BioPharma Credit: a risky punt on promising new drugs

BioPharma Credit, a life-sciences investment trust, offers a tempting yield. But the dangers may be high when the credit cycle turns.

911_MW_P20_Funds
Like Hamlet's sorrows, defaults tend to come in battalions

BioPharma Credit offers a tempting yield, but the dangers may be high when the credit cycle turns

Having raised $762m in its stockmarket debut in early 2017, BioPharma Credit (LSE: BPCR)went on to raise another $154m in December and $164m in April, taking the total to well over $1bn. Admittedly, half of the initial money came from existing investors in a private fund who converted their holdings into listed shares, but that still makes this one of the biggest cash raisings in the investment-funds sector in recent years.

BioPharma Credit, as the name implies, lends money to the life-sciences sector. It invests in "corporate or royalty debt secured by the cash flow derived from the sale of approved life-science products", but up to 35% of the portfolio can be unsecured. The firms it lends to may still be lossmaking and so would struggle to raise conventional debt from banks or investors, but anticipate a significant increase in cash flow, perhaps from new products.

Expensive capital

For the companies that borrow, this is very expensive capital, implying that the loans are risky. Yet Perfall doesn't see this as risky "unless you don't know what you are doing". The managers, Pharmakon Advisors, have invested $2.3bn since 2009 in 30 transactions and have suffered no defaults or re-pricings, he points out. This is encouraging, but these have been good times for credit. As Claudius warns in Hamlet, "when sorrows come, they come not single spies but in battalions". One day, the risk implied by these high returns may be all too apparent.

The loans are for between five and seven years, but BPCR is looking to be repaid early. Proceeds from repayment would then be recycled into new loans, subject to BPCR's continuation votes. Loans are typically for less than half the appraised value of a new product, but the portfolio is concentrated, with up to 30% invested in a single credit.

Of the initial amounts raised, $339m was invested in a seed portfolio of already acquired assets. Further investments have reduced the cash to $149m, but two investments account for nearly half the assets and four for nearly 75%. The largest is the $322m committed to oncology-focused biotechnology company Tesoro. Its main product was approved last year in the US and the EU. If predicted sales figures are achieved, the loan will probably be repaid early. In April, $194m was committed to private pharma firm Sebela the loan appears to have been taken out to fund an acquisition.

Reckless borrowers?

The 7% yield looks attractive, but the dividend outlook isn't certain. Future loans could be at lower returns as easily as higher ones (implying a dividend cut) unless the fund takes on riskier loans. Overall, investors would do well to remain cautious.

Recommended

Why investment trusts are the connoisseur’s choice of fund
Investment trusts

Why investment trusts are the connoisseur’s choice of fund

Investment trusts have justified their reputation as the best type of collective investment in 2020, says Jonathan Davis.
7 Dec 2020
Why investors should take investment trusts up on their free lunches
Investment trusts

Why investors should take investment trusts up on their free lunches

Investment trusts are brilliant, says Merryn Somerset Webb. Perhaps the most brilliant thing of all about them is the fact that investors can meet and…
16 Nov 2020
If you think now is a good time to buy, look at these investment trusts
Investment trusts

If you think now is a good time to buy, look at these investment trusts

With the latest market slides, an awful lot of assets are beginning to look very cheap indeed. If you are thinking of buying, Merryn Somerset Webb has…
10 Mar 2020
How to build a properly diversified investment trust portfolio
Sponsored

How to build a properly diversified investment trust portfolio

Max King explains how to build a well diversified portfolio using one of our favourite tools – investment trusts.
25 Feb 2020

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Inflation is the easiest way out of this – just don’t expect politicians to admit it
Inflation

Inflation is the easiest way out of this – just don’t expect politicians to admit it

The UK government borrowed £34.1bn in December, a record amount for that month. Britain's debt pile now amounts to 100% of GDP. How are we going to pa…
22 Jan 2021
When will the US stockmarket bubble burst?
US stockmarkets

When will the US stockmarket bubble burst?

With US stocks more expensive than before the Wall Street crash of 1929, there are growing signs of “mania”. But what will push markets over the edge?
22 Jan 2021