Debt and equity investment in BDSI

BioPharma Credit 3 June 2019 Review
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BioPharma Credit

Debt and equity investment in BDSI

Investment trusts
Debt: Direct lending

3 June 2019

Price*

US$1.04

Market cap

US$1,428.9m

NAV

US$1,421.9m

NAV (ordinary shares)**

103.49c

Premium to NAV

0.5%

*Ordinary shares. **As at end-September 2018.

Yield

6.5%

Ordinary shares in issue

1,373.9m

Code

BPCR

Primary exchange

LSE

AIC sector

Specialist: Debt

Benchmark

N/A

Share price/discount performance

One-year performance vs index

52-week high/low

111.0c

102.0c

104.27c

99.62c

**Including income.

Gearing

Gross*

0.0%

Net*

0.0%

*As at end-April 2019.

Analysts

Milosz Papst

+44 (0)20 3077 5720

BioPharma Credit is a research client of Edison Investment Research Limited

BioPharma Credit (BPCR) recently announced that it has entered into an agreement to provide a US$80m senior secured loan to BioDelivery Sciences International (BDSI), a Nasdaq-listed commercial-stage pharma company. BDSI’s main assets include Belbuca, an FDA-approved partial opioid agonist classified as a Schedule III drug, as well as Symproic, an FDA-approved drug for the treatment of opioid-induced constipation (OIC). This agreement represents BPCR’s first investment this year. Moreover, it invested US$25m in BDSI’s recent share issue, which constitutes BPCR’s first equity investment since inception. We estimate that BPCR still has around US$500m in uncommitted cash available for further deals.

Month ending

Share price
(%)

NAV
(%)

NASDAQ Biotechnology
(%)

FTSE All-Share
(%)

Credit Suisse HY
(%)

S&P Euro Lev Loan
(%)

31/12/18

1.4

(0.1)

(11.2)

(3.9)

(4.4)

0.1

31/01/19

(0.5)

3.8

13.4

7.6

7.8

1.3

28/02/19

0.4

0.5

2.7

3.4

4.3

0.0

31/03/19

1.0

0.3

(0.8)

0.6

4.1

(1.3)

30/04/19

0.2

0.3

(4.8)

2.7

3.6

0.6

Source: Refinitiv. Note: All % on a total return basis in US$.

Loan terms broadly in line with previous transactions

BPCR has agreed to provide US$80m of debt funding through a senior secured loan (secured on substantially all of BDSI’s assets). US$60m was provided on 28 May, with the additional US$20m tranche available until May 2020. The loan has a coupon rate of Libor plus 7.5% and BPCR will also receive a funding fee of 2.0%. These terms are in line with BPCR’s last deal (Amicus) which concluded in September 2018 and is broadly comparable with the earlier Tesaro transaction. The loan is interest-only for the first three years.

BPCR’s first equity investment

BPCR also acquired a US$25m equity stake during BDSI’s secondary public offering in April 2019 (representing 50% of the new share issue) priced at US$5.00/share (vs the last close which was US$4.24). BPCR’s equity stake now represents c 6% of BDSI’s share capital. As per its investment policy, its total equity exposure can be up to 15% of BPCR’s gross assets. Overall, the BDSI deal is a somewhat smaller transaction for BPCR, as the combined debt and equity investment (including the second US$20m tranche not yet funded) equals c 7% of BPCR’s NAV as at end-April 2019. This compares with the share of each of the other senior secured loans in the company’s portfolio, at c 9–12%. However, we appreciate that it moderately reduces BPCR’s current high cash position.

Valuation: Offers a c 7% dividend yield

At 30 May 2019, BPCR’s shares are trading at a minor 0.5% premium to its last reported NAV (as at end-April 2019). Including the DPS of 1.8c payable in June, the shares offer a c 7% trailing dividend yield, in line with BPCR’s target.

Transaction rationale

BDSI: Product ramp up supports funding measures

BPCR’s transaction with BDSI follows the solid ramp up in sales of Belbuca (up 134% y-o-y to US$18.7m in Q119) and BDSI’s acquisition of the commercialisation rights to Symproic in April this year. Belbuca (which was developed by BDSI in partnership with Endo) received FDA approval in October 2015. BDSI subsequently re-acquired full commercial rights to the drug in January 2017 when Endo discontinued its commercial efforts with respect to its branded pain business.

BDSI raised its FY19 sales guidance for Belbuca following the Q119 results announcement to US$83–88m (implying y-o-y growth at 80–91%) from US$80–85m previously. The Evaluate Pharma consensus for FY19 currently stands at US$80m, with further growth expected for FY20 and FY21 of 39% y-o-y (to US$111m) and 21% (to US$134m), respectively. The company also confirmed group sales guidance for FY19 of US$92–100m (including US$7–9m attributable to Symproic). The ramp up in Belbuca sales has allowed BDSI to refinance the more expensive US$61.8m loan from CRG Services (fixed coupon rate of 12.5%) with the BPCR loan and raise US$50m gross from an equity offering in April.

Demand for Schedule III pain relief drugs is likely to remain high

The opioid epidemic in the US and other markets is significant and results in an estimated 130 deaths from overdose every day according to the US National Institutes of Health. The cause of this opioid crisis is partly due to the rise in surgical procedures and the number of cancer patients. While efforts to reduce opioid prescriptions have had an effect, some sources suggest that this is due to a reclassification of some drugs. Nevertheless, demand for so-called Schedule III opioid formulations like Belbuca that, by virtue of their drug delivery systems are less able to be abused or diverted, but still treat chronic pain effectively, is likely to remain high in patients requiring pain management. In the same way, many cancer and surgical patients suffer the side effects of opioid pain medication as these drugs bind to the opioid receptors in the gut leading to OIC, which delays a patient’s discharge from hospital. Drugs such as Symproic have been developed to address this indication and their use can be associated with a positive return on investment at the hospital level, as the earlier discharge of patients frees up beds for more admissions. 

Significant dry powder still available for further deals

At end-April 2019, BPCR had US$724.3m in cash (or 51% of its NAV). In part this is due to the acquisition of Tesaro (BPCR’s largest borrower at end-2018) by GlaxoSmithKline in early 2019, which triggered the loan repayment based on a change of control clause. Together with substantial make-whole/prepayment fees, this translated into a cash inflow of US$369.9m to BPCR on its US$322m investment. As a result, the company generated a solid IRR of 28.8% on this investment. The healthy make-whole payment on the Tesaro loan allows for a long reinvestment runway of the returned cash. Moreover, in autumn 2018, the company raised gross proceeds of US$305m in a new share issue. The US$65m invested in BDSI (excluding the second tranche of US$20m) represents a relatively minor part of BPCR’s cash balance, leaving the company with ample dry powder for prospective deals.

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This report has been commissioned by BioPharma Credit and prepared and issued by Edison, in consideration of a fee payable by BioPharma Credit. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by BioPharma Credit and prepared and issued by Edison, in consideration of a fee payable by BioPharma Credit. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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