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Ethereum Upgrade “Merge” Represents a Shift Forward in the Future of Cryptocurrency and Blockchain

Since the formulation of Bitcoin in 2009, the ground-breaking idea of using blockchain to generate what is now known as “cryptocurrency” has attained a level of popularity, even in the face of tremendous volatility, that detractors could never have imagined. Ethereum was first conceptualised in 2013 and brought to life in 2014 by programmer Vitalik Buterin. The cryptocurrency was founded not as a currency in itself, but as a platform with a goal to fully decentralise the internet. Since its formation, Ethereum has grown to earn its position as the second-largest cryptocurrency in the world with a current market cap of $163.28bn, despite a recent but steady fall in price of 66% from annual highs. 

Although Bitcoin and Ethereum are quite different with regards to their structure and capabilities, they have faced common criticisms by both observers and users alike. “Proof-of-work” is the decentralised mechanism used by both whereby members of a network solve arbitrary mathematical problems that use massive amounts of computing power for mining new tokens and validating transactions. The total consumption of energy needed to fuel this computing power has been condemned. According to estimates, Bitcoin alone consumes as much energy as Poland. In the face of climate change and energy shortages, there has been increased pressure on governments and corporations to disincentivise the growth of such cryptocurrencies based on the system of proof-of-work. The White House proposed restrictions on proof-of-work mining earlier this month as a way to reduce energy consumption. 

These problems prompted Ethereum developers to reconsider the “proof-of-work” system and led to the proposal of a “proof-of-stake” upgrade to underwrite Ethereum. This project eventually led to the “Merge” that took place last Thursday, 15th September which went off without a hitch. The proof-of stake mechanism is based on the work of “validators” rather than “miners”. These validators are compensated modestly in return for their validation of transactions and collateralize their own cryptocurrency which deters dishonest or lazy work. Over 100 developers worked on the upgrade for years to ensure minimal risks for bugs and the new mechanism is estimated to cut energy consumption by the cryptocurrency by roughly 99.95%.

The upgrade will significantly reduce the quantity of Ether (Ethereum’s token) coming into circulation which may allow it to serve as a deflationary currency in the coming months. Ethereum may well become more accessible for institutional investors as corporations can no longer use the wasteful use of energy as an excuse to ban its use in portfolios. Institutions such as Bank of America have recently indicated that the upgrade may ease their current restrictive policy on Ethereum. Cryptocurrency advocates say the transition marks a turning point in the future of digital assets while critics argue that a number of challenges remain. While the “Merge” will accelerate the process of introducing upgrades and make Ethereum more efficient, it will still face the inherited problems of congestion and very high transaction costs. The proof-of-stake upgrade represents more than just a change in operating system. Proof-of-stake has now been proven to be a suitable mechanism for operating blockchain technology and will have broad implications for the innovation of digital assets in the future. 

The Pharma Industry: Where next?

As Covid-19 returns to being an endemic disease, the pandemic has taken a back seat in recent weeks as other, more pressing crises come to the fore. While certain pharmaceutical companies benefited greatly from the pandemic, as illustrated by Astrazeneca’s 41% rise in revenue for 2021, the irony holds that the industry failed to gain in equity markets as much as firms in other industries (E.g. in hospitality/catering), from the re-opening that they enabled. That said, in the US alone the Pharma industry is valued at approximately $2.8 trillion. Given this, alongside the impressive speed of vaccine developments, and the heightened importance placed on what pharmaceutical firms can offer by the pandemic, the potential for growth exists if it can be capitalised on. The pharmaceuticals industry is highly volatile and hugely speculative, with history illustrating that news of final-stage trials, testing success, or acquisitions, can cause huge share price swings. Therefore, this article is meant to be a conversation-starter, and provide food for thought, rather than provide any investment advice or know-how, regarding what is next to come for the pharmaceuticals industry. 

A Deep Dive Into Some Pandemic Performers:

Astrazeneca: Potential to grow

AstraZeneca’s development of the Covid-19 vaccine broke headlines in late 2021, leading the company to become a household name. While the firm’s promise of providing vaccines at cost boosts its ESG commitments, since November 2021 it has backtracked on this policy, taking minor profit from advanced economies, but remaining not-for-profit for low-income countries. This is an understandable policy not only as Covid-19 begins to become endemic, but also for Astrazeneca’s own business model (its core vaccine rivals Moderna and Pfizer have always sold Covid-19 vaccines at a profit). Despite this policy, Astrazeneca’s revenues were still very strong in 2021, meaning that in February 2022 they increased the annual dividend for the first time, as sales are forecast to be just as strong, if not stronger, for 2022 – notably from new cancer and kidney disease drugs, alongside its research into rare conditions. The latter of these stems from Aztrazeneca’s acquisition of Alexion Pharmaceuticals in July 2021, which would serve to boost its experience in rare diseases. Interestingly, from 7,000 rare diseases today, only 5% have treatments that are certified by the FDA, illustrating the room for growth and development within this sector, something that Astrazeneca is certainly capitalising on. While this suggests promise to this firm, the earnings per share (EPS) have dropped to very low levels (0.04), meaning there may be concerns towards future profitability, particularly in a competitive, volatile market – and one where fast development and adaptivity is required. Furthermore, the price to equity ratio is (by historical standards) very high, suggesting the share price is overvalued, and further signaling that the market has concerns about Astrazeneca’s future profitability. Therefore it is worth exploring whether this is a common trend among other Covid-19 vaccine suppliers. 

Pfizer: Consistently strong performer

Having paid a quarterly dividend for more than 83 years, and increasing this by 25% for the past 5 years, Pfizer was performing strongly prior to the Pandemic, which only certified its status as the world’s leading pharmaceuticals company (by revenue) in 2021. Furthermore, its stronger EPS, at 3.83, alongside its much more promising price-equity ratio (compared to AstraZeneca’s), symbolise that perhaps some pharmaceuticals firms are emerging out of the pandemic in a better position than others. Pfizer are utilising some of the lessons learned during the pandemic to complete its aim of delivering 25 drug breakthoughs by 2025. This ambition is possible due to Pfizer’s size, meaning that while the Covid-19 vaccine was a boost to revenue, it did not have as significant an impact compared to its core rivals. This diversification and broad range of interests means that Pfizer has a lot of room to grow with fairly minimal risk. Meanwhile, its strong ESG awareness and policies illustrate a focus on sustainable growth, alongside solid investment opportunities in an age of impact investing. Finally, Pfizer’s partnership with BioNTech in vaccine development is symbolic of the collaborative possibilities held by the firm, illustrating further room for growth and opportunities for research and development.  

Moderna: Vaccine-focussed

This is in contrast with Moderna, which saw a colossal rise in revenue between 2020 and 2021, from $803 million to $18.5 billion, largely driven by its Covid-19 vaccine development. However, this illustrates its dependency on the vaccine’s development, which, as the Pandemic begins to subside, risks impacting revenue drastically by 2023. Furthermore, Moderna are striving to replicate their Covid-19 mRNA vaccine success into other areas, focussing on adapting and developing vaccinations with a similar technology. However, this lack of a broad base is highly risky, particularly in pharmaceuticals, where trials may not be a success. Therefore, the question of whether Moderna can continue performing into the future depends on whether it is able to adapt and perhaps diversify its interests slightly, to ensure its ability to compete with its major rivals.  

Johnson & Johnson: A more streamlined approach

In a differing strategy, Johnson & Johnson (J&J), like many large firms, have recently decided to streamline operations and heighten their focus through divesting multiple sections of its core business. This could see a profits increase, as is anticipated next year. Notably, while morally contentious (potentially impacting its ESG ratings), J+J recently divested its talcum powder business into its own company (which subsequently filed for bankruptcy), reducing the impact of its asbestos-related liabilities on profits. Additionally, plans to make its consumer health unit a standalone entity next year would leave the company focussed on pharmaceuticals and medical equipment. The latter gained increased sales of almost 18% in the last year, and the former is also one of the firm’s fastest-growing units, illustrating the potential for growth when focussing on these sectors. Furthermore, J&J are currently inundated with late-stage clinical trials, meaning that imminent breakthroughs are highly possible, providing the potential to rack up profits in the coming year. 

What to Watch: 

Given that pharmaceuticals stocks have slightly outperformed the overall market over the past twelve months, it is unsurprising that the above companies are not the only strong contenders in this promising industry. Alongside Pfizer, which has held a strong 12-month trailing total return, other firms, namely Amphastar Pharmaceuticals and Intracellular Therapies, the latter of which focuses on neurological disorders, with a particular focus on Alzheimer’s Disease (illustrating strong room to grow in an aging world), have shown high momentum in the past year, with the possibility this could continue. Furthermore, Dynavax’s revenue grew 897.8% in the last year, a firm that specialises in immunotherapy. Given this, alongside its interest in vaccine production, Dynavax could capitalise on the lessons learned over the Pandemic, namely regarding immunology and vaccine production, to continue this path towards revenue growth. 

In a dynamic and well-contested market, growth and a focus on research & development are crucial for Pharma firms, and drawing on lessons learned from the pandemic to ensure adaptability and innovation will be key. Additionally, given the presence of potential lawsuits, alongside the long-term focus (due to the amount of time taken to create a new drug) for many pharmaceutical companies, ESG considerations in this industry are particularly key, and should be at the forefront of competitive firms’ decisions. Thus, the pharmaceuticals industry still has a lot of room to grow, and as long as firms can capitalise on this, perhaps streamlining their R+D in a particular area, while ensuring strong ESG commitments, then the industry shows a lot of promise.

Biden sanctions Russia over belligerent foreign policy

Last Thursday, the White House announced that sanctions are to be placed on Russia for its “harmful foreign activities”, interference in US elections and sweeping cyber-attacks on US government and corporations. The impositions also follow strong international condemnation of Russia’s heavy military deployment at the Ukrainian border. The actions target 32 Russian entities and involve the expulsion of certain diplomats. Biden’s sanctions align with his rhetoric in recent months, during which he has promised to make Putin “pay” for attempting to undermine the American democratic process and accused the Russian government of poisoning Alexei Navalny. The sanctions also sharply contrast from recent American policy towards Russia, a period during which Donald Trump rarely criticised Russia or Putin’s belligerent behaviour on the world stage.

What do the sanctions entail?

The wide-ranging sanctions imposed by Biden’s executive order includes “long-feared” restrictions that ban U.S. financial institutions from participating in the primary market for Russian sovereign debt, effective from June 14th. Once news of the sanctions broke, Russian bonds suffered their largest fall in value for months and the rouble dropped by 2.2%, before making a slight recovery later in the day. Still, a large sell-off of Russian assets was sparked. Nonetheless, one senior Russian official said that the new debt restrictions were the “least painful” option, as they will not affect the secondary debt market, while others have said that a reciprocal response is “inevitable”.

In addition to this, 32 entities and individuals have been sanctioned by Biden’s order. The list includes Russian government and intelligence officials, as well as six Russian companies involved in the Kremlin’s hacking activities. Ten Russian diplomats in Washington are also to be expelled. Some worry that the expulsion of diplomats will worsen intergovernmental dialogue between the two nations, but Putin is still thought to be considering Biden’s offer of a US-Russia summit in the near future.

National Security Advisor Jake Sullivan says that the measures taken by the White House are “proportionate” and that their goal is “to provide a significant and credible response but not to escalate the situation”. Indeed, Biden’s sanctions are consistent with America’s handling of Russian transgressions since its annexation of Crimea in 2014: to punish illegal Russian behaviour but not to escalate tensions further, particularly given the anxiety surrounding Russia’s military build-up at the Ukrainian border.

What has inspired the sanctions?

The US has threatened to place additional sanctions on Russia for a throng of misdeeds over recent years. However, the introduction of these specific restrictions has occurred in close proximity to a recent US intelligent report confirming attempts by the Russian government to rig the 2020 presidential election. Additionally, the order follows a review, ordered by Biden, into other key areas of concern with Russian behaviour that include reports of Russian bounties on U.S. soldiers in Afghanistan, the historic SolarWinds cyber-attack and the poisoning of Putin’s pro-democracy rival Alexei Navalny.

The sanctions are viewed as a single, sweeping response to these various Russian wrongdoings, rather than to one particular incident. This is likely the case for two main reasons. Firstly, the US does not wish to escalate tensions with Russia, but rather wishes to signal that the Biden administration has adopted a harder line than his predecessor. Secondly, devising an individual response to the major SolarWinds cyber-attack would be politically difficult for Biden. Some members of Congress described the attack as “an act of war”, while some highlighted that the US conducts similar operations abroad. Treating Russia’s various offences with a single package of sanctions has allowed Biden to maintain his election promise of a strong stance on Russia while avoiding an image of hypocrisy (i.e., sanctioning Russia for activities similar to those that the US partakes in).

Will Biden’s order result in further US-Russia divergence?

The extent to which the sanctions will damage US-Russo diplomatic relations is still unclear. Many believe that overly harsh sanctions on Russia would be inconsistent with Biden’s offer to hold a summit and normalise relations between the two countries. Given that the sanctions are not disastrously severe, and that Putin is still thought to be mulling over the prospect of a US-Russia summit, it seems that relations between the White House and Kremlin will remain similarly strained. However, Biden signalling a firmer approach to Russia than Trump is not a welcome prospect for the Kremlin, and will likely reduce the belief that they can act with impunity. Indeed, a Kremlin spokesman seemed to explain the increased Russian military activity on its Ukrainian border as a kind of bargaining tool in the case of US action, like sanctions.

Overall, it is difficult to know how the sanctions will affect US-Russo relations. If they are enough to prevent Putin from joining Biden at a summit, then they will have had a clearly negative effect. Otherwise, even in the case of roughly equivalent Russian retaliation, the two countries’ relationship will likely remain as it has been over recent years: strained.