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Giant firms have hidden borrowing advantage that has helped keep them on top for decades – new research

New research reveals how talk of a K-shaped recovery misses the point.

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Ladders for us, snakes for you. Ratthaphong Ekariyasap

When the COVID-19 pandemic first hit, it seemed like the day of reckoning for over-stretched corporate borrowers was finally at hand. For years, pundits and policymakers had been warning about a dangerous build-up of the debt of “non-financial firms”, meaning all those that aren’t in finance, insurance or property.

According to an OECD report from 2019, their debt doubled globally in the decade following the crash of 2008-09. Surely the devastation wrought by a global pandemic would be enough to pop this giant bubble, setting off a wave of corporate defaults and putting the global financial system at risk of another major crisis?

Though corporate default rates climbed across the world in 2020, the long-anticipated collapse of the corporate debt market has not come to pass – at least not yet. This is thanks to government intervention, especially the unprecedented moves by central banks, including the Bank of England, to keep the interest rates on corporate bonds low by directly purchasing them.

These aggressive measures may have helped to avert a corporate debt catastrophe, but they’ve come at a hefty price. In 2020, global corporate debt issuance reached record highs, stoking fears that central banks have merely delayed the inevitable.

Central banks to the rescue?

The measures also appear to be fuelling a “K-shaped recovery” from the pandemic, as large corporations revive and their smaller counterparts keep falling. This is because central bank purchases have been heavily biased toward investment-grade debt, which is issued by large companies with more robust balance sheets.

Picture of K-shaped recovery
K for kleptocracy? SewCream

This has meant that corporate giants have been borrowing vast amounts at record low costs, while their smaller counterparts have struggled to raise funds to see them through the pandemic. With these dynamics at play, it seems almost certain that in the post-COVID world there will be an increase in corporate concentration as more small players get absorbed by the giants.

Yet signs of a K-shaped recovery are less surprising than most people probably realise. The economy has in fact been K-shaped for decades. As our new research on the US shows, the financial fortunes of large corporations have been steadily improving since the early 1980s, while many smaller corporations have fallen into acute financial distress. The pandemic, in other words, is intensifying longstanding dysfunctionalities in US capitalism. The very idea of a K-shaped recovery obscures this reality.

The K-shaped recovery in context

The situation can be seen in the graphs below. Based on US non-financial corporations listed on the stock market from 1954 to 2019, they map their leverage ratios (debt as a proportion of capital), debt-servicing costs, the interest rates they are effectively paying, and net profit margins. The lines in each graph represent the top 10% (in bold), the next 40% (in dashes) and the bottom 50% (in plain black) of corporations based on their revenues.

We see that the borrowing levels (leverage) of the top 10% have increased since the mid-1980s, while their debt servicing costs and effective interest rates fell. In line with these fortuitous borrowing conditions, the profit margins of large corporations doubled from just over 3.1% in the early-1990s to 7.3% in 2019.

Graph showing the longstanding K-shaped economy in the US
Sandy Hager/Joseph Baines/New Political Economy

What’s astonishing is that the bottom 50% reduced their borrowing over roughly the same period, but their debt servicing costs increased. Over this time, smaller corporations saw their profit margins dip consistently into negative territory. The decades-long fall in interest rates appears to be the only thing that has kept smaller corporations afloat.

Smaller corporations thus appear to be caught in a vicious circle. The fact that their debt-servicing burdens have increased sharply despite deleveraging and falling interest rates points toward rapidly deteriorating financial fortunes. This is reaffirmed by the severe losses registered in their negative profit margins.

Smaller corporations might have been tempted to take advantage of falling interest rates on borrowing to increase their revenues and profits. But the cost of borrowing for smaller firms has been considerably higher than for medium-sized and large corporations, putting them at a considerable disadvantage.

For large corporations, on the other hand, the circle is virtuous: high and stable profit margins allow them to issue investment-grade bonds and borrow from banks at low interest rates, which, in turn, reinforce high and stable profit margins.

Shareholder capitalism

How did we end up in this situation? To address this question, we have to take into account the peculiar dynamics of shareholder capitalism as they have evolved in recent decades. The graphs below chart shareholder payouts and fixed investment as a proportion of revenues for our sample of US non-financial corporations – again with three different lines representing the top 10%, the next 40% and the bottom 50% of corporations.

Graph showing longstanding K shape of US economy
Sandy Hager/Joseph Baines/New Political Economy

This shows that, in recent decades, corporations of all sizes have been under pressure from financial markets to increase payouts to shareholders in the form of dividends and stock buybacks. But many of the largest firms enjoy such a dominant position in the economy that they can return vast sums to shareholders without engaging in the large-scale investments that may lead to long-term employment and wage growth.

Corporations in the bottom 50% also have to appease shareholders who are continually demanding higher returns on their investments, but unlike large firms they additionally have to establish themselves through large-scale capital investment. This dual imperative puts them in a very precarious position.

So while we may be witnessing a K-shaped recovery from COVID-19, it’s important to keep in mind that this K-shape has a much longer history. Though more research is needed, there are signs that this K-shape has also characterised many other advanced economies in the lead-up to the pandemic, including the UK.

In our view, the pandemic represents a missed opportunity for policymakers. Rather than use their fiscal and monetary power to build a more stable and equitable financial system, central banks instead have chosen to prop up a highly dysfunctional one.

Unless there is a radical departure from the current policy regime, the post-COVID 19 world is likely to resemble the pre-COVID 19 one, only with more market turmoil because of the precarious position of smaller companies, more concentration, and even less investment.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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Four burning questions about the future of the $16.5B Novo-Catalent deal

To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.
Beyond spending billions of dollars to expand…

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To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.

Beyond spending billions of dollars to expand its own production capacity for its weight loss drugs, the Danish drugmaker said Monday it will pay $11 billion to acquire three manufacturing plants from Catalent. It’s part of a broader $16.5 billion deal with Novo Holdings, the investment arm of the pharma’s parent group, which agreed to acquire the contract manufacturer and take it private.

It’s a big deal for all parties, with potential ripple effects across the biotech ecosystem. Here’s a look at some of the most pressing questions to watch after Monday’s announcement.

Why did Novo do this?

Novo Holdings isn’t the most obvious buyer for Catalent, particularly after last year’s on-and-off M&A interest from the serial acquirer Danaher. But the deal could benefit both Novo Holdings and Novo Nordisk.

Novo Nordisk’s biggest challenge has been simply making enough of the weight loss drug Wegovy and diabetes therapy Ozempic. On last week’s earnings call, Novo Nordisk CEO Lars Fruergaard Jørgensen said the company isn’t constrained by capital in its efforts to boost manufacturing. Rather, the main challenge is the limited amount of capabilities out there, he said.

“Most pharmaceutical companies in the world would be shopping among the same manufacturers,” he said. “There’s not an unlimited amount of machinery and people to build it.”

While Novo was already one of Catalent’s major customers, the manufacturer has been hamstrung by its own balance sheet. With roughly $5 billion in debt on its books, it’s had to juggle paying down debt with sufficiently investing in its facilities. That’s been particularly challenging in keeping pace with soaring demand for GLP-1 drugs.

Novo, on the other hand, has the balance sheet to funnel as much money as needed into the plants in Italy, Belgium, and Indiana. It’s also struggled to make enough of its popular GLP-1 drugs to meet their soaring demand, with documented shortages of both Ozempic and Wegovy.

The impact won’t be immediate. The parties expect the deal to close near the end of 2024. Novo Nordisk said it expects the three new sites to “gradually increase Novo Nordisk’s filling capacity from 2026 and onwards.”

As for the rest of Catalent — nearly 50 other sites employing thousands of workers — Novo Holdings will take control. The group previously acquired Altasciences in 2021 and Ritedose in 2022, so the Catalent deal builds on a core investing interest in biopharma services, Novo Holdings CEO Kasim Kutay told Endpoints News.

Kasim Kutay

When asked about possible site closures or layoffs, Kutay said the team hasn’t thought about that.

“That’s not our track record. Our track record is to invest in quality businesses and help them grow,” he said. “There’s always stuff to do with any asset you own, but we haven’t bought this company to do some of the stuff you’re talking about.”

What does it mean for Catalent’s customers? 

Until the deal closes, Catalent will operate as a standalone business. After it closes, Novo Nordisk said it will honor its customer obligations at the three sites, a spokesperson said. But they didn’t answer a question about what happens when those contracts expire.

The wrinkle is the long-term future of the three plants that Novo Nordisk is paying for. Those sites don’t exclusively pump out Wegovy, but that could be the logical long-term aim for the Danish drugmaker.

The ideal scenario is that pricing and timelines remain the same for customers, said Nicole Paulk, CEO of the gene therapy startup Siren Biotechnology.

Nicole Paulk

“The name of the group that you’re going to send your check to is now going to be Novo Holdings instead of Catalent, but otherwise everything remains the same,” Paulk told Endpoints. “That’s the best-case scenario.”

In a worst case, Paulk said she feared the new owners could wind up closing sites or laying off Catalent groups. That could create some uncertainty for customers looking for a long-term manufacturing partner.

Are shareholders and regulators happy? 

The pandemic was a wild ride for Catalent’s stock, with shares surging from about $40 to $140 and then crashing back to earth. The $63.50 share price for the takeover is a happy ending depending on the investor.

On that point, the investing giant Elliott Investment Management is satisfied. Marc Steinberg, a partner at Elliott, called the agreement “an outstanding outcome” that “clearly maximizes value for Catalent stockholders” in a statement.

Elliott helped kick off a strategic review last August that culminated in the sale agreement. Compared to Catalent’s stock price before that review started, the deal pays a nearly 40% premium.

Alessandro Maselli

But this is hardly a victory lap for CEO Alessandro Maselli, who took over in July 2022 when Catalent’s stock price was north of $100. Novo’s takeover is a tacit acknowledgment that Maselli could never fully right the ship, as operational problems plagued the company throughout 2023 while it was limited by its debt.

Additional regulatory filings in the next few weeks could give insight into just how competitive the sale process was. William Blair analysts said they don’t expect a competing bidder “given the organic investments already being pursued at other leading CDMOs and the breadth and scale of Catalent’s operations.”

The Blair analysts also noted the companies likely “expect to spend some time educating relevant government agencies” about the deal, given the lengthy closing timeline. Given Novo Nordisk’s ascent — it’s now one of Europe’s most valuable companies — paired with the limited number of large contract manufacturers, antitrust regulators could be interested in taking a close look.

Are Catalent’s problems finally a thing of the past?

Catalent ran into a mix of financial and operational problems over the past year that played no small part in attracting the interest of an activist like Elliott.

Now with a deal in place, how quickly can Novo rectify those problems? Some of the challenges were driven by the demands of being a publicly traded company, like failing to meet investors’ revenue expectations or even filing earnings reports on time.

But Catalent also struggled with its business at times, with a range of manufacturing delays, inspection reports and occasionally writing down acquisitions that didn’t pan out. Novo’s deep pockets will go a long way to a turnaround, but only the future will tell if all these issues are fixed.

Kutay said his team is excited by the opportunity and was satisfied with the due diligence it did on the company.

“We believe we’re buying a strong company with a good management team and good prospects,” Kutay said. “If that wasn’t the case, I don’t think we’d be here.”

Amber Tong and Reynald Castañeda contributed reporting.

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Petrina Kamya, Ph.D., Head of AI Platforms at Insilico Medicine, presents at BIO CEO & Investor Conference

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb….

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Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

Credit: Insilico Medicine

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

The session will look at how the latest artificial intelligence (AI) tools – including generative AI and large language models – are currently being used to advance the discovery and design of new drugs, and which technologies are still in development. 

The BIO CEO & Investor Conference brings together over 1,000 attendees and more than 700 companies across industry and institutional investment to discuss the future investment landscape of biotechnology. Sessions focus on topics such as therapeutic advancements, market outlook, and policy priorities.

Insilico Medicine is a leading, clinical stage AI-driven drug discovery company that has raised over $400m in investments since it was founded in 2014. Dr. Kamya leads the development of the Company’s end-to-end generative AI platform, Pharma.AI from Insilico’s AI R&D Center in Montreal. Using modern machine learning techniques in the context of chemistry and biology, the platform has driven the discovery and design of 30+ new therapies, with five in clinical stages – for cancer, fibrosis, inflammatory bowel disease (IBD), and COVID-19. The Company’s lead drug, for the chronic, rare lung condition idiopathic pulmonary fibrosis, is the first AI-designed drug for an AI-discovered target to reach Phase II clinical trials with patients. Nine of the top 20 pharmaceutical companies have used Insilico’s AI platform to advance their programs, and the Company has a number of major strategic licensing deals around its AI-designed therapeutic assets, including with Sanofi, Exelixis and Menarini. 

 

About Insilico Medicine

Insilico Medicine, a global clinical stage biotechnology company powered by generative AI, is connecting biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques for novel target discovery and the generation of novel molecular structures with desired properties. Insilico Medicine is developing breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system diseases, infectious diseases, autoimmune diseases, and aging-related diseases. www.insilico.com 


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Another country is getting ready to launch a visa for digital nomads

Early reports are saying Japan will soon have a digital nomad visa for high-earning foreigners.

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Over the last decade, the explosion of remote work that came as a result of improved technology and the pandemic has allowed an increasing number of people to become digital nomads. 

When looked at more broadly as anyone not required to come into a fixed office but instead moves between different locations such as the home and the coffee shop, the latest estimate shows that there were more than 35 million such workers in the world by the end of 2023 while over half of those come from the United States.

Related: There is a new list of cities that are best for digital nomads

While remote work has also allowed many to move to cheaper places and travel around the world while still bringing in income, working outside of one's home country requires either dual citizenship or work authorization — the global shift toward remote work has pushed many countries to launch specific digital nomad visas to boost their economies and bring in new residents.

Japan is a very popular destination for U.S. tourists. 

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This popular vacation destination will soon have a nomad visa

Spain, Portugal, Indonesia, Malaysia, Costa Rica, Brazil, Latvia and Malta are some of the countries currently offering specific visas for foreigners who want to live there while bringing in income from abroad.

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With the exception of a few, Asian countries generally have stricter immigration laws and were much slower to launch these types of visas that some of the countries with weaker economies had as far back as 2015. As first reported by the Japan Times, the country's Immigration Services Agency ended up making the leap toward a visa for those who can earn more than ¥10 million ($68,300 USD) with income from another country.

The Japanese government has not yet worked out the specifics of how long the visa will be valid for or how much it will cost — public comment on the proposal is being accepted throughout next week. 

That said, early reports say the visa will be shorter than the typical digital nomad option that allows foreigners to live in a country for several years. The visa will reportedly be valid for six months or slightly longer but still no more than a year — along with the ability to work, this allows some to stay beyond the 90-day tourist period typically afforded to those from countries with visa-free agreements.

'Not be given a residence card of residence certificate'

While one will be able to reapply for the visa after the time runs out, this can only be done by exiting the country and being away for six months before coming back again — becoming a permanent resident on the pathway to citizenship is an entirely different process with much more strict requirements.

"Those living in Japan with the digital nomad visa will not be given a residence card or a residence certificate, which provide access to certain government benefits," reports the news outlet. "The visa cannot be renewed and must be reapplied for, with this only possible six months after leaving the countr

The visa will reportedly start in March and also allow holders to bring their spouses and families with them. To start using the visa, holders will also need to purchase private health insurance from their home country while taxes on any money one earns will also need to be paid through one's home country.

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