We've long been fans of biotech convertibles. Having said that, while Aegerion's optics aren't bad for today's market, they're not quite what we'd hope for from a relatively large deal from a modest-size, one-product biotech. Given the market capitalization, we'd have been more comfortable with a deal roughly half this size. Still, our credit view is reasonably constructive, and the convertible (especially as a five-year bullet) should give long-term holders the mix of upside and protection they seek.
Aegerion priced an upsized $300 million 5-year convertible new issue this week, which includes a $35 million private stock buyback from several holders swapping into the bonds. Given the size of the deal relative to the $900 million market cap, the buyback will be important in stabilizing the stock price. The stock has suffered massively over the past year due to concerns about the potential market opportunity for AEGR's sole product Juxtapid, emerging competition, and an ongoing government investigation into the company's marketing practices. However, credit quality is fairly strong with $104 million cash and no debt as of 2Q, combined with a modest expense structure that should be expected of an orphan drug company with no pipeline. If management can hit the revised guidance of $180-200 million in revenue for 2014, AEGR should exit the year free cash flow positive. The outlook for the credit will depend on the continued growth of Juxtapid and management's deployment of the deal proceeds to diversify the revenue base.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.