On Monday, global market indices crashed after a week of soft corporate earnings, a macroeconomic warning, and concerns that the Federal Reserve had waited too long to cut interest rates.
Biotech and pharma weren’t spared. Here are six questions (and some answers) about what happened and what it means for the industry once the dust settles.
Why is the stock market falling so much today?
There are a lot of different things going on, some of which are very much about the markets and some of which are more about economic fundamentals.
Last week there was an earnings-related sell-off in the huge tech stocks that make up much of major stock indices. Then, on Friday, the US posted weak job numbers that led to worries about a recession or a “hard landing” that the US had until now avoided.
On top of that, get ready to hear a lot about the carry trade over the next couple of days. The short version is: Traders who make bets on the differing interest rates between countries like the US (where rates are high) and Japan (where rates are very low) use lots of leverage to bet on stocks. When it seemed like the interest rate policies of both countries were going to reverse, they started unwinding those bets by selling US stocks. That can cause some very big, very sudden moves.
What’s that look like today?
A broad market decline. Stocks are down across the board and yields on bonds are falling (which is what happens when people buy “safer” assets like bonds).
- The broader S&P 500 $SPX: -3%
- S&P’s biotech index $XBI: -4.8%
- The tech-heavy Nasdaq Composite: -3.4%
- The small-cap Russell 2000: -4.4%
- Japan’s main index, the Nikkei 225: -12.4%
“I think what we’re seeing in a broad sense is a loss of confidence and fear creeping back into the market, and that’s related to the declines in stocks like Nvidia, Apple, Microsoft,” said Tim Opler, a managing director in Stifel’s Global Healthcare Group. “I love Nvidia, we all do, but was it worth $3.3 trillion?”
Tim OplerOpler called it a “classic market correction” but said it wasn’t a loss of confidence in fundamentals, like worrying financial institutions might be at risk, a credit lock-up, or other, much more problematic issues.
That’s still not good news for some of the biggest names in biopharma. Market darling Eli Lilly $LLY was down 4%, its weight-loss rival Novo Nordisk was down 2.5%, and Pfizer was down almost 3%. Japan-based biopharmas were also particularly hit. Daiichi Sankyo slid more than 10%, Eisai was down more than 8% and Takeda fell almost 7%.
How could it affect biotech and pharma stocks in the longer term?
It’s going to be bumpy out there for a bit. Market and economic turmoil tend to take a while to sort itself out, and things tend to be volatile before they settle into any kind of narrative.
Oppenheimer’s James Yoo, in a note before Monday’s crash, said that among the investors they’d spoken to, “more than a few believe mid-cap biotech will be one of the first sectors to outperform as the rates trade continues to come off with the economy slowing and because the group tends to do well during recessions.” But Yoo also pointed out the US election and IRA pricing as risks that still haven’t settled.
What does this mean for interest rates?
John MaraganoreThe US Federal Reserve has held off on making a long-expected rate cut, saying it was waiting for more data about the state of the economy. But last week’s jobs report was a hint the US economy was slowing, and traders who wager on interest rates made bets that they would come down. Monday’s sell-off has some hoping for an emergency rate cut, and arguing that the Fed shouldn’t have waited.
A cut in rates would make the cost of borrowing cheaper, which has generally been good news for biotech stocks and equities as a whole. But broader economic and market turmoil — at least in the short term — is likely a far more powerful force.
The long term might be a different matter, said John Maraganore, the former Alnylam CEO who now sits on boards across the industry. On Monday morning he said interest rates were “number one, two, and three for the capital markets as it relates to biotech.”
What are people close to the market saying?
“Nobody wants a recession, and I hardly think one jobs report that didn’t quite meet expectations is enough to say there is recession coming, personally, but the reality is that those recessionary markets tend to be better for biotech from a stock standpoint than otherwise,” said Maraganore.
Kevin EiseleBiotech could “suffer some shorter-term knockdown effects that will impact valuations and the ability for companies to raise capital,” said Kevin Eisele, a managing director on the healthcare equity capital markets team at William Blair. “But at its core biotech sector performance is driven by positive clinical developments, commercial success, and prospects for M&A. The fundamentals for all three drivers remain, to varying degrees, intact for the longer term.”
“On the biotech side, the fundamentals have been good for a while but have not yet shown the type of performance I’d have expected in front of a Fed rate cut,” said Opler. “All of the positives of biotech are still there.”
What does this mean for biotech IPOs?
I mean, it’s probably not great.
Editor’s note: Kyle LaHucik and Andrew Dunn contributed reporting.