Risky Biotech Stocks’ Recovery Hinges on Deeper Fed Rate Cuts

(Bloomberg) -- The prospect of further interest-rate cuts from the Federal Reserve is finally giving diehard believers in the biotechnology sector reason for guarded optimism after a punishing four years.

The Nasdaq Biotechnology Index has rebounded some 30% from the depths of April’s tariff-fueled gloom as investors bid up the sector ahead of the Fed’s first move to lower borrowing costs this year. With further rate cuts on the table investors are rushing back into riskier corners of the stock market. A broader benchmark of small-cap stocks, the Russell 2000, marked its first closing record since 2021, yet the closely watched biotech gauge remains more than 10% below its all-time highs. 

That’s because clinical-stage biotech companies remain some of the biggest gambles in the market. While the reward for holding a winning stock can be manifold, firms also tend to burn through cash faster than they can raise it, meaning the Fed needs to keep bringing down borrowing costs for the sector to truly thrive.  

Now that officials have formally penciled in two more reductions for the year — following the quarter-percentage point cut earlier this week — hope is being revived that Wall Street’s rush back into riskier assets will finally seep through to drug developers.

“With the potential for interest rates to be cut more, you’re going to see a loosening up, especially with the biotech sector sentiment getting slightly better,” said Hartaj Singh, founding partner of Tecumseh Partners. 

Lower borrowing costs should give a boost to the funding market that has long stalled since the Fed began its aggressive rate-hiking campaign in 2022. The sector bottomed as investors became increasingly hesitant to fund riskier assets. A return to the frenzy for biotech stocks, ignited by the pandemic’s easy-money era when interest rates were sitting near zero, still seems somewhat distant.

“Usually the first three to six months of a rate cycle aren’t necessarily a positive for biotech stocks,” said Mike Perrone, a health-care specialist at Baird. But “this could be a little bit different because it feels like the economy’s in a better place than it usually is by the time we cut rates.”

Optimism that President Donald Trump’s second administration was going to ease regulations and spur momentum in the capital markets quickly tempered amid tariff headlines and upheaval at government health agencies — sending the sector to a 16-month low in April.

Waiting on Momentum

Since then, positive clinical trial data, new regulatory approvals and drug launches as well as mergers and acquisitions by large drugmakers have also contributed to the upward trajectory of the sector.

About 16 companies in the index have more than tripled in size since the April lows, with the likes of Stoke Therapeutics Inc., Tourmaline Bio Inc. and Mineralys Therapeutics Inc. among the group’s top performers. 

Generalist investors typically pile back back into biotech sector when the group is outperforming and underweight positions hurt their portfolios, according to Baird’s Perrone.

“We’re a little ways away from that, but if we can get some biotech outperformance, it’s going to force people who are underweight biotech to just go even-weight, or if it continues, to go overweight,” Perrone said. 

IPO Drought

The start of a Fed easing cycle is also bringing back optimism for initial public offerings in the sector. First-time share sales for the biotech industry have lagged compared to recent years, with new entrants on US exchanges raising $1.2 billion in the year to date, down by 57% versus the same period in 2024, according to data compiled by Bloomberg. 

LB Pharmaceuticals Inc.’s debut last week, was a welcome change of pace for investors who haven’t seen a biotech IPO since January. Shares of the biotech company ended their trading debut 15% higher. 

“Whenever Fed rates go up, IPOs go down and vice versa, so that may be the trigger, that may be the signal for the IPOs to resume for the right companies,” Arda Ural, head of EY Americas life sciences, said in an interview.

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