Biopharma Credit — Debt investment in Collegium Pharmaceutical

BioPharma Credit (LSE: BPCR)

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Research: Investment Companies

Biopharma Credit — Debt investment in Collegium Pharmaceutical

BioPharma Credit (BPCR) has entered into a definitive agreement to provide US$165m in a single-tranche senior secured loan to Collegium Pharmaceutical, a Nasdaq-listed biopharmaceutical company, which currently markets an abuse-deterrent formulation of oxycodone (opioid) under the Xtampza brand, as well as Nucynta, a centrally acting synthetic analgesic. Collegium reported US$223m in total sales for these two drugs in 9M19. The investment is made alongside BioPharma-V, which provides an additional US$35m, implying BPCR’s share of the deal is 83%.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Investment Companies

BioPharma Credit

Debt investment in Collegium Pharmaceutical

Investment trusts
Debt: Direct lending

17 February 2020

Price

US$1.00

Market cap

US$1,373.9m

AUM

US$1,403.7m

NAV*

102.16c

Premium/(discount) to NAV

(2.1%)

*As at end December 2019.

Yield

7.2%

Ordinary shares in issue

1,373.9m

Code

BPCR

Primary exchange

LSE

AIC sector

Debt – Direct Lending

Benchmark

N/A

Share price/discount performance

Three-year performance vs index

52-week high/low

US$1.07

US$0.99

US$1.04

US$1.01

*Including income.

Gearing

Gross*

0.0%

Net*

0.0%

*As at end-December 2019.

Analyst

Milosz Papst

+44 (0)20 3077 5720

BioPharma Credit (BPCR) has entered into a definitive agreement to provide US$165m in a single-tranche senior secured loan to Collegium Pharmaceutical, a Nasdaq-listed biopharmaceutical company, which currently markets an abuse-deterrent formulation of oxycodone (opioid) under the Xtampza brand, as well as Nucynta, a centrally acting synthetic analgesic. Collegium reported US$223m in total sales for these two drugs in 9M19. The investment is made alongside BioPharma-V, which provides an additional US$35m, implying BPCR’s share of the deal is 83%.

Floating coupon and attractive upfront fee

The loan bears a floating coupon rate of Libor + 7.5% pa with a 2.0% floor, which is broadly in line with BPCR’s recent transactions. At the same time, BPCR will receive an upfront fee of 2.5%, which is somewhat ahead of its current portfolio investments (0–2%) and translates into a c US$4.1m cash inflow on drawdown of the loan. The loan has a four-year term and matures in February 2024. No details about exit or prepayment fees have been disclosed at this stage.

BPCR’s net cash position is c 9% of NAV

We estimate that, after funding the Collegium Pharmaceutical loan, BPCR’s net cash position will represent less than 10% of its NAV. BPCR currently has c US$320m in outstanding commitments, most of which are to be drawn before the end of 2020 (if at all), while none of BPCR’s debt investments mature in 2020. We calculate that BPCR’s current portfolio of senior secured loans (of which 55% have a floating rate) pays a weighted average coupon of 9.2%, which broadly covers its dividend target and ongoing charges. Consequently, we believe BPCR is likely to seek external capital in 2020 to meet its commitments or fund new investments. Additional income may come from its investments in royalty streams, convertible bonds and equities, which currently make up 16% of the portfolio.

Valuation: Offers a c 7% dividend yield

As at 7 February 2020, BPCR’s shares are trading at a minor 2.1% discount to last reported NAV (as at end-December 2019). The shares currently offer a 7.2% trailing dividend yield, in line with BPCR’s target of an annual dividend yield of 7% with respect to its IPO price of US$1.00.

BioPharma Credit is a research client of Edison Investment Research Limited

Deal rationale

Nucynta (tapentadol) is a centrally acting synthetic analgesic, which is used to manage pain severe enough to require daily around-the-clock, long-term treatment with an opioid. The drug was first launched in June 2009 and its extended release formulation (Nucynta ER) entered the market in September 2011. Collegium Pharmaceutical’s management expects FY20 Nucynta sales of US$170–180m, down from US$211m in 2018 and vs US$145m reported in 9M19. EvaluatePharma consensus (based on six analysts who provided their forecasts in August to-October 2019) is US$196m for FY20 on a combined basis (ie including both the immediate-release and extended release formulations) and implies broadly flat sales of US$190–200m pa until BPCR’s loan matures in 2024. The flat sales profile reflects the fact that tapentadol is classified as a Schedule II drug, which means it is subject to increasingly stringent regulations to reduce abuse (as opposed to Schedule III drugs such as BDSI’s Belbuca).

We note that Nucynta is well known to BPCR as it has been an underlying drug in its seed portfolio (see our initiation note), when Assertio Therapeutics (formerly Depomed) owned the rights to market the drug in the US. On 6 February 2020, Collegium Pharmaceutical acquired the rights to the Nucynta franchise in the US from Assertio for US$375m in cash, which terminated the licensing agreement between the parties. Since entering into the agreement in January 2018, Assertio has been eligible for royalty payments from Collegium, which amounted to c US$135m in 2018 according to our estimates.

Xtampza is an abuse-deterrent, extended-release, oral formulation of oxycodone (opioid), which presents statistically significant lower abuse potential compared with immediate release (IR) oxycodone. Like Nucynta, it is used in the treatment of severe and long-lasting pain. The drug was FDA-approved and first launched in June 2016 and achieved US$78m in sales in 9M19. According to EvaluatePharma consensus, sales are expected to grow at a CAGR of 26% (2018–23) and reach US$219m in 2023. The 2020 sales estimate is US$134m compared to recent Collegium sales guidance of US$150–160m. We note that despite Xtampza being abuse-deterrent, the active ingredient of the drug (oxycodone) is one of the six most frequently misused opioids, and as such is subject to manufacturing quotas set by the Controlled Substances Act (CSA) and the Drug Enforcement Administration (DEA). Consequently, these quotas could at some stage affect Xtampza’s sales expansion.

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 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 opioid formulations is likely to remain high from patients requiring pain management, especially with respect to abuse-deterrent substances. The global opioid market was estimated at US$23bn in 2017 and is expected to grow at a 4.5% CAGR by 2026, according to Industry Watch.

Overall consensus estimates for combined sales of Nucynta and Xtampza are US$1.5bn (7.5x the face value of the loan) until loan maturity in 2024. We note that following the termination of the licensing agreement with Assertio, Collegium is the sole owner of Nucynta’s revenue streams. We consider the loan well covered given that both brands are already established on the market and generate substantial revenues. Although it is yet to achieve sustained profitability, which is not uncommon for an early-stage speciality pharma company, Collegium actively markets the product to 11,000 healthcare professionals, who write c 65% of branded extended-release oral opioid prescriptions in the US, according to company estimates.

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.

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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 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “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.

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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

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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