Riding High

"It's the cheapest way to raise money," explained Edward Hurwitz, VP and CFO at Affymetrix Inc. "But that's not why companies do them for the most part." They do these debt offerings because they're "extremely quick." He should know: It took Affymetrix a mere two days to place $175 million principal amount of seven-year notes, and another two days to sell an additional $50 million to the buyer. "The market's so hot that it allows the bankers to do a deal without a road show," Hurwitz added. (Affymetrix, however, did have a road show, he said, but it took just one day.)

Protein Design Labs Inc., which raised $150 million in a convertible notes placement, also did a road show, according to Robert Kirkman, the company's VP of business development and acting CFO. Even though the company had to delay the pricing in order to complete a quality control check on a new lot of antibody needed for an ongoing clinical trial, it closed the deal in nine days. Less than a week later it had sold an additional $25 million to the investors. "Given how hot the market is right now, it's quicker [than an equity offering]," Kirkman said. "It addresses a different, broader investor base and it's less dilutive for the same amount of money raised -- that is, if you believe your stock price is going up."


"Throughout the entire history of the industrialization of America, every industry that's needed to raise money has come to the convertible debt market," explained Brendan Dyson, the managing director of Robertson Stephens' convertible securities businesses. However, until recently, "The small-market-cap biotech companies (typically between $500 million and $1 billion) were prevented from using convertible debt financing. They were high-risk and had a negative cash flow for the foreseeable future," he continued. But all that's changed now. Not only have market caps soared, but more companies are profitable, or nearly so, and the sector has an extremely high visibility. "Money is rushing in from all sectors," Dyson said. "There's a broad acceptance that biotech is a real industry. There are companies with revenues, near-term profitability, multi-billion-dollar market caps and a cultural history of being starved for capital." And, though "many companies are doing common stock deals, they can raise money faster and cheaper with converts."

Take Alkermes Inc., for instance, which just placed $200 million principal amount of convertible subordinated notes in only eight days. "Alkermes has got an approved product [Nutropin Depot, a long-acting version of growth hormone which FDA approved in Dec. 1999], a deep development portfolio and it's projecting profitability by mid-2001," Dyson said.

And Cor Therapeutics Inc., which completed its private placement in three days, is also poised at the brink of profitability. "We look to break through by the end of the year and be profitable in 2001," said Peter Roddy, Cor's VP of finance. As well, Cor has an approved product on the market: Integrilin, for treating acute coronary syndrome (including unstable angina) was approved by the FDA in May 1998.


Another advantage of a convertible notes placement is that "you sell to qualified institutional investors only," Hurwitz said. This is a great way for a company to broaden its investor base, for the institutions that participate in the convertibles market are a specialized breed. And, like everybody else, they're eager to get their hands on some sizzling biotech investments.

"The supply/demand equation in the convert market is extremely favorable right now," he continued. "There are pools of money that are obligated to invest in converts." When the notes convert into common stock, the funds aren't allowed to own that stock. They have to sell it, and then take that cash and re-invest it in the "next piece of convertible paper."

Because the demand is higher than the supply, institutional investors are also more than willing to look at companies they used to consider too chancy. Now, "more and more companies with higher risk profiles are getting access to the convert market. It's a matter of supply and demand," Hurwitz said.

"It's an extremely vibrant convert market," Robertson Stephens' Dyson added. "The biotech industry has moved into the crosshairs of exactly what the convert market wants."

There's a downside, of course. This is a debt, after all, and the company is obligated to repay the principal amount in the future. The company is betting that its stock price will continue to rise, but if it falls instead, and the company lacks sufficient cash to support the debt, then it's in trouble, Hurwitz added.