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Biotech turns to Alternative Credit in new fund

The BioPharma Credit investment trust has raised gross cash proceeds of $423m after an Initial Public Offering (IPO).

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For several years, biotechnology has been one of the hottest markets, with valuations booming between and 2015. A lone tweet from Hilary Clinton in the run up to the US election, however, saw the market crash as the (then) likely winner promised tough rules on drug pricing.

As the graph below shows, despite Trump’s win and Republican control of the Senate, that the market hasn’t yet sawed as many had hope. 

Performance of the Nasdaq Biotech index over 7Yrs

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Source: FE Analytics

For those still bullish on biotech but worried about bubbles in the equity valuations, a new fund has launched targeting a 7 per cent yield from the debt of life science and biotech companies. In year one this is targeted at 4 per cent, with a net total return target of 8-9 per cent pa over the medium term.

The new Guernsey-domiciled BioPharma Credit fund is to be listed on the Specialist Fund sector of the London market. In addition, $338.6m of shares will be issued to acquire a seed portfolio, taking total gross proceeds are $761.9m. The cash proceeds include $373.3m via the placing and $50m from additional subscriptions. The shares are now trading under the ticker “BPCR”.

The fund is managed by Pharmakon Advisors, based in New York, which has invested over $1.3bn in life sciences debt since its inception in 2009. The lead manager will be Pedro Gonzalez de Cosio, a Principal and co-founder of Pharmakon. Under a shared services agreement, the Investment Manager will have access to the expertise of Royalty Pharma, a New York based investor in Pharma royalties since 1996. Principals of Pharmakon and Royalty Pharma have invested $106.2m, representing 13.9% of share capital, though the contribution of seed assets and direct participation in the offering.

The fund will invest in a portfolio of debt and royalty assets issued by biotech and life sciences or secured on assets (typically in the US, Europe and Japan). There will be an initial seed portfolio with a value of $338.6m comprising a note issued by RPS BioPharma Investments LP that is secured by royalties on 21 pharmaceutical products (12 per cent coupon), with a value of $185.1m. There is also a portfolio of five loans to pharmaceutical and medical device companies originated by BioPharma Secured Investments III Partners with a blended gross rate of return of 11.4 per cent, valued at $153.5m.

While the new trust is the only one of its kind, it is not the first healthcare focused Alternative Credit fund. Last April, the US-based HealthCare Royalty Management had to cancel its own plans to launch the Healthcare Royalty trust citing EU referendum uncertainty.

Initial expenses for the new fund will be capped at 2 per cent of proceeds. The management fee will be 1.0 per cent pa of net assets plus a performance fee of 10 per cent of returns in excess of 6 per cent pa, subject to a high watermark (if the fund trades at a discount then 50 per cent of the performance fee, less taxes, will be used by the manager to buy shares in the market). Ongoing expenses of the fund are expected to be an additional 0.59 per cent per annum.

The investment trust has four independent directors: Jeremy Sillem, Chairman, a managing partner of Spencer House Partners, Duncan Budge who previously worked for Rothschild Investment Trust, Colin Bond who is the CFO of Swiss specialty pharmaceutical company Vifor Pharma, and Harry Hyman (MD of Primary Health Properties).

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