Navigating an Uncertain Market Amidst Cautious Optimism: Steps Biotech Companies Can Take to Hedge Against Financial Fluctuations

As global markets continue to contend with a complex mix of macroeconomic pressures, development-stage biotech companies are being urged to proactively strengthen their financial resilience. The ability to anticipate and respond to liquidity challenges has become a defining factor in determining which companies emerge from this period of volatility with momentum and stability.

In this post, we explore practical measures that development-stage companies can implement to mitigate financial risks and maintain operational agility in an evolving market environment.

Market Pressures Continue to Weigh on Biotech Stability

Despite an upturn in biotech M&A toward the end of Q2 2025, it was reported in August 2025 that biotech layoffs have not slowed down but are rather outpacing those of 2024, with the industry surpassing 13,000 layoffs by July 2025, a 31% year-over-year increase at the halfway mark. Cuts have been reported as being ongoing and frequent up until the end of Q3 2025 and, throughout 2025, a number have been the subject of restructuring or insolvencies.

The continuing layoffs have been attributed to the sector grappling with patent cliffs, strategic investment, and pressure to streamline operations. The market is still undergoing a correction after the disruption caused by the pandemic, which introduced an influx of cheap capital that created an arguably unsustainable boost in investment. Higher borrowing costs, growing public debt, healthcare pricing reforms, shifting regulatory frameworks, tariff uncertainties, and an evolving global trade environment are contributory factors to ongoing market uncertainty, and have had a disproportionately significant impact upon the biotech sector in the first half of 2025, and whose impact is still being felt in the second half of the year. Development-stage biotechs remain at risk of entering into a situation that incorporates some degree of financial pressure, and this situation may continue for 12–24 months.

Practical Steps to Anticipate and Prepare for Financial Distress Before It Occurs

It is a common scenario for companies to encounter a situation in which their financial health is substantially contingent on a binary outcome relating to one or more testing or product approval efforts. Even if a company has approved drugs in development, it can still find itself potentially vulnerable to encountering the common liquidity issues that arise when cash runs out. A company carrying debt might also foresee debt defaults further down the road due to being unable to hit covenants and the subsequent materialization of a debt maturity or a covenant breach. It is therefore advisable to:

• Identify potential triggers and identify paths to address challenges. Inflection points, such as clinical trial results or anticipated equity raises, should be routinely identified by management. Boards that understand these triggers can preserve optionality and avoid being forced into reactive or disorderly restructuring processes.
• Establish a robust contingency plan. A well-prepared contingency plan should identify the relevant duties that might become applicable should outcomes be negative, including duties under all the legal regimes that impact a company’s national and international operations. It is advisable to have access to counsel and advisors that are familiar with the relative rigors and stringencies of insolvency regimes in all applicable jurisdictions.
• Engage in fact-finding during periods of buoyancy. The board should be prepared to discharge its duties in any situation of potential financial distress. Even when corporate health is buoyant, it is prudent to engage in fact-finding exercises that have the capacity and rigor to set out areas of the business where funds might run low, and to ‘game-plan’ steps the company may implement should such a situation materialize. Executives would be well advised to budget for the cost of navigating such periods of distress and of steering the company toward better outcomes.
• Be mindful of the length of insolvency proceedings. Even a relatively straightforward dissolution or liquidation for a solvent company has the capacity to be a time-consuming and expensive endeavor. Boards that consider recommending shareholders approve a dissolution and liquidation of the company, resulting in the distribution of available cash to shareholders, must account for several steps and approvals in what is often a lengthy process. Final cash distributions require the conclusion of a dissolution process, which can last three or more years. If a more complicated wind-down process, like an assignment for the benefit of creditors or a bankruptcy, are value-additive, process costs and time required can quickly escalate.
• Identify high-value transactions. Before reaching a crisis point, companies should consider running a structured process to evaluate strategic alternatives, such as asset sales, mergers, or licensing deals. A well-run marketing process can take months to execute but may significantly enhance stakeholder value relative to a liquidation scenario.
• Evaluate a hypothetical liquidation at an early stage. By conducting a preliminary analysis, boards can identify the optimal process for a company’s plan B, budget for that plan, and reserve sufficient resources so that quality options are available in the event they are unable to successfully navigate the headwinds described above. Although a liquidation may be viewed as a last resort or least preferable alternative, evaluating a hypothetical liquidation and being informed of timing and cash requirements can be helpful in evaluating available strategic alternatives and ultimately explaining, justifying, and extrapolating a board’s rationale for corporate strategy to shareholders and stakeholders.

Conclusion

As the biotech market continues to recover, resilience will depend on disciplined foresight, governance, and adaptability. While the return of capital and M&A activity signals cautious optimism, persistent layoffs and liquidity challenges highlight the need for disciplined planning and risk management. Companies that rigorously evaluate contingencies, maintain transparent communication with stakeholders, and act early to preserve value will be best positioned to navigate uncertainty. Companies should consider restructuring, not as a retreat, but as a recalibration of resources and purpose, and plan for this contingency with the knowledge that a rigorous overview of assets and options can only strengthen a business regardless of outcomes.

Author: Sam Newman

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.