Guest Commentary
Biotech executives and investors alike will be watching the Federal Reserve’s interest-rate decision this week closely for the potential double impact a rate cut could mean for life sciences: the opening of financial options to emerging growth companies as well as the increasing flexibility of lab landlords to invest in their growth.
Biotech companies could be considered fragile during the early stages of product development given that they typically require significant capital for research, development, and clinical trials. A reduction in interest rates lowers the cost of borrowing, making it easier for biotech firms to access the funds they need to continue their research and expand their operations.
“The industry’s consensus is that interest rate declines will loosen venture funding, but we haven’t seen significant movement yet,” said Russell Allen, CEO of BiotechExec, a firm that places c-suite professionals with early-to-mid-stage biotech and medtech companies.
For biotech investors, a rate decrease would mean fewer financial burdens for the companies they invest in, allowing them to stretch the funding they receive further. This boosts the prospects for investing in product development and can be a factor in return on investment.
Lower interest rates also improve market sentiment, often leading to increased flexibility in raising capital. The ability of emerging life sciences companies to extend their operating runway can influence their ability to survive short-term financial pressures.
Equity markets also tend to perform well in low-interest environments, giving companies better opportunities to raise capital through initial public offerings. Since the most recent biotech IPO window peaked in 2021, these companies have faced a restrictive financing environment with several of the usual avenues for fundraising relatively closed. Biotech companies have attempted few IPOs since rate increases began in the first quarter of 2022.
Wave of innovation
For investors, returning to this cycle of investment signals a wave of innovation and potential breakthroughs, maximized when all avenues for fundraising are open.
“Everyone talks about the impact of interest rates on public biotechs, but what’s less discussed is how depressed public prices are impacting early-stage investments,” said Lindy Fishburne, managing partner at Breakout Ventures. “Valuations are tight and cash is moving slowly as exit comps don’t support the investments these new businesses need to grow. We all need interest rates to come down for this sector to be fairly valued given how important biotech is in everyone’s life.”
[“Exit comps” are financial metrics designed to help determine the value of a business by comparing the selling price of that business to comparable companies following an exit such as an acquisition or an initial public offering (IPO)].
In a less restrictive investment environment, biotech companies are better positioned to allocate resources to new products, people and places. Even in a more encouraging economic climate, these companies face extreme challenges. A survey published in June in the Journal of the American Medical Association reflected an average cost per drug developed of $879.3 million.
Lower interest rates encourage risk-taking and long-term investment, which are essential for biotech investors looking for high returns in a field that traditionally requires patience but offers significant scientific, societal, and financial upside.
Additionally, the capital that drives laboratory-based real estate is highly specialized, catering to the unique needs of biotech companies and research institutions. Lower interest rates reduce the cost of capital for developers, allowing them to incur the higher costs associated with lab construction projects and to enhance tenant improvements, which are allowances that tenants use to build out their leased space.
Lab real estate opportunity
For investors in lab real estate, this creates an opportunity to participate in and even stimulate demand from biotech firms looking for state-of-the-art facilities. As both companies and their lab landlords gain access to more capital at lower cost, they balance decisions to invest in those same products, people and places, driving demand in the lab market.
To Fishburne’s point, there is significant investment capital waiting expectantly for the Fed to loosen monetary policy. According to S&P Global Market Intelligence’s July update, there is $2.6 trillion in global private equity currently sitting on the sidelines, looking for an improved environment in which to invest. While this capital is not exclusive to life sciences, it is a critical reminder that risk capital is sensitive to many variables.
The Federal Reserve faces an intriguing window of opportunity here: biotech’s last growth cycle lasted from 2015 through 2021 and was the industry’s longest bull run. The result was a greater investment in science than the world has ever known before.
A decrease in rates now has the accompanying benefit of propelling that scientific wave forward after a relatively brief interruption amid the constrained capital conditions over the last 24 months. Lowering interest rates now presents multiple benefits for both the life sciences industry and lab real estate developers.
In a low-interest-rate environment, companies can innovate more freely, and lab developers can invest alongside them and expand their portfolios at reduced borrowing costs. Together, these conditions create a more fertile ground for life sciences growth.
Matt Gardner is Life Sciences Leader in the Americas for CBRE, the global commercial real estate services company. He previously served in leadership roles for the California Biomanufacturing Center, the Maryland Technology Development Center, Prospect Silicon Valley, BayBio and MarylandBio. He has served on the boards of Seeding Labs, Exploratorium and Johns Hopkins University. Email: [email protected]
