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BioPharma Credit eyes £30m windfall as Glaxo grabs Tesaro

4 December 2018

High-yielding lender to drugs companies stands to earn $39 million in early repayment fees after its biggest borrower, US cancer specialist Tesaro, fell to a $5.1 billion (£4 billion) bid from Britain’s GlaxoSmithKline.

BioPharma Credit (BPCR), a popular, high-yielding lender to drugs companies, stands to reap a windfall of around $39 million (£30.5 million) from Britain’s GlaxoSmithKline’s successful $5.1 billion (£4 billion) bid for US cancer specialist Tesaro (TSRO.O).

The agreed takeover of Tesaro - BioPharma’s biggest borrower - will trigger the repayment of $322 million (£252 million) of loans the investment company has made. This will make it eligible for an estimated $39 million early repayment fees which could boost net asset value (NAV) per share by 2.8 cents when the deal completes next year.

Analysts said the news supported BPCR’s investment philosophy of targeting attractive companies and drugs with loans. However, it has also left the company with the challenge of having to find new borrowers to re-lend the money, equivalent to 23% of its portfolio.

The company, launched in March last year, was already in the process of lending $305 million (£235 million) it raised in an oversubscribed share issue last month.

That leaves it with around $729 million (£569 million) or 50% of the portfolio’s NAV to lend. While that raises the risk of ‘cash drag’ - if its assets are stuck in low-yielding cash while the money is invested - analysts were encouraged by the fact that earlier this year the company’s fund managers Pedro Gonzalez de Cosio Martin Friedman deployed a $300 million (£234 million) C-share issue in six months.

Last month the managers said they had a ‘robust pipeline of key investment opportunities’.

‘Following the completion of the transaction, the company will have a high level of cash whilst the managers redeploy the capital and the $305m of equity raised in November,’ said Ben Newell, analyst at Canaccord Genuity.

He reiterated his ‘buy’ stance saying: ‘A current yield of 6.5% has obvious attractions, whilst we expect returns to have a very low correlation with other investments, along with relatively low volatility.’

On a negative day for the UK stock market, with the FTSE 100 settling back after yesterday’s sharp rally inspired by hopes of a US-China trade deal, shares in BioPharma eased slightly to $1.06. At this level they stand on a 6% premium to their 30 October net asset value of $1.02 per share.

BPCR has a portfolio of around 30 loans. It pays quarterly dividends of 7p a year, equivalent to a 6.6% yield. Invesco Perpetual is the largest investor witha 16% stake, mostly held in the UK equity income funds of Mark Barnett.

Glaxo (GSK) is paying $75 a share for Tesaro, which represents a 110% premium over its average monthly share price of $35.67 (£27.86). Acquiring the Massachusetts-based oncology specialist with its debts would strengthen Glaxo’s pharmaceutical business, said chief executive Emma Walmsley.

Tesaro’s biggest product Zejula (niraparib) is currently used to treat women with recurrent ovarian cancer. It generated revenues of $166 million in the nine months to the end of September but tests are underway to greatly expand its use as a ‘first line’ treatment of a wider range of cancers.

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