A recent move by the Trump administration to substantially lower funding from the National Institutes of Health for research institutions around the country has investors fearing meaningful losses for life science tools companies. The NIH announced in early February that it would cap research funding at 15% for “indirect costs” â those that aren’t directly tied to specific research projects, such as overhead and administrative costs. The new cap is below the average indirect cost rate of between 27% and 28% and well under the rates of more than 60% that universities such as Harvard, Yale and Johns Hopkins receive. The agency has estimated that the proposed indirect funding cuts would amount to more than $4 billion in savings per year for the federal government. That’s relative to the institutes’ total budget for fiscal 2024 of more than $47 billion , which makes the NIH the world’s largest single public funder of biomedical and behavioral research. However, the steep cuts from the Trump administration are already being challenged in court. Earlier this month, a federal judge blocked the White House from carrying out the reductions. Some lawmakers have spoken out against the cuts, including Republicans such as Sen. Susan Collins of Maine â who said in a statement last month that it was “poorly conceived.” As uncertainty hangs over the future of NIH-funded research, some on Wall Street are raising the alarm over stocks that could take a hit. “Approximately 60% of U.S. academic research is funded by federal government agencies, and the NIH is the single largest source of A & G (Academic & Government) revenues for Tools companies,” Bank of America analyst Michael Ryskin wrote in a Feb. 25 note. “Regardless how it’s resolved in the end, capping all indirect costs at 15% could significantly impact the ability of those institutions to provide the facilities and support for certain types of research, as individual scientists / grants are not going to be capable of supporting entire vivariums or complex infrastructure,” the analyst continued. ‘Bracing for weakness’ In the aftermath of the NIH announcement, shares of many notable life science tools companies have lagged the broader market. While the S & P 500 has fallen 4% in the past month, Bruker slid more than 14%, and Illumina has dropped about 10.8%. Agilent and 10x Genomics declined more than 11% and 19%, respectively. Thermo Fisher Scientific has shed more than 3% in that time. Among those names, 10x Genomics, Illumina and Bruker have the highest A & G exposure in BofA’s coverage. While direct NIH exposure is “more limited,” that could still be meaningful if funding is frozen, Ryskin wrote. That comes as the life science tools space was already coming under pressure over the past couple years. William Blair’s Matt Larew told CNBC that this is largely because the space was coming off the Covid-19 pandemic, when clients made significant purchases in areas like equipment and consumables, overstocking many products because of supply chain concerns. “Due to the weak macro in the last couple of years, growth in this space was really challenged, because customers had a lot of the product already,” the analyst said. “Finally, you’d gotten through that, and so the space for the first two weeks of the year actually outperformed the market for maybe the first time in a couple of years.” Those gains have now just completely disappeared, he pointed out. ILMN TXG,TMO,BRKR 5Y mountain ILMN, TGX, TMO and BRKR in past 5 years “From an investor standpoint, I think people are very frustrated with what historically is viewed as a durable, noncyclical part of the market acting ⦠more sensitive to these changing net market conditions,” he continued. “It’s certainly a problem for the stocks. No question.” Larew also said that the current quarter and probably the next quarter are “unquestionably” going to look challenging for companies. Other analysts hold a similar view. “People are bracing for weakness,” TD Cowen analyst Daniel Brennan said in an interview with CNBC, adding that the market is preparing for impact particularly on companies’ first-quarter earnings results over the next couple of months. “People are trying to figure out: Is it priced in?” Nevertheless, Brennan noted that any pressure on the stocks might offer a silver lining for those on the Street. “If there is weakness, maybe it creates an opportunity for investors to step in,” he continued. Longer-term turmoil? If the indirect costs cap is passed, institutions could collectively stand to lose billions of dollars in their research budgets. According to estimates from a calculator designed by Data for the Common Good at the University of Chicago, the total research budget loss would be more than $6.9 billion, based on fiscal 2024 figures. The D4CG also notes that the calculator is likely underestimating the amount of lost indirect costs, meaning the loss may actually be even greater. Tara LeGates, who has been a researcher in biological sciences at the University of Maryland, Baltimore County, since 2019, emphasized this will have a massive impact on the research projects she proposes. On top of that, she said the local economy is going to suffer as university staff could be laid off because those institutions won’t have the means to support them. “The indirects essentially are providing the infrastructure where I can do the project,” she told CNBC. “I can have a building with the lights on and electricity, and the students and the staff there to be able to actually accomplish those research goals. That evaporates.” Moving forward, LeGates believes that universities aren’t going to have a reason to support research anymore with this policy change, anticipating that more hiring and admissions freezes for staff and students could ensue. Just a month ago, Stanford University, for instance, announced a staff hiring freeze , citing uncertainty around NIH cuts. “We’re going to see a huge stalling of scientific progress, because if universities are closing buildings because they can’t operate them or they have fewer people to actually do the work, things just aren’t going to get done,” LeGates added. On that front, analyst Puneet Souda at Leerink said that the long-term impact of these cuts would threaten the U.S.’ global position in scientific research, especially when it comes to drug discovery. “We’re talking fundamental, novel innovation, and that’s what the American biomedical research system is able to do,” he said to CNBC. “It doesn’t happen like this anywhere in the world, and that’s what’s at risk if these cuts are implemented.”
