The drop in interest rate is slightly bigger than anticipated and good news for the biotech industry, but little will change in the near term.
Biotech industry watchers have been eagerly awaiting a drop in the federal interest rate. Now that it’s here, the biotech index has collectively shrugged.
On Wednesday, the Federal Reserve cut rates by half a percentage point—more than expected. But if industry watchers were expecting a sudden gold rush of fundraising, M&A deals and IPOs, that’s unlikely to happen, according to Jared Holz, an analyst with Mizuho Securities.
“I don’t think that there are meaningful shifts in the way that executives are running these companies,” Holz told BioSpace. “I feel like the headline is a little bit anticlimactic.”
That sentiment bore out in the numbers. The S&P Biotech XBI, considered the best measure of small-cap biotech stocks, spiked initially when the news was released at 2 p.m. ET on Wednesday, gaining about $2, but closed right where it began, at $100. This morning the index was up about 2%. Overall, it’s the same as it has been since August, Holz said. That said, he added that the rate cut is certainly “a net positive.” For one, Holz said that the rate cut does bring down the cost of capital, which is good for everyone.
“Money goes a little bit further, it helps strengthen operations. That’s a fundamental positive for a group that is so predicated on . . . capital preservation and our perennial financers,” Holz said.
Careful What You Wish For
Many biotechs have been taking dramatic steps to hang on amid the rocky markets, with programs jettisoned and substantial layoffs to preserve cash. The rate cut could spur some return to scientific projects, but that will be hard to quantify, Holz said.
Holz noted that since the rate drop, there has been a “bit more momentum” for small cap equities though, which bodes well for biotech.
“When I look at biotech, I just view it as a nichey, highly academic kind of component of small cap equities,” he said. “If small cap stocks continue to trade well, biotech will probably do fine. And if not, then maybe there’s a point in which there’s a little bit of stagnation in terms of the index.”
As for M&A, Holz doesn’t see a big spike coming. Major pharma players have still been executing a fairly normal number of deals, albeit smaller ones. About 15 to 20 deals usually get done each year, and pharma is on track for that for 2024.
“Potentially lower rates help a bit just in terms of managing balance sheet, but I don’t really think rates have a material impact on M&A strategy at all,” Holz said.
One place that could see a slight boost is the IPO market. Three biotechs went out last week prior to the rate cut, seeking over $700 million. That was a glimmer of activity after a relatively slow summer but biotech is unlikely to return to the pandemic-fueled IPO heyday, when dozens of biotechs headed to the public markets—nor should it, said Holz.
“I don’t see the floodgates opening necessarily, because the last time that we were kicking out 50 or more IPOs a year, the broader sector was negatively impacted by that,” Holz said. “Be careful what you wish for. Too many IPOs in this space I think is actually a very, very meaningful negative for publicly traded equities.”
Lastly, Holz commented on the level of interest that’s been trained on this anticipated rate drop. The idea that interest rates are a predictor of the biotech industry’s success is relatively new, he explained. Prior to 2020, rates had no bearing on how these stocks were doing. But the pandemic changed everything, sending investors of all kinds piling into the industry with substantial funding flowing into therapeutics-focused companies. And then in 2021, biotechs began to struggle and face the reality of a more normal fundraising environment.
“I’ve never heard of rates being a reason to own biotech in my career, until the sector started getting hammered in 2021,” Holz said.
