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Lexicon setback raises further question mark over BiopPharma dividend

2 August 2019

BioPharma Credit under increased pressure to reinvest its cash pile after shares in Lexicon, one of the high-yielding fund's borrowers, plunged, raising doubts over its future.

BioPharma Credit (BPCR), the UK's only specialist healthcare debt fund, has hit its first major problem since launch two years ago after one of its biggest borrowers, Lexicon Pharmaceuticals, lost its main commercial partner.

Shares in Nasdaq-listed Lexicon (LXRX.O), which has borrowed  $124.5 million (£113.8 million) from BioPharma, have plunged 78% in the past week after French healthcare giant Sanofi (SAN.PA) terminated an agreement to help develop and commercialise Lexicon's diabetes drug Zynquista after it failed phase three testing.

The US Food and Drug Administration said the drug had not made a statistically significant impact on blood sugar control despite being approved for use in the EU.

The steep share price fall cut Lexicon's market value to $139 million (£114 million) and raises a question mark over its future, with second quarter results this week showing the company currently only has enough cash to fund its operations for a year.

This in turn provoked doubts about the security over BioPharma's loan, which accounts for 8.8% of the fund's assets on which it earns 9% annual interest until 2022.

Shares in the £1.1 billion dollar-denominated investment company - one of the largest and most popular debt funds listed in London - slipped just 0.5% to $1.04 on Tuesday when it issued an update.

However, at $1.03 today the share price rating has weakened to a small 1.3% premium over net asset value, down from 9% at the end of June. The shares pay quarterly dividends and yield 6.7%.

In its statement, BioPharma said its fund manager Pharmakon Advisers 'believes that there continues to be excess collateral value to fully support the loan', which it said was secured on 'substantially all' of Lexicon's assets.

This includes Xermelo, a treatment for carcinoid syndrome diarrhea, which has been approved for use in the US and the European Union. According to US analysts at Stifel it is forecast to generate annual sales of $40 million to $54 million in the next three years.

BioPharma, which is backed by a raft of income and multi-asset funds at Invesco, M&G, Newton and Quilter, said it was ‘actively monitoring the situation’.

It added that talks between the two drugs companies could take weeks or months to resolve with Lexicon saying Sanofi’s termination of the contract was ‘invalid’ and insisting it had a responsibility to continue funding trials of the drug.

Investment company analysts welcomed Biopharma's assurance but said nonetheless the risk around the loan - the portfolio's fifth largest out of seven - had clearly increased.

The setback for Lexicon comes at an awkward time for Biopharma, which was sitting on a huge uninvested pile of cash of $613 million at the end of June, equivalent to 43.5% of its assets. This is the result of a $305 million fund raising last November and the early repayment of a loan to Tesaro after its acquisition by GlaxoSmithKline.

Biopharma says it has a long pipeline of potential loans and expects to be fully invested by the end of the year. However, in the absence of new investments, analysts have begun to worry whether there will be enough loan income to cover next year's dividend (this year's is fully covered already).

Matthew Hose of Jefferies estimated the current portfolio 'would only deliver 2020 dividend cover of around 60%. In turn, any such over-distribution could eventually put pressure on the fund's premium rating.'

He also described as 'unhelpful' Pharmakon's recent launch of a new private fund, BioPharma V, which could reduce lending opportunities for the London-listed company.

Sachin Saggar of Stifel said: 'While the base case remains that there is value in Zynquista we reiterate our "neutral" recommendation for BioPharma as this scenario is the poster child of why a concentrated debt fund is not ideal portfolio construction as unforeseen events do occur.'

Anthony Leatham of Peel Hunt was more positive, saying Pharmakon had not suffered a loan default since its launch 10 years ago and that other of its borrowers, such as Vivus and Depomed, had previously continued to make loan repayments after slumps in their shares.

'Following discussion with the manager, we believe the assets will remain unimpaired and that the value of the collateral (both Xermelo and Zynquista) will more than cover the loan commitment,' Leatham said. 

Numis Securities said it had retained BioPharma as a ‘core buy’ on its list of 'alternative' trust recommendations.

Biopharma Credit was one of 'five trust bargains for income' in the latest issue of Investment Trust Insider e-zine.


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