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BIoWatch Thoughts on BioMarin's Convertible Notes

04:52 EDT 10 Aug 2017 | Biotech Watcher

On Tuesday, August 8, 2017, the BioMarin (BMRN) announced a $450M convertible notes offering. The terms were summarized in its SEC-filed prospectus:

BioMarin Offering of $450M of 0.599%
Senior Subordinated Convertible Notes due 2024
Notes
0.599% Senior Subordinated Convertible Notes
Principal Amount
$450M
$495M (Underwriters exercise option)
Net Proceeds
$437.9
$481.8 (Underwriters exercise option)
Maturity Date
August 1, 2024
Interest
0.599% per year. Interest will be payable semiannually in arrears on February 1 and August 1 of each year, commencing February 1, 2018, at the close on the preceding January 15 and July 15, respectively.
Conversion Premium
Approximately 40.0% above the Last Reported Sale Price ($89.05) on August 7, 2017. The conversion price is about $124.67 per share, subject to adjustment.
Book-Running Mangers[1]
Merrill Lynch, Pierce, Fenner & Smith Inc.
Goldman Sachs & Co. LLC
J.P. Morgan Securities LLC

Some of the net proceeds will be used to resolve “some or all of BioMarin's 0.75% senior subordinated convertible notes due in October 2018”. The rest will be used to support “general corporate purposes, including clinical trials of its product candidates and the expansion of its manufacturing capacity, particularly with respect to the manufacturing capability for its gene therapy program.”

The outstanding principal amount of BioMarin’s 0.75% senior subordinated convertible notes due in October 2018 is $375M. These older notes have a conversion price of $94.15 per share.

If BioMarin retires this debt with cash in the near-term, then we expect that it will retain about $106M for other corporate purposes. It will hold about $1.3B in cash and equivalents.

Our Thoughts

On Deck
Product
Notes
A regulatory filing is scheduled for mid-2017. More top-line efficacy and neurocognitive results in 2017. Will we see positive neurocognitive results?
Recently approved for the USA, we expect slow sales for the first year with a stronger uptake afterwards. The EMA is scheduled for a Q3-2017 approval decision.

Management has (unsurprisingly) found a larger market than the original estimate of 500 patients, perhaps 1,500. As the drug helps patients to live longer, peak markets may be large. This scenario is cut short if and when rival cell therapies are successfully developed. 
If approved, CEO JJ Bienaime estimates that peak sales will exceed $1B. We take a more cautious tact for now. If it maintains current results, peak revenues should exceed $650M
BMN-270
BMN-270 is an AAV-driven gene therapy that restores an essential clotting element, factor VIII, for hemophilia A. So far, extended results suggest that unlike prior AAV-delivered gene therapies, durable treatment effects are present. If these results truly hold and repeat, then this represents $650M+ in peak sales. Depending upon further robust results, this would be upwardly revised.

While we certainly won’t complain about using cheaper debt to retire older, more expensive debt, we are surprised that the company took an extra $100M for “general corporate purposes”. This is right after BioMarin’s management reaffirmed its commitment to becoming non-GAAP profitable for 2017.

The extra cash may be prudent, but some investors reacted with fear. Is BioMarin trapped being a non-profitable company with billion+ dollar in sales?

To remain non-profitable, BioMarin’s growth pillars must stall and the marketed products only bring incrementally better sales.

Will this depressing scenario occur? We think BioMarin has a promising pipeline, but this is biotech. Product development is tough. We have already seen downward adjustments from Wall Street for Brineura and Pegvaliase.

What About Acquisition?

When “acquisition fever” among investors sent BMRN soaring, we asserted that BioMarin would remain free. We still hold that position - at least until Pegvaliase is commercialized. That time is coming near. 

While these thoughts are a far cry from declaring acquisition, we will cease being such an adamant naysayer.

(At the time this was written, one or more BioWatch staff owned a long position in BMRN)


[1]The underwriters agreed to purchase the following amounts: $247.5M (Merrill Lynch, Pierce, Fenner & Smith Inc.); $101.25M (Goldman Sachs & Co. LLC); $101.25M (J.P. Morgan Securities LLC)

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