BioPharma Credit (LSE: BPCR) is one of the more esoteric investment trusts listed in London. Biotech is a specialist sector that I usually wouldn’t touch with a barge pole. The risk of failure is very high, and even the experts are often wrong-footed by a surprising trial result, court case or even fatality. However, as is often the case, uncertainty and complexity create opportunities.
BioPharma lends money to small- and mid-sized life sciences companies. Most of the borrowers are public companies, and the trust is lending against their future cash flows, with the loans secured by asset values.
“For the most part, our borrowers are asset rich,” says Pedro Gonzalez de Cosio, co-founder and chief executive officer of Pharmakon Advisors, the specialist biotechnology investor that manages the trust. “They are a monopoly in treating a certain disease in a certain way. [They] have very high gross margins [and] very valuable assets, but most of these companies are at a stage where they are probably still investing more in launching the product… So they have these assets worth a lot of money, but they’re still burning cash.”
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BioPharma isn’t the only player in its sector, but this type of specialist life-sciences lending requires experience and a strong pipeline cultivated by reputation and knowledge to succeed. Pharmakon has been around since 2009 and has invested nearly $10 billion so far through the trust and other private funds (BioPharma usually partners with another Pharmakon fund on its deals). “We’ve only had to put a company into default once,” says Gonzalez de Cosio, and even on this default, the fund has recovered more than 90% of its investment.
BioPharma’s portfolio is relatively concentrated. At the end of January, just over 60% of the portfolio was allocated to just three senior loans to three separate companies. However, the portfolio shouldn’t be viewed in isolation, says Gonzalez de Cosio. “I can guarantee you that [by] investing in us [you] diversify your portfolio because there is no other way that you can get access to these assets.”
BioPharma's early repayments
When BioPharma listed in 2017, it committed to an annual dividend of 7% or $0.07 on the $1 per share issue price. It has topped this return up over the past three years with additional special dividends. Over the past three years, the trust has paid out $0.33 per share, or an average of $0.11 per year. It’s been able to do this as the bulk (78%) of the portfolio is floating rate and because companies generally commit to additional payments if the bonds are repaid earlier than scheduled.
For example, in November 2022, Immunocore took out a $50 million senior secured loan, funded jointly by the trust and BioPharma Credit Investments V. The floating rate note was set for repayment in November 2028 and paid an interest rate of 9.75%. In November last year, it was repaid early. Immunocore had to pay a $1.5 million early repayment fee, of which the investment trust received $750,000, as well as accrued interest of $264,000.
In May 2023, BioPharma loaned $25 million to Reata Pharmaceuticals, which owned the rights to the first and only approved treatment for Friedreich’s ataxia (FA) – a rare inherited and progressive neurodegenerative disorder – in the United States. Three months later, Reata was acquired for $7.3 billion by Biogen. Reata had committed to pay two years of interest on the loan, so when the acquisition took place, it had to pay interest upfront as well as the principal and early repayment fees. BioPharma booked a 141% internal rate of return.
BioPharma offers something different from a unique asset class. Currently, it is trading at a double-digit discount to its January net asset value (NAV) of $0.975. It paid $0.10 in regular and special dividends last year and in 2023, and while the special payouts are not guaranteed, that amounts to a trailing dividend yield of 11%.
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