Biotech Sector Resilience in a Protectionist Trade Environment: Capital Allocation Strategies Between Large Pharma and Small Biotechs
The biotech sector's ability to adapt to protectionist trade policies has become a defining factor in its resilience. From 2023 to 2025, tariffs on pharmaceutical imports, supply chain disruptions, and regulatory shifts have reshaped capital allocation strategies for both large pharmaceutical companies and small biotech firms. While these challenges have created headwinds, they have also spurred innovation in funding mechanisms, strategic partnerships, and operational efficiency. This analysis explores how the sector is navigating this complex landscape, with a focus on divergent approaches to capital allocation.
Large Pharma: Strategic Acquisitions and R&D Optimization
Large pharmaceutical companies have prioritized capital allocation strategies that balance short-term cost control with long-term pipeline growth. According to a report by EY, major firms are increasingly favoring strategic acquisitions and in-licensing deals to secure late-stage assets, particularly in high-growth areas like oncology and neuroscience[1]. For example, Merck's $11.5 billion acquisition of Acceleron Pharma in 2024 underscored its commitment to expanding its therapeutic footprint in pulmonary fibrosis and other rare diseases[2]. Similarly, Roche's $9.1 billion acquisition of Blueprint Medicines in 2025 highlighted the sector's focus on acquiring innovative platforms to offset patent expirations[3].
R&D spending remains a cornerstone of large pharma's strategy. In 2023, MerckMRK-- allocated 50.79% of its revenue to R&D, the highest among its peers, driven by its Prometheus Biosciences acquisition[4]. Roche followed closely, investing CHF 13.2 billion in 2024 to advance its precision oncology pipeline[5]. However, protectionist policies have forced companies to reevaluate their R&D priorities. The PwC analysis notes that firms are shifting toward tax-efficient supply chains and localized manufacturing to mitigate tariff risks, even if this requires higher upfront capital expenditures[6].
Small Biotechs: Agility and Alternative Funding
Small biotech firms, while more vulnerable to protectionist pressures, have demonstrated remarkable agility in capital allocation. With venture capital funding drying up and IPOs remaining subdued, many have turned to royalty financing and milestone-based deals to sustain operations. A 2025 EY report found that royalty deal values grew at a 45% CAGR, with biotechs leveraging future revenue streams from specific drug candidates to secure immediate capital[7]. For instance, AstraZeneca's partnership with Quell Therapeutics to develop T-regulator cell therapies allowed smaller firms to access larger pharma's R&D infrastructure without diluting equity[8].
Protectionist tariffs have also forced small biotechs to rethink supply chain strategies. Nearly 90% of U.S. biotech companies rely on imported APIs, with 30% sourced from China[9]. Tariffs of 10–25% on these imports have squeezed margins, prompting firms to adopt virtual models and partner with contract research organizations (CROs) like ICON to reduce costs[10]. Leen Kawas of Propel Bio Partners notes that small biotechs are leveraging foreign trade zones and free trade agreements to mitigate tariff impacts, demonstrating their capacity for rapid adaptation[11].
Divergent Paths, Shared Challenges
While large pharma and small biotechs have adopted distinct strategies, both face common challenges. Regulatory scrutiny over foreign acquisitions has made cross-border M&A more complex, particularly for Asian firms seeking to enter Western markets[12]. Additionally, the Inflation Reduction Act's price controls and global reference pricing systems have intensified pressure on pricing strategies, forcing companies to justify cost increases with value-based evidence[13].
AI-driven drug discovery has emerged as a unifying trend, with 87% of alliance investments in 2024 focused on AI platforms[14]. However, smaller firms struggle with the high upfront costs of AI deployment, exacerbating resource gaps. Large pharma's ability to absorb these costs—Roche's $13.2 billion R&D budget, for example—gives it a clear advantage in leveraging cutting-edge technologies[15].
Investment Implications
For investors, the biotech sector's resilience lies in its capacity to balance innovation with financial prudence. Large pharma's focus on strategic acquisitions and localized manufacturing offers stability, while small biotechs' reliance on agile funding models and partnerships presents high-risk, high-reward opportunities. The key is to identify firms that align capital allocation with long-term therapeutic goals, rather than short-term cost-cutting.
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