Deutsche sees 9 biotech issues highly probable for distressed exchange

By Ronda Fears

Nashville, Jan. 30 - With the U.S. biotech industry facing a mountain of convertible debt, Deutsche Bank Securities Inc. analysts have identified nine issues with a high probability of getting a distressed exchange offer.

It is widely anticipated that many biotech convertible issuers will follow the path of Alkermes Inc. and Cell Therapeutics Inc., which both recently completed exchanges.

Those identified by the Deutsche analysts with the highest likelihood of exchanges are Enzon, OSI Pharmaceuticals, Human Genome's two converts, Abgenix, Sepracor, Nektar Therapeutics, Alexion and ImClone Systems.

In addition to the nine considered to be highly likely candidates for exchanges, the Deutsche analysts in a report Thursday identified another 11 with a medium to low probability of making an exchange for their convertibles.

"As a general rule, the bonds in the 'High' category are probably the most interesting because where the potential exists for an exchange offer, the potential also exists for short-term appreciation in the bond price," said analysts Jeremy Howard, Jonathan Cohen, Jonathan Poole and Robert Barron in the report.

The U.S. biotech industry is almost exclusively financed by convertible debt alongside straight equity, the analysts noted, with the 34 U.S. biotechs showing $16 billion in face value of convertible debt outstanding versus just $212 million in straight debt and almost no bank debt.

"Convertible bonds are popular with biotech issuers because cash preservation is very important in these (predominantly) loss-making companies. Convertible debt allows them to (potentially) sell equity forward at a premium, while keeping the cash interest expense extremely low," the analysts said.

"But the problem is that if the stock price does not perform, the issuer is eventually faced with the requirement to redeem the bond for cash. We estimate that almost $6 billion of U.S. biotech convertible issuance has little or no chance of conversion into equity.

"This creates a serious problem, because our projections show that the majority of biotechs will have burned through all their remaining cash before these bonds come due.

"Many biotech issuers will probably have no choice but to follow the example of Alkermes and Cell Therapeutics by 're-striking' their convertibles to increase the probability of conversion."

In the highly likely category, with the analyst comments, were:

Enzon's $400 million of 4.5% convertibles due 2008 (78.40 bid, 79.15 ask). Exchange dilution would be moderate at 19.4%. Enzon is a newer issue and has more time than most but an exchange is possible at some point. Enzon is free cash flow positive.

OSI Pharmaceuticals' $160 million of 4% convertibles due 2009 (70.82 bid, 71.82 ask). Dilution of exchange would be very low at 4.6%. There is a good chance of an exchange at some point, although the 2009 maturity lessens urgency somewhat.

Human Genome's $200 million of 5% convertibles due 2007 (70.80 bid, 71.80 ask). Dilution impact of exchange is low at 5.8%. There's a good chance of exchange on both Human Genome bonds. A 'natural' conversion looks unlikely and the cash position is deceptive.

Human Genome's $300 million of 3.75% convertibles due 2007 (66.19 bid, 66.69 ask). The 5% due 2007 exchange would cause less dilution but Human Genome will have to bite the bullet at some point and an exchange of both bonds is a distinct possibility.

Abgenix's $200 million of 3.5% convertibles due 2007 (65.50 bid, 66.50 ask). Dilution is manageable at 15.5% and interest saving would be big. A 'natural' conversion would require greater than 350% stock appreciation.

Sepracor's $430 million of 5.75% convertibles due 2006 (73.43 bid, 74.18 ask). This is the real issue for Sepracor now as cash runs out. Although dilution will be painful at 21%, this has to be a good candidate for exchange.

Nektar Therapeutics' $230 million of 3.5% convertibles due 2007 (58.44 bid, 59.44 ask). There is a good chance of an exchange at some point, although the company would like a higher share price to lessen the dilution estimated at 19.4%.

Alexion's $120 million of 5.75% convertibles due 2007 (67.15 bid, 68.15 ask). Dilution moderate at 17.6%. Alexion would prefer a higher stock price before exchange, but cash is slowly running out and so is time to deal with the convert.

Imclone Systems' $240 million of 5.5% convertibles due 2005 (69.57 bid, 71.57 ask). There is a 17% dilution to exchange. This may be interesting as cash runs out, and this is one of the first of this batch to mature.

Others considered to have a medium chance of getting exchange offers were the Vertex Pharmaceuticals 5% convertible due 2007, Protein Design Labs 5.5% convertible due 2007, ISIS Pharmaceutical 5.5% convertible due 2009, Sepracor 7% convertible due 2005, CV Therapeutics 4.75% convertible due 2007, Incyte Genomics 5.5% convertible due 2007, Sepracor 5% convertible due 2007, Nektar Therapeutics 5% convertible due 2007, Curagen 6% convertible due 2007, Medarex 4.5% convertible due 2006 and Cubist 5.5% convertible due 2008.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.