Debt comes back to haunt biotech

Analysis

In the week that Orexigen limped into Chapter 11 bankruptcy protection some investors might wonder whether biotech has turned over a new leaf. Might we now be at a point where failed biotechs do the decent thing and put themselves out of their misery rather than lurching from one disastrous equity raise to another?

Alas, the answer is probably no. Rather, Orexigen illustrates yet again the perils for lossmaking businesses of taking on debt, and this is the main reason why the group is now proposing a fire sale. Investors might thus wonder which other companies have got themselves into a similar bind, and EvaluatePharma provides a handy list (see table below).

Followers of Orexigen will notice a familiar name near the top of this list: the company’s one-time rival Vivus. The two have had a parallel existence – rising to prominence 10 years ago on the promise of oral treatments for obesity, and then crashing when it became apparent that limited efficacy and unpleasant side effects conspired to eliminate the economic rationale.

Times of plenty

And – in times of plenty, of course – both decided to take on debt, no doubt having being pitched such deals by eager bankers touting the attractiveness of “non-dilutive” financing.

True, if a company is capitalised at over $1bn then $200m or so of debt can make for a smart capital structure, especially if debt is cheap and equity relatively expensive. The problems start when a group’s market cap plummets, debt repayment deadlines loom, and there is no way of raising fresh equity.

Orexigen is the latest in a line of biotechs to have learned this the hard way. Dendreon was a notable earlier example (Lessons from Dendreon’s slow-motion car crash, November 10, 2014).

The list below, of other heavily indebted biopharma groups, has been generated by comparing their most recently reported gross debt positions with their market capitalisations. Larger speciality companies like Teva and Valeant are excluded since for these debt is a way of life and they have their own problems to contend with.

Selected disproportionately indebted biopharma groups
Market capitalisation ($m) Gross debt ($m) Debt/mkt cap
Pernix Therapeutics 28 284 995%
Orexigen (pre-Chapter 11) 24 172 704%
Vivus 53 236 443%
Novelion Therapeutics 58 250 429%
Egalet 46 135 294%
Aralez Pharmaceuticals 95 275 289%
Amag Pharmaceuticals 452 735 163%
Kempharm 59 92 156%
Moberg Pharma 58 72 125%
Depomed 510 627 123%
Source: EvaluatePharma and SEC filings. Note: minimum $20m market cap, and excluding larger, speciality companies; includes only loss-making or near loss-making companies.

Of course, the list should be treated with caution, and there is no suggestion that all these groups will shortly head the way of Orexigen; the gross debt to valuation ratio makes no allowance for cash held by these companies. Some have considerable cash reserves, which defer risk of a near-term debt crunch, though the whittling away of cash combined with further share price drift could make the equity increasingly uninvestable and put assets in debt holders’ hands.

Some in the list will be acutely aware of the repayment juggernaut heading their way. For instance, Vivus’s $250m convertible comes due in May 2020, while that held by Novelion, a company resulting from the merger of QLT and Aegerion, will have to be repaid by August 2019 unless it is refinanced earlier.

The most disproportionately indebted group in the list, Pernix, already restructured much of its debt pile back in 2016, so at least the need to repay debt holders has been deferred, even if it has not been eliminated.

It probably goes without saying that debt refinancing should take up a fair amount of time for execs of the remaining companies, though barring an unexpected change of fortune few will be able to do much more than kick the repayment can down the road.

To contact the writers of this story email Jacob Plieth or Edwin Elmhirst in London at news@epvantage.com or follow @JacobPlieth or @EdwinElmhirst on Twitter

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