By Bill Alpert

Medical research fell under the hatchet of the Trump administration this week, and investors slashed the stocks of those who make lab equipment.

The National Institutes of Health announced on Friday, Feb. 7, that it will cap its payments for the indirect costs of research, like support staff and costly lab equipment.

Shares of gene-sequencing leader Illumina have fallen 17% to $101.50 since the announcement. Its smaller rivals 10X Genomics and Pacific BioSciences of California have lost 23% and 15%, respectively.

Until now, the amount of a grant that could be spent on overhead -- known as "indirect funds" -- was negotiated for each grant. Indirect funds amounted to $9 billion, or 26%, of the $35 billion that NIH distributed in grants last year. NIH says it will now only allow 15% toward overhead. That would have reduced its last year's overhead payments to $5 billion from $9 billion.

Medical research institutes and universities quickly warned that the cuts would devastate the search for cancer cures and other cutting edge research.

"We're all reeling," Harvard Medical School Dean George Daley told NPR. "This would decimate medical research."

The Boston area's concentration of research labs has made Massachusetts into the nation's biggest recipient of NIH funds, per-capita. Institutions in the state stand to lose about half a billion dollars under the announced cuts, says James S. Murphy, a policy analyst at the advocacy group Education Reform Now. That includes about $105 million for Massachusetts General Hospital, $78 million for Brigham and Women's Hospital, and $55 million for Boston Children's Hospital.

"Cutting indirect funding for NIH research with a hatchet instead of a chisel jeopardizes the entire ecosystem of scientific discovery," said a post on X by Answer ALS, a charity that funds research into the deadly neurological disease amyotrophic lateral sclerosis.

Attorneys general from 22 states went to federal court in Boston on Monday, where U.S. District Judge Angel Kelley temporarily halted the policy in those states, pending a hearing on Feb. 21.

In its announcement, the NIH had called out Ivy League research centers that it said had spent two-thirds of their grants on overhead.

The cuts were cheered by President Donald Trump's designated ax-wielder, Tesla CEO Elon Musk, who claimed elite universities were wasting grant dollars on administrative costs.

"Can you believe that universities with tens of billions in endowments were siphoning off 60% of research award money for 'overhead'?" Musk wrote on his social-media platform X. "What a ripoff!"

The cuts are bad news for some scientific instrument makers, whose expensive systems are shared at a research institution and funded from the overhead portion of NIH grants.

The 2025 budget for NIH is for $49 billion. So the just-announced cuts would trim that by about 8%, or $4 billion, said Morgan analyst Rachel Vatnsdal in a Sunday research note.

"We believe the budget actions will result in broader headwinds for the life science tools space, although we expect specialty tools will be more impacted than core tools," she writes.

Those specialty tools include Illumina gene-sequencing systems, which research centers usually house in a central lab funded from the "indirect" pieces of NIH grants. She rates Illumina stock at a Hold.

Vatnsdal figures that some 25% of Illumina orders come from customers reliant on NIH's indirect funding. At Pacific Biosciences and 10x Genomics, she estimates that NIH overhead grants account for 20% of revenue.

Illumina shares have been shadowed for months by fears of NIH cuts and of a trade war. China's Ministry of Commerce recently blacklisted the company's products. Apart from warning that these actions pose risks, Illumina hasn't quantified how they would affect its revenue.

Illumina has dominated the market for gene-sequencing systems, and kept America at the forefront of genomics. It now faces competition from Roche Holding, and a handful of start-ups. So its sales of sequencers could slow over the rest of the decade, says Guggenheim analyst Subbu Nambi.

But most Illumina revenue comes from consumables used in sequencing. Those sales will continue growing, the analyst says, and that will lift Illumina earnings at a 10% annual rate. Nambi rates Illumina a Buy, and hopes its stock will rise to $150, from $101 today.

The NIH cuts won't help.

Illumina's 2024 year 10-K just appeared on Thursday.

It warns: "Reduced allocations to government agencies that fund research and development activities, such as the U.S. National Institutes of Health, or NIH, or targeted cancellations by the U.S. federal government of certain grants or contracts, could adversely affect our business or results of operations."

Write to Bill Alpert at william.alpert@barrons.com

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February 14, 2025 21:30 ET (02:30 GMT)

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