Investors are poring over a handful of pharmaceutical deals that came to market last week. Graceway Pharmaceuticals, Stiefel Laboratories and CHG Healthcare are shopping for a total of about $1.8 billion in credit, testing the appetite for risk in a market not entirely comfortable with the sector.
"You are taking a real risk," when you invest in a pharmaceutical credit, said one portfolio manager. Apprehension comes from the reality a drug may fail to obtain FDA approval, the drug could go generic, and the fact there are often competing drugs. "Generally [investors] have a lot of work to do," he said, commenting that an investor almost has to become an expert in the pharmaceutical field in order to understand the credit. "There's not one specific trend and you definitely aren't going to play all of them."
Another investor said there are some obvious choices when it comes to investing in pharmaceuticals. "A drug that's already in the market--a proven name--tends to do well," he said. "But you don't want to take a risk with a new name," he continued, mentioning torcetrapib, which was recently pulled from clinical development by Pfizer.
Citigroup held a bank meeting last Friday for a $290 million credit backing JW Childs' buyout of CHG Healthcare. The credit consists of a $50 million revolver, a $160 million "B" term loan, a $40 million synthetic letter of credit and a $40 million second lien. Price talk on the first lien is LIBOR plus 2 1/2-2 3/4% and LIBOR plus 6% on the second lien. The company filed for an initial public offering with the Securities and Exchange Commission in March, but decided not to proceed due to unfavorable market conditions, according to the filing. Calls to a company spokeswoman were not returned by press time. A JW Childs representative could not be reached by press time.
Graceway Pharmaceuticals also hit the market last week for $740 million to back its $875 million acquisition of 3M's pharmaceutical business. Bank of America, Goldman Sachs and Deutsche Bank lead the deal, which consists of a $30 million revolver, a $500 million term loan "B" and a $210 million second lien, according to a banker. Pricing could not be determined by press time.
At first glance, the company's EBITDA margins looked robust, one investor said. Graceway was formed in February as a partnership between private equity firm GTCR Golder Rauner and Jefferson Gregory, who is now chairman and ceo. Graceway, headquartered in Bristol, Tenn., focuses on acquiring and developing branded prescription pharmaceutical products. It announced Nov. 9 it would acquire 3M's pharmaceutical businesses in the U.S., Canada, Puerto Rico and Latin America for $875 million. As part of the transaction Chester Valley Pharmaceuticals, another GTCR portfolio company, would also be merged into the Graceway name. Calls to Constantine Mihas, principal at GTCR, were not returned.
Deutsche Bank is also leading an $848 million credit backing the approximately $620 million acquisition of Connectics by Stiefel, announced Oct. 23. The deal comprises a $75 million revolver, a $623 million first lien and a $150 million second lien. Pricing on the credit is LIBOR plus 2 1/2% on the first lien and LIBOR plus 5% on the second. An investor said its assets rest largely in its trademarks including Duac and PHYSIOGEL, but its drugs are still on patent for a long time. Stiefel and Connectics are pharmaceutical companies specializing in dermatology. Calls to a company spokeswoman were not returned.
