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Daily Briefing

How will the Fed's interest rate cut impact healthcare?


The Federal Reserve last week announced plans to cut its benchmark rate by 0.5 percentage points, marking the bank's first rate cut since 2020, which experts say could spur more capital spending among hospitals and health systems and investments in biotech.

How the Fed's rate cut could impact providers

The Fed's decision cuts the federal funds rate, which is the interest rate banks charge each other for short-term borrowing and can influence consumer and business borrowing as well as investments. Experts say the cut could encourage health systems to issue more bonds or reprice already existing ones, which could attract investor support while lowering the cost of capital for the issuer.

According to Rick Kes, a healthcare senior analyst at consultancy RSM, providers that issue bonds at lower rates could reinvest their saved capital costs into other projects.

Marty Bonick, president and CEO of Ardent Health, said the cut could accelerate the post-initial public offering growth strategy for Ardent, including leaning into ambulatory care in new and existing markets. Recently, Arden repriced a term loan and said it expects to save around $5 million a year in interest expenses, Bonick said.

"We'll continue to be opportunistic when it comes to finding ways to strengthen our balance sheet, given the changing economic environment," he said.

However, some healthcare providers are choosing to wait and see if interest rates continue to decline before acting.

Steve Markovich, president and CEO of OhioHealth, said the health system may consider variable rates on future bond issues if rates continue to drop.

Similarly, AdventHealth CEO Terry Shaw said his health system is thinking long-term. "While we recognize that changes in the rate environment can influence short-term market dynamics, our borrowing and investment strategies are designed with a long-term horizon, typically spanning five to 10 years," he said.

It's also possible that lower rates could have some negative effects on health systems, as they could potentially translate into smaller returns on a system's own investments in the financial markets, depending on how their portfolio is structured, according to Eric Ralph, managing director at Highland Associates.

Ralph added that providers who rely more heavily on fixed income investments could see a decline in returns, and if operations are strained as well, they could feel pressure to pursue riskier investment strategies. Typically, a health system's cash and investment portfolio involve more money than any outstanding debt it has, Ralph said.

How the Fed's rate cut could impact biotech

Meanwhile, experts say the Fed's rate cut could spur investment in biotech companies, which are often seen as risky investments, given that drug startups often need many years and hundreds of millions of dollars to invent a new medicine and bring it to market.

When interest rates are too high, "it's too expensive to make an investment," said Christiana Bardon, comanaging partner of BioImpact Capital and portfolio manager at MPM Capital. "We're really very dependent on interest rates" as a result, she added.

The Fed's decision to cut rates "will be very positive for the biotech capital markets," said John Maraganore, former CEO of Alnylam Pharmaceuticals and an advisor to drug startups. "I expect to see a meaningful strengthening of the biotech tape as interest rates decline."

In the past, interest rates "have correlated with fund flows into and out of biotech," meaning lower rates "should hopefully help" bring money back to the sector, said Umer Raffat, an analyst with Evercore ISI.

Similarly, Arrakis Therapeutics CEO Michael Gilman said that rising interest rates "are historically a headwind for our industry, so I think it's reasonable to expect the wind to shift direction."

As interest rates drop, investors could look more closely at earlier and riskier companies that they've seemed to avoid recently, said Jeff Jonas, a partner with the investment firm Cure Ventures. "When people are nervous, they look for more de-risked assets," he said. "In this environment, I'm hoping that there'll be more avidity for things that are more innovative."

Kevin Parker, CEO of Cartography Biosciences, said lower rates could bring "momentum" back into private markets. Venture firms typically require more time to raise new funds when interest rates are high, which typically translates to a slower rate of investments. However, lower rates could mean more money comes into venture firms and, eventually, startups.

"While we shouldn't have a 'wild west' of unrestricted capital in the ecosystem, the work that companies do to bring therapeutics to patients requires capital investment," Parker said. "So hopefully the easing of interest rates helps get the investment-exit cycle moving more smoothly."

However, it's also possible the investors could choose to put their money elsewhere. "Falling interest rates will clearly be better for riskier segments of the markets like ours," Gilman said. "Whether it is indeed ours or some other segment will depend on other factors, internal or external. I guess we'll see."

The biotech market is also cyclical, often subject to stock swings that are "probably larger than warranted by the facts and often accelerated by sentiment and emotion," Gilman said. There's "FOMO when the market is moving up, fear when it's moving down," he added.

"Lower interest rates will most definitely open up risk appetite for investors," said Chris Garabedian, chair and CEO of biotech company creator Xontogeny. But "my own view is other macro factors will have a greater influence over private and public investment in biotech." (Hudson, Modern Healthcare, 9/24; Fidler, BioPharmaDive, 9/19)


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