Life sciences companies and investors continue to navigate a complex and challenging investment landscape – marked by high interest rates, a volatile regulatory environment, tight venture capital (VC) markets, and slowly rebounding initial public offering (IPO) activity. Even so, the sector’s deep reliance on partnerships with major pharmaceutical companies and innovative MedTech providers is keeping deal activity alive, enabling strong performers to secure capital while driving life sciences advancements.
Against this backdrop, alternative financing strategies are no longer niche – in life sciences especially, they’re now essential. As costs continue to rise and pricing and reimbursement headwinds shift commercial assumptions, hybrid and crossover financing models – including royalty financing, innovative debt structures, and flexible capital stacks – are reshaping how capital is deployed across the life sciences sector and changing how deals get done.
Hybrid financing structures are helping catalyze sector growth and value creation, giving investors earlier, less crowded access to life sciences and MedTech operators. Blended finance approaches are helping companies secure better pricing and deal terms, de-risk investments, and position investors for significant upside when market favorability returns. And as life sciences mergers and acquisitions (M&A) accelerate and buyers look to acquire earlier in the development cycle, hybrid financing has become a critical bridge to acquisition – giving target companies the capital influx needed while providing investors structured protections and multiple paths to liquidity.
Creative financing and dealmaking options are also helping life sciences companies keep up with the rapid pace of scientific progress, while maintaining cash reserves to drive growth, development, and top-line success. At the same time, investors are structuring deals focused on creating value for all parties, whether that’s co-investing with VCs or partnering with strategics to reduce risk.
With these key trends in mind, what should life sciences investors and targets focus on for dealmaking success? Six actionable steps include:
1. Spread financial risk and remain competitive. In a crowded market, creative life sciences dealmakers must move beyond binary “exit-or-bust” financing models to achieve success. Royalties, build-to-buy, or partial-liquidity structures help spread financial exposure while letting investors capture upside from pivotal inflection points like regulatory approvals and asset development milestones. These flexible structures give companies access to needed capital without forcing premature exits or excessive dilution.
2. Prioritize metrics and measurement. A comprehensive risk management strategy must include internal metrics and measurement to evaluate hybrid deal performance, such as milestone-to-capital spend ratios, actual vs. modeled probability-of-success curves, non-dilutive capital leverage, structured-return realization rates, and portfolio-level hybrid exposure concentration. Investors who make measurement a strong, repeatable capability will shape the next wave of investment wins and market norms.
3. Match funding models and capital needs to sector dynamics. Not every funding model works everywhere or at every point in time. In MedTech, hybrid financing options can shorten the path to commercialization, giving companies timely, flexible access to capital during the incredibly expensive clinical, regulatory, and scale-up phases. By reducing dilution and funding critical milestones without delays, companies and investors can accelerate launch preparation and reach commercialization faster. For specialty pharma, on the other hand, royalties may be a simpler investment approach, given fewer operational entanglements, clearer economics, and more predictable risk/return characteristics. Leveraging advisors with deep life sciences industry knowledge around the models that resonate in specific sectors can help investors move quickly and ensure alignment among stakeholders.
4. Build the right syndicate early. Deals succeed when investors line up and begin their due diligence before a capital raise is critical. Now more than ever, investors need to build strong relationships and explore proactive deal terms with potential partners well before a formal fundraising round begins, including providing strategic advice and expertise. This forward-looking, collaborative approach often leads to more favorable deal terms, better strategic alignment, and a smoother overall fundraising process for both parties, reducing the pressure and competition typical of later-stage, more crowded raises.
5. Treat hybrids as a core strategy, not a side bet. Hybrid structures allow for a combination of high-growth potential assets, which carry higher risk, with more de-risked or cash-flowing assets, thereby creating a more stable portfolio with longer-term viability. Embedding hybrid structures into the core investment playbook – not just using them opportunistically – creates more consistent returns across cycles and improves resilience when traditional equity markets are tightened.
6. Embrace the power of secondary markets. Secondary markets are opening new pathways for early investors to realize liquidity well before traditional exits. In the life sciences sector, secondary markets help investors and founders unlock capital even while clinical trials are ongoing or regulatory milestones are pending, reducing pressure to sell under suboptimal conditions, such as today’s unpredictable reimbursement and regulatory ecosystem. Secondary markets also help new investors acquire stakes in later-stage, more derisked companies, meaning investors can participate in the upside of targets with validated pipelines, established manufacturing capabilities, or early revenue streams, while mitigating the operational and clinical risks that often challenge earlier-stage ventures.
The life sciences sector is at an exciting inflection point, with headwinds and opportunities aplenty. But as we think about the actual assets that are coming online – those with high-ROI potential and thus ability for continued reinvestment into growing pipelines – hybrid financing options represent the kind of creative, strategic dealmaking that will drive scientific and technological advancements now and in the future.
Photo: sesame, Getty Images
Kristian (Krist) Werling is the global head of McDermott’s Health & Life Sciences practice, which provides regulatory and transactional counsel to health and life sciences industry leaders, changemakers, and investors. Krist represents life sciences companies, health service providers, private equity firms, and venture capital investors in a wide variety of transactional and regulatory matters.
Todd Finger represents clients across the full range of corporate transactions and financings, including mergers, stock and asset purchases and sales, leveraged buyout transactions, venture capital investments, joint ventures, restructurings, and recapitalizations. He advises clients with interests and operations in the biotechnology, medical device, healthcare, consumer products, food and beverage, entertainment and media, and fashion and apparel industries, among others.
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