Monday, March 27, 2000
Events of the past few weeks have illustrated both the tremendous opportunity and the potential pitfalls of this year's most popular fundraising vehicle, convertible debt.
On the one hand, drug delivery company Biovail Corp. International earlier this month raised $300 million through a convert deal, demonstrating how companies with products and profits - or close to them - can use these vehicles to tap into new pools of investors, raising a lot of money with less dilution than straight equity.
On the other hand, the 33 percent plunge in the BioCentury 100 index of biotech stocks since March 3 provides a note of caution for convert enthusiasm when common shares are at historically high valuations: if the market goes into a prolonged downturn and the underlying stocks cannot beat their conversion prices, companies could find themselves owing a lot of money.
In addition, for technical reasons, these deals also increase
the short interest in the underlying stocks. But overall, companies doing these
deals see little to worry about. Indeed, 21 convert deals have been done so
far this year, almost matching the numbers in 1999 and 1997 (see "Convert Stampede",
A2, and "Biotech's Convert History", A4).
Probably more significant than the absolute number of convertible offerings is their size: 18 deals have been done this year for more than $100 million - versus a total of 17 for the entire period from 1994 through 1999. And although BVF is the most recent example, it is far from the smallest deal, as Sepracor Inc. (SEPR) and Millennium Pharmaceuticals Inc. (MLNM) each have topped $400 million in their deals this year.
Indeed, 30 percent of the $14.1 billion raised by publicly held biotech companies this year was through convertible debt.
Moreover, it doesn't appear that the bar is being lowered. The most junior company that has raised convertible debt this year is Alexion Pharmaceuticals Inc. (ALXN, New Haven, Conn.), which has five pivotal Phase II efficacy trials underway.
"A typical convert buyer probably sees it as a Phase II company, but equity buyers know these are efficacy trials and understand what this means," said President Leonard Bell. "Whether you call it Phase II or Phase III doesn't mean anything - you need two pivotal trials for registration. So I don't see it as lowering the bar."
The current interest in converts is in sharp contrast to attitudes
in early 1993, when the funding window was barely open and many companies tried
to do deals that weren't straight stock. The "toxic" debt deals done at the
time elicited broad concern, even among fund managers who liked the companies
making the offerings. Thus Sarah Gordon Wild, then at Amerindo Investment Advisors
and now at Lone Pine Capital, said at the time, "Debt turns me off, unless the
company is within one or two years of product launch." Added Kevin Wenck of
G.T. Global American Growth Fund, "Junk bonds for biotech companies? You've
got to be drunk" (see BioCentury, Jan. 11, 1993).
Tapping a new pool
These securities are bringing