In the decade following the financial crash, companies in western economies operated in an environment of unusually cheap capital. Life sciences companies were funded, valued and sold on the assumption that it would stay that way. It has not.

Since 2022, the cost of capital has risen sharply, a trend that shows little sign of reversing soon. Biopharma funding as a whole has adapted: venture investment is well above pre-pandemic levels. For cell and gene therapy (CGT) however, venture funding has barely increased since 2019 and the money that is still flowing into this sector has undeniably moved away from early-stage companies.

Higher interest rates affect biotech valuations

In 2021, the US 10-year Treasury yielded around 1.5% and UK gilts around 1%. Today Treasuries yield about 5% and gilts about 5.4%.

Those yields matter even to companies that never borrow, because they set the floor for every other investment. Investors expect a risky asset to return what they could earn safely, plus a premium for the risk. So, although life sciences companies are funded mainly through equity, a higher risk-free rate feeds through into the returns their investors demand.

The shift in rate therefore hits life sciences particularly hard because the further away a company’s revenue is, the more a higher required return reduces what it is worth today. A cell or gene therapy entering the clinic today may not earn revenue for a decade.

On this timescale, the arithmetic is unforgiving. A rise of four percentage points cuts the present value of cash received in 10 years’ time by between a quarter and a third, whether the investor starts from a gilt yield or a venture capital (VC) hurdle rate of 40%. That raises the bar for funding a company and reduces what investors are willing to pay when they do.

Why the cost of capital is staying high

Several forces suggest the cost of capital is unlikely to return to pre-pandemic levels:

• Inflation has proved sticky. US inflation rose to 3.7% in September, and UK inflation to 3.5%, with the Bank of England expecting it to go above 4% early next year.
• Long-term rates are set by markets more than by central banks. US and UK official interest rates are lower than in September 2025, yet 10-year yields have risen by about a point in the US and 0.7 points in the UK, driven by energy-driven inflation and concerns over government borrowing.
• Quantitative tightening looks set to continue. On current plans the Bank of England will shrink its gilt holdings by an average of £46bn a year until 2034.

None of this makes higher rates permanent, and by historical standards today’s rates are not unusually high: it was the near-zero rates of the 2010s that were the exception. But together, these pressures make it likely that the floor under the cost of capital stays well above its 2010s level for years, not quarters.

Biopharma money has moved to later stages

Biopharma venture funding has not declined in response. On the contrary, global deal value reached $36.1bn in 2025, well above the $21.1bn invested in 2019. What has changed is where it goes.

Investors are still backing new companies, but a growing share of their money is going to businesses that already have clinical data.

For most of the sector, that is a shift in emphasis rather than a drought. Early-stage funding for biopharma excluding CGT was about 50% higher in 2025 than in 2019, even as its share fell. Cell and gene therapy tells a very different story.

Cell and gene therapy faces a higher funding bar

CGT is a key sector for the UK, with a dense base of developers and manufacturers and a share in more than half of Europe’s advanced therapy clinical trials.

CGT funding has grown far more slowly than the rest of biopharma, as a higher cost of capital has strengthened investors’ preference for de-risked assets. CGT venture investment reached $5.6bn in 2025, just 10% above its 2019 level. Over the same period, venture funding for the rest of biopharma rose 84%. As a result, CGT's share of biopharma venture funding fell from 24% in 2019 to 16% in 2025.

Increased costs of capital have raised the bar for investment across biotech, but specific characteristics of CGT help explain why it has lagged so far behind the rest of the sector. Development programmes are extremely capital-intensive. Manufacturing must be built and validated long before a therapy generates revenue, so CGT companies need more capital, earlier, than most. There is also a level of specialist risk associated with these programmes. CGT carries enhanced manufacturing and commercial risks on top of clinical risk, and recent commercial setbacks in gene therapy have made those risks harder to ignore. Investors price that in, so the bar for CGT is higher still.

Unsurprisingly, funding has moved decisively to later stages. Early-stage CGT funding fell 62% between 2019 and 2025, while late-stage and growth funding almost tripled.

The number of early-stage CGT deals has held broadly steady, at 89 in 2019 and 81 in 2025. What has changed is their size. Companies are still being funded, but on much less money, at the stage where development is most uncertain and CGT costs begin to rise sharply.

This is consistent with a higher cost of capital. Investors have not abandoned CGT. They are paying for evidence, backing companies that already have clinical data and rationing capital to those that do not.

The effect on clinical assets will take longer to show. Exits have rebounded strongly this year, but most of the companies being sold today raised their early funding in the cheap-money years. In CGT, early-stage companies raised $5.4bn across 2023 to 2025, against $7.3bn across 2017 to 2019. Smaller rounds mean shorter runways, and fewer companies reaching clinical data now means fewer assets for buyers later.

How UK cell and gene therapy companies should respond

The UK has significant depth and strength in CGT, including academic research, clinical trials and manufacturing. Much of that strength is in the area that is now being squeezed: early-stage companies that are looking to raise money and working towards clinical proof.

Three practical considerations for UK CGT companies:

• Funding rounds should be designed around the next data readout. Smaller funding rounds that stop short of the next meaningful data inflection point leave early-stage companies exposed in a market that now requires more evidence to green-light investment. Each round needs to be sufficient to reach the next point at which a specialist investor or acquirer can price the risk.
• Non-dilutive funding needs to be treated as core capital. When equity is expensive, non-dilutive funding like grants, partnering income and R&D tax credits needs to sit at the centre of a company’s funding strategy. These are now key levers to scale.
• Transaction readiness. Exits have rebounded, but buyers are selective and the window can close quickly. Companies need clean IP, well-organised data and defensible records before a buyer or partner appears. Those that can move quickly when an opportunity arises will be the ones to capitalise.

Cheap money did not make investors less demanding about returns so much as more willing to wait for them. The businesses furthest from revenue, early-stage biotech among them, attracted the marginal pound. That patience has gone, and few businesses ask investors to wait longer than early-stage CGT. UK companies that plan for this shift, and fund themselves to reach the evidence investors now demand, will still find capital available.

For more information, please contact Max Stanyard or your usual RSM contact.

Latest related insights