Stock Watch: Debt And Biotech Do Not Mix

In late 2005 I was kicking myself after Novartis AG announced the $5.1bn acquisition of the 58% of Chiron Corporation that it did not already own. Earlier in the year I had decided that Chiron had much of what I was interested in as a potential biotech investment. Despite remaining unprofitable, Chiron had a vaccine division, a diagnostics division and a biopharma portfolio. The only fly in my investment proposition ointment was that Chiron had more debt than cash. In 2005, the federal funds rate was just over 3%, on its way up to a peak of just over 5% in 2007. I was worried that an indebted loss-making company like Chiron could suffer if its interest bill rose and outpaced its sales growth, forcing a spiral of more debt issuance and increased losses. In the event, my worry was academic because when Novartis bought Chiron the much bigger acquirer assumed the nearly $1bn of Chiron’s long-term debt onto its balance sheet without batting a corporate eyelid.

So, from 2005 on I tried to learn from my experience and began to discriminate less against indebted biotech companies particularly in the low interest rate environment after 2007. However,...