The convertible debt market started bubbling in May, and two biotech companies – Celgene Corp. and Connetics Corp. – immediately took advantage of the opportunity, raising $480 million between them. In June, the 11 others listed in the table below also seized the moment, taking advantage of low interest rates and rising stock prices to raise considerable sums of money almost overnight. Right after Independence Day, two more firms – Indevus Pharmaceuticals Inc. and Protein Design Labs Inc. – announced plans to sell convertible notes, and the latter actually completed a $250 million offering on July 8. But this convert market may already be cooling off, so Indevus could be the last of the bunch.

Convertible Debt Financings May-June 2003

“Last month was really remarkable in terms of converts,” explained Dennis Purcell, senior managing director at Perseus-Soros BioPharmaceutical Fund. “To raise that amount of money in that short a period of time with that instrument is quite remarkable.”

“The types of companies and the terms [of the deals] are different than we’ve seen before,” he said. “With the exception of Cephalon, every other company shared one characteristic: None of them makes money.” As well, a few of the notes aren’t due for 20 or even 30 years, and most were struck at low interest rates, an added boon for companies wishing to stretch their hard-won dollars as far as possible.

In prior years, convert buyers (normally, qualified institutional investors) looked at the issuer’s ability to cover the interest payments on the debt, Purcell said. For instance, those biotechs that raised money through convertible debt offerings in February 2000 “all had market caps of more than $1 billion.” (See the Signals article, “Biotechs Riding High on Convertibles,” for details.) But currently, “companies with a more modest market cap (and unprofitable, as well) are able to raise debt financing.”

These financings are tricky, though. If a company’s stock doesn’t rise to the price at which the notes convert into stock, then the biotech firm had better have enough cash on hand to support the debt (and, it’s also got to set aside enough money to pay the interest). The investors, on the other hand, have set up these deals so they can’t lose, he said. “They don’t care whether the company is a good bet. They buy and hold the convert but short the stock. If the company doesn’t do well, they will make money on the short. If it does do well, they will make money on the [converted] stock.”

Obviously, there’s been plenty of money available in the convertible market the last few months; in fact, the funds that specialize in this type of financing were sitting on the sidelines looking for a place to put their money. “Once one or two biotechs did debt financings, the flood gates opened,” Purcell added. But, he cautioned, the time for striking more of these deals “has probably come and gone.”


Even so, public biotechs have plenty of other financing options. For instance, many firms have taken advantage of shelf registrations of securities of various sorts (including preferred and common stock) to raise cash through private placements and even occasional public follow-on stock offerings. In the first six months of 2003, companies raised $740 million this way, nearly 18 percent of the total $4.18 billion garnered by public biotechs through various financings.

Shelf Registrations 2Q 2003

However, biotech public offerings still haven’t caught the eye of most investors. Only 10 companies have sold stock in follow-on offerings this year and nary a one has managed to pull off an IPO. (For details, see the Signals article, ”Eye On Wall Street,” which tracks U.S.-based public financings in 2003.)

Not that there has even been an IPO market to speak of – in any sector of the economy -- but this could be changing, according to analysts who detect a positive turn in investor sentiment. (For instance, insurer AXIS Capital Holdings Ltd. and managed-care company Molina Healthcare Inc. both priced their IPOs on July 1, and both stocks rose in their market debuts.)

Even biotech gurus are beginning to think that IPOs may be possible in the not-too-distant future. Perseus-Soros’ Purcell said that he “gets the feeling that the market is a little bit better for an eventual IPO market.” And Peter Barrett, senior principal at Atlas Venture, speaking on a panel at BIO 2003 last month, said “We could be near a window. A lot of people are talking about IPOs.” Also speaking at BIO 2003, G. Steven Burrill, CEO of Burrill & Co., believes that “we will have a boomlet of IPOs later this year,” perhaps as many as 10-15. On the other hand, Eric Roberts, managing director at Lehman Brothers Inc., thinks that it’s more likely that there won’t be a market for biotech IPOs until the beginning of next year, and even then, “it will be a handful of deals.”


Meanwhile, biotech firms managed to raise about $5.5 billion in the first half of 2003 (excluding revenues and payments from corporate partners), much less than the roughly $7.8 billion they raised in the first half of 2002. (For comparison, biotechs raised $7.4 billion in the first half of 2001 and $15.9 billion in the first half of 2000.)