Stock Watch: Debt And Biotech Do Not Mix

Debt Raises Are Poor Substitutes For Licensing Or Acquisition

Even with higher interest rates, some debt on the balance sheets of profitable biotechs is healthy. However, among loss-making biotechs and in the current environment, raising new debt has unhealthy connotations.

Andy Smith
ANDY SMITH OFFERS A LIFE SCIENCE INVESTOR'S PERSPECTIVE ON BIOPHARMA BUSINESS

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...

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