After fed rate cut, biotech stocks face ‘anticlimactic’ reality
After fed rate cut, biotech stocks face ‘anticlimactic’ reality
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.
