Biopharma Credit (BPCR), the blockbusting fund launch of the year so far, has taken a big step towards investing the cash pile from the £610 million ($762 million) it raised at its flotation in March.
The pharmaceutical loan fund, which is backed by star Invesco fund manager Mark Barnett, has agreed to make a high interest rate loan of up to $370 million to Tesaro (TSRO.O), a US cancer drugs specialist listed on the Nasdaq technology exchange.
Biopharma IV, a private fund run by Pharmakon Advisors, its New York-based investment manager, will provide a further $130 million, leaving Tesaro with $500 million for research and development.
The seven-year loan will be secured on the US rights of Tesaro’s main products: Zejula, a treatment for ovarian cancer that gained marketing approval from the European Commission on Monday; and Varubi, which tackles nausea and vomiting in cancer sufferers undergoing chemotherapy.
Pedro Gonzalez de Cosio, chief executive of Pharmakon Advisors, said the transaction put the company on track to invest in the first year most of the $423 million of cash that its initial public offer (IPO) left it with outside its seed portfolios. Future loans were unlikely to be as large, he said.
Once fully invested Biopharma Credit aims to generate a 7% dividend yield. Tesaro will help with this target as the Massachusetts-based biotech will pay floating rate interest of 8% over Libor, the inter-bank lending rate, on the first $300 million tranche of its loan, subject to a floor of 1% and caps on the maximum it can pay. This will give it a pay rate of 9.4%.
De Cosio said this was an excellent coupon for what he said was a high quality asset, given he said analysts were forecasting future sales of over $1 billion for Zejula in its current form. This could grow to several billion if trials to extend its application to breast and other cancers were successful, he added.
Tesaro posted a $371 million operating loss for last year and its shares have fallen 36% in the past 12 months, valuing it at $4.5 billion. Nevertheless, de Cosio said it was not a distressed borrower.
‘There are a very large number of companies in the biopharmaceutical and life sciences industry where they have approved products, in some cases with expectations of more than $1 billion sales over their life time, yet they cannot get lending.
‘They have no ebitda [earnings before interest, tax, depreciation and amortisation], no cashflow,’ he said.
Excluded from the bank market, companies like Tesaro had in the past raised money through issuing convertible bonds. But convertibles could be expensive and diluted existing shareholders when converted into new equity, de Cosio said.
Biopharma Credit’s dollar-denominated shares dipped 0.8% to $1.05 on the news yesterday, a premium of about 7% to their net asset value of 99 cents per share. The company started life with a $153 million stake in Biopharma III, a limited partnership also in the Pharmakon stable, with a $185 million loan to a portfolio of royalties managed by a Pharmakon affiliate, RPS Biopharma Investments.
M&G Investments is its biggest investor with a 15% stake. Barnett’s £5.2 billion Invesco Perpetual Income fund holds 6.5%, according to Thomson Reuters data.