WSJ : Democrats Bet on Raising Taxes on High-Income People, Big Businesses

Democrats Bet on Raising Taxes on High-Income People, Big Businesses
Push is viewed broadly within party as political asset, based on opinion polls, but GOP sees it as overreach

WASHINGTON—Many Democrats are willing—even eager—to enact tax increases on high-income households and big businesses and campaign on them in next year’s midterm elections, embracing a stance that the party has struggled with in the past.

Although Democrats’ slim majorities have forced them to abandon some of their most sweeping tax proposals, President Biden and congressional Democrats are still seeking to raise about $2 trillion over a decade from businesses and high-income households.

Democrats say their focus on the top tier of households would help combat growing wealth inequality. The money would help pay for the healthcare, education and climate-change programs that Democrats hope to pass in the coming months.

The House’s proposed tax increases would be the largest since 1968 on their own and the largest since 1990 after subtracting tax cuts also included in the plan. This push for higher corporate taxes and higher rates for top earners—with a Biden pledge that no household making less than $400,000 will see a tax increase—is viewed broadly within the party as a political asset, not a liability.

Individual Democrats highlight different pieces of the overall agenda, but even some of the most conservative members, such as Sen. Joe Manchin (D., W.Va.), back significant tax increases that reverse some of the Republican tax cuts from 2017.

Still, raising taxes during a bumpy economic recovery is no sure bet, especially after federal revenues jumped 18% in fiscal 2021. Republicans, opposed to higher taxes for decades, frequently argue that Democrats’ plans would hamper economic growth and allow reckless spending. They see the planned tax increases as an opportunity to recapture higher-income suburban voters who voted for Democrats in opposition to former President Donald Trump.

The Democratic outlook represents a shift from the start of the last two Democratic administrations, when the party was on the defensive in the 1994 and 2010 elections after lawmakers passed tax increases as part of economic and healthcare laws. In 2010, Democrats put off a decision on whether to extend President George W. Bush’s tax cuts until after the midterms in part to avoid making taxes a bigger electoral issue. After losing seats in the election, they extended them all for two years.

This time, the push comes after Mr. Biden campaigned in 2020 on using tax increases on the wealthy and businesses to pay for an expansive social agenda. Democrats point to opinion polls to argue that voters support their plans to reverse some of Mr. Trump’s tax cuts—which lowered the corporate tax rate, shrank the estate tax and reduced taxes for business owners—and impose other new increases.

A Pew Research poll released in September found that 66% of Americans said tax rates on large businesses and corporations should be raised a lot or a little, compared with about 33% who said they should be lowered or kept the same. The same poll found 61% said households making more than $400,000 should see taxes raised a lot or a little, compared with 37% who said they should be reduced or stay the same.

“It used to be that any conversation about taxes, the political consultants say to Democrats, don’t go there,” said Senate Finance Committee Chairman Ron Wyden (D., Ore.), who was first elected to Congress in 1980.

Now, when Mr. Wyden talks about a proposal to dramatically change taxes, like an annual tax on billionaires’ unrealized capital gains, “People say, of course, how come that wasn’t done a long time ago?” he said.

Republicans, preparing to challenge narrow Democratic majorities in the House and the Senate, view Mr. Biden’s tax agenda as an overreach that will lead to inflation and recession. And they point to analyses showing that people making less than $400,000 would see increases on tobacco taxes and would be hurt by the effects of corporate taxes on Americans’ retirement accounts and jobs.

“Democrats, I think, have a blind spot when it comes to tax increases, that somehow they can rationalize or justify it in a way that this is not going to affect you, but in the end it does, and I think most people have figured that out,” said Sen. John Thune (R., S.D.).

Mr. Trump made bashing Democrats’ tax plans a key part of his pitch during a rally in Iowa last week, calling the healthcare, education and climate proposal a “sinister combination of job-killing tax hikes and woke fascism.”

Mr. Biden and his advisers believe that raising taxes on the rich and American corporations is a popular solution that fits the times. The president frequently says that billionaires dramatically increased their wealth during the pandemic and that many working Americans pay higher tax rates than the wealthy.

“It’s about changing the paradigm so the economy works for you, not just for those at the very top,” Mr. Biden said last week during an event in Michigan.

Democrats are still negotiating the details of the social-policy and climate proposal that includes the tax increases and are expected to reduce its size. That plan is separate from a roughly $1 trillion infrastructure bill that is also moving through Congress.

The tax proposals could change, too. The most recent version called for raising taxes on corporations’ domestic and foreign income, on closely held businesses, capital gains, high-income individuals and estates. It also would nearly double the size of the Internal Revenue Service.

Mr. Biden called for raising the corporate tax rate to 28% from 21%, but Mr. Manchin and some other lawmakers have said they prefer a 25% rate. Because of Democrats’ slim majorities in Congress, any senator or a handful of House members could prevent a tax increase from happening.

Parochial politics matter, too. New Jersey Democrats back higher taxes on the rich—but they also want Congress to remove a cap on the state and local deduction that benefits the wealthy. Rural Democrats, meanwhile, have resisted Mr. Biden’s capital-gains tax proposals and forced them to be scaled back.

Progressive Democrats embrace tax increases as a way to make the system more fair. Other lawmakers defend the plans by pointing to the need to limit the spending package’s impact on the budget deficit or focus on touting the many programs that the increases would finance.

Sen. Chris Coons (D., Del.), a close Biden ally, said paying for programs is important in selling them. Sen. Raphael Warnock (D., Ga.), who faces re-election next year in a state that typically elects Republicans, emphasized Democrats’ proposal to extend the expanded child tax credit.

“What is being missed too often is that we’re cutting a lot of taxes,” Mr. Warnock said.

Democratic strategists say voters’ views on higher taxes for the wealthy have changed since Walter Mondale was punished in the 1984 presidential election for openly advocating for tax increases on a broad group of Americans and President George H.W. Bush lost his re-election bid in 1992 after violating his “read my lips” pledge not to raise taxes.

“If they want to win the tax fight, it really comes down to one word: Fairness,” said Tad Devine, a longtime Democratic strategist who advised Sen. Bernie Sanders’s 2016 presidential campaign.

FT : Bond bankers and investors cry foul over rule change

Bond bankers and investors cry foul over rule change
SEC stands firm in applying disclosure regulation to fixed-income trading

After US regulators finalised an amendment to a 50-year-old rule designed to limit fraud in penny stocks, lawyer Bruce Newman at WilmerHale did what lawyers do and went through it with a fine tooth comb.

In a note to his clients in October last year, he detailed the pertinent parts of the rule for those looking to comply with it, mostly around disclosures that dealers must check before quoting prices on a security. Then he noted something that would eventually send tremors through Wall Street trading desks.

“Although market participants may think of Rule 15c2-11 as limited to stocks, it is not, in fact, so limited, and covers all securities other than municipal securities,” he wrote.

Bank compliance officers began asking for clarification from the regulator, the Securities and Exchange Commission, roping in trade associations to get to the bottom of how five decades could have gone by without anyone — bankers or regulators — seemingly being aware that the rule encompassed debt markets.

When the amendment was passed in September 2020, there was no mention of the bond market. There was no due diligence — a legal requirement for the SEC when it proposes regulation — on how it might affect the bond market. Even commissioners responsible for passing the rule have said they only thought of the amendment in the context of the equity market.

The regulation requires that dealers publishing prices for securities that are not listed on an exchange must ensure certain financial information from the issuer is up to date, with the intention of limiting bogus companies luring investment. The uncontentious amendment proposed last year required this same information also be publicly available for investors to see.

“The amended rule represents another important step in our tireless and proactive efforts to protect retail investors from being victimised by microcap fraud,” said Stephanie Avakian, director of the division of enforcement, at the time. That certainly doesn’t sound much like the corporate bond market.

Nonetheless, this year a new administration took the helm at the SEC, uninvolved in the amendment when it was proposed in September 2020 and untethered to any assumptions that may have been made about its applicability across markets.

The current SEC has approached the issue much like Newman did; there is no exemption, therefore — regardless of what has happened before or what was understood by market participants — the rule applies to the corporate bond market.

Bond bankers and investors have cried foul.

When the rule was first written in 1972, most companies with tradable bonds were also public companies, already captured by the rule’s application to stock markets. The high-yield bond market was in its nascency. And the predominant means of trading — between parties over the phone — would not be captured by this rule. The need for an exemption was less pressing.

Even in 1998, when a proposed exemption for fixed income was considered but not passed, the majority of trading in the corporate bond market still took place bilaterally.

Fast forward to the present day and the way debt is traded has changed and the sheer size of the corporate bond market has swelled. Many issuers, especially in the high-yield bond market, are private companies, typically required to make disclosures to investors in their debt but not required to publish these disclosures publicly.

As a result, for this part of the bond market, gathering the data required under rule 15c2-11 is not possible, the bankers say.

That means either the SEC gives the market an exemption or private companies start publishing their financial information, or trading in a chunk of the corporate bond market could be curtailed.

The issue came to a head at the end of September when the amendment was due to come into effect, until the SEC gave a last-minute extension to the new year.

Bankers say that is still not enough time, complaining about a lack of guidance from the SEC on how to implement the rule in the bond market when it is so clearly written for stocks.

The SEC is so far unmoved. However accidental, the rule encourages greater transparency from companies. What’s more, it’s not as if the bond market will actually grind to a halt; for public companies, this rule already applies to trading in their shares, and for companies unwilling to give up the information publicly, their debt will still trade as it once did — over the phone.

But for bankers, the scuffle over the rule is indicative of a less sympathetic agency under the leadership of chair Gary Gensler, less willing to listen to the industry and more intent of forcing regulation upon it.

“He is much more about regulators telling the market what to do,” said one banker familiar with the rule. Another said: “We have been scrambling internally . . . It’s definitely a hard line.”

Bruce Newman and WilmerHale declined to comment.

Barrons : Dell Is a Leader in PCs. How a Spinoff Could Unlock the Value in the S

Dell Is a Leader in PCs. How a Spinoff Could Unlock the Value in the Stock.

Many investors have paid Dell Technologies little attention in recent years. It’s time to take a fresh look.

The indifference stems from a $24 billion leveraged buyout in 2013, when founder Michael Dell, shown above, took the company private—on the cheap, according to critics. A return to the public market in 2018 was met with a lukewarm reception, thanks to a convoluted deal structure and a heavy debt load.

Now, Dell Technologies (ticker: DELL) is about to become much more attractive to investors as it prepares to spin off its valuable stake in software maker VMware (VMW) in early November.

Dell will emerge with a solid balance sheet and simpler structure. This will allow investors to get direct exposure to one of the world’s top technology hardware makers at a bargain price. With annual sales of more than $90 billion, it is a leader in personal computers, servers, and storage devices.

“The VMware transaction should unlock some of the value in Dell,” says Simon Leopold, an analyst at Raymond James. “It creates a more simplified narrative and an easier-to-understand story.”

Shares of Dell have recently traded around $106, but roughly half that price is attributed to Dell’s 81% interest in VMware, When Dell completes the spinoff, shareholders should get roughly $55 a share in VMware stock—assuming that the software company remains near its recent price of $152—leaving them with a “core Dell” valued at about $51.

Core Dell, which should have a market value of nearly $40 billion, is where much of the opportunity lies. The stock effectively trades for just eight times projected earnings of about $6 a share for the company’s fiscal year ending in January. (The consensus Dell estimate of $9 a share now includes its share of VMware earnings.)

Samik Chatterjee, an analyst at J.P. Morgan, says the low “valuation could be a catalyst for Dell.” He says that it has a better outlook than rivals HP Inc. (HPQ) and Hewlett-Packard Enterprises (HPE), which have similar price/earnings ratios.

And Dell trades for half the P/E multiple of Cisco Systems (CSCO), which has a comparable profit growth outlook. Chatterjee has an Overweight rating on the stock and a price target of $67 on core Dell.

In September, Dell unveiled targets of annual sales growth of 3% to 4% for the next four years and 6%-plus yearly growth in earnings per share. That is far from spectacular, but comparable to what food and electric utilities are generating, and they trade for double Dell’s implied multiple.

Chatterjee views Dell’s guidance as conservative, and he sees high-single digit annual growth in earnings. He projects “core” earning of $6.09 a share in the current year ending in January (what Dell calls fiscal-year 2022) and $6.55 next year. His view is that Dell can trade for 10 times earnings—hardly a rich valuation at half of the market multiple.

Investors can wait until the VMware spinoff to consider buying Dell or purchase the stock now and either hold or sell the VMware shares that they will receive in the spinoff. Dell has not yet set a date for the spinoff.

Dell holders will get about 0.44 share of VMware per Dell share. The estimated spinoff value of about $55 for every Dell share is determined by multiplying 0.44 times an adjusted price of $125 a share on VMware. That is VMware’s recent share price of $152, less a roughly $27-a-share dividend that VMware will pay to its holders and directly to Dell, not to Dell holders.

VMware is much cheaper than subscription software stocks like Salesforce.com (CRM). It trades for about 21 times projected current-year earnings, but is growing more slowly and faces more challenges as businesses move their computing needs to the cloud.

Dell’s recent results have been strong, buoyed by a robust market for PCs. Revenue was up 15% in its quarter ending in July, and adjusted earnings rose 17%. It has two main divisions: the client solutions group (PCs) and infrastructure solutions group (servers and storage).

One question about Dell’s prospects involves the health of the PC sector, which received a big lift from people working at home during the pandemic. “We see another leg up on the commercial side, even as the consumer business moderates,” says Chatterjee of J.P. Morgan. Dell is the industry leader in higher-end PCs geared toward corporate buyers.

Dell’s gross core debt, excluding the obligations of its finance unit, should fall to about $20 billion after the VMware spinoff. Dell’s net debt (debt less cash) could end 2021 close to $5 billion, and it has long sought investment-grade credit ratings from two major agencies.

This will enable the company to initiate a roughly $1 billion annual dividend in its fiscal year beginning in February for yield of about 2.5%, based on the current, implied price of core Dell.

That could attract income-oriented funds. It also has unveiled a $5 billion share repurchase program. Chatterjee projects about $2 billion in annual buybacks.

A buyback would shrink a relatively small public float of about 38% of its roughly 765 million shares outstanding. CEO Michael Dell controls about 50%, and investment firm Silver Lake, which participated in the 2013 buyout, owns 12%.

Then there is the Michael Dell factor. Many shareholders—and Barron’s—criticized him over the Dell LBO and then when Dell bought out holders in a Dell tracking stock for VMware in 2018. That deal allowed Dell to go public.

One issue now is that Dell has a dual-class structure: Michael Dell owns supervoting stock with 10 votes a share. Some investors would like to see Dell move to a single class of one-vote stock the way VMware will be doing after the spinoff.

“And why is it necessary, if ultimately you control the majority of economic interest, to have such a structure in place?” Toni Sacconaghi, a Bernstein analyst, asked the Dell CEO earlier this year.

(Dell executives declined to comment for this article.)

Getting rid of that structure would enable Dell to be included in the S&P 500 index, which doesn’t admit companies with dual classes. Michael Dell has rejected the idea, saying that he has “no plans” to collapse the share classes.

That is a mild negative. More important, the interest of investors is now aligned with Michael Dell in an underrated and inexpensively valued company

Barrons : China Has Good Reason to Fear Bitcoin

China’s sweeping crackdown has roiled the cryptocurrency world. China had become a key player in this new financial ecosystem, and Beijing’s actions could be the leading edge of a broader regulatory crackdown on cryptocurrencies and crypto assets by regulators around the world. This would be unfortunate. Cryptocurrencies have many flaws, but the underlying technology has great promise.

China had earlier banned initial coin offerings, the cryptocurrency equivalent of initial public offerings of stock by companies. It then took steps to limit Chinese financial institutions’ dealings with cryptocurrencies and crypto assets. The latest move is much broader. All domestic cryptocurrency transactions are now prohibited. In principle, such transactions can be conducted without the government’s direct knowledge. But few Chinese citizens or financial institutions are likely to risk the government’s wrath.

Beijing’s actions illustrate how national governments and central banks are becoming increasingly fearful of cryptocurrencies destabilizing their financial systems and other negative consequences. They have good reason to be worried.

Bitcoin, the original cryptocurrency, once fueled illicit transactions on the dark web and now facilitates payoffs for ransomware attacks. It has become apparent, meanwhile, that Bitcoin doesn’t work well as a medium of exchange for everyday transactions. Its value is unstable, and the Bitcoin network cannot process a large volume of transactions quickly and cheaply.

Bitcoin has, instead, become a purely speculative digital financial asset with no intrinsic worth. Its entire value proposition rests on its scarcity. The computer algorithm that manages Bitcoin issuance has a hard cap on the total number of the digital coins that can be issued, in contrast to fiat currencies that central banks can print at will.

The prospect of households channeling their savings into crypto assets, leaving them vulnerable to a bursting of the speculative bubble, is worrying to governments. China’s government clearly didn’t want any part of this, especially since it is already facing pushback for trying to cool off the speculative bubble in housing markets, which it once encouraged.

Beijing also had concerns about cryptocurrencies affecting its control of domestic payment systems. This concern has been evident in its crackdowns on Ant Financial and other tech giants that had come to dominate domestic retail payments, rendering central bank money increasingly irrelevant. Beijing also has been wary of new cryptocurrencies called stablecoins, which maintain stable value by being backed by stores of fiat currencies and could serve as alternatives to those same fiat currencies in making payments.

Yet another concern was that cryptocurrencies and stablecoins could be used to evade restrictions on cross-border financial flows. Such controls have been eased in recent years. but the government worries that unfettered flows would make it harder to manage the renminbi’s exchange rate. In 2015-16, when China was trying to rein in massive capital outflows and stanch a steep depreciation of the currency, demand for Bitcoin from within China spiked as people used it to take money out of the country and evade the government’s controls. Beijing now sees cryptocurrencies as conduits for evasion of capital controls.

China also has taken aim at Bitcoin mining—the process by which massive amounts of computing power are devoted to validating transactions on the cryptocurrency’s network, in exchange for rewards in the form of Bitcoins. Such mining had proliferated in China because of the easy availability of cheap energy and computer hardware, making it the global center of such activity. The environmental impacts, in terms of energy consumption and computer detritus, have been enormous. With the country in the midst of a power crunch as it tries to wean itself off dependence on nonrenewable energy, Bitcoin mining clearly wasn’t going to be tolerated.

Notwithstanding all of these deep flaws, the blockchain technology that underpins Bitcoin could in fact have widespread benefits. The technology is already finding uses in other areas of finance. It will soon be possible to conduct a broad range of transactions, even purchasing a house or car, without traditional intermediaries such as lawyers and real estate brokers. Moreover, the emergence of cryptocurrencies has prompted central banks to start designing digital versions of their own fiat currencies. China has already initiated such trials. So have Japan and Sweden, with many other countries planning to do so soon.

The future of cryptocurrencies as financial assets is murky. But the revolution they set off will make low-cost digital payments broadly accessible. These new technologies, if allowed to develop further, also will help broaden access to basic banking and financial services, even for low-income households and others underserved by existing financial institutions.

Cryptocurrency advocates should draw the right lessons from China’s crackdown. Rather than resisting regulation and oversight, or claiming that technology will allow the industry to police itself, they should engage with governments and regulators in designing effective regulation. In turn, the industry will benefit from greater legitimacy and stability.

Barrons : The Culprits of the 1987 Market Crash Remain a Mystery. What Lessons C

The Culprits of the 1987 Market Crash Remain a Mystery. What Lessons Can We Draw From It Now?

Black Monday didn’t come out of the blue. The red flags were there.

The crash of Oct. 19, 1987, was preceded by a bull market in stocks that began in August 1982 and drove the Dow industrials to 2722.42 from 776.91. The index’s price/earnings ratio hit a 25-year high, while interest rates reached their steepest levels in a decade.

The Dow had been trading sideways for six weeks when, on Wednesday, Oct. 14, it dropped 95.46 points, or 3.81%. It lost another 57.61 points the next day. Friday delivered the bull’s biggest reversal yet, a 108.36-point dive.

The question, according to Alan Abelson in Barron’s Up & Down Wall Street column that Monday, was whether the “blood in the Street” signaled a correction or a bear market. “In a correction, other people’s stocks go down,” he wrote. “In a bear market, your stocks go down.”

It was a bear market, and everybody’s stocks went down. The Dow on Monday dropped 507.99 points, a record single-day 22.61% decline, almost 10 percentage points worse than anything 1929 or Covid could deliver. The contagion crossed the globe; it’s known as Black Tuesday in Australia and New Zealand.

This crash seemed to come out of the blue, like most crashes, only because they are so rare and destructive. All things must end, yet when the end comes it’s usually a surprise. That’s worth remembering as today’s market leaves the pandemic trough behind and powers to new highs once more.

As for Black Monday’s warning signs, Merrill Lynch’s Bob Farrell got the timing right, if not the intensity, telling Abelson on Aug. 31 that he saw the bull continuing into October, setting “the stage for a true correction” of “15% or so.”

Shearson’s Elaine Garzarelli turned bearish in August, “in time to get her own mutual fund out ahead of the crash,” Floyd Norris noted. But there wasn’t a rush to the doors behind her. Most investors were blindsided. What happened?

“What set off the selling at the opening Monday is not completely clear,” Norris wrote on Oct. 26, echoing market watchers past and present.

One culprit Norris and others cite is portfolio insurance, a relatively new type of automated trading that bought index futures when stocks were going up and sold futures when stocks were going down. But while it certainly contributed to the declines, “that alone could not be the whole story,” Norris argued.

Shearson’s Garzarelli, months earlier, warned of other potential roadblocks for the bull. “Only when they see dramatic interest-rate rises, or the Federal Reserve tightens its credit policy, will investors lose confidence,” she told The Wall Street Journal on April 6. The Fed did tighten in 1987, amid hotter inflation. And the 30-year Treasury bond yield, at 8.5% in July, “slashed through the 10% barrier for the first time in almost 10 years” on Wednesday, according to Randall W. Forsyth on Oct. 19.

The “increase in interest rates can’t explain the upheavals” alone, Forsyth wrote, citing two other potential triggers for the previous week’s selloff: a disappointing trade-deficit report and what one economist called “a rather horrible tax proposal” in the House.

Looking back 10 years later, Forsyth wrote that the “root cause of the October 1987 crash remains monetary,” citing international efforts to control foreign-exchange rates.

Whatever sparked Monday’s selling, the result “was panic,” Norris wrote. A quick 200-point drop was followed by a 100-point gain, as some “nibbled at bargains,” but then came “free fall,” eclipsing even the then-record drop of Oct. 28, 1929, the original Black Monday.

And then it was over. No depression, not even recession, would follow. To be sure, fortunes were lost and companies ruined. But the bear market lasted just over three months and, in two years, the Dow recovered everything and was soaring again.

Fed Chair Alan Greenspan is credited with calming markets Tuesday by affirming the central bank’s “readiness to serve as a source of liquidity to support the economic and financial system.” Dubbed the “Greenspan put” or “Fed put,” that pledge continues to backstop the market.

Still, like the potential causes of the crash, this explanation for its recovery seems inadequate, and we are left with one of market history’s great mysteries.

The very inexplicability of Black Monday is, of course, the frightening part. Given the right conditions, a market—like a forest—needs just a tiny spark to go up in flames.

Barrons : The FDA Is About to Make Some Major Drug Decisions. What Investors Nee

The FDA Is About to Make Some Major Drug Decisions. What Investors Need to Know.

The Food and Drug Administration’s decisions on Covid-19 vaccine boosters have dominated investors’ attention in recent weeks, but the agency has plenty more on its plate in the coming months.

Before the year is out, the FDA will announce a handful of billion-dollar decisions expected to move the shares of big pharma companies like Pfizer (ticker: PFE) and Eli Lilly (LLY), and of biotechs small and large, including Intra-Cellular Therapies (ITCI) and BioMarin Phamaceutical (BMRN), among others.

The rulings will come from an agency that has been working without a permanent commissioner since the start of the year, and has been buffeted by controversy over some of its approval decisions. That injects a degree of unpredictability into the process, and demands careful watching by investors.

Dr. Janet Woodcock, a longtime FDA official, has led the agency as its acting commissioner. Her term expires on Nov. 15, putting pressure on the Biden administration to make a pick in the coming weeks.

Until that appointee is confirmed, analysts say that the lack of permanent leadership at the agency is making it harder to know what to expect from the FDA on certain decisions.

“From an operational standpoint, the FDA has actually been working relatively efficiently,” says Brian Abrahams, an analyst at RBC Capital Markets. Still, he says that “there are a number of spaces where having a more defined philosophy and direction would be helpful.”

One of those areas is Alzheimer’s disease treatments, where the agency received enormous backlash over its approval of Biogen ’s (BIIB) Alzheimer’s therapy, Aduhelm, despite a rejection of its efficacy by the agency’s outside advisers.

Before the end of the year, Eli Lilly is expected to submit an application for accelerated approval of its own Alzheimer’s therapy, known as donanemab. The FDA will need to decide whether to accept the application for review.

“Given all the controversy around Biogen’s Aduhelm, it’s not a zero percent chance” that the FDA will decline to review Lilly’s application, says Louise Chen, a Cantor Fitzgerald analyst. “That would be a bad day for Lilly, if that happened.”

Lilly shares are up about 40% this year, to a recent $236, in no small part because of the excitement over donanemab after the FDA’s surprise approval of Aduhelm. While the agency is likely to accept the application for review, Chen says that Lilly shares would plunge if it didn’t. It would also probably drag on the shares of other companies developing similar Alzheimer’s therapies, including Roche Holding (RHHBY) and Biogen.

Another big decision likely to come soon from the FDA will determine the future of a drug class known as the JAK inhibitors.

JAK inhibitors are used to treat rheumatoid arthritis, along with other inflammatory conditions. The FDA has been increasingly worried about the drugs’ safety. In September, the agency announced that it would require JAK inhibitors being used to treat arthritis and ulcerative colitis to carry new labels warning that these drugs carry a risk of serious heart-related events and death.

Pfizer and AbbVie (ABBV), meanwhile, have each been waiting on the regulator to decide whether to approve their JAK inhibitors to treat atopic dermatitis. The FDA has missed deadlines to determine whether to approve Pfizer’s abrocitinib, and AbbVie’s Rinvoq, to treat the skin disorder.

Now, the FDA needs to decide how the safety concerns around JAK inhibitors as arthritis treatments should apply in a different area of medicine, overseen by different offices within the agency. The lack of a commissioner could make this tougher.

“The commissioner’s role, to some extent, is to coordinate between divisions,” says Ronny Gal, an analyst at Bernstein.

The decision, when it comes, will offer insight into how the FDA is thinking about JAK inhibitors as a class, and will have implications beyond Pfizer and AbbVie, to companies like Incyte (INCY) and Eli Lilly that also sell such drugs.

Smaller firms are also waiting on decisions that could have major implications for their share prices. Intra-Cellular Therapies is expecting a decision from the FDA by Dec. 17 on whether to approve its drug Caplyta to treat bipolar depression. Andrew Tsai, an analyst at Jefferies, says he thinks the drug will be approved, and that the stock will climb from its recent price of $38 to as high as $55 on approval.

Another biotech, argenx (ARGX), is expecting the FDA to decide by Dec. 17 on whether to approve its drug efgartigimod as a myasthenia gravis treatment. Jefferies analyst Akash Tewari wrote in an early October note that he believes the approval will come this year. He has a $362 target price on the stock, which traded recently around $297.

BioMarin, meanwhile, is expecting the FDA to decide by Nov. 20 on whether to approve Voxzogo as a treatment for a genetic disorder called achondroplasia. Cowen analyst Phil Nadeau wrote in August that signs point to the FDA approving the therapy. Nadeau’s target price on the stock is $135; it traded recently at $76.

Barrons : This Small Biotech Is Partnering With Johnson & Johnson. The Stock Cou

This Small Biotech Is Partnering With Johnson & Johnson. The Stock Could More Than Double.

Since the excitement of multibillion-dollar acquisitions of gene-therapy firms by Novartis and Roche Holding a few years ago, many gene-therapy stocks have sunk to small-cap valuations. Among them is MeiraGTx Holdings , shares of which fell from a 2019 peak of $30 to a recent $14, leaving its market capitalization below $600 million—and only a half-dozen analysts paying it heed.

That’s an opportunity for investors. MeiraGTx (ticker: MGTX) has several treatments in clinical trials, some of the industry’s best manufacturing centers, and a deep-pocketed partner in Johnson & Johnson (JNJ). And MeiraGTx says it has a technology that could revolutionize genetic medicine by regulating the artificial genes that gene-transfer therapies place in patients’ cells. MeiraGTx has been quietly working on that technology for six years and hasn’t revealed much data. But at today’s stock price, it could be a good time for investors with an appetite for risk to invest.

MeiraGTx will present its gene-regulating “switches” at next week’s conference of the European Society of Gene and Cell Therapy, and to Wall Street investors in mid-December. Next year, Meira hopes to start human trials on pills containing small-molecule drugs that could tightly regulate the output of previously transferred genes.

“This isn’t a decade away from the clinic,” says Meira CEO Alexandria Forbes.

Today, genes inserted into cells turn on and just crank out their instructions. Forbes says Meira can switch a transferred gene on and off, and dial its activity up and down in a range from zero to 5,000 by varying doses of safe, small-molecule drugs. In animal studies, Meira has achieved this dynamic control for inherited eye disease. Meira has also been able to regulate genes that produce some of today’s biggest-selling biologic drugs, like red-blood-cell stimulant erythropoietin or PCSK9 antibodies that treat inherited heart disease.

Meira’s technology is known as a riboswitch because it can control instructions sent by genes to the ribosomes—cellular factories for making proteins. After discovering riboswitches in bacteria, scientists spent decades trying to adapt them to mammalian cells—without much success. The best riboswitches have been able to vary a gene’s activity by only an order of magnitude, instead of the four orders of magnitude that Meira claims.

Meira’s riboswitch is a fragment of RNA packaged with the gene inserted into a patient’s cells. The riboswitch resembles an open hairpin and prevents the trans-gene from sending workable messages to the ribosomes. But when the riboswitch is triggered by a drug—in pills or drops—it snaps closed and allows the trans-gene to work. The technique thus implants switched-off genes that can be turned on hourly or daily, and precisely controlled over a range of outputs.

Meira has kept its work out of science journals while securing patents on the technology. “This isn’t anything that you can find in nature,” Forbes says. “This is really unprecedented.”

Besides controlling gene therapies like ones that companies are testing for hemophilia or Parkinson’s, Meira’s riboswitches could also control insulin and other hormones whose short-lived action currently requires frequent infusions. Gene-editing techniques like Crispr-Cas9 could be turned on and off with a riboswitch. Many biologic drugs can’t cross the blood/brain barrier to treat brain cancer or neurodegenerative disease, but riboswitched genes could be placed in the brain and controlled with small molecules that can cross over.

Forbes notes that a successful gene-regulation technology could also change gene-therapy pricing, which has seen the Novartis (NVS) one-time treatment Zolgensma for spinal muscular atrophy cost $2.1 million—making it the world’s most expensive drug. Trans-genes with riboswitches could cost a lot less, with subsequent charges for drugs that turn the trans-genes on.

The London- and New York–based company has been working with researchers at leading eye-disease centers like University College London and that city’s Moorfields Eye Hospital, and has had publicly available data readouts in its clinical trials.

Meira’s good data won it a deal with J&J’s Janssen unit on eye-disease therapies. Now a 7% shareholder, J&J covers the costs of Meira’s eye-disease trials, so the still-unprofitable company can dedicate the capital raised since its June 2018 initial public offering to research and building manufacturing plants in the United Kingdom and Ireland. At the end of June, Meira had over $170 million in cash, enough to cover operations into 2023—when it could see sales from its first gene therapy and receive further payments from J&J.

Focusing mainly on Meira’s gene therapies, the six analysts covering it rate it a Buy and say that its shares should more than double. Analyst Geulah Livshits of boutique biotech banker Chardan Capital Markets thinks the shares could even reach $55. Chardan’s chief scientific officer, Gbola Amusa, talked up Meira in a 2019 Barron’s biotech roundtable and believes that it would already be valued in the billions if it hadn’t been so circumspect about its gene-regulation technology during its patent pursuit.

When science and Wall Street finally get a look at Meira’s gene-regulation platform, its days as a small-cap stock might end.

Barrons : Tobacco Maker BAT Is Hardly Flaming Out. New Products Will Help Boost

Tobacco Maker BAT Is Hardly Flaming Out. New Products Will Help Boost the Stock.

Cigarette maker British American Tobacco has been under pressure as effective public health campaigns led to restrictions on smoking in public places, and changed the way its products are marketed.

The stock (ticker: BATS.UK) has fallen 26% in the past three years to 25.36 pounds sterling ($34.60), along with peers Japan Tobacco (2914.Japan), down 27.39%, and Altria Group (MO), which lost 28.12%.

The Food and Drug Administration in April announced a ban in the U.S. on flavored cigars and menthol cigarettes—the latter of which generates 25% of BAT group profits, according to estimates from broker Jefferies. Uncertainty surrounding the implementation of the ban has also been a drag on the stock.

But the maker of Lucky Strike and Newport in 2020 invested £430 million in new products that included e-cigarette Vuse, glo tobacco-heated products, and Velo nicotine pouches. While noncombustible products—those that don’t involve burning tobacco—account for just 12% of overall revenue, new Chief Executive Officer Jack Bowles says BAT’s new products are set to soar this year.

In June, the company raised annual growth forecasts to more than 5%, from 3% to 5% previously. More than 2.6 million new users of what BAT calls “lower-risk products” were added over the first half, amounting to 16.1 million. BAT estimates it will boost that number of users in this category to 50 million by 2030 and hit £5 billion in sales for this part of the business by 2025.

Laura Parisot, an analyst at independent research firm Alpha Value, forecasts the stock could rise 75% to £44.34. She said in a recent note that the new categories business has “impressively grown” 37% in 2019. “There is no doubt that growth will continue in this segment,” she wrote.

Jonathan Leinster, an analyst at Société Générale, has a Buy rating and a more modest £36 price target. The resumption of the share-repurchase program in 2022 and growth in the sales of the new products “will be a positive catalyst for the shares.”

BAT sells more than 200 brands in over 180 markets. It has a market value of £58 billion and employs more than 55,000 workers. The stock has a low multiple of 7.3 times this year’s expected earnings and is valued in line with its peers.

BAT posted pretax profit of £8.6 billion for 2020 on revenue of £25.8 billion. That compares with £7.9 billion in pretax profit in 2019 on sales of £25.8 billion.

“There is great momentum across the business,” Bowles tells Barron’s, adding that the company is on track to meet its targets of £5 billion in new category revenue by 2025 and 50 million noncombustible product consumers by 2030. “We are building strong, global brands of the future with Vuse, Velo and glo,’’ he says.

Traditional stick cigarettes, though, are still a significant part of the business. There are 1.1 billion combustible customers, despite sales volumes gradually falling over the years.

Developing countries contribute to around 70% of the company’s cigarette volume and could be a spark for growth. BAT has Pakistan, Bangladesh, and Vietnam in its sights, each of which have more relaxed approaches to smoking regulations.

A further boost for the business is its cost-cutting program called Quantum. Alpha Value’s Parisot says it should deliver £1 billion to £1.5 billion of efficiencies over the three years through 2022. BAT has a solid dividend policy, with a hefty 8.8% yield and 23 years of dividend growth.

Those payouts should keep investors happy as the cigarette market changes.

>>> US Close Dow +1.09% S&P +0.75% Nasdaq +0.50% Russell -0.37%

Closing Stock Market Summary

The S&P 500 gained 0.8% on Friday, supported by an upside surprise in the retail sales report for September, better-than-expected earnings news, and improving technical factors. The Dow Jones Industrial Average rose 1.1%, while the Nasdaq Composite increased just 0.5% and the Russell 2000 fell 0.4%. 

Briefly, total retail sales in September were up 0.7% m/m (Briefing.com consensus -0.3%), reflecting resilient consumer demand amid higher prices. Amazon.com (AMZN 3409.02, +109.16, +3.3%) took the news in stride, carrying the S&P 500 consumer discretionary sector (+1.8%) to a first-place finish. 

The financials sector (+1.5%) was next in line amid higher Treasury yields and earnings-driven gains in Goldman Sachs (GS 406.07, +14.87, +3.8%) and Charles Schwab (SCHW 80.90, +2.79, +3.6%). The industrials sector (+1.0%) benefited from J.B. Hunt Transport's (JBHT 190.55, +15.31, +8.7%) better-than-expected earnings report. 

Conversely, the counter-cyclical consumer staples (-0.2%), utilities (-0.2%), and communication services (-0.1%) sectors finished in negative territory. The latter was pressured by Facebook (FB 324.76, -3.77, -1.2%), which was added to the Tactical Underperform List at Evercore ISI.

Notably, the 10-yr yield rose six basis points to 1.58%, but that didn't upset the growth stocks too much presumably because it remained below recent highs. The Russell 1000 Growth Index (+0.8%) outpaced the Russell 1000 Value Index (+0.6%) in percentage terms. 

On the technical side, the S&P 500 increased its distance above its 50-day moving average (4437) after closing above the key technical level yesterday. This positive price action was likely viewed as a good indicator among traders.   

In vaccine news, an FDA advisory committee unanimously recommended Johnson & Johnson's (JNJ 161.30, +1.19, +0.7%) booster COVID-19 shot for people 18 and older. The FDA, however, is reportedly delaying a decision on Moderna's (MRNA 324.21, -7.67, -2.3%) vaccine for the 12-17 age group to review the risks of a rare heart condition.

The 2-yr yield rose five basis points to 0.40%. The U.S. Dollar Index finished little changed at 93.94. WTI crude futures rose 1.2%, or $0.98, to $82.26/bbl.

Reviewing Friday's economic data, which featured the Retail Sales report for September:

  • Total retail sales in September were up 0.7% month-over-month (consensus -0.3%) following an upwardly revised 0.9% increase (from 0.7%) in August. Excluding autos, retail sales jumped 0.8% month-over-month (Briefing.com consensus +0.4%) following an upwardly revised 2.0% increase (from 1.8%) in August.
    • The key takeaway from the report is the recognition that the broad-based sales increases reflect a rebound from some of the Delta-related restraint shown in August and presumably price increases that are a byproduct of supply chain constraints and higher transportation costs.
  • The preliminary October University of Michigan Index of Consumer Sentiment dropped to 71.4 (consensus 73.5) from the final reading of 72.8 for September, leaving it pinned near the lows that were registered last year following the shutdown of the economy to combat the spread of COVID.
    • The key takeaway from the report is the finding that confidence in economic policies is fading regardless of political affiliation, as well as across all age, income, and education subgroups.
  • Business inventories increased 0.6% m/m in August (consensus 0.7%) following an upwardly revised 0.6% increase (from +0.5%) in July.
  • Import prices increased 0.4% in September after decreasing 0.3% in August. Excluding oil, import prices were flat after decreasing 0.1% in August. Export prices increased 0.1% after increasing 0.4% in August. Excluding agriculture, export prices increased 0.3% after increasing a revised 0.3% (from 0.2%) in August.

Looking ahead, investors will receive Industrial Production and Capacity Utilization for September, the NAHB Housing Market Index for October, and Net Long-Term TIC Flows for August on Monday. 

  • S&P 500 +19.0% YTD
  • Nasdaq Composite +15.6% YTD
  • Dow Jones Industrial Average +15.3% YTD
  • Russell 2000 +14.7% YTD