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US Treasury Set To Spend Trillions In The Next Few Months

US Treasury Set To Spend Trillions In The Next Few Months

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US Treasury Set To Spend Trillions In The Next Few Months Tyler Durden Mon, 08/03/2020 - 17:45

Three months ago, in its then latest estimate of Marketable Borrowings published on May 4, the US Treasury shocked markets when it unveiled that in the April-June quarter it would borrow a humongous $2.999 trillion, exponentially higher than what it had expected to borrow during the quarter in its previous estimate in February when it forecast a $56 billion decline in debt. And while the projected debt number stunned the market, it barely registered on the price or yield of US Treasurys for the simple reason that just weeks earlier the Fed announced it would monetize all gross debt issuance for the US when it unveiled Unlimited QE, something it has been doing since.

This massive surge in debt issuance would also result in a far higher Treasury cash balance which would be used to pre-fund various fiscal stimulus programs, and as the chart below shows, that's precisely what happened with the Treasury cash balance exploding from $400BN at the end of March to an record high just above $1.7 trillion currently, an amount that is just waiting to be spent as soon as Congress gives the green light.

In retrospect the cash surge was too much: in fact, more than double what the Treasury had expected on May 4. While the Treasury had forecast a $3 trillion increase in marketable borrowing for the quarter ending June 30, it also expected the cash balance to grow to $800 billion on that same date (shown highlighted in yellow on the table below).

And yet the final number ended up being over $922 billion higher, meaning that the Treasury had substantially overshot its funding need and had a cash buffer of nearly $1 trillion more than it had anticipated. 

So with all this extra cash in hand, did the Treasury reduce its debt need for the current quarter? As shown above, three months ago the Treasury expected that it would need to borrow $677BN in the final fiscal quarter of the year ending Sept 30, which while a massive number, was still well below the $2.753 trillion it ended up borrowing (just shy of the $2.999 trillion initial forecast, a number which was not hit due to "lower-than-projected expenditures and higher receipts largely offset by the increase in the cash balance.")?

The answer, it will shock exactly nobody, was a resounding no because as it disclosed in its latest estimate of Marketable Borrowing needs, the Treasury once again surprised markets by announcing it would borrow a whopping $947BN this quarter, $270BN more than it had forecast a quarter ago, even though the Treasury started this quarter with a cash balance that is $922 billion higher than it had expected one quarter ago!

Source: US Treasury

Why this unexpected increase in debt even though the Treasury was starting off with nearly $1 trillion more in cash than originally budgeted? This is how it explains it.

During the July - September 2020 quarter, Treasury expects to borrow $947 billion in privately-held net marketable debt, assuming an end-of-September cash balance of $800 billion.  The borrowing estimate is $270 billion higher than announced in May 2020.  The increase in privately-held net marketable borrowing is primarily driven by higher expenditures, due to a shift from the prior quarter and anticipated new legislation, largely offset by the higher beginning-of-July cash balance and higher receipts.

In other words, not only will the Treasury draw down on $922 billion in cash in the calendar quarter the ends in less than two months...

... but it will also sell enough debt to raise an additional $881 billion (net) which will also end up being spent, suggesting that in the current quarter the Treasury plans on spending a gargantuan $1.8 trillion!

But that's not all, because in its first glimpse of Oct-Dec quarter funding needs, the Treasury now expects to borrow another $1.216 trillion in privately-held net marketable debt, once again assuming that the end-of-December cash balance remains unchanged from the Sept 30 balance of $800 billion. This means that the Treasury will spend an additional $1.2 trillion in the quarter ending Dec. 31, assuming every dollar it raises in the open market is then promptly spent (since the cash balance remains unchanged).

According to the Treasury, "these estimates assume $1 trillion of additional borrowing need in anticipation of additional legislation being passed in response to the COVID-19 outbreak."

So what does this mean?

First, when putting together the actual data for the first three quarters of fiscal 2020 and adding the Fiscal Q4 estimate of $947BN in new issuance, the Treasury will borrow a record $4.5 trillion in Fiscal 2020, more than it borrowed in the previous view years combined!

Second, it means that for calendar Q3 and Q4, the Treasury will spend almost $3 trillion consisting of:

  • i) a drawdown in cash from $1722 billion to $800 billion, for $922 billion, in the quarter ending Sept 30
  • ii) new debt issuance of $947 billion in the same quarter and
  • iii) new debt issuance of $1,216 billion in the quarter ended Dec 31

... for a grand total of $3.085 trillion in new funds (either from spending cash or raising debt).

And even if the Treasury uses some of this cash to pay down maturing Bills (which we doubt as it will most likely keep rolling this short-term debt indefinitely with rates at all time lows), it still means that there will be nearly $3 trillion left for Congress and Trump to spend as they fit in order to boost the economy in the next few months to make sure there is no imminent economic crash. It also means that for all the posturing about whether the $1 trillion Republican or $3 trillion Democrat stimulus package is accepted, the Treasury is already budgeting for the latter.

Finally, with the presidential elections are looming, we hope that we don't need to answer "why" - despite the Congressional theater - it is only a matter of time before this massive spending tsunami is unleashed.

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide…

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide Black Lives Matter riots in the summer of 2020, some elite colleges and universities shredded testing requirements for admission. Several years later, the test-optional admission has yet to produce the promising results for racial and class-based equity that many woke academic institutions wished.

The failure of test-optional admission policies has forced Dartmouth College to reinstate standardized test scores for admission starting next year. This should never have been eliminated, as merit will always prevail. 

"Nearly four years later, having studied the role of testing in our admissions process as well as its value as a predictor of student success at Dartmouth, we are removing the extended pause and reactivating the standardized testing requirement for undergraduate admission, effective with the Class of 2029," Dartmouth wrote in a press release Monday morning. 

"For Dartmouth, the evidence supporting our reactivation of a required testing policy is clear. Our bottom line is simple: we believe a standardized testing requirement will improve—not detract from—our ability to bring the most promising and diverse students to our campus," the elite college said. 

Who would've thought eliminating standardized tests for admission because a fringe minority said they were instruments of racism and a biased system was ever a good idea? 

Also, it doesn't take a rocket scientist to figure this out. More from Dartmouth, who commissioned the research: 

They also found that test scores represent an especially valuable tool to identify high-achieving applicants from low and middle-income backgrounds; who are first-generation college-bound; as well as students from urban and rural backgrounds.

All the colleges and universities that quickly adopted test-optional admissions in 2020 experienced a surge in applications. Perhaps the push for test-optional was under the guise of woke equality but was nothing more than protecting the bottom line for these institutions. 

A glimpse of sanity returns to woke schools: Admit qualified kids. Next up is corporate America and all tiers of the US government. 

Tyler Durden Mon, 02/05/2024 - 17:20

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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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