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Fully invested after recent transactions

Biopharma Credit 10 January 2022 Update
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BioPharma Credit

Fully invested after recent transactions

Investment trusts
Debt: Direct lending

10 January 2022

Price

US$0.98

Market cap

US$1,340.9m

NAV*

US$1,359.3m

NAV per share*

US$0.99

Premium/(discount) to NAV

(1.0%)

*At end-November 2021

Yield

7.4%

Shares in issue

1,373.9m

Code Ord/A-share

BPCR

Primary exchange

LSE

AIC sector

Debt – Direct Lending

52-week high/low

US$1.03

US$0.86

US$1.01

US$1.00

Gearing

Net cash at end-November 2021

18%

Fund objective

BioPharma Credit was incorporated in the UK in October 2016. It aims to generate predictable income for shareholders over the long term through a diversified portfolio of loans and other instruments, backed by royalties or other cash flows derived from sales of approved life sciences products. This includes senior secured notes, royalty debt instruments and priority royalty tranches.

Bull points

Strong and predictable income generation.

Loans backed by approved and marketed products.

High dividend yield (7% target).

Bear points

The life sciences sector is inherently risky and characterised by high R&D spending.

Fixed-income characteristic limits investor upside potential close to coupon rate.

Loans are often prepaid, creating a temporary cash drag (though normally at least partially offset by prepayment fees).

Analysts

Milosz Papst

+44 (0)20 3077 5720

Michal Mordel

+44 (0)20 3077 5720

BioPharma Credit is a research client of Edison Investment Research Limited

BioPharma Credit (BPCR) recently announced it has entered into new senior secured loan agreements for up to US$212.5m in aggregate with two Nasdaq-listed biopharmaceutical companies: Evolus (focused on aesthetic medicine) and Coherus (which owns a commercial biosimilar business and plans to build an immunoncology franchise). BPCR also provided an additional tranche of US$50m to Global Blood Therapeutics (GBT). We estimate that the tranches BPCR will fund until end-March 2022 as part of these deals will allow it to restore dividend cover based exclusively on the income generated by its investment portfolio.

BPCR’s cash as % of NAV

Source: BioPharma Credit. Note: *Pro forma at end-November 2021 after accounting for the first Evolus tranche, the first and second Coherus tranches and the additional GBT tranche.

Terms of new loans in line with existing portfolio

The Evolus loan (maturing in December 2027) and Coherus loan (maturing in January 2027) offer a floating rate coupon based on three-month Libor with a margin of 8.50% and 8.25%, respectively (subject to a 1.00% Libor floor in both cases), which is broadly in line with the average coupon rate on BPCR’s current portfolio. BPCR will receive a one-time fee at 2.25% and 2.00% of the total loan amount, respectively, upon funding the first tranches. The additional tranche of the GBT loan was provided on similar terms to the original two tranches (see below).

Dividend and ongoing charge fully covered

We estimate that the additional recurring coupon income as well as funding fees (which BPCR amortises over the lifetime of the loan investment) from the above transactions should increase its portfolio income to a level allowing it to fully cover its ongoing charges and targeted attractive dividend payout at US$0.07 pa (c 7% yield) starting from end-March 2022. Given that the vast majority of its floating rate loan investments has a Libor floor (at 1% or 2%), we estimate that its portfolio should by then generate an average coupon rate of c 9%. Moreover, BPCR’s cash position should decline below 5% of NAV, all else being equal. Its investment commitments beyond end March 2022 will include the additional Evolus and Coherus tranches of up to US$25m and US$50m, respectively (both of which may be drawn by end December 2022), which if necessary may be partially funded by BPCR’s US$50m credit facility (which remains undrawn).

Evolus deal rationale

Evolus markets Jeuveau (prabotulinumtoxinA-xvfs), an FDA-approved, first and only neurotoxin dedicated exclusively to aesthetics. The product is used to temporarily improve the look of moderate to severe frown lines between the eyebrows (glabellar lines), with the injection relaxing muscles responsible for the wrinkles.

Jeuveau’s sale began in mid-2019 and net revenues reached US$64.3m in the first nine months of 2021, more than the entire FY20 revenue and up 83% y-o-y. Nevertheless, the company is yet to break even as it continues to incur marketing expenses for entering new markets and has kept the product price low to stimulate further revenue growth. The product addresses the global aesthetic neurotoxin market currently dominated by botulinum toxin (Botox, Dyport, Xeomin), the aggregate sales of which reached US$3.6bn in 2020 and are expected to grow at 10% pa (according to Mordor Intelligence).

The debt funding of up to US$62.5m from BPCR (together with US$62.5m provided by BioPharma V) will be used to fund Evolus’s general corporate and working capital requirements and is the only non-sponsor debt incurred by the company. Evolus expects the first tranche to fund the company beyond cash flow break-even, while it believes the second tranche provides financial flexibility for potential strategic transactions.

Exhibit 1: Consensus sales of Jeuveau by Evolus (US$m)

Source: EvaluatePharma

Coherus deal rationale

The company currently markets Udenyca (pegfilgrastim-cbqv), which is an FDA-approved biosimilar of Neulasta (used to treat neutropenia, ie low levels of neutrophils in cancer patients) launched in January 2019. The company’s 9M21 revenues reached US$253.2m (vs US$365.4m in 9M20) with the current Refinitiv consensus for FY21 at US$339m (implying a c 29% decrease vs US$475.8m in FY20, see Exhibit 2).

In 2023, Coherus plans to launch biosimilars for Humira (a tumour necrosis factor blocker used to reduce the signs and symptoms of rheumatoid arthritis, juvenile idiopathic arthritis, psoriatic arthritis and ankylosing spondylitis, and to treat Crohn’s disease, ulcerative colitis and plaque psoriasis), Avastin (for the treatment of metastatic colorectal cancer) and Lucentis (used to treat wet age-related macular degeneration, as well as diabetic eye disease and other diseases affecting the retina). As a reference point for the total addressable market for these biosimilars, global peak sales were US$20.5bn in 2017 for Humira, US$7.1bn in 2019 for Avastin and US$4.3bn in 2014 for Lucentis. Coherus announced on 20 December 2021 that the Humira biosimilar (marketed under the name Yusimry) was approved by the FDA. Furthermore, the FDA is currently reviewing the biologics licence application for the Lucentis biosimilar (CHS-201) with a target action date in August 2022.

Coherus’s strategy is to build a leading immunoncology franchise funded with cash generated from its biosimilars business. In early 2021, the company has in-licensed toripalimab (an anti-PD-1 antibody) in the United States and Canada. Its biologics licence application is currently subject to a priority review by the FDA for treatment of metastatic or recurrent nasopharyngeal carcinoma (with a target action date in April 2022). Toripalimab is also being evaluated in pivotal clinical trials for other indications, including lung, breast, liver, skin, kidney, stomach, oesophagus and bladder cancers.

Exhibit 2: Revenue consensus estimates for Coherus (US$m)

Source: Refinitiv

Amendments to existing deals

BPCR announced it will invest an additional US$50m (with another US$50m invested by BioPharma V) in the GBT loan it originally provided in December 2019 (see our January 2020 note). BPCR had already funded both previous tranches with an aggregate volume of US$82.5m (with a further US$67.5m provided by BioPharma-V). The third tranche will mature in December 2027 and bear interest at three-month Libor plus 7.00% subject to a 2.00% floor (in line with the terms of the previous two tranches). BPCR will also receive a one-time funding fee of 1.50% and an additional 2.00% payable on loan repayment. At the same time, the maturity of the earlier two tranches was extended from December 2025 to December 2027 in exchange for a 1.25% fee and a reset of the three-year make-whole period to December 2021. We note that GBT’s flagship product Oxbryta successfully launched in late 2019 and reached US$124m in sales in 2020; according to Evaluate Pharma’s consensus estimate, 2021 sales reached c US$206m (up 66% y-o-y).

On 16 November 2021, BPCR amended the terms of the Optinose loan originally provided in September 2019 (see our September 2019 note for details). The amendments include reduced sales covenants, extension of the interest-only period by nine months with the amortisation period beginning in September 2023 and extension of the make-whole period by an additional 30 months. BPCR also received new warrants with a lower strike price and a new threeyear maturity (with the original warrants being cancelled).

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 £60,000,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 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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

1185 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 £60,000,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 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

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

1185 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

1185 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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