09.20.2022 | Forbes
By Steve Brozak
Serious thought should be given to the effect the anticipated Federal Reserve 0.75% rate hike will have on the biotechnology industry and consequently on the health of the nation. Given we are in the fastest inflationary period in 30 years and rate hikes are really the only tool the Fed has to address this economic challenge, unintended consequences are certain.
As interest rates and inflation continue to rise, challenging “safer” fixed returned securities and capital market’s dramatic swings, investors are becoming justifiably alarmed. It should therefore be expected that investment in higher-risk, long-term growth companies like biotechs will have to decline, making the industry’s continued growth tenuous.
The anticipated rate hike will result in an annual increase of 3.25% – 3.5%. By the end of 2023, rates are projected to rise even higher to between 3.75% and 4%. Such rate increases will further impair the biotech sector’s ability to raise life-sustaining funds and could be its most significant challenge to date. So what happens if the biotech sector breaks down?
Consider that between 1980 and 2021, there were 635 biotech IPOs launched. Of that total, 173 (over 27%) entered the market in 2020 and 2021. That unprecedented number of enterprises all required financial support from a now shrinking market of serious investors who were mindful of the history that 90% of biotech’s drug programs fail.
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