Torben,
Interest rates come into play in a number of ways. First, and easiest, higher interest rates slow down the economy. Basically irrelevant for biotechs, as you point out, given they are not selling into consumer or industrial-type markets.
More significant for biotech is the valuation issue. Risk-free rates are the benchmark against which discount rates are measured, and discount rates have everything to do with biotech valuation. The key question is how biotech discount rates should change in response to a change in interest rates. My own view (and I'm also an amateur here) is that a biotech discount rate is really the sum of two rates - one represents the time value of money, and the other is a measure of the riskiness of the particular project you are evaluating. If this is the correct view, then interest rates are pretty irrelevant for valuing early-stage biotechs. For example, if your project is 5 years from earnings, and you use a 50% per year discount rate when the risk-free rate is 5%, then this model says you should use a 51% rate when interest rates go to 6%. Total effect is negligible - the riskiness of the project swamps the time-value issue.
Of course if the correct model is that you should be using some multiple of the risk-free rate, then biotech valuations take a big hit.
Note that in my version, a stock such as AMGN which is heavily based on current products takes a much bigger hit when you increase interest rates than one of the early stage companies.
Peter |
