The Biotech Funding Crisis: How Broken Models and Regulatory Chaos Are Reshaping an Industry

Editor’s Note:

Hey y’all - your friendly neighbourhood newsletter editor here.

This is going to be the beginning of a series of long form pieces for TLDR Biotech. Long form, original writing is a medium we’ve been meaning to get into, and we’re excited to share insights and remarks from some of the best people in the biotech and pharma field (as well as our own hot takes).

Hope you enjoy this wide-ranging conversation!

A candid conversation with Treehill Partners' Ali Pashazadeh reveals an industry at an inflection point.

It’s not surprise that the biotech industry is drowning in uncertainty.

And according to Ali Pashazadeh, founder and CEO of Treehill Partners, we're living through "the worst investment drought in recent history."

Speaking from his unique vantage point as both a practicing physician and healthcare investment banker who has spent the last 11 years navigating companies through distress, Pashazadeh paints a picture of an industry caught in a perfect storm.

The traditional funding conveyor belt has ground to a halt, regulatory uncertainty is driving capital flight from the US, and even the industry's premier networking event—BIO—has become a venue for uncomfortable reckonings rather than optimistic deal-making.

"We are in a layering context here," Pashazadeh explains, outlining how multiple waves of disruption have compounded into an almost impossible-to-navigate landscape.

"If you and I had spoken about seven months ago, we'd be talking about RFK Jr. coming in and the possible impacts of that.

We then layered on top of that tariffs. We layered on top of that APIs, possible reference pricing. And now we've got the big, beautiful bill on top of it."

(Our conversation was before the more recent news of EU-US pharma tariffs and most-favoured nation pricing) 

The result is an investment environment where boards can barely advise management and investors struggle to see clear paths to returns - but the problems run far deeper than temporary market volatility.

The Conveyor Belt Has Broken

To understand the severity of the current crisis, Pashazadeh emphasizes the sheer duration of the funding drought. The industry has effectively lost four and a half years of normal funding cycles.

"We have lost three to four years worth of IP during this [post-COVID] time frame," Pashazadeh notes, adding that since then, "the markets haven't really rebounded."

Consider that over the last year, the S&P Biotech ETF $XBI ( ▲ 1.24% ) is down nearly 22% over the last 6 years - while the S&P 500 has nearly doubled.

The numbers paint a stark picture of systemic dysfunction.

According to Pashazadeh, approximately 250 companies are waiting to go public, while about 200 companies are trading below cash on public markets. This represents a fundamental breakdown of what he calls the "conveyor belt of financing"—the traditional progression from Series A through IPO to acquisition.

"For that conveyor belt to work, each investor needs to make an investment, a return and be able to exit," Pashazadeh explains. "And that's not happening."

The breakdown becomes particularly acute at the phase three level, where companies need roughly $300 million not just to get drugs approved, but to prepare for launch. These companies face a double bind: they need management experienced in late-stage development, but historically, biotechs handed off to big pharma before reaching that stage.

The VC Model That No Longer Works

According to Pashazadeh, the fundamental issue extends beyond market conditions to the structure of venture capital itself.

"The model hasn't been fit for purpose for about six or seven years," he states bluntly - the core problem is architectural.

LPs provide funding based on specific risk profiles and guardrails, but when that landscape "continues to change on a quarterly, if not monthly basis, by definition, the LP investment that's made and the LP documents you have in place aren't going to be fit for purpose for that fund," Pashazadeh explains.

Consider the breakdown in phase three funding strategies: LPs historically funded these assets expecting licensing deals with large pharma to provide the commercialization pathway.

"Now, when the licensing deal doesn't happen, that model no longer works," Pashazadeh notes.

The solution requires fundamental flexibility across the entire funding ecosystem. "You need flexibility in the LP component. You need flexibility in the GP component. Then you need flexibility in terms of how you deploy your capital," he argues.

The problem isn't just money - it's how efficiently that money gets deployed.

Consider that at his firm Treehill Partners, Pashazadeh reports that they can typically "reduce the cost of that phase three probably by about 30 percent" while shaving "about a year off the study timeline" and improving "the chance of success by about 10 percent."

While alternative funding sources are emerging, including Saudi capital, family offices, and crowdfunding, Pashazadeh emphasizes that "you're stepping into a ladder of funding and the whole conveyor belt of funding needs to be in place for the drug to ever get to market."

Capital Flight and the Four-Year Detour

The regulatory uncertainty created by the Trump administration's policy initiatives has triggered what Pashazadeh describes as a material flight of capital from the US.

The impact extends beyond simple policy changes to fundamental questions about America's role as the global center of drug development.

"The benchmark in terms of regulatory approval is the US, so it's the FDA," Pashazadeh explains. "Everybody feeds off the FDA, whether it's the EMA, whether it's the KFDA or ANVISA in Brazil, everybody feeds off the FDA. That's a gold standard."

Initially, the requirements seemed manageable. Companies needed US manufacturing capability and "a material footprint in the US to be considered investable within the US." However, the goalposts have continued moving.

Pashazadeh estimates that "about 30 to 35 percent of the conversations" his firm is having involve people reconsidering US-focused strategies.

Hypothetical thinking from a client might be:

"I was going to move to the US, but given the fact that the US continues to change, I may just run some of my studies in Europe, I may run some of my studies in Australia, or I might generate some data in China, give the US some time to stabilize, and then I will access the US market via a detour."

This detour strategy carries significant time costs. Pashazadeh estimates the alternative pathway takes "probably about a four-year detour" as companies "need to find the geography, set up the study, typically run the study for a year to a year and a half, generate the data, clean it up, and get ready for the next study, and then prepare for accessing the US market."

The capital implications are substantial.

"About 35 to 40 percent of the capital that would have been earmarked for non-U.S. issuers to move to the U.S. will now find itself in an interim step - where this capital will be spent outside the US while simultaneously giving sponsors time to wait out where the U.S. might land by the time they come out of that study," Pashazadeh explains.

Importantly, this represents money that was always intended for the US market based on regulatory gold standard status and market size.

When companies start questioning these fundamentals, they must reconsider their entire global strategy.

Reality Check at BIO

The stark present and uncertain future facing biotech was on full display at this year's BIO. According to Pashazadeh, the conversations at this year’s conference were a lot more “realistic” - a shift from more overt optimism in years previous.

Where BIO traditionally featured optimistic networking and deal-making discussions, this year brought urgent conversations about survival.

"What you typically have at BIO is 70-80 percent of ‘nice speak’," Pashazadeh observes. "But this time at BIO, we heard a much more realistic approach from companies that needed something positive to happen in the next six or 12 months, or companies facing a genuine viability crisis."

For example, many companies that had spent years insisting they would find licensing partners were finally confronting reality.

"For two years, certain companies have been telling us that they’ll find a licensing partner. We were saying to them two years ago, well, what if you don't find a licensing partner?" Pashazadeh soberly recalls.

This shift is a harsh reality check for these fledgling biotechs - there’s no choice but to confront the uncomfortable truths about the time and resources needed for late-stage development.

"To gear up to running a phase three, first of all, you need the management team to do that. And that takes a while to put in place," Pashazadeh explains.

Companies also need "a very different" capital raising profile and boards that can handle "later stage" or "commercialization" challenges.

Patent estates that companies had previously ignored suddenly became "rate limiting steps." With only "five, six, seven years worth of patent estate left" by the time they commercialize, companies realized they needed much more robust commercial strategies.

Pashazadeh characterizes his conference experience this year as spending "less in the 30-minute meetings and more outside having coffees and lunches and dinners with people who said, ‘okay, we're now ready to take on board what you guys have been saying for a while.’”

Cell & Gene Therapy: A Case Study in Systemic Problems

The challenges facing cell and gene therapy (CGT) illustrate many of the broader systemic issues plaguing biotech funding and development.

Despite years of hype and investment, the field continues to struggle with fundamental manufacturing bottlenecks that Pashazadeh argues should have been solved long ago.

"My biggest criticism is if we as an industry ARE serious about cell and gene therapy, why are we still talking about manufacturing issues a decade on?"

Pashazadeh asks pointedly. "If we were serious about it, isn't that the first thing we'd fix?"

From his perspective as a practicing physician, Pashazadeh sees CGT as having been "an academic area for a long time rather than a clinical area."

Companies often lack understanding of the pathology they're treating, have "unproven mechanisms," and target "undefined conditions with unknown etiology with unknown therapies."

The result is what he describes as a fundamental disconnect: "You're going to close your eyes and shoot but you don't actually know what you're shooting at or what the target is."

For CGT companies that Treehill works with, Pashazadeh has implemented a back-to-basics approach.

"Step one: fix your manufacturing. If you don't have manufacturing you don't have a drug." Only after solving manufacturing do they move to protocol design focused on understanding patients and quantifying benefits.

This patient-centric approach requires acknowledging limitations.

"[A few CGT] companies that we're involved in actually have taken a very robust approach to drug development as if it's an Rx treatment," Pashazadeh explains. "They're not high science, highfalutin - they’re very much into the nuts and bolts."

The manufacturing imperative extends beyond individual companies to industry-wide competitiveness.

"Unless we have the manufacturing and the scale up figured out, it's a purely academic discussion," Pashazadeh argues.

His criticism cuts to broader questions about how the industry allocates resources and attention.

"It's easy to talk about [cell & gene therapy] as game-changing, but then you look back at it 10 years from now and ask, “How many patients were really treated by these therapies?”

The AI Mirage

While artificial intelligence dominates industry conversations, Pashazadeh offers a sobering assessment of its current limitations in drug development.

According to him, "AI is going to completely transform our industry," but the transformation faces a fundamental bottleneck: data availability.

"The rate limiting step at the moment is data," Pashazadeh explains. "Eleven percent of Investigator Sponsored Trials (ISTs) publish their data. If you look at most clinical studies, you don't know what the inclusion criteria was, what the exclusion criteria was. You don't know what the patient's subpopulation was. You don't know what the results were per dose."

For AI to truly impact drug development, it needs feedback loops that currently don't exist.

Pashazadeh envisions a system where AI can analyze hundreds of clinical trial protocols and "write me the next protocol," but emphasizes that "for that to be AI, there needs to be a feedback loop when that study reads out in two or three years."

The challenge is, like many things in healthcare, temporal.

Unlike many AI software applications where feedback is immediate, clinical development feedback cycles take "two to four years." Additionally, companies remain reluctant to share detailed information about "inclusion criteria, exclusion criteria, dose intervals, dose range, all the complications that patients had, why patients dropped out."

"At the moment, we've got lots of people saying AI, AI, AI. And you look at it and say, but where's the feedback loop?" Pashazadeh asks. "Where is the intelligence? Where is it learning? It's assimilating a lot of information. But it's not then figuring out how to deploy that information."

Despite these limitations, Pashazadeh believes AI will eventually "replace us as drug developers" within 10-15 years, but only if the industry achieves "a greater level of disclosure."

The View from Five Years Out

Looking ahead, Pashazadeh offers a nuanced assessment of whether America will maintain its position as the global leader in drug development.

His answer reflects both confidence in underlying strengths and concern about mounting challenges.

"America has been the Cadillac of drug development forever," Pashazadeh explains, noting that this status depends on "having world class investors, world class boards, world class management, world class regulatory framework and world class reimbursement and hospital system."

Critically, "nowhere else has that" complete ecosystem.

The competitive timeline favors continued US dominance. "I think America is a good 15, 20 years ahead of the world," Pashazadeh argues. For Europe to catch up would require not just increased drug pricing but attracting back scientists who "have all fled Europe for better paying jobs and greater opportunities in the US."

However, the US position will likely be "far leaner" and "far more to the bone" than current arrangements.

Pashazadeh expects drug prices to decrease and acknowledges that "other countries will close the gap" to some extent, though "I don't think it's five years for that to happen."

His bigger concern lies in the pipeline. "The biggest question for me is, what do the large pharma do in that timeframe where you've got your Keytrudas coming off patent in 2028, for example, and biotechs struggling to raise money?"

By 2030, "the number of biotechs to acquire is going to be very different to the biotechs today."

This creates an industry-wide challenge: "I think we as an industry need to figure out how we're going to support the biotechs in 2025 to make sure that in 2030, there's enough high quality biotechs with potential blockbuster drugs that the large pharma are going to acquire."

In Conclusion: Evolution or Extinction

Rather than viewing the current crisis as purely destructive, Pashazadeh frames it as an opportunity to fix long-standing inefficiencies.

"We don't have an efficient system," he emphasizes. "There's a lot of areas that we can improve on in terms of drug development, clinical trial protocol, patient selection."

The industry's previous approach carried unacceptable failure rates. "Fifty percent drug failures in phase three? Unacceptable," Pashazadeh states. "Do I think we'll go back to that? No. We need to do drug development in a much more effective, efficient way."

His assessment echoes a medical perspective focused on prevention rather than reaction. "Coming from a medical background, as a doctor, your main objective is to predict and to prevent as opposed to be reactive," he explains. "You don't wait for their heart to stop before you do something."

For individual companies, this means embracing fundamental changes rather than hoping for a return to previous conditions.

"I think if you are evolving, then it's exciting," Pashazadeh concludes. "If you're not evolving, then extinction is the only pathway forward."

The question facing the biotech industry isn't whether change will come (as change is the only constant) - it's whether the sector can adapt quickly enough to emerge stronger.

According to Pashazadeh, the current crisis represents both the end of an inefficient era and the potential beginning of a more robust system.

Whether that potential gets realized depends on how quickly industry participants can evolve beyond broken models toward sustainable alternatives.

This funding drought may be the worst in recent history, but it might also be exactly the forcing function the industry needs.