Federal health research funding has faced a tumultuous four days after the Trump administration announced cuts Friday to a certain type of funding for the National Institutes of Health (NIH) — causing concern in the drug research world that it could have damaging trickle-down effects.

The move to cut the rate at which NIH covers "indirect costs," such as rent, lighting, heat, and scientists' salaries, to 15% from 30% would allegedly save the government $4 billion.

On Monday, 22 states, along with some higher education institutions, filed suit against the Trump administration calling the funding cut unlawful. Late Monday, a federal judge temporarily halted the cuts and set a hearing for Feb. 21.

On Friday, the announcement wiped out $16 billion in market cap for diagnostic tool and genomics companies, such as Ilumina (ILMN) and Exact Sciences (EXAS), according to Jefferies analysts.

"We think the initial move is overdone, with other outcomes (court order, rate negotiations) likely," the analysts wrote in a note to clients Monday. 

"For context, indirect costs, which cover expenses like facility maintenance, utilities, and administrative support, are additive to direct research expenses (i.e., researcher wages), typically at a rate of 30% (sometimes as high as 70% at universities like Harvard), and accounted for $9B of the $35B total extramural grant disbursements in FY23," according to Jefferies.

The stocks in the note, including Labcorp (LH) and Quest Diagnostics (DGX), have recovered from Friday's after-market slide on the news — and the drug industry has remained silent on the matter, despite the potential impacts to business and research. 

Still, the threat of sudden cuts has resulted in warnings of mass layoffs, project cancellations, and the potential for reductions in biomedical research by higher education and academic researchers, especially since NIH grants are highly competitive, with just 20% of the applications approved, according to the NIH website.

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Dr. Paul Offit, director of the Vaccine Education Center at the Children's Hospital of Philadelphia, has experience with federal research funding, having spent more than two decades developing the rotavirus vaccine.

"I would write my grants ... and that's what paid my salary, it would pay for graduate students or post-docs in my lab, it would pay for supplies and reagents [substances that help in researching chemical reactions]. But I didn't have a space to work, so basically indirect costs are for renting space ... but also lighting and heat and all the other things that come with renting a space," Offit said.

If the government believes that at least 30% of the indirect research expenses are unnecessary, it should describe in what ways it is not fair or wasteful, Offit added.

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Trickle-down fears

Mizuho's healthcare expert Jared Holz said the medium- to long-term concern is that the cut to indirect costs can have greater impacts.

"I think there's a cascading effect that could happen. That's why I think the issue is so controversial. To me, it's less about the overhead being cut significantly," Holz said. 

But he added that there is a lot of uncertainty around how the Trump administration could implement such a cut, since budgets involve Congress. That uncertainty is also an underlying concern for researchers and health experts around the country.

Holz said market uncertainty has investors wary. 

"The way the stocks have reacted has been investors just rejecting another challenge. Despite not really being able to quantify any of this," Holz said.

Offit noted that now that a judge has pushed back, the question remains how the Trump administration will handle any judiciary branch decisions — and that is key to watch for any broader implications. For example, what if the administration ignores the ruling?

"Then what? I just feel like we're on the verge of ... a true Constitutional crisis," Offit said.

In addition, the threat of cuts is already having a chilling effect on young researchers, according to Yale School of Medicine's Reshma Ramachandran.

"We're already hearing from trainees, especially our postdocs. A lot of them wanted to stay in academia ... but because of the uncertainty of what's happening, a lot of folks are thinking about going to industry or just not continuing any research," Ramachandran said.

"So the generational effect this is going to have is just going to be awful," she said.

Leaders from both Harvard and Yale published notes addressing the cuts.

Yale School of Medicine's dean, Dr. Nancy Brown, noted that for every $1 spent on research, including direct and indirect costs, the total cost is actually $1.50 — suggesting that the dollars are stretched and don't cover all costs.

Harvard president Alan Garber published a note expressing concerns for the future of US dominance in science and medicine. 

"The discovery of new treatments would slow, opportunities to train the next generation of scientific leaders would shrink, and our nation’s science and engineering prowess would be severely compromised," Garber wrote.

"At a time of rapid strides in quantum computing, artificial intelligence, brain science, biological imaging, and regenerative biology, and when other nations are expanding their investment in science, America should not drop knowingly and willingly from her lead position on the endless frontier," he said.

Anjalee Khemlani is the senior health reporter at Yahoo Finance, covering all things pharma, insurance, care services, digital health, PBMs, and health policy and politics. That includes GLP-1s, of course. Follow Anjalee on social media platforms X, LinkedIn, and Bluesky @AnjKhem.

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