The Federal Reserve made its long-anticipated interest rate cuts on Wednesday, lowering rates by a half of a percentage point.
It’s the first time the Fed has cut interest rates since March 2020, at the start of the Covid-19 pandemic. Biotech markets reacted almost immediately after months of speculation about a rate reduction: The XBI, the closely-watched barometer of biotech stocks, rose about 2% in the wake of Wednesday’s cuts.
John MaraganoreThe new benchmark interest rate of 4.75% to 5% will pressure investors who have sat on cash to put it to work in higher-risk, higher-return investments. The Fed also projected more rate cuts of an additional half-point before the end of the year.
For biotech, that’s likely to make it easier for private and public companies to raise money, and to allow “many of these great innovation engines to get funded,” former Alnylam CEO John Maraganore told Endpoints News.
Interest rates are “biotech kryptonite, so it is extremely welcome to see what is hoped to be the beginnings of rate cuts,” Maraganore said.
Stifel analyst Paul Matteis said any rate cut, no matter the size, is welcome news to biotech. Most investors have assumed some cut was coming and are trying to position themselves as best they can.
“They’re trading on fundamentals, and they’re trying to make sure they don’t just get, like, blindsided by the Fed,” Matteis said. “The data out there is a little over 60% of the market, from what I’ve seen, expects a half-point. So that’s generally what’s priced in the stocks.”
TD Cowen analyst Yaron Werber said either a quarter-point or half-point cut would be seen as the start of a trend, but noted forecasting when the trend might accelerate is difficult. The biggest impact will be felt by small-cap biotechs, which are likely to see most of the near-term impact as cash starts flowing toward them from larger companies.
Recovery, not a boom
Although more investors will be putting money to work, Werber doesn’t think the market will return to levels of the pandemic boom era — but not because of interest rates. There are simply fewer companies out there in the current “innovation cycle” that can start selling blockbuster drugs in the next few years.
“I think we’re going to continue to see a recovery, just like when we did in the post-2000s genomic bubble,” Werber said. “But I’m not convinced that we’re going to go into a full bull market, because I just don’t think we have quite the same fundamentals that we did in 2008, 2010, and then obviously during Covid.”
As the Covid-19 pandemic triggered a sharp recession, the Fed lowered interest rates to 0-0.25% to try to stabilize — and stimulate — the economy. By letting people borrow money essentially for free, regulators invited a tsunami of cash that flooded the biotech sector, leading to an 18-month bull market that saw nearly 200 IPOs and several dozen SPAC mergers.
But as economic activity heated up, the Fed raised interest rates 11 times since early 2022 to tamp down on runaway inflation. The rates have remained stagnant for over a year as inflation has cooled and Federal Reserve Chair Jerome Powell has tried to navigate a “soft landing” for the economy, mauling biotech stocks in the process.
Powell had signaled rate cuts as early as last December, when the Fed projected lowering interest rates between three and seven times in 2024. However, as rates stayed high, biotech was lulled into a handful of “false starts.” Some companies have managed to pull off IPOs this year after a significant cool-down in 2022 and 2023, but the market has remained tough.
Srini AkkarajuOthers in the venture capital space don’t believe interest rates will have much impact, particularly in the short term. Economic fundamentals matter more and will have greater influence over both investment in biotech and market sentiment than how much the federal interest rate changes, in their view.
Samsara BioCapital founder Srini Akkaraju said interest rate changes have historically held less weight than the M&A environment — although he noted low interest rates typically bring generalist investors back into biotech, which boosts IPO activity. It’s only been in the last few years where interest rates began affecting biotech more potently.
But the pandemic, he said, may have changed things. “Maybe we've evolved as an industry and as an investor group that this is affecting how investors think about it,” Akkaraju said.