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7%-yielding Biopharma deserves some credit after big loan to US opioid provider

11 February 2020

Analysts reckon Biopharma Credit needs to arrange overdraft after drug company lender’s latest loan to Collegium Pharmaceutical, but say its 7% dividend yield looks more secure.

Analysts reckon Biopharma Credit (BPCR ) will be talking to its bank soon about getting an overdraft after the drug company lender made the latest in a series of loan investments that in theory leaves it without the cash to meet all its commitments.

That’s a big turnaround for the £1bn ‘alternative income’ fund offering an attractive 7% dividend yield from a portfolio of loans to smaller US pharmaceutical companies.

Last year investors were worried BPCR would be unable to find homes for a cash pile caused by GlaxoSmithKline’s takeover of Tesaro, which triggered an early repayment of its loan.

However, a flurry of large loans at the end of last year to Sarepta Therapeutics (SRPT.O) and Global Blood Therapeutics (GBT.O) consumed the remaining $297m of cash and reassured shareholders there would be enough interest income to cover its quarterly dividends this year.

The latest loan, a $165m (£127m) four-year advance to Collegium Pharmaceutical (COLL.O), a Nasdaq-listed provider of opioid pain meidcation, will support the dividend target of 7 cents a year by charging an interest rate of 7.5% above Libor, the inter-bank lending rate.

Collegium, which this year expects to generate $320m-£340m from its Xtampza Extended Release (ER) and Nucynta medicines, will also pay an upfront $4.1m or 2.5% of the loan, adding 0.3% to BPCR’s net asset value (NAV).

This is a sensitive area coming in the wake of an addiction scandal in the US that has prompted a clampdown by the Food and Drug Administration. According to website Biopharma Dive, in 2018 the FDA reprimanded Collegium for a conference display that did not sufficiently highlight the risk of addiction and other side effects to Xtampza ER.  The company's own website does describe the dangers of withdrawal and life-threatening respiratory depression from the oxycodone-based treatment.   

The $200m Collegium loan, which BPCR is making alongside a $35m contribution from BioPharma Credit Investments V, a fund run by its investment manager Pharmakon Advisers, will be the company’s second biggest at around 12% of assets.

It will leave BPCR with around $97m of cash, which is $140m short of all its commitments to provide extra tranches of loans to borrowers, assuming there are no loan repayments.

Stifel analyst Sachin Saggar said the size of the loan was ‘trending towards the higher end of what we would prefer’.

Numis Securities analyst Priyesh Parmar said: ‘We understand the company is looking into a revolving credit facility.’

Priyam Rayatt of Peel Hunt said the overdraft would be used as a buffer between borrowers drawing down on their loans and BPCR raising money from shareholders. ‘This will substantially improve the internal rate of return for BPCR shareholders and ensure the dividend cover has greater stability.’

Like most London-listed debt funds, BPCR updates its NAV monthly. Christopher Brown, analyst at JPMorgan Cazenove, BPCR’s joint broker, estimated the current NAV per share after Collegium’s upfront payment would be $1.031, putting the shares at $1 on a 3% discount. He calculated that the loan interest income currently provided 106% cover for the dividends.

‘We think BPCR is an excellent alternative income investment and we reiterate our “overweight” recommendation,’ he said.

This echoes the views of analysts at Liberum and Winterflood who both added BPCR to their New Year recommendations.




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