Transcript: Biotech is back

This is an audio transcript of the FT News Briefing podcast episode: ‘Biotech is back’

Jessica Smith
Good morning from the Financial Times. Today is Monday, February 26th, and this is your FT News Briefing.

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Israel plans to raise more funds for defence spending. Investors are feverish about biotech again. And a new report gives mixed grades to the EU’s signature Covid recovery fund.

Paola Tamma
So will this fund actually deliver higher growth in the long term? I think the jury’s still out.

Jessica Smith
I’m Jessica Smith, in for Marc Filippino, and here’s the news you need to start your day.

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A top Israeli finance official told the FT his government plans to raise about $60bn in debt this year. It also plans to raise taxes and freeze government hiring. These measures are to fund a near doubling of defence spending to continue Israel’s war in Gaza. The war has been costly for Israel’s economy, which shrunk by nearly 20 per cent at the end of last year. The finance official says he expects the economy to begin recovering as large numbers of reservists are sent home and consumer spending picks up.

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American biotech companies are rushing to raise funds on US stock markets at the fastest rate since the biotech boom of the pandemic. Last month, drug developers pulled in more than $6bn on US equity markets, and that ends a two-year fundraising drought that forced many companies to cut jobs and shelve projects. The FT’s Nick Megaw joins me to talk more about what’s going on now. Hey, Nick.

Nicholas Megaw
Hey.

Jessica Smith
So, Nick, the last boom in biotech stocks was during the pandemic. Can you remind us why biotech was so hot then and why investors lost interest?

Nicholas Megaw
So there are a couple of things going on. Once that kind of initial panic at the start of the pandemic subsided, there were lots of financial markets that boomed just because interest rates were so low that investors were looking for other areas to make returns. And then biotech in particular got this extra boost because of the environment. Coronavirus vaccines got developed so quickly and made people kind of appreciate the potential value of drugmakers. And then there was a kind of reversal when all of those tailwinds started going in the other direction. So interest rates started going up and then people kind of started to realise that they just gotten carried away when some of those earlier investments didn’t pan out.

Jessica Smith
So what’s behind the renewed interest in US biotech shares?

Nicholas Megaw
So I think the biggest thing that has changed is the interest rate picture. The Fed hasn’t started cutting yet, but broadly there is agreement that rates have peaked. And so again, that helps people feel safer going back to riskier investments. There’s also been more kind of reminders that things can go well after those previous failures. So you’ve had companies report good progress developing drugs. And then also a couple of like big acquisitions by big pharma groups. That has a double impact because partly it just makes people feel optimistic and it drives up share prices. And then also because this sector has a lot of specialist investors who tend to take quite large, concentrated positions in stocks. So if you were an investor in one of these companies that’s just been bought out, you now have a big pile of profits that you need to put to work somewhere else in the sector. And instead of spreading that out across lots of small pieces in lots of different companies, it’s more attractive sometimes to recycle that into taking a big stake in a new IPO or a big block trade.

Jessica Smith
So, how would you describe the current excitement, Nick? Are we back to the levels we saw during the pandemic?

Nicholas Megaw
So we’re not yet at the pandemic-era peaks, but now we had $6bn in a single month. So it’s a real change. I mean, unsurprisingly, it is still easier for already listed companies to move first. Investors are more familiar with them, and it doesn’t take as much prep. The IPOs are also picking up pace, and people are expecting it to continue.

Jessica Smith
Nick Megaw is a US capital markets correspondent for the FT. Thanks, Nick.

Nicholas Megaw
Thanks.

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Jessica Smith
Housing prices in the world’s advanced economies are on the rise again. According to an FT analysis, house prices across 37 OECD countries grew a little over 2 per cent in last year’s third quarter over the previous quarter. It’s led some economists to predict that the global property downturn may have bottomed out. Prices dropped two years ago after central banks began raising interest rates to fight inflation. Those declines then eased and even reversed on expectations that central banks would cut rates. But this upturn isn’t across the board. In the US, the strongest market, nominal house prices rose more than 5 per cent. In Germany, property prices fell more than 10 per cent.

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In the European Union, there are concerns over the bloc’s signature pandemic rescue programme. This €800bn financial stimulus package was designed to boost economies hit by Covid lockdowns and invest in future growth. But a report out from the EU commission reveals problems that could hamper the program’s ability to reach its goals. Our EU correspondent Paola Tamma tells us more.

Paola Tamma
Well, the fund was described by some as the EU’s most momentous decision. Essentially, at the height of the pandemic in 2020, EU countries decided to jointly underwrite 800bn of common debt and this will be disbursed to the countries as grants and loans in order to promote investment in things like green renewable energy, digitalisation and so on. And also on the basis of reforms that they will commit themselves to do.

Jessica Smith
So what’s working with the fund, and what’s not working so well?

Paola Tamma
In terms of the recovery, so helping these countries rebound from the lockdown induced recession, it did really well. And there is a consensus on that. But then if you look at the other parts, so will this fund actually deliver higher growth in the long term, I think the jury’s still out.

Jessica Smith
And you wrote in your article that one of the problems is that a lot of the funds for the goal of investing in future economic growth, a lot of that money isn’t getting doled out to EU member states or the projects in EU member states. Why is that?

Paola Tamma
There’s a lot of reasons for that. In a number of countries, there is a disagreement between the commission and the capital on whether they have achieved these objectives. And there’s other reasons, too. Some of it is that the plans got rewritten multiple times to account for inflation, to account for a change in government or other reasons that will make governments want to tweak their plans. And so that was also a lot of time lost.

Jessica Smith
Can you give us an example of a project that’s stuck in this dilemma, like a project that’s seen as good for future growth, but just can’t get the funds from Brussels?

Paola Tamma
Yes. If you look at where I’m sitting, which is Belgium, they are trying to build a shiny world-first artificial energy island in the North Sea, and that’s going to deliver eventually up to 3.5GW of power, connect with the electricity grids of Denmark and the UK. And be just a really innovative way and example of how the EU is supposed to reduce their dependence on fossil fuels and imported fossil fuels particularly. But Belgium has not yet seen a single penny from the recovery fund to build this island because their funds have been caught up in a dispute with Brussels over whether or not a pension reform that they’re supposed to carry out has delivered the expected results.

Jessica Smith
And as I understand it, Paola, one of the pressures is a deadline to spend these funds, and it’s not too far off. What happens if these problems continue?

Paola Tamma
So the fund has to be spent by 2026, and that’s a hard deadline. So if countries do not manage to get these funds to ground by then, they simply lose it. And we’re now around a third of the fund being disbursed. The largest beneficiaries of the fund, like Italy and Spain, are on track with that, but others have yet to receive any funds, like Hungary, Belgium or Poland. I think that if countries keep to the implementation pace that they have today, it’s unlikely that 100 per cent of the money will get disbursed. So for countries that have staked a lot upon this plan, like their entire energy investments, they have every incentive to kind of step it up a notch in terms of the implementation. The stakes are much higher in a sense because a lot of people are looking at this as a potential for further fiscal integration in the future in the EU. So if it’s a success, it may also mean that people are more inclined to take out joint debt in the future.

Jessica Smith
Paola Tamma is an EU correspondent for the FT. Thanks for your time, Paola.

Paola Tamma
Thank you.

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Jessica Smith
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.