FDA Funding Changes Could Impact Biotech M&A

With companies constantly developing new therapies and technologies, the biotech industry is a hotbed of innovation. This dynamic environment often leads to mergers and acquisitions (M&A) as a vehicle for larger companies to acquire promising technologies and product candidates to bolster their development pipeline. However, changes in funding for the U.S. Food and Drug Administration (FDA) have the potential to affect new product development and significantly impact biotech M&A activity.

The Trump administration has signaled a reduction in government funding across many departments, including FDA and other government agencies, like the National Institutes of Health, that fund research and development activities. As discussed below, reductions and fluctuations in FDA funding can directly impact biotech M&A in several ways, making it more likely that biotechs will seek to combine with peers or be acquired by large pharma companies.

• Cash Runway Concerns: Funding and workforce reductions will stretch the FDA’s already limited resources. While the FDA’s processes for reviewing new drug products rely significantly on user fees paid by the company seeking approval, some processes, including facility inspections, rely to a certain extent on appropriated funds. FDA inspection processes have operated under backlogs in previous years because of pandemic-related delays and additional budget cuts could further hinder review processes.

  Reduced funds may make it more difficult for the FDA to conduct reinspections at facilities for product candidates whose sponsors received complete response letters for Chemistry Manufacturing and Controls-related issues or to clear warning letters at contract manufacturing sites. These delays in clearing necessary approval hurdles could cause financing overhangs for smaller biotech companies with capital intensive operations that are waiting for approval before launching commercialization.

  Some new products also may depend on multiple FDA components, such as drug products that will be marketed with a companion diagnostic, which results in additional points of vulnerability for delays and increased costs. Even if user-fee funding continues to be available at the FDA, reduced funding may hinder agency coordination and regulatory functions. M&A may increasingly become a financing solution for biotech companies facing funding challenges and FDA delays.

• Regulatory Uncertainty: Funding changes can affect how the FDA conducts its routine operations, including the resources available to address novel technologies. Decreased funding also may result in a loss of personnel with experience and expertise that can, in some cases, expedite regulatory decision-making. Similarly, even if the FDA continues to operate review processes pursuant to user-fee funding, the agency’s ability to hire additional talent to support new technologies, such as artificial intelligence, may be hindered by new executive orders that tie new hiring to other federal employee departures.

  Funding changes also may create additional uncertainty in the FDA’s capacity to implement existing and new regulatory requirements. For example, although currently subject to ongoing litigation, funding changes may impact the FDA’s ability to regulate laboratory-developed tests, which are sometimes used to support drug development or as companion diagnostics even after drug approval. Decreased funding that leads to government shutdowns also may hinder routine regulatory processes. All of these changes can cause delays and uncertainty in the regulatory process, which may impact the timing and valuation of M&A deals, as well as other strategic alternatives.

• Investor Confidence: How the FDA is funded and how efficiently it works can influence investor confidence in the biotech sector. If there are delays or uncertainty, investors may be more cautious about investing in biotech companies. This can affect company valuations and artificially skew the attractiveness of some companies and their technology for M&A partners.


• Strategic Alternatives: As biotech companies face funding problems or FDA delays, they may be more likely to seek a merger or acquisition to get the necessary capital from cash-rich or synergistic partners. Well-funded large pharma companies might see opportunities to acquire financially distressed companies at opportunistic values, and there may be increased interested in biotech companies from private equity firms that have a backlog of dry powder to deploy. Additionally, activist investors are expected to continue campaigning for financially stretched biotech companies to review strategic alternatives, including a sale of the company.

While it is easy to anticipate that funding cuts across government agencies will impact the work that gets done, there also will be indirect consequences that may be significant. The reduction of FDA funding and its profound impact on biotech companies, including on M&A activity within the industry, is just one example.