US FDA and NIH cuts are expected to delay drug approvals and decrease grant funding, making it harder for young health sector companies to survive.
Healthcare investors and startups are growing increasingly concerned that the US administration’s funding cuts for the Food and Drug Administration (FDA) and the National Institutes of Health (NIH) will have a chilling effect on innovation in the sector.
As part of its latest budget planning, the administration of US President Donald Trump recently imposed job cuts to the FDA’s Office of Inspections and Investigations, with all FDA scientists in the San Juan and Detroit labs being recently laid off. This has delayed the agency’s drug review schedule, especially for overseas drug manufacturers and food products.
Similarly, there are proposed cuts to the Centers for Medicare & Medicaid Services (CMS), the federal agency overseeing the Medicare and Medicaid programmes, which could lengthen the time it takes to make a decision on whether a particular treatment can be funded for a patient.
“Any time CMS or the FDA is under resourced that means it’s more time to a decision. What used to probably be three to six months, it is now more like one to three years,” one healthcare sector investor told GCV. “It is a company killer. You can’t get venture funds to continue to invest in a company just so that they can wait around for a reimbursement decision. Delaying these important decisions can make or break some of these smaller companies.”
Developing a new drug is a long and complex business, “but at the same time, the FDA review process was one of the more predictable parts,” Bauke Anninga, investment director at M Ventures, CVC arm of pharmaceutical company Merck, says.
While latest reports have indicated that some FDA scientists and inspections staff will have their jobs reinstated, concerns remain around the compound effect these changes could have on the industry.
The traditional approach of the FDA previously working to rigid deadlines added security to this part of the process. “That’s the question now — whether they can meet those timelines and whether that’s going to put additional unpredictability on an ecosystem that’s already pretty stressed,” Anninga says.
Investment hesitancy and suspended NIH funding for startups expected
Meanwhile, at the earlier end of the process, a decrease in grant funding to the US National Institutes of Health could slow down the pipeline of new research and new startups. Basic research by the NIH contributes to the vast majority of drugs that eventually achieve FDA approval in the US, and many young startups receive non-dilutive grants from the organisation, through programmes like Small Business Innovation Research (SBIR).
However, the new US administration has cut grant funding to the NIH, leading to some 800 research projects being terminated.
This is compounding the pre-existing funding drought in the biotech industry, where investments have dwindled since the boom seen during the pandemic.
“Right now, they are getting pushed — less NIH research, less overhead and then tariffs — so when you’re getting pushed on both sides, that is a signal to make fewer investments because there’s just a lot of unknowns,” says Jahanara Ali, biotech venture expert and chief business development officer at drug manufacturer NomoCan Pharmaceuticals.
She says that with fewer exits for the sector recently, investors have not been as comfortable backing companies with equity.
That leaves healthcare startups potentially without the non-dilutive grant funding they might have once been able to get from the NIH, and less interest from investors.
Investors likely to ‘retreat to safety’
Not everyone is as pessimistic. Others say they expect their work to be relatively unaffected for now.
“I think, from a funding perspective, even pre-Trump, biotech has been having a rough ride for the last two or three years. So personally, I wouldn’t say it feels noticeably better or worse,” Joe Healey, CEO of Warwick University’s biotech spinout NanoSyrinx, says.
Instead, he feels like the dominating phenomenon of some startups that could raise money — raising a lot, but those that couldn’t — really struggling to raise anything, will remain similar.
“I get the sense that this is probably the same or is exacerbated right now, and that the ‘retreat to safety’ that has been seen with many investors piling into the same deals with one another where it feels a bit safer will continue,” Healey adds.
Instead, he suspects the main threat for startups at the early-stages might be “if the tariffs drive interest rates up — that’s obviously generally bad for biotech and VC, so that wouldn’t help, but hopefully it won’t be the case”.
Back up plans and alternative strategies
Amid austerity at federal organisations and the knock-on impact on overall market stability, corporate VCs advise organisations to have some alternative plans prepared.
Acknowledging the lack of predictability in how the FDA staffing changes will evolve over the next couple of weeks, Anninga, says: “If [unprecedented disruption] plays out, you want to have a backup strategy. What we’re talking about with our portfolio companies is how they can try to mitigate that risk and find alternative routes elsewhere,” Anninga says. He predicts that this will likely see companies pick up multiple routes rather than just one review process.
Ali says that the acquisition route could become more appealing for some startups and their investors. “The IPO market in [biotech] might be closed, but there are companies still acquiring startups as they have all these relationships. If the program is good and the data is good, you can make M&As happen,” Ali says.
Ultimately, she says, pharmaceuticals still have plenty of capital, but lack of clarity is the biggest problem in the sector.
“Pharma companies are sitting on a lot of money, but under chaos, people just get scared,” she says. “I don’t think they feel as comfortable and are thinking of the worst-case scenario”.
