The broad U.S. stock market is approaching a record high level, but the biotech index is still 50 percent below its peak at the beginning of 2021, though now there is a glimmer of hope.

The American biotech sector is one of the sectors most affected by recent changes in interest rate expectations, according to the Financial Times.

During 2021 and 2022, the sector has suffered declines of over 20 percent, but at the beginning of September, biotech stocks increased by over 25 percent, and a 5 percent gain on Wednesday suggests a brighter outlook.

‘At the end of 2020 and beginning of 2021, many early-stage companies received valuations that were not sensible. Now we have the opposite situation… (so) we are scanning the sector to try to identify companies that have been left for dead,’ Andy Acker tells the Financial Times.

He is a portfolio manager for healthcare at the managing investment company Janus Henderson.

They have weighed down the index

Biotech recovers on the stock market as interest rates stabilize

Vaccine developer Moderna and Altimmune, which develops treatments for obesity, are a couple of the companies that have contributed the most to the recent weakness of the S&P Biotechnology.

As demand for COVID-19 vaccines has decreased, Moderna’s stock has fallen, losing over 50 percent of its value this year.

After a drug trial showed serious side effects for some patients, Altimmune’s stock also lost more than half of its value in a single day in March.

Pharmaceutical manufacturers

According to Janus Henderson, in October, a total of 232 Life Science companies globally were traded at a market value lower than their cash reserves. However, this was before the recent stock market rally in the sector.

Even major pharmaceutical manufacturers have underperformed, with S&P 500 Pharmaceuticals on track for its worst performance in 20 years relative to the broader S&P 500.

On Wednesday, Pfizer reached its lowest level since 2013 and is the pharmaceutical company that has impacted the S&P 500 the most this year.

Extra Large Interest Rate Effect

Rising interest rates have weighed down all industries, but for sectors like biotechnology, the effect tends to be particularly large since many companies in the sector focus on growth far into the future.

On Wednesday, the U.S. Federal Reserve left benchmark interest rates at 5.25-5.5 percent and signaled that cuts will begin next year.

The belief that the Federal Reserve will soon begin lowering interest rates has already started to inflate the valuations of biotech companies. S&P Biotechnology increased by 14 percent in November and has risen by 11 percent now in December.

‘I think there is a budding optimism right now,’ says Rahul Chaudhary, head of healthcare equity capital markets at investment bank Leerink Partners, to the Financial Times.

He adds that there is hope that the environment with lower interest rates will start to help the biotech sector next year and more companies will then be able to access capital.