In Simple Terms
Biotech companies are attracting investors again after several tough years, and more are raising money by selling shares or partnering with drugmakers. But the cash is not reaching every company: investors favor those closer to testing a medicine in people. The sector is recovering, but early-stage companies still face a difficult road, and big risks remain.
A Visible Rebound in Stocks and IPOs
After years of decline and uncertainty, biotech stocks regained some of their shine in 2026. The recovery came alongside an increase in the number of companies going public and growth in some types of financing. But the market has not been on a steady upward run. Shifting interest rates, unequal access to funding, and investors’ growing preference for drugs closer to clinical testing all show that the recovery is not benefiting everyone equally. A third-quarter market conditions report from investment bank LuxxTwo paints a mixed picture: the sector is improving, but its weaknesses have not gone away.
One of the clearest signs of a turnaround came from exchange-traded funds that track biotech companies. The iShares Biotechnology ETF, the largest fund in the category by assets, gained 34% in the 12 months leading up to the Friday mentioned in the report. Its share price rose from $154.58 to $207.74, and it has about $11 billion in assets. The SPDR S&P Biotech ETF, run by State Street and the second-largest fund in the category, climbed 39%, from $107.56 to $149.54, with about $10.6 billion in assets.
Fund performance alone cannot tell us whether every company is healthy or any particular drug will succeed. Still, the gains point to a renewed appetite for biotech after the difficult period that followed the pandemic boom. The shift is also apparent in the initial public offering market. In 2026, the 27 IPOs cited in the report raised a total of $7.776 billion. That was 573% more than the sector raised in 2025, when 11 IPOs brought in a combined $1.155 billion.
The third quarter stood out in particular: nine biotech companies went public, raising a combined $2.4 billion. According to LuxxTwo data, that was the largest number of biotech IPOs in a single quarter in five years. But a return in IPO activity does not mean the market is open to every company. Investors want clearer evidence that a drug has a chance of success, making it harder for projects still at the discovery stage to win them over.
Investors Are Following the Drugs Closest to Patients
Private investment deals show how much a company’s position in the drug-development process now matters. In North America, there were 46 venture capital financing deals in the third quarter, compared with 55 in the second quarter of 2026 and 38 in the third quarter of 2025. Although the number of deals fell from the previous quarter, the average deal size rose to $96 million, up from $83 million in the second quarter and $75 million in the third quarter of the previous year. Much of the activity centered on Series B rounds. In other words, companies that managed to attract funding tended to raise larger amounts and be further along in development.
Jeff Meerson, CEO and co-founder of LuxxTwo and of Banyan Bio Innovations, an investment firm launched in May, says that grouping companies by funding round can hide the more important difference: how far their treatment has progressed. Banyan, for example, is building new companies around potential treatments that have reached Phase 2 trials. Those companies may begin with a Series A round. So the name of a funding round alone does not show whether a company is early or advanced. What matters more is whether it has a drug candidate ready for development or clinical data investors can assess.
Companies still in the drug-discovery stage or testing drugs before human trials face a much tougher funding environment. Meerson sees this as a change from 2020 and 2021, when investors showed intense interest in promising science platforms and new areas of research, even before companies had a clear treatment to test in people. Today, investors generally want to see tangible progress toward developing a drug. They may prefer companies with a fully developed drug candidate or those nearing the point of filing an application to begin human trials.
One response has been to create new companies around treatments developed elsewhere, then give them a focused team, expertise, and funding to move the work forward. These treatments may cost less to develop than building a drug program from scratch, but this approach does not remove the need for trials and data. And if a project is spun out of a university or laboratory too early, it may face a long funding gap before it becomes attractive to the market.
Licensing Gains Ground as Other Funding Routes Narrow
Alongside IPOs and venture capital, licensing and collaboration deals between drug companies have become an important way to raise money or reach new markets. But the total value of these deals fell in the third quarter to about $48 billion across 41 deals, down from $71.5 billion across 43 deals in the second quarter. The average deal size also dropped, from $1.662 billion to $1.171 billion. That does not necessarily mean interest in innovation is fading. The report links the change to a stronger focus on drug candidates that have reached the stage of being tested in people, rather than some early-stage deals whose announced value depends on future payments and numerous conditions.
China has a significant place in this market. Chinese companies accounted for 58% of the value of global licensing deals recorded through the end of the third quarter of 2026, up from 48% in the same period of the previous year. The United States accounted for 26%, while Europe and the United Kingdom together made up 8%. Meerson says part of the difference reflects how difficult it has become for some Chinese companies to raise money through Hong Kong’s market, an important route for them the previous year. Listing procedures and related controls have made that path more complicated, and government agencies must approve whether a company can go public.
In Meerson’s estimate, mergers and acquisitions accounted for only about 1% of the value of Chinese deals. When an IPO or a company sale becomes harder to pursue, licensing drug or technology rights to another company can be a practical way to raise capital—and sometimes return part of it to investors. This helps explain why licensing deals matter more to Chinese companies than to their counterparts in the United States, where acquiring a company is often the usual way for a larger firm to obtain a drug that is being tested in people.
Still, announced deal values need to be read with care. The headline value of some Chinese deals may include large sums that are not paid upfront, but depend on future milestones that may never be reached. So the announced figure is not necessarily the amount of money the company receives when the deal is signed. Meerson points to differences in how deal value is calculated: in some Chinese agreements, the upfront payment may represent a smaller share of the announced total, while greater weight is given to all the potential future payments. Investors need to distinguish between money available now and value conditional on later results.
Acquisitions and Private Funding Reveal a Market with Many Paths
Deal activity extended beyond licensing. Mergers and acquisitions totaled $42.1 billion across 30 deals in the third quarter, down from a three-year high in the second quarter, when 35 deals were worth $80.7 billion. But the total for the first nine months of 2026 reached $173 billion, exceeding the value of all deals recorded in 2025. According to the data Meerson discussed, companies based in the United States received 91% of the value of M&A deals.
The different roles U.S. and Chinese companies play in these figures reflect different funding routes, not a simple judgment about the quality of innovation in either country. In the United States, a large drug company may prefer to buy a company when it wants a drug being tested in people or the main rights to one. In China, licensing deals carry more weight when opportunities to go public or be acquired are limited. Cross-border partnerships remain exposed to regulatory and geopolitical risks on both sides, and their terms may change in response to government decisions and policies on technology transfers.
Another funding route is private investment in public equity, commonly known as PIPE deals. This activity grew to $3.808 billion across 14 deals in the third quarter, compared with $603 million in the second quarter and $1.151 billion in the third quarter of 2025. Some of these deals are tied to reverse mergers, which allow private companies to enter the public market by merging with an already-listed company. The process often requires additional funding to go ahead. In the example Meerson gave, if the market sees 20 traditional IPOs and 20 reverse mergers, that would mean 40 companies could become public, with many of those entering through a merger needing PIPE funding.
A company may choose this kind of financing to lock in an amount it can count on, even if it might be able to raise more through a later secondary share offering. Waiting until after announcing trial results could boost a company’s value if investors respond positively to the data. But it could also send the share price down and close the window for raising money. PIPE funding can therefore be a way to reduce uncertainty, especially when company leaders do not know how investors will react to upcoming results.
What Could Bring the Recovery to a Halt?
Despite the signs of improvement, biotech stocks do not move independently of the wider economy. Meerson links a recent slowdown in activity among some specialist investors to rising inflation and higher yields on long-term government bonds. When borrowing costs rise and lower-risk investments offer better returns, it becomes harder to fund biotech companies that may need years before a drug produces revenue. IPO activity also paused for a time as conditions changed after the war in Iran began, according to the discussion. The market picked up again during the spring and summer, then cooled in recent weeks.
Investors are also influenced by how clear the political and regulatory landscape looks. Meerson believes that some market participants may wait until after the midterm elections to see how the political balance will shift. Legislation that makes drug development more efficient in the United States could support the sector. But he does not expect competition from China to disappear, and he does not think cooperation between the two countries is free from regulatory risks. Potential restrictions on technology transfers or the sharing of treatments could come from either side, adding another layer of uncertainty to deals.
Artificial intelligence is playing a growing role in drug discovery, but it cannot shorten the entire journey. Algorithms may help researchers propose compounds or improve early stages of research, but a drug still has to be tested in people, and researchers must wait to see how the disease progresses and what the results show. Meerson estimates that more than half of drugs are now discovered with the help of AI. Yet 99.5% of spending on a drug comes after a treatment candidate has been selected. That helps explain why having a smart tool alone is not enough to build a successful drug company or guarantee it a high stock-market valuation.
Raising money for startups from outside venture capital funds remains a challenge. Some teams may turn to family offices or organizations that support research into a particular disease. Universities may also invest in spinout companies to help them reach a more advanced stage. But these alternatives do not guarantee funding: private organizations also tend to demand clear signs of a project’s potential, and it can be hard to find families willing to provide support unless they have a direct connection to the disease. Research into cancer and the immune system remains a major focus, and research into the brain and nervous system also appears to offer reasonable opportunities. By contrast, Meerson notes that rare diseases are not attracting the same enthusiasm they once did, despite the possibility of valuable treatments for smaller markets.
The Bottom Line
The 2026 figures show that confidence is returning to biotech: major biotech funds’ share prices rose 34% and 39%, IPOs raised $7.776 billion, PIPE financing expanded, and the value of acquisitions during the first nine months exceeded the total for all of 2025. But these numbers do not mean a broad recovery is complete. Early-stage companies are still struggling, funding is leaning toward programs closer to clinical trials, and interest rates, regulation, and competition remain important forces. Meerson sees strong opportunities for the sector over the medium and long term, but whether that optimism holds will depend on companies producing convincing data and capital continuing to flow after the current wave of IPOs.