With interest rates at historic lows, it might seem odd that pharma companies would look elsewhere for financing given that many US-listed companies rely on cheap financing from mainstream lenders. However, Pedro Gonzalez de Cosio, CEO of Pharmakon Advisors, lead manager of Biopharma Credit, told Fundeye the reasons why his closed-ended fund is attractive to cutting edge drug makers.
“The types of loans we make are highly specialised, investors need to have an in-depth understanding of the drugs. You don’t make these loans based off an Excel spreadsheet, we have manufacturing and intellectual property consultants, the sort of thing banks wouldn’t have,” said Mr de Cosio.
To recap, Biopharma Credit lends money to drug manufacturers and keeps the patents to the drugs as collateral in case of default. The trust has been a major success, its results show that it roughly doubled the size of its portfolio in 2019.
Another benefit to this fund is that it is largely uncorrelated to wider equity markets. Mr de Cosio explained that even when markets are bad, people get sick. In relation to the Coronavirus, he said: “If markets are bad because people are getting sick, there will always be a demand for drugs. As long as our loans are structured correctly, for instance the right collateral for the right drugs we expect to have very low volatility.”
Its dislocation to the FTSE (the index it’s listed on) is stark. While Biopharma’s share price has dropped off by a few percent, year to date the FTSE 100 is down by 25 percent. For investors seeking a safe haven, a solid debt trust may be a wise move, especially a trust that is only trading at a minimal discount.
Given the amount of M&A activity in the pharma sector specifically, Biopharma can benefit from it, although it would be wrong to classify it as an ‘M&A premium’. For instance, GSK acquired Tesaro just one year after the latter borrowed from the trust. As per their contractual agreement, GSK had to pay the outstanding interest on the loan to make the trust ‘whole again’ in Mr de Cosio’s words.
In terms of future growth, this trust is unlikely to engage in share buy-backs as the goal is to grow the fund. Despite a near doubling of the portfolio last year, this was due to the trust having $750 million in dry powder. Mr de Cosio doesn’t want to be sitting on large cash reserves, he’d rather put that money to work.
Despite having no gearing at present, again another rarity in the investment company space, the aim is to have a leverage limit of between 20-25 percent. This will allow the trust, with a market cap of over £1 billion, to make further loans if and when it feels that the right opportunity comes up.
Despite having a shareholder register that includes a large Peruvian financial institution and many UK-based multi-asset managers, the trust is hoping to add wealth managers to its roster. With three years on the markets, in which time it has invested £1.7 billion and generates a dividend yield in excess of 8 percent, it may well prove a prudent move in today’s highly volatile equity markets.
