The effects of the Federal Reserve’s recent interest rate cut haven’t fully been felt by the economy or financial markets. But the first instance of U.S. monetary easing in over four years may be a boon for capital-intensive biotech companies. That’s particularly so for those with small- and midcap (SMID) designations.
Should that thesis prove accurate, the ALPS Medical Breakthroughs ETF (SBIO ) is among the exchange traded funds that could benefit. Indeed, there’s no denying that it was high interest rates that plagued biotech stocks in 2022 and 2023. Fortunately, 10-year Treasury yields are well off the highs seen last year. That indicates there is at least one tailwind emerging for SMID biotech names.
Actually, the lower rates have multiple benefits for SMID biotech firms, including SBIO components. More favorable borrowings costs lower the cost of capital for smaller, cash-hungry companies. But those lower rates can also make mergers and acquisitions more attractive. That’s something to ponder given the history of SBIO being home to takeover targets and the needs of large-cap pharmaceuticals companies to replenish product pipelines.
Other Possible Catalysts for SBIO
Beyond interest rates and the hope that consolidation activity will resume in earnest, there are possible sparks that could come into play for SMID biotech companies. These firms remain innovative at a time when that’s a coveted trait by investors positioning for a biotech rebound.
Looking at the healthcare space today, there are a variety of unmet needs that some SBIO firms could tap into. Those include side effects caused by popular weight-loss drugs.
“If patients discontinue the treatment they regain the fat but have a hard time regaining lost muscle, which puts them in a worse metabolic state than before. There is therefore an unmet medical need for next-generation drugs which either do not generate muscle loss and/or increase muscle,” noted Jon Stephenson of BNP Paribas.
Another area that could hold long-term promise for some SBIO constituents is autoimmune diseases, which stem from a patient’s own memory B cells. It’s one of the fastest-growing healthcare segments, confirming a potential-rich long-term trajectory.
“Hypothesising that depleting these memory B cells could reset the immune system, immunologists are exploring the use of engineered T cells and T-cell engaging antibodies to deplete these memory cells, thus restoring the immune system to its state before the accidental learned memory,” added Stephenson.
VettaFi LLC (“VettaFi”) is the index provider for SBIO, for which it receives an index licensing fee. However, SBIO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of SBIO.
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