REPLACEMENT: Annual Financial Report

The Company notes that the announcement released at 7.00am on 10 March 2020 under reference 5194F contained a small number of inconsistencies.

 

The correct details are as follows: Cash invested in the year - $509 million; Net income - $114 million; Net income per share - $0.0828; Remaining commitments - $319 million.

 

All other details in the announcement remain correct.

 

 

 

 

BIOPHARMA CREDIT PLC

 

(THE "COMPANY")

 

ANNUAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2019

DELIVERING DEFENSIVE INCOME FROM AN INCREASINGLY DIVERSE PORTFOLIO

BioPharma Credit PLC (LSE: BPCR), the specialist life sciences debt investment trust, is pleased to present the Annual Report of the Company for the period ended 31 December 2019.

The full Annual Report and Financial Statements can be accessed via the Company's website at www.bpcruk.com or by contacting the Company Secretary by telephone on 01392 477500.

INVESTMENT HIGHLIGHTS

·      In the twelve-month period the Company made a number of significant investments in attractive life sciences companies including:

o  $500m senior secured loan commitment to Sarepta Therapeutics Inc. (Nasdaq: SRPT) alongside BioPharma Credit Investments V (Master) LP ("BioPharma-V") of which the Company initially invested $175m on 13 December 2019

o  $150m senior secured loan commitment to OptiNose (Nasdaq: OPTN) alongside BioPharma-V of which the Company initially invested $44m on 13 September 2019

o  $150m senior secured loan commitment to Global Blood Therapeutics (Nasdaq: GBT) alongside BioPharma-V of which the Company initially invested $41.25m on 18 December 2019

o  $100m senior secured loan commitment to Akebia (Nasdaq: AKBA) alongside BioPharma-V of which the Company initially invested $40m on 13 November 2019

o  $80m senior secured loan commitment to BioDelivery Sciences International (Nasdaq: BDSI) ("BDSI") of which the Company initially invested $60m on 23 May 2019

o  $70m senior secured loan commitment to Epizyme (Nasdaq: EPZM) alongside BioPharma-V of which the Company initially invested $12.5m on 13 November 2019

o  $25m equity investment in BDSI acquired at a cost of $5.00 per share through participation in a public offering that took place on 11 April 2019

o  Post period end on 7 February 2020, the Company entered into a $200m senior secured loan agreement with Collegium Pharmaceutical Inc. (Nasdaq: COLL) alongside BioPharma-V of which the Company has invested its full commitment of $165m

o  Post period end on 11 February 2020, the Company alongside BioPharma-V invested in the second tranche of $30m to Optinose with the Company funding $16.5m 

 

·      GlaxoSmithKline completed its acquisition of TESARO Inc ("Tesaro") on 22 January 2019, triggering the repayment of the Company's $322m loan, generating $45.8m in prepayment and other fees and earning a 22.5% annualised rate of return on the Company's investment

·      The Company paid four dividends totalling $0.0718 per Ordinary Share for the four quarters ended 30 September 2019 continuing to meet its dividend target of 7 cents per share

·      Post period end the Company announced a further dividend distribution of 3.03 cents per share comprising the ordinary dividend of 1.75 cents per share and a special dividend of 1.28 cents per share

·      The Company continues to have a substantial pipeline of attractive potential investments and looks forward to updating shareholders on these opportunities in due course.

FINANCIAL HIGHLIGHTS

ORDINARY SHARES as at 31 December 2019

Assets as at 31 December 2019

 

Share price	Net assets
$1.0200	$1,403.7m
(31 December 2018: $1.0650)	(31 December 2018: $1,380.0m)

 

NAV per Share	Shares in issue
$1.0217	1,373.9m
(31 December 2018: $1.0044)	(31 December 2018: 1,373.9m)

 

Premium to NAV per Share	Target dividend
(0.17%)	7 cents per annum
(31 December 2018: 6.0%)

 

Net income per share
$0.0828
(31 December 2018: $0.0707)

 

PORTFOLIO COMPOSITION

($ in millions)	As at 31 December 2019	As at 31 December 2018
Sarepta Therapeutics senior secured loan	175	-
Novocure senior secured loan	150	150
Amicus senior secured loan	150	150
BMS purchased payments	150	64
Sebela senior secured loan	130	189
Lexicon senior secured loan	125	125
BioDelivery Sciences senior secured loan	60	-
OptiNose US senior secured note and warrants	46	-
Global Blood Therapeutics senior secured loan	41	-
Akebia senior secured loan	40	-
Convertible bonds	20	-
BioDelivery Sciences equity	17	-
Epizyme senior secured loan	13	-
Cash and cash equivalents	297	364
Tesaro senior secured loan	-	322
Limited partnership interest in BioPharma III	-	8
Other net assets	(9)	9
Total net assets	1,404	1,380

 

Pedro Gonzalez de Cosio, CEO and co-founder of Pharmakon Advisors L.P., the Investment Manager of BioPharma Credit PLC said:

"We have delivered another year of considerable investment activity that has transformed our investment portfolio as we deployed the cash resources into compelling opportunities and roughly doubled the number of our portfolio holdings.

The significant cash resources available to the Company at the outset of 2019 provided a unique opportunity to increase the scale of the portfolio. We are delighted that this process has been completed on schedule with the cash resources fully invested or otherwise allocated towards a leading portfolio of life sciences credit investments.

We continue to see a number of significant opportunities in our pipeline and will update the market in due course as these progress through our rigorous due diligence process. We believe the Company is ideally poised from its 2019 investment activity to deliver further growth and add additional diversification to our income base.

The manager also launched BioPharma-V in 2019, a private vehicle investing in similar assets to the Company and has through the year co-invested alongside the Company in many transactions. This has had a noticeable effect in materially diversifying the BioPharma Credit portfolio and has also enhanced the transactional resources available to the manager, ensuring that the most attractive deals can be secured for the benefit of the Company's shareholders.

At a time of uncertainty in the global equity markets, we are focused on continuing to deliver a robust income stream delivered on a quarterly basis and derived from contracted revenues that are uncorrelated to broader equity market movements.

The global sales of approved life sciences products continue to increase in value year on year driven by four fundamental growth drivers of a global growing population, an ageing population, growth in emerging markets and continued innovation. BioPharma Credit remains ideally placed to offer investors defensive exposure to this important asset class through life sciences companies that provide critical solutions to unmet needs to deliver regular returns to shareholders and transformative outcomes for patients."

Results presentation

As announced on 17 February 2020, a management presentation will be delivered through a conference call facility at 2:00pm GMT on 10 March 2020. To request dial-in details, please email [email protected].

Enquiries

Buchanan

David Rydell / Mark Court / Jamie Hooper / Henry Wilson

+44 (0) 20 7466 5000

[email protected]

Notes to Editors

BioPharma Credit PLC is London's only specialist debt investor to the life sciences industry and joined the LSE in March 2017. The Company seeks to provide long-term shareholder returns, principally in the form of sustainable income distributions from exposure to the life sciences industry. The Company seeks to achieve this objective primarily through investments in debt assets secured by royalties or other cash flows derived from the sales of approved life sciences products.

 

 

INVESTMENT

 

Portfolio diversity increased in 2019
Key statistics ($ in millions)	As at  31 Dec   2019	As at 31 Dec  2018	% change
Cash and cash equivalents	297	364	-18.4%
Limited partnership interest in BioPharma III	-	8	-
Tesaro senior secured loan	-	322	-
Lexicon senior secured loan	125	125	-
Novocure senior secured loan	150	150	-
Sebela senior secured loan	130	189	-30.9%
BMS purchased payments	150	64	132.7%
Amicus senior secured loan	150	150	-
BioDelivery Sciences senior secured loan	60	-	-
BioDelivery Sciences equity	17	-	-
OptiNose US senior secured note and warrants	46	-	-
Epizyme senior secured loan	13	-	-
Akebia senior secured loan	40	-	-
Sarepta Therapeutics senior secured loan	175	-	-
Global Blood Therapeutics senior secured loan	41	-	-
Convertible bonds	20	-	-
Other net (liabilities)/assets	(9)	9	-198.5%
Total net assets	1,404	1,380	1.7%

 

Portfolio diversification as at 31 December 2019
Type	Percentage
Cash and cash equivalents	21.1%
Lexicon senior secured loan	8.9%
Novocure senior secured loan	10.7%
Sebela senior secured loan	9.3%
BMS purchased payments	10.7%
Amicus senior secured loan	10.7%
BioDelivery Sciences senior secured loan	4.3%
BioDelivery Sciences equity	1.2%
OptiNose US senior secured loan and warrants	3.3%
Epizyme senior secured loan	0.9%
Akebia senior secured loan	2.8%
Sarepta Therapeutics senior secured loan	12.5%
Global Blood Therapeutics senior secured loan	2.9%
Convertible bonds	1.4%
Other net (liabilities)/assets	-0.7%
Total net assets	100.0%

 

 

 

 

 

CHAIRMAN'S STATEMENT

 

Introduction

2019 was the Company's second full year of operations and I am pleased to be able to report on another year of success.

 

Investments

As described in previous reports, January 2019 saw the early repayment to the Company of its largest investment, that of $322 million to Tesaro. That repayment was accompanied by prepayment and other fees totalling $46 million, thereby securing a very attractive rate of return on our investment but presenting our manager with the challenge of re-employing a substantial amount of capital. Over the course of the 2019 the Company was able to announce six new investments totalling $728 million, of which $423 million was funded in 2019. In addition, $86 million of previous commitments were also funded, leading to a total of $509 million being invested over the course of the year. The balance of outstanding commitments at the end of 2019 is expected to be funded over the course of 2020.

 

Shareholder returns

The Company reported total Net Income of $114 million for 2019 or $0.0828 per share. Over the course of the year, Net Asset Value per share increased from $1.0044 on 31 December 2018 to $1.0217 on 31 December 2019, an increase of $0.0173 per share. Over the same period the Company made four dividend payments totalling $0.0718 per share, referencing the four quarters ending 30 September 2019. The Company was therefore able to maintain its record of paying a dividend of at least 1.75 cents per share in every quarter since that ending 30 June 2018.

 

Following the end of the year, the Company declared a further dividend in respect of the last quarter of 2019 of 3.03 cents per share made up of an ordinary dividend of 1.75 cents per share together with a special dividend of 1.28 cents per share.

 

Over the year the Company's ordinary share price declined from $1.0650 as at 31 December 2018 to $1.0200 as at 31 December 2019, therefore ending the year closely in line with Net Asset Value per share of $1.0217.

 

Portfolio diversification

The Company ended the year with total net assets of $1,404 million, comprised of $1,116 million of investments, $297 million of cash, $16 million of other assets and $25 million of other liabilities. Follow-on commitments totalled $319 million as at 31 December 2019, of which most is expected to be funded during the second half of 2020.

 

As at 31 December 2019, the Company had outstanding 12 investments with amounts outstanding ranging in size from $10 million to $175 million.  This compares with a portfolio as at 31 December 2018 of seven loans with commitments between $76 million and $96 million. Since year end, one further commitment, with Collegium Pharmaceutical, was made for $165 million, adding further diversification to the portfolio and taking the number of outstanding investments to 13, almost double the number outstanding 12 months earlier.

 

Outlook

Our investment manager, Pharmakon Advisors, continues to develop a pipeline of additional potential investments and, as a consequence, we expect to be evaluating a number of potential alternatives to fund this expected growth.

 

On behalf of the Board, I should like to express our thanks to Pharmakon for their continued achievements on behalf of the Company in 2019 and to our shareholders for their continued support.

 

 

Jeremy Sillem

Chairman

9 March 2020

 

 

 

MARKET OVERVIEW

 

LIFE SCIENCES IS A LARGE, VITAL INDUSTRY WITH A TRACK RECORD OF STRONG, CONSISTENT GROWTH

 

Size and growth dynamics of the industry

The life sciences industry consists of pharmaceutical and biotechnology firms and is a large and vital industry with a track record of strong, consistent growth. Worldwide prescription drugs sales were $827 billion in 2018 and are expected to reach $1.2 trillion by 2024, reflecting a compounded annual growth rate of 6 per cent. While medical and scientific advances contribute to a portion of that increase, other growth drivers include more basic demographic and macroeconomic factors, such as a growing population, ageing populations and increasing prosperity in developing countries which is improving access to healthcare for millions of patients. The increase in spending is expected to be largely driven by brands and increased usage in emerging markets, offset by expiring patents.

 

Product life cycle

Pharmaceutical and biotechnology products have long life cycles, which can provide considerable downside protection for the Company. Worldwide patents can lead to more than 20 years of protection, which frequently translates into as long as 15 years of exclusivity from the time the products are first approved by regulatory agencies such as the U.S. Food and Drug Administration ("FDA"). Some governments also provide for regulatory exclusivity, which provides for six to ten years of commercial exclusivity independent of an approved patent, if an innovator performs clinical trials. On average, sales growth is very robust for the first 12 years of a product's life cycle, after which some of these products begin to lose exclusivity, and their sales growth slows and starts to decline shortly thereafter. A key driver of initial sales growth is increasing prescriptions from physicians in the early-launch markets, but subsequent commercialisation rates in additional geographic markets, as well as expanding indications, frequently drive attractive growth for more than a decade.

 

Market dynamics create fragmentation of the industry and more lending opportunities

Despite growth in the pharmaceutical market, large pharmaceutical companies continue to face mounting pressure on top-line sales from patent expiry on blockbuster products and failures in their research and development pipelines. The internal research and development departments of larger pharmaceutical companies have struggled to replace lost revenue with new products. Dramatically escalating research and development costs have also put pressure on industry participants to adapt their business model and seek partners to reduce risk. The amount of research and development investment per FDA-approved product is now approximately $1.4 billion. As a result of these factors, large pharmaceutical companies are increasingly relying on in-licensing and corporate acquisitions for new products.

 

Over the last 30 to 40 years, the landscape of the pharmaceuticals industry has been transformed from one dominated by fully integrated pharmaceutical companies to a more dynamic and entrepreneurial research and development ecosystem comprised of thousands of participants. As a result of this research and development evolution, smaller companies, investor groups, universities and non-profit research institutes increasingly have rights to royalty streams on products that have been out-licensed to larger pharmaceutical companies. This broader shift in research and development approach provides an expanding landscape of lending opportunities for the Company, as smaller companies are increasingly partnering with large pharmaceutical companies.

 

The pharmaceutical and biotechnology ecosystem has evolved to one where innovation and commercialisation, which was once centralised in fewer than 100 big pharmaceuticals, has now spread among more than 5,000 academic labs, government-funded entities and more than 5,000 biotech companies. The pool of creditworthy borrowers has increased exponentially.

 

 

INVESTMENT MANAGER'S REPORT

 

AN ATTRACTIVE INVESTMENT ENVIRONMENT TO BUILD ON PAST PERFORMANCE

 

INTRODUCTION TO THE INVESTMENT MANAGER

 

Pharmakon Advisors, the Company's Investment Manager, was founded in 2009 and has invested $3.8 billion in 40 transactions on behalf of its clients.

 

Pharmakon prides itself on its ability to identify and structure investments that meet its target returns while minimising risk through its rigorous diligence process and industry expertise.

 

As at 31 December 2019, Pharmakon clients included four previous BioPharma Funds (I, II, III and IV), BioPharma V, a private fund also investing in life sciences debt managed by Pharmakon Advisors launched in June 2019, and seven managed co-investor accounts. The four previous BioPharma Funds have now reached the end of their investment period.

 

The Pharmakon team has extensive expertise investing in debt and other cash flows backed by life sciences products.

 

Through a shared services agreement with RP Management LLC, Pharmakon has access to the complementary expertise of the team behind the market-leading investor in pharmaceutical royalties. RP Management LLC, an affiliate of Pharmakon, was established in 1996 and acquires revenue-producing intellectual property, with over $17 billion in royalty assets.

 

INVESTMENTS

 

Pharmakon is pleased to present an update on the Company's portfolio and investment outlook. We are delighted with the results over the past year and look forward to a productive 2020 as we continue to solidify our position as the leading investor in life sciences debt. 2019 started with the previously announced repayment of the Tesaro loan which increased the Company's cash position to $768 million by 31 January 2019. During the remainder of the year Pharmakon was successful in executing six transactions on behalf of the Company and BioPharma V. The Company's share of these transactions amounted to $728 million, of which $319 million are commitments expected to be funded during 2020. Cash invested during the year totalled $509 million including funding $86 million in previous commitments. Below is an update on the Company's portfolio.

 

GBT

On 18 December 2019, the Company and BioPharma-V entered into a definitive senior secured term loan agreement for up to $150 million with Global Blood Therapeutics (Nasdaq: GBT), a biopharmaceutical company focused on innovative treatments that provide hope to underserved patient communities with a current market capitalisation of approximately $4,027 million as at 2 March 2020 ("GBT"). Under the terms of the agreement, GBT drew down $75 million at closing and has until December 2020 to draw the remaining $75 million, at their option.

 

The Company funded $41 million of the $75 million first tranche and will fund up to $41 million of the second tranche if the full $75 million of the second tranche is drawn. The loan will mature in December 2025 and will bear interest at three month LIBOR plus 7.00 per cent. per annum subject to a 2.00 per cent. floor along with a one-time additional consideration of 1.50 per cent. of the total loan amount payable upon funding and an additional 2.00 per cent. payable upon the repayment of the loan. GBT recently obtained US FDA approval for its first product, Oxbryta TM (voxelotor) for the treatment of sickle cell disease in adults and pediatric patients 12 years of age and older.

 

Investment type	Date
Secured loan	20 December 2019
Total amount	Company commitment
$150m	$83m
Maturity
Dec 2025

 

Sarepta Therapeutics

On 13 December 2019, the Company and BioPharma-V entered into a definitive senior secured term loan agreement for up to $500 million with Sarepta Therapeutics (Nasdaq: SRPT), a fully integrated biopharmaceutical company focused on precision genetic medicine with a current market capitalisation of approximately $9,322 million as at 2 March 2020 ("Sarepta"). Under the terms of the agreement Sarepta drew down a first tranche of $250 million and has until December 2020 to draw the remaining second tranche of $250 million, at their option.

 

The Company funded $175 million of the $250 million first tranche and will fund up to $175 million of the second tranche if the full $250 million of the second tranche is drawn. The loan will mature in December 2023 and will bear interest at 8.5 per cent per annum along with a one-time additional consideration of 1.75 per cent of the total loan amount payable upon funding and an additional 2 per cent. payable upon the repayment of the loan.

 

Sarepta currently markets Exondys 51 (eteplirsen) in the US for the treatment of Duchenne muscular dystrophy (DMD) in patients who have a confirmed mutation of the DMD gene that is amenable to exon 51 skipping. On 12 December 2019, Sarepta announced the FDA approval of Vyondys 53 (golodirsen), its second RNA exon-skipping treatment for DMD approved in the U.S. and that commercial distribution of Vyondys 53 in the US will commence immediately. On 23 December 2019, Sarepta announced a partnership with Roche in territories outside the United States for its investigational micro-dystrophin gene therapy for duchenne muscular dystrophy. Sarepta received an upfront payment of $1.15 billion, comprising $750 million in cash and $400 million in equity and will receive future success-based milestones and royalties.

 

Investment type	Date
Secured loan	20 December 2019
Total amount	Company commitment
$500m	$350m
Maturity
Dec 2023

 

Akebia

On 11 November 2019, the Company and BioPharma-V entered into a definitive senior secured term loan agreement for up to $100 million with Akebia (Nasdaq: AKBA), a fully integrated biopharmaceutical company focused on the development and commercialisation of therapeutics for people living with kidney disease with a current market capitalisation of approximately $1,079 million as at 2 March 2020 ("Akebia"). Under the terms of the agreement Akebia drew down $80 million at closing and has until December 2020 to draw the remaining $20 million, at their option.

 

The Company funded $40 million of the $80 million first tranche and will fund $10 million of the second tranche if it is drawn. The loan will mature in November 2024 and will bear interest at LIBOR plus 7.5 per cent. per annum along with a one-time additional consideration of 2 per cent. of the total loan amount. Akebia currently markets Auryxia® (ferric citrate) which is approved in the US for hyperphosphatemia (elevated phosphorus levels in blood serum) in adult patients with chronic kidney disease (CKD) on dialysis and iron deficiency anaemia in adult patients with CKD not on dialysis.

 

Investment type	Date
Secured loan	25 November 2019
Total amount	Company commitment
$100m	$50m
Maturity
Nov 2024

 

Epizyme

On 4 November 2019, the Company and BioPharma-V entered into a definitive senior secured term loan agreement for up to $70 million with Epizyme (Nasdaq: EPZM), a late-stage biopharmaceutical company developing novel epigenetic therapies with a current market capitalisation of $2,317 million as at 2 March 2020 ("Epizyme"). Under the terms of the agreement Epizyme drew down $25 million at closing and has until December 2020 to draw the remaining $45 million, in two tranches.

The Company funded $13 million of the $25 million first tranche and will fund $23 million of the remaining tranches if they are drawn. The loan will mature in November 2024 and will bear interest at LIBOR plus 7.75 per cent. per annum along with a one-time additional consideration of 2 per cent. of the total loan amount. Epizyme's lead product, tazemetostat, is a first-in-class, oral EZH2 inhibitor in clinical development for certain oncology indications, including epithelioid sarcoma and follicular lymphoma. Since tazemetostat was not FDA approved at the time the loan was funded, the loan was over collateralised with cash. This requirement went away when tazemetostat was approved on 23 January 2020.

Investment type	Date
Secured loan	18 November 2019
Total amount	Company commitment
$70m	$35m
Maturity
Nov 2024

 

Optinose

On 12 September 2019, the Company and BioPharma-V entered into a definitive senior secured note purchase agreement for the issuance and sale of senior secured notes in an aggregate original principal amount of up to US$150 million by OptiNose US, a wholly-owned subsidiary of OptiNose (Nasdaq: OPTN), a commercial-stage specialty pharmaceutical company with a current market capitalisation of approximately $284 million as at 2 March 2020 ("OptiNose"). Under the terms of the agreement Optinose purchased $80 million at closing and has until February 2021 to purchase the remaining $70 million of notes, in three tranches, at OptiNose's option.

 

The Company funded $44 million of the $80 million first tranche and will issue $39 million of the remaining tranches if they are drawn. The notes mature in September 2024 and bear interest at 10.75 per cent. per annum along with a one-time additional consideration of 0.75 per cent. of the aggregate original principal amount of senior secured notes which the Company and BioPharma-V are committed to purchase under the facility and approximately 800,000 warrants exercisable into common stock of OptiNose.

 

OptiNose's leading product, XHANCE® (fluticasone propionate), is a nasal spray approved by the U.S. Food and Drug Administration (FDA) in September 2017 for the treatment of nasal polyps in patients 18 years or older. XHANCE® utilises a novel and proprietary exhalation delivery system to deliver the drug high and deep into the sinuses, targeting areas traditional intranasal spray are not able to reach.

 

Investment type	Date
Secured loan	12 September 2019
Total amount	Company commitment
$150m	$82.5m
Maturity
September 2024

 

Biodelivery Sciences International

On 23 May 2019, the Company entered into a senior secured loan agreement for up to $80 million with BioDelivery Sciences International (Nasdaq: BDSI), a commercial-stage specialty pharmaceutical company ("BDSI") with a market capitalisation of approximately $496 million as at 2 March 2020. BDSI utilizes its novel and proprietary BioErodible MucoAdhesive (BEMA®) technology, to develop and commercialize new applications of proven therapies aimed at addressing important unmet medical needs. BDSI's leading products include BELBUCA® (buprenorphine buccal film) and Symproic® (naldemedine).

 

In addition, the Company acquired 5,000,000 BDSI shares at $5.00 each for a total cost of $25 million in a public offering that took place on 11 April 2019. As at 28 June 2019, BDSI's shares closed at $4.65. The first tranche of the loan for $60 million was funded on 28 May 2019 and an additional tranche of $20 million is available to be drawn down by May 2020 at BDSI's option. The loan will mature in May 2025 and bears interest at LIBOR plus 7.5 per cent., along with 2 per cent. additional consideration. Proceeds from this financing, along with available cash on hand, were used to repay and retire the company's existing term loan with CRG Servicing LLC which had an outstanding balance of $62 million and a maturity date of December 2022. As at 2 March 2020 BDSI had a market capitalisation of $496 million.

 

Investment type	Date
Secured loan and equity	28 May 2019
Total amount	Equity
$80m	$25m
Company commitment	Maturity
$105m	May 2025

 

 

Amicus Therapeutics

On 20 September 2018, the Company entered into a definitive senior secured loan agreement for $150 million with Amicus Therapeutics, Inc (NASDAQ: FOLD), a commercial stage, rare metabolic disease-focused biopharmaceutical company ("Amicus").

 

The $150 million loan has a five-year maturity and is interest-only for the first four years. The loan bears interest at LIBOR plus 7.5 per cent. (subject to certain caps) and includes 2 per cent. Additional consideration. Amicus can prepay the loan at any time subject to a two year make-whole premium and prepayment fees.

 

Amicus has commercial operations in the United States, Europe, Japan and several other geographies in which it currently markets Galafold® (migalastat HCl) for Fabry disease with sales of $182 million during 2019. As at 2 March 2020 Amicus had a market capitalisation of $2,398 million.

 

Sebela Pharmaceuticals

On 1 May 2018, the Company was lead arranger of a $316 million senior secured term loan for Sebela BT Holdings Inc. ("Sebela"), a subsidiary of Sebela Pharmaceuticals. The Company committed to a $194 million investment, with the remaining $122 million balance coming from co-investors.

 

The five-year senior secured loan began amortising in the third quarter of 2018 and fully matures in December 2022. The loan bears interest at LIBOR (un-capped) plus a single-digit spread and includes additional consideration.

 

Sebela is a private specialty pharmaceutical company focused on gastrointestinal medicines, dermatology, and women's health. As at 31 December 2019, the principal amount outstanding of the Company's investment was $130 million.

 

Novocure Limited

On 7 February 2018, the Company entered into a senior secured loan agreement for $150 million with Novocure Limited (NASDAQ: NVCR), a commercial stage oncology company with a current market capitalisation of approximately $7,467 million as at 2 March 2020  ("Novocure").

 

The $150 million loan will mature in February 2023 and bears interest at 9.0 per cent. per annum. Novocure used $100 million of the net proceeds to entirely prepay the $100 million, 10.0 per cent. coupon loan made by BioPharma III Holdings, LP ("BioPharma III") in 2015 that was scheduled to mature in 2020.

 

The Company was a limited partner in BioPharma III and therefore received a distribution of approximately $46 million from BioPharma III as a result of the prepayment from Novocure.

 

Novocure manufactures and sells the Optune system, a cancer treatment centered on a proprietary therapy called TTFields, which involves the use of electric fields tuned to specific frequencies to disrupt solid tumor cancer cell division. Optune is currently approved for the treatment of adults with Glioblastoma ("GBM").

 

On 27 February 2020, Novocure reported revenues of $351 million for the year ended 31 December 2019 a 42 per cent. increase over 2018. Novocure invests meaningfully in research and development and has late stage trials (Phase III pivotal studies) underway for TTFields in brain metastases, non-small cell lung cancer and pancreatic cancer.

 

On 23 May 2019, the FDA approved the NovoTTF-100L system in combination with chemotherapy for the treatment of malignant pleural mesothelioma. This is the first FDA approved mesothelioma treatment in over 15 years.

 

Lexicon Pharmaceuticals

On 4 December 2017, the Company and BioPharma IV entered into a definitive term loan agreement for up to $200 million with Lexicon Pharmaceuticals (NASDAQ: LXRX) ("Lexicon"), a fully integrated biopharmaceutical company with a current market capitalisation of approximately $301 million as at 2 March 2020.  

 

The Company funded $125 million of the $200 million first tranche and Lexicon did not draw the second tranche. The loan pays a fixed 9.0% coupon. Lexicon markets Xermelo® (teloristat ethyl) for the treatment of carcinoid syndrome diarrhoea in the United States and has licensed Xermelo® to Ipsen Pharma SA for commercialisation in territories outside of the United States and Japan. Lexicon is also developing Zynquista (sotagliflozin) for the treatment of type 1 and type 2 diabetes in partnership with Sanofi. The loan is secured by substantially all of Lexicon's assets, including its rights to XERMELO and Zynquista.

 

Zynquista (sotagliflozin) received approval in Europe for Type 1 diabetes on 26 April 2019. On 22 March 2019, the FDA issued a Complete Response Letter (CRL) which indicated that a New Drug Application for the oral treatment of type 1 diabetes would not be approved in its present form for Zynquista. Lexicon appealed the decision to the FDA and on 2 December 2019, the FDA affirmed its initial decision. Lexicon has escalated its appeal to the FDA's Center for Drug Evaluation and Research and is awaiting a decision. The drug is still being evaluated for use in Type 2 patients with potential to generate $110 million in development milestones by early 2020 plus $150 million upon approval. The Type 2 diabetes market is much larger than the Type 1 market.

 

On 26 July 2019, Lexicon announced Sanofi's notice of termination in relation to its collaboration and license agreement with Lexicon for the development and commercialisation of Zynquista. Sanofi's actions do not impact XERMELO® which is marketed by Lexicon in the US and is partnered outside the US with Ipsen. Lexicon and Sanofi came to an agreement effective 9 September 2019 in which Lexicon will regain all rights to and will be solely responsible for the worldwide development and commercialization of Zynquista. Under the terms of the settlement, Sanofi agreed to pay Lexicon US$260 million and coordinate with Lexicon in the transition of responsibility for ongoing clinical studies and other activities. Sanofi paid Lexicon $208 million in September 2019 and will pay the remaining $52 million in the next 12 months.

 

Bristol-Myers Squibb

On 8 December 2017, the Company's wholly-owned subsidiary entered into a purchase, sale and assignment agreement with a wholly-owned subsidiary of Royalty Pharma Investments ("RPI"), an affiliate of the Investment Manager, for the purchase of a 50 per cent. interest in a stream of payments (the "Purchased Payments") acquired by RPI's subsidiary from Bristol-Myers Squibb (NYSE: BMY) through a purchase agreement dated 14 November 2017.

 

As a result of the arrangements, RPI's subsidiary and the Company's subsidiary are each entitled to the benefit of 50 per cent. of the Purchased Payments under identical economic terms. The Purchased Payments are linked to tiered worldwide sales of Onglyza and Farxiga, diabetes agents marketed by AstraZeneca, and related products. The Company was expected to fund $140 million to $165 million during 2018 and 2019, determined by product sales over that period, and will receive payments from 2020 through 2025. The Purchased Payments are expected to generate attractive risk-adjusted returns in the high single digits per annum. As of 31 December 2019, the Company funded seven of the Purchased Payments based on sales from 1 January 2018 to 30 September 2019 for a total of $150 million out of the originally expected range.

 

Tesaro

On 21 November 2017, the Company and BioPharma Credit Investments IV, S.àr.L. ("BioPharma IV") entered into a definitive loan agreement for up to $500 million with Tesaro (NASDAQ: TSRO) ("Tesaro").

 

The Company funded $222 million of the $300 million first tranche on 6 December 2017 and $100 million of the $200 million second tranche on 29 June 2018 for a total investment of $322 million.

 

The Tesaro loan had a term of seven years and was secured by Tesaro's US rights to ZEJULA®. The first $300 million tranche bore interest at LIBOR plus 8 per cent. and the second tranche bore interest at LIBOR plus 7.5 per cent. The LIBOR rate was subject to a floor of 1 per cent. and certain caps. Each tranche of the loan was interest only for the first two years, amortises over the remaining term. Following its acquisition by GlaxoSmithKline, Tesaro repaid the $500 million loan on 23 January 2019.

 

The Company received a payment of $370 million on its $322 million share of the loan, including the make-whole and prepayment premium totalling $46 million, or 14.2 per cent., of the $322 million investment, which is the equivalent of what the Company would have received had the loan remained

outstanding for another approximately fifteen months. The Company earned a 29 per cent. Internal rate of return on its Tesaro investment.

 

Update on seed assets

The Company acquired $339 million in seed assets at the time of the IPO in March 2017, consisting of a $185 million investment in the RPS Note and a 46 per cent. limited partnership interest in BioPharma III, valued at $154 million at the time of the IPO. On 15 October 2018, the Company received its final payment on the RPS Note of $20 million, realising a 12.9 per cent. IRR. On 29 January 2019, the Company received $8 million as its final payment from BioPharma III, realising a 13.6 per cent. IRR.

 

Investment outlook

The life sciences industry is expected to continue to have substantial capital needs during the coming years as the number of products undergoing clinical trials continues to grow. All else being equal, companies seeking to raise capital are generally more receptive to straight debt financing alternatives at times when equity markets are soft, increasing the number and size of fixed-income investment opportunities for the Company, and will be more inclined to issue equity or convertible bonds at times when equity markets are strong. A good indicator of the life sciences equity market is the New York Stock Exchange Biotechnology Index ("BTK Index"). While 2018 was a volatile year, with the BTK Index essentially at the same levels as it started the year, 2019 proved to be stronger with the BTK Index rising by 20%. As a result of the downside protection embedded in the debt nature of the Company's investments, the volatility in equity prices does not affect the value or quality of the assets in the portfolio. Global equity issuance by life sciences companies during 2019 was $62 billion, a 13 per cent. increase from the $55 billion issued during 2018. We anticipate an increased appetite for fixed-income as a source of capital in 2020.

 

Acquisition financing is an important driver of capital needs in the life sciences industry in general and a source of investment opportunities. An active M&A market helps drive opportunities for investors such as the Company, as acquiring companies need capital to fund acquisitions. Global life sciences M&A volume during 2019 was $198 billion, a 27 per cent decrease less than the $270 billion witnessed during 2018, driven by an increase in biotech consolidation. We are encouraged by the number of M&A opportunities that are starting to build up and should lead to a more active market over the coming year.

 

In conclusion, there continues to be a robust pipeline of investment opportunities, but as usual, the precise timing of their execution is not completely within our control. Pharmakon will continue to evaluate potential capital sources to fund additional investments in addition to the $319 million in commitments expected to be funded during 2020. While the Company can raise equity and debt, it will also be important to monitor the potential early prepayment of loans in the portfolio in order to ensure the maximum amount of funds are deployed at all times. We remain focused on our mission of creating the premier dedicated provider of debt capital to the life sciences industry while generating attractive returns and sustainable income to investors. Further, Pharmakon remains confident of our ability to deliver attractive returns that will enable the Company to pay a robust dividend yield for our investors.

 

 

Pedro Gonzalez de Cosio

Co-founder and CEO, Pharmakon

9 March 2020