Where’s The Money?: State Of Federal Biomedical Funding

The TD Cowen Insight

The U.S. government has been a prolific funder of basic biomedical research via the NIH, other institutions, and strategic initiatives, which benefits life science tools providers. The federal government’s prolific funding is running into gridlock in D.C., regardless of a government shutdown. This gridlock presents a headwind to the life science tools sector (one we view as manageable). In the meantime, ARPA-H is emerging as a nonpartisan agency likely to continue Cancer Moonshot funding while also investing in synthetic biology tools and technologies.

Near Term U.S. Federal Government Investment in Biomedical Research

Federal government investment in biomedical research is a key input to support basic science and fuel innovation. As we embark on an election year in 2024 and gridlock continues in Washington, it is important for life science tools and SynBio investors to understand the current state of federal biomedical funding in the U.S. and where it might be headed.

While we don’t foresee dramatic cuts in the coming year, inaction and the very real threat of a shutdown could translate into flat funding (-1%/+1% y/y) in FY24. NIH funding, which, after years of high single digit % growth, could serve as a headwind for the Tools/Dx industry. Additionally, critical legislation related to biodefense and pandemic preparedness (PAHPA) remains stuck in gridlock. Meanwhile other bills that may have spurred greater development of new antibiotics have been left for dead, further deflating interest in this therapeutic area.

Biomedical Research Funding Analysis

Our report provides an in-depth overview of historical biomedical research funding in the U.S., including detailed analyses by sources of funding, research into NIH funding priorities, and KOL interviews with regulatory and health policy experts. Additionally, we explore the biomedical funding priorities outside the US to understand where we stack up against peer countries. We also delve into efforts in China to build its innovative biomedical research infrastructure.

Impact of Reduced NIH Funding on Life Science Tools and Diagnostics Companies

A moderation in NIH life science funding support, after years of above-average high single digit funding growth y/y, presents a potential headwind for the Life Science Tools/Dx industry. However, we believe that it is largely manageable, particularly for larger caps.

For our larger cap diversified Tools companies, the revenue exposure to US Academic & Government varies considerably. The percent of revenues this end market represents has been declining over the last 10 years. Today we estimate it represents ~6% of the large cap diversified tools revenue base. Within this, we estimate revenue exposure to NIH grants is ~4%. As such, a 7% y/y deceleration in FY24 NIH funding (from ~7% y/y growth in ’22 and ’23 down to ~0% in ’24) on average represents a ~0.3% funding headwind to FY24 revenue growth.

Impact of Reduced NIH Funding on SMID Cap Specialty Tools Companies

For the smid-cap specialty tools companies who have greater exposure to NIH (~25% of revenues), a 7% y/y moderation in the rate of FY24 NIH funding growth represents a ~2% funding headwind to FY24 revenue growth (from ~7% y/y growth in ’22 and ’23 down to ~0% in ’24). As such, we believe this is still manageable. It is worth noting that there is a wider range of exposure and of outcomes. Many companies in this area have new product cycle launches ongoing, and most management teams tend to believe scientists will find ways to secure funds for these new innovative instruments. This would allow them to cut spending elsewhere, hence mitigating any impact. If so, we suspect that the more mature product categories and the commoditized instruments could see an impact and/or even higher scientific instruments where the replacement cycle period could be extended.

Impact of Decreased NIH and NSF Funding on Life Science Companies

NIH is the US research agency which gets by far the most attention amongst investors (and scientists and the press) for the obvious reason. It represents the largest pool of grant funding for life sciences. The National Science Foundation (NSF) is another top agency whose annual appropriations represent ~20% of the NIH levels. Our research focused on tools companies’ NIH revenue exposure, but the NSF can also experience ~flat y/y funding in F24, down from recent high single digit % y/y advances. This could present an additional headwind to revenues, but a modest one based on our math.