Genentech floats $2 billion in bonds; Advanced Medical Optics convert dished up; Mylan talk out

By Ronda Fears

Nashville, July 13 - Biotech players were keen to get in on the jumbo bond deal launched by Genentech Inc. Wednesday and sources close to the deal said the book was running far over the $2 billion offering - but in the end the deal was not upsized as some had hoped.

The funding round spawned rampant speculation about how Genentech would use the money to boost drug manufacturing capacity, which the company said a couple of weeks ago would be at full tilt this year to meet demand for its drugs. That sparked a whole new round of merger conjecture with several smaller biotechs moving as potential targets but no clear consensus on what would be a good fit for Genentech.

"You can't help but wonder, a $90 billion market cap company raising this much, who are they buying," said a sellside bond trader.

Bonds were the theme in financing efforts, with a $150 million convertible offered up as a breakfast deal from eye surgery tool maker Advanced Medical Optics Inc. and price talk emerging on drugmaker Mylan Laboratories Inc.'s junk bond slated for Thursday's business. New York-based NanoViricides Inc., which develops therapeutics to treat viruses, was in the PIPEs market with a one-year, 9% series A convertible note. And Synthetic Blood International, Inc. has closed a private placement of $1.85 million in convertible debentures, sold at a discount.

Partnering, VC still key funding

Partnering and venture capital, however, are still what's keeping biotechs' wallets full, said Jefferies & Co. analyst David Windley in a report Wednesday.

"The public markets have not been kind to biotech in 2005. Venture capital funding remained strong in second quarter, up 14% year-over-year and 19% sequentially. Total non-partnering funding, however, declined 29% year-over-year and 26% sequentially in second quarter. Year-to-date, non-partnering funding has declined 27% over the same time last year," Windley said in the report.

"The large increase in funding via partnering (+81% year-over-year, 90% sequentially) is a logical reflection of Big Pharma's pipeline woes."

Initial public offerings so far in 2005 come to $362 million for biotechs, off 71% from a year ago, according to the Jefferies research. Follow-on stock offerings are down 13% at $1.5 billion. PIPEs are off 44% at $935 million. And debt offerings, at $2.5 billion, are down 21%.

Venture capital, while up in second quarter by 14%, is down 22% year-to-date at $1.7 billion and other private funding up nearly threefold at $408 million.

Partnering transactions, meanwhile, are up 46% year-to-date at $6.2 billion.

Overall funding for biotechs this year, according to Jefferies, is off 5%, at $13.65 billion, from 2004.

Mylan talk tighter than thought

Mylan Labs' $500 million bonds (Ba1/BB+) were getting talked considerably tighter than buyside sources had been anticipating, The five-year bullet was being pitched in the 5.875% area and the 10-year note in the 6.375% area.

Earlier this week, a buyside source in the high-yield market speculated that the bonds would come in the neighborhood of 6% to 6.5%. Even earlier, when the bond plans first emerged, another high yield fixed income fund manager considered 7% a reasonable handle on the BB+ credit.

Along with on-hand cash, the Canonsburg, Pa., generic and branded drugmaker will use proceeds to fund a $1.25 billion share repurchase program. Mylan shares on Wednesday lost a quarter, or 1.26%, to settle at $19.59.

Pricing is scheduled for Thursday.

Genentech buyers crowd in

Genentech's jumbo offering was oversubscribed to the tune of double-digit multiples by midday and by the end of the session, buyside sources were bracing for dwindling allocations in the hot deal. Buyside speculation was that the $2 billion deal would be upsized, but that did not transpire.

The $500 million of five-year notes, with a 4.4% handle, priced at 99.992 to yield 4.402%, a spread of 45 basis points over Treasuries. The $1 billion of 10-year 4.75% notes priced at 99.937 to yield 4.758%, or 60 basis points over Treasuries. The 30-year bonds, with a 5.25% coupon, priced at 99.85 to yield 5.26% or 87 basis points over Treasuries. Goldman Sachs & Co. and Citigroup Global Markets Inc. are joint bookrunners. (See full terms elsewhere in this edition.)

"This is a great story, the news flow is very positive and the earnings (Monday) is just the latest bit," said one market source. "We kept hearing the book [on the bond offering] getting bigger and bigger, and, to our dismay, that means allocations were getting smaller and smaller. But, hey, we'll take what we can get."

Like most other buyers putting orders in for the Genentech bonds, he was not overly concerned about terms on the A1/A+ rated issues.

Genentech capacity boost key

The popularity of the Genentech bonds was directly related to its growth and expectations that it would use proceeds to boost drug manufacturing capacity following comments from the company a couple of weeks ago that it was running at 100%, as well as a big upside surprise in drug sales figures in second quarter.

"There is just too much demand for their products. You can't run at 100% capacity for long," said a buyside analyst. "It's a good problem to have, though."

After buying Biogen Idec Inc.'s plant in Oceanside, Calif., for about $417 million in June, Genentech executives said they expected further capital expenditures in 2005 to bring the year's total to $1.7 billion. The company updated its manufacturing status and said it will be running close to 100% capacity for the next several years just to meet its own internal forecasts.

San Francisco-based Genentech said it would use $585 million of bond proceeds to reduce or repay leases, including a synthetic lease related to its manufacturing facility in Vacaville, Calif. The company said it also intends to fund upgrade, start-up and validation costs at the former Biogen plant.

The balance of proceeds, Genentech said, will be used for general corporate purposes.

Genentech targets not clear cut

Genentech shares have climbed from around $80 since the manufacturing update, amid a slew of analyst upgrades just ahead of and following the earnings. Speculation about acquisitions it could make to boost manufacturing capacity on Wednesday were widespread but a credit analyst said a clear candidate has not emerged.

"They [Genentech] don't have to do anything that would take time to build out, they could acquire some more facilities," said a sellside bond trader.

It's not quite that easy, said a bond analyst just picking up Genentech coverage as the new issue emerged.

"The Biogen Idec plant was available because they pulled Tysabri production," he analyst said. "You don't find a plant like these sitting empty on every corner. I'm sure, though, they have their eye on something."

So, one exercise that would attempt to zone in on Genentech's targets, he said, would be to look for similar situations to those that made Biogen's plant become available. Biogen and Elan Corp. plc withdrew their joint product Tysabri, a multiple sclerosis drug, from the market in February following five patients in clinical trials developing potentially fatal brain conditions.

Credit analysts rate DNA high

Standard & Poor's and Moody's Investors Service both gave Genentech a high debt rating, with few concerns raised for the giant biotech's future. As a credit, S&P rates Genentech A+ and Moody's rated the bonds A1, both with a stable outlook

"These senior notes are the first issues for Genentech, and clarify the extent to which the biotechnology company is willing to employ debt leverage," said S&P healthcare rating analyst David Lugg. "Yet, even with these borrowings, the company will remain in a net invested position, as its cash and investments totaled $2.9 billion as of June 30."

Moody's acknowledged Genentech's healthy outlook for growth in revenue, earnings and operating cash flow and a strong cash coverage of debt. But Moody's analyst Patrick Finnegan also pointed out that there is product concentration risk - in Rituxan, Avastin and Herceptin - and anticipation of a free cash flow deficit for the next 12 to 24 months due to higher capital expenditures.

Rituxan liability could overhang

Finnegan also said there is some concern, or at least uncertainty, about the impact of the Department of Justice investigations into promotions practices for the non-Hodgkin's lymphoma treatment Rituxan - Genentech's biggest revenue generating product.

Although very little information about the Rituxan investigation is currently available, he said other investigations of this type have led to extremely large payments by other companies. If Genentech were subject to a big liability payment, say over $2 billion, he said the A1 rating could be in jeopardy.

S&P's Lugg said there is an expansion of Genentech's product portfolio under way as recent clinical trial results have demonstrated that existing cancer drugs could be used for a much wider range of tumors. As a result of these efforts, he said Genentech's dependence on Rituxan has fallen to just under 30% of total revenues from more than 40% just two years ago.

Advanced Medical passes 103

Advanced Medical Optics' new $150 million convertible was priced to sell, and that it did, buyside sources in the convertible universe said Wednesday. Buyers bellied up to the table for the deal, which priced before the market opened Wednesday, pushing the par bond as high as 103 bid, 103.5 offered, one buyside source on the West Coast said.

Proceeds from the $150 million 1.375% convertible, which priced with a 12.53% conversion premium, senior subordinated notes, were earmarked to repay its outstanding term loan under its senior credit facility.

"We got involved with this one. The use of proceeds makes a lot of sense, they are lowering interest rate expense," from Libor plus 225 basis points on the bank loan, a buyside analyst said. "Given the demographics in the space, we like it.

In May, Advanced Medical Optics Inc. amended its credit facility, increasing the revolver size by $100 million and terminating $100 million of existing term loan commitments. About $200 million was drawn under the upsized revolver on Friday to help finance the now completed acquisition VISX Inc. for a total consideration of about $1.25 billion, consisting of about 27.7 million shares of Advanced Medical common stock and $175.9 million in cash.

Santa Ana, Calif.-based Advanced Medical Optics develops, manufactures and markets surgical devices for the eyes.

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