Good morning, everyone, and thank you for joining us today, both you in person as well as those who are joining us via the webcast. Thank you to Buchanan and Henry for organizing this. Again, this is the annual results presentation for BioPharma Credit PLC. When you look at the slides, there are a number of disclaimers, which I encourage everybody to read as part of the presentation. Starting with the team page, many of you know me already. I'm Pedro Gonzalez de Cosio. I'm the CEO of Pharmakon. My background is in structured finance, having worked about 20-odd years in different forms of structured finance at multiple investment banks. I started Pharmakon in 2009 together with Pablo Legorreta, who is the Partner on the right.
Pablo is the Founder and CEO of Royalty Pharma, the largest investor in pharmaceutical royalty streams. When we started Pharmakon, there was an opportunity to invest in debt backed by royalty streams. Royalty Pharma made the strategic decision of not going into the debt business, given that it's a completely different risk-return profile. Our partner in the middle, Martin Friedman, he joined us close to 11 years ago. His background is in healthcare investment banking. On the left hand side, we have the three other members of the investment group, Scott, Simon, and Ankit. Scott is a Bioengineer, who was covering medical device companies at Evercore as an Equity Analyst when we hired him. Simon has a PhD in biophysics. He was covering oncology companies at Deutsche Bank when we hired him.
Finally, Ankit, who is our most recent hire in the investment team, he worked for five years at Citi doing Healthcare Investment Banking. Patrick Fisher runs Investor Relations, and Jeff, Adriana, and Laura make up the back office. I still have some people from Royalty Pharma on this slide, particularly the team from the research and investments group, which continues to be a resource that is available to us whenever we want to have a discussion on a given disease or a given drug. All in all, a growing team within Pharmakon. To the results. There was a fairly extensive write-up published this morning with a lot of detail, but these are more or less the highlights. In essence, the shares closed the year at a slight discount to NAV.
Right now they're trading at or slightly above NAV. The net income for the year was below that of 2020. The difference was approximately $50 million lower. The main reasons behind the decrease in net income is a combination of higher debt expenses during 2021, lower money market rates during 2021 than 2020. Even though they had the same cash balance, that hurt a little bit the income from our money market interest. Finally, lower prepayment fees earned during 2021. We really didn't have any prepayments versus 2020. That made up the key difference. There weren't any changes in the portfolio, no changes in the valuation of the portfolio, but it was mainly all of those factors.
The dividend for the year was still $0.07, as we had discussed. The leverage remained at zero. That is expected to change in the fairly near term. As soon as the Collegium transaction closes, we will draw on our credit line for the first time. Briefly again on the investment opportunity and a reminder for those who do not know us that well as to what we do. BioPharma Credit PLC is an investor in debt issued by Life Sciences companies and backed by approved Life Sciences products. By life sciences products, we mean drugs, devices, diagnostics. We do not lend to hospitals or service companies. We only assign collateral value to approved products in their approved indications and in their approved territories, meaning we are not taking clinical trial risk, we're not taking approval risk.
That pretty much separates us from most of the better-known risks in biotech that lead to a lot of volatility in biotech. We tend to be immune from that because from our perspective, even if the research and development fails, if all of the pipeline products fail, the loans are expected to perform well because the approved product should be sufficient to service the debt. This is not such a limiting factor. Our industry is substantial. Pharmaceutical sales alone are over $1 trillion in sales. If you add devices and diagnostics, that takes you to about $1.5 trillion and growing. This is also an industry that spends heavily in research and development. As an industry, it's probably the largest spender, close to $200 billion a year. This is what drives the need for our capital.
That's what drives our business as companies continue to invest in research and development. Pharmakon Advisors, the investment manager of BioPharma Credit, was the first dedicated lender to the space. We continue to be by far the largest and the leader in the industry. Over the 12, 13 years that we've been in business, we've invested over $6 billion across 45 transactions. To date, we haven't had a single default, much less loss of interest or loss of principal. We started investing out of four private funds that have been fully vested, meaning we've returned all capital to investors. Those funds generated a net return of 10.4% unlevered. Pharmakon advises two, we have two funds, BioPharma Credit PLC, but we also have a private fund called BioPharma V.
BioPharma V currently has $1.3 billion in capital. Both funds invest side by side. As managers, we offer 50% of every transaction to both funds. If they have the capital, then they will share 50/50. If one of the funds cannot take the full 50%, it'll take as much as it can, and the excess will be offered to the other fund. This structure really helps both funds because it allows us to do fairly large transactions without overly concentrating any one portfolio. BioPharma Credit PLC itself, again, we IPO'd in 2017, and we're targeting a net return of 8%-9% once substantially invested and targeting a $0.07 dividend. On that note, as you can see, the dividend has been fairly consistent.
We started with a portfolio of seed assets and cash at the time of the IPO. The initial target dividend was $0.04, which we started paying right from the start. We were able to reach our $0.07 target annualized fairly quickly. Starting in the second quarter of 2018, we've continuously paid this $0.07 annualized dividend together with a special dividend at the end of the year if on any given year net income ends up being higher than $0.07. We intend to continue to pay this dividend. With regards to the share price, there's been almost very limited volatility, other than for the dip in March of 2020 when the COVID scare caused a big dip across every market. As you can see, it was pretty quick to recover.
This chart here shows the evolution of the portfolio over the years since IPO. Again, at the time of IPO, we had about $350 million in seed assets, $340 million in seed assets that were fairly short duration assets. To us, it was important that the fund was able to generate income from the start and not just have cash. Those are the dark gray bars. As you can see, those amortized fairly quickly. By the end of 2018, they had been fully repaid. In the process, they were being replaced by new investments. The bars in the light gray, those are investments that we started to make on behalf of BPCR, but that have since been prepaid.
Then the green bars show the current investments owned by BPCR, that as you see, they've been growing, they've been diversifying. As of the end of the year, we had slightly less than $200 million in cash. That's the blue column. As soon as we close the Collegium transaction, we're going to have to redesign this chart because we're going to go into a negative position because of the leverage. We had an average cash balance of around $200 million over the past year, which is similar to the cash balance in 2020. We look to drop that significantly during 2022, and that will put an impact on the cash run. Oh, sorry.
One important note to make here is we do make a lot of investments, we recycle the capital with fairly quickly. Since we started BioPharma Credit PLC, we've been repaid $1.4 billion, right? We've had to recycle that. In total, since the IPO, we have invested $2.3 billion. This chart here shows the current portfolio, again, $1.3 billion. Again, this is excluding the Collegium transaction, which is expected to close any day now. Of this $1.3 billion, that's 12 different investments. There's already been five investments that have been prepaid. Overall, since we started BPCR, we've made 17 investments for the fund.
As time continues to progress, we expect the number of positions in the portfolio will continue to grow. We believe that it should peak at around 20 investments at some point in the not too distant future. It all depends on the pace of investment. There's been a lot of activity to these investments in these past few months. For example, Global Blood Therapeutics, that was a $150 million loan. We increased it by $100 million last November. Collegium, I will get into more details, but as you know, we're in the process of increasing the size of that loan. BioDelivery Sciences is going to be prepaid because it's getting acquired by Collegium.
Evolus, Coherus, and UroGen are all very recent loans done, starting in December of last year. The portfolio continues to grow, the portfolio continues to diversify. When you look at the IRR to maturity column, right, that 10%-12% range continues to be the rate that we're underwriting to. It's the same rate that we've been underwriting to for the past 10 years. There hasn't been any pressure on our returns. And again, that's the expected IRR to maturity, assuming no prepayments. We do expect that most of these investments will be prepaid early, and the resulting IRR to maturity will be higher because we're amortizing the upfront fees over a shorter period of time, and we do get some prepayment fees, et cetera.
As of right now, the largest position is Sarepta at 25% of the portfolio. As soon as we close Collegium, there's going to be now two larger positions, both Sarepta and Collegium in the, in the upper 20%. We intend this to continue to decline as we plan to make more investments for the remainder of the year. We're going to be drawing on approximately $150 million of debt. The facility has an accordion feature up to $300 million. This slide shows the individual investments. We've now had to separate them into two because the font started to get a bit small.
Again, as a reminder, the common characteristics of the portfolio, the first one, which is quite unique to the direct lending space, is that all of our borrowers are publicly traded companies. In most direct lending funds, there is not a lot of information on the ultimate borrowers. It's really the investment manager who will tell you what the borrower does. In our case, there's a lot of information available on our borrowers. The second thing in common is that with the exception of the Bristol Myers transaction, everything else is a senior secured loan, so a plain vanilla corporate obligation of the borrower, structured under standard loan agreements, where we have as collateral at a minimum the cash position of these companies as well as all of the rights to their approved products.
As you can see from the numbers here, the cash balances tend to be large. In many cases, companies will have more cash than debt outstanding. That's because they're investing heavily in research and development. They want to make sure that they have enough capital for the next two to three years to continue to invest in R&D uninterrupted. Obviously, as lenders, we cannot just rely on that cash, right? We have to focus on what happens when things go badly and the cash runs out. That's where the rights really become important. These product rights are a very portable form of collateral. Every year, there are dozens of M&A transactions of companies buying each other, buying each other's products.
Whenever a company seeks to change a little bit strategic direction and puts a product up for sale or a division up for sale or whenever there's a bankruptcy and products come up for sale, you tend to see very healthy M&A processes with a number of interested buyers. Just to give you an idea, the FDA approves about 50 drugs each year. There's many more IPOs in the sector than drugs getting approved. An approved drug is a really scarce resource that's very valuable to other players in the industry. That is an ideal form of collateral.
Again, we've never had to put a company in bankruptcy ourselves, but it's been encouraging to see, other cases where, there's been, financial difficulties and after bankruptcy, lenders for the most part have been able to recover, 100% of their money back, by selling the underlying drug. Other common, things to note about the different investments, the maturity, they range from 3 years-7 years. For the most part, our loans will be 5 years. When loans are longer than 5 years, they will always amortize early. In fact, most of these loans do begin to amortize after 2 years-3 years. The majority of the loans are floating, right? We do seek to have a floating exposure.
Now our floating loans, they always have a floor that is higher than the reference rate at the time we make the loan. We're not taking downside exposure to interest rates, but we do benefit in the event rates, rise, slightly. Now, all of these loans have a fairly short duration, we shouldn't be impacted much anyway for changes in interest rates. With that, I want to move to the Collegium transaction, which is the most recent announcement and which will become the second-largest transaction, if not kind of like identical to Sarepta. As a result, it's important to understand why we really like this transaction as a lender. The loan itself, it's a $650 million loan.
BioPharma Credit PLC will take 50% of the loan with BioPharma V taking the other 50%. The use of proceeds is going to be to repay the existing Collegium debt to pay and to acquire a BDSI. This is being used to pay the BDSI equity holders, as well as to repay the BDSI debt, which is held by BioPharma Credit PLC. Once the dust settles, and the transaction closes, which again is expected to be any day now, we will have one new loan to Collegium, which will be a 4-year loan that is going to be amortizing fairly quickly.
The first $100 million is going to amortize on a quarterly basis over the first year, and then the remaining $550 are going to amortize straight line during the remaining three years. Very quick amortization. The reason for that is that the company is going to be throwing off a lot of cash, right? If you look at the combined EBITDA using analyst consensus for 2022, that's over $200 million, and that's excluding synergies. The company's has announced that including giving some credit to synergies, the debt to EBITDA is going to be less than 3x . Very limited leverage for again, a company that is going to have combined sales of over $500 million and EBITDA of over $200 million and growing.
As the debt amortizes and EBITDA increases, then the leverage of this company is going to decline very quickly from the already low, 3x . Our comfort with this investment dates back many years, right? We were initially introduced to the space in 2015 when Pharmakon helped finance the acquisition of Nucynta. That was a drug sold by Johnson & Johnson that was acquired by a U.S. company called Depomed. We helped structure a $575 million loan in 2015. At the time, our funds weren't that large, so we could only take $150 million, + $50 million with co-investors. But anyway, a few years later, Depomed was acquired by Collegium, right?
Finally in 2020, they acquired all of the rights to Nucynta. At that time, we made a $200 million loan to Collegium. In the interim, in 2019, we gave an $80 million loan to BDSI, which was marketing Belbuca. Again, this is over 7 years that we have been constantly following these drugs, diligencing these drugs, speaking to these physicians, running surveys of these physicians, really having a good understanding of this, of this market. Again, I talked briefly about synergies. These three drugs are sold to the same physician, so the sales reps will be able to talk about the three drugs with the same physicians. These are drugs that are prescribed by pain doctors, pain specialists.
They do not compete against each other because they have very different mechanisms of action, and they benefit different patients differently. There will be a lot of benefit to that. Continuing briefly with the track record, and what we hope to expect for the future. As I've mentioned, the rates that we have been underwriting to have been consistent over a number of years. That has resulted in having very consistent returns in our investments. What this chart shows are all of the realized returns of past loans that have been fully repaid, meaning there are no there are no valuation assumptions here. These loans no longer exist. This is cash out, cash in. As you can see, there's been no cyclicality to our returns. There's been no correlation to other markets.
There's been pretty steady over 10 years+ , including these three dots that are prepayments to BPCR investments. We do expect that we will continue to generate individual returns within this range. The out-performers in this case were loans that were prepaid early and therefore had a large make-whole. The last outperformer, that was Sarepta. Sorry, that was TESARO. That was a $500 million loan that was acquired by Glaxo for $5 billion one year after our loan. That gives you a sense of the loan to value. As a result, they had to pay us back our principal, accrued interest, prepayment fees, and another full year of interest payments. That's what resulted in that 25%. There is no equity component to our excess returns.
That 5% underperformance, that was not a loan. That was a capped royalty in a structure that we're no longer using. We are going to have probably two more dots to add to this slide, which will be BDSI and the first tranche of Collegium, which will be within this range. The market where we participate, as you know, the companies that we lend to are frequent issuers of equity capital. When share prices are doing well, it helps these companies fund themselves in the equity markets, and it helps feed a number of IPOs, which really helps us in the long- term because these IPOs are helping fund companies that will become our borrowers down the road once they get their products approved.
On the flip side, having a strong equity market also makes the issuance of convertible bonds more attractive to these companies. Issuing converts when your shares are trading at or near their all-time high, it's not such a hard decision, right? In periods like 2020, when the stock market, especially for biotech, was booming, we saw significant issuance of convertible bonds, close to $18 billion in Life Sciences alone. Many of those companies could have benefited from borrowing from people like us, right? Instead, they wanted to do a convertible bond. That's what led to a some slowdown in our deployment of capital during those years. Again, it doesn't affect the quality of our loans, and it doesn't affect the rates of our loans. It simply affects how quickly we're deploying capital.
We're not going to be chasing the market. That turned around towards the end of last year. We started to see a softening in the equity markets, and that's what drove the pickup in activity that I mentioned starting towards the end of last year. What's going to keep driving us for the remainder of this year that we continue to see many opportunities, and we don't see the convertible market being that attractive. I'm just going to make one. The slides that were shared and that are up on the screen, sorry, and on the website, have a lot of detail on the different loans. Would be very hard to go over all of them in detail today.
I'll just go to the other large investment in the portfolio, which is Sarepta, so that, again, people understand why we feel so comfortable having these two large positions. I already described Collegium that has this low leverage and generating over $200 billion of EBITDA. The case of Sarepta, it's different but the same conclusion, right? Sarepta is a company that has three approved products. Exondys, Vyondys, and Amondys. These three drugs are used to treat Duchenne muscular dystrophy. That's a devastating disease that affects boys, that sadly puts most in a wheelchair in their teens and few live past their thirties. These are the first drugs that are actually working at the disease level as opposed to just trying to work on the symptoms.
They help increase the level of dystrophin production. These three drugs are expected to have peak sales of around $1 billion by analyst estimates. Already for this year in 2021, they generated sales of over $600 million, right? 40% increase over 2020. These three drugs have a very long IP duration, and they have orphan exclusivity, so there is a lot of stability to these cash flows. One of the drugs is older. Exondys has been around for a number of years. Vyondys and Amondys, they were both approved post our loan, so they still have many, many years to go. These drugs have very high gross margins in the 90s, right? Operating margins in the 70s.
Meaning if Sarepta were to stop investing in research and development and just focused on selling these three drugs, they would start to generate hundreds of millions of dollars of cash, dollars of cash flow, overnight, you know. Again, that's what gives us the comfort. The reason why they're not doing that is because they have a very impressive, very aggressive research and development program, which again is not the success of that program is not necessary to support our debt or to support the existing products. That's to bring products number four, five, six, and seven to the market. Last year alone, they spent close to $800 million in research and development. That's what drives the need for capital, right? That's what makes the bond market, pretty difficult for borrowers like them.
With that, I am going to stop, Henry, and offer up for questions.
Thank you very much indeed, Pedro, for that presentation. We're going to take questions from the room first. Please indicate whether you'd like to ask a question, wait for the microphone to reach you and state your name. Thanks to those who have submitted questions online. Reminder for those listening remotely to do so in the question function indicated, and we'll come to you shortly after those in the room have been addressed.
Hi. Priyan Rayatt, Berium. Just quickly, how much has BioPharma V called?
BioPharma V has called about $1.2.
Secondly, the debt terms for BioPharma Credit, the accordion facility you mentioned. Can you just remind me the term on that?
The term is three years.
three years. Thank you.
Can you just comment on the cash position and the drawdown? I think it was $130 million odd at the end of February, and where you expect that to be when Collegium is drawn imminently.
Sure. We do need to conserve some cash to make sure we have the dividends, right? Other than that, we're going to be at zero cash, right? We're going to be drawing... When we finance Collegium, we're going to be using all of our cash and drawing on the revolver.
just where you expect the leverage to be?
We expect to draw $150.
$150.
It's still $150 on $1.5, $1.45 billion.
Hi, Sachin from Stifel. Could you just go through the terms of the leverage again? I guess if it's a LIBOR floating leverage facility, given where LIBOR is up, where LIBOR is today, I guess that's gone up, whereas your investments have LIBOR floors, so you might see a bit of a squeeze until the floors dissipate.
Right now LIBOR is pretty close to 1%, so it's not going to be a huge, a huge difference. It's kind of like within the range. The new loan is, we switched it to SOFR, you know. Our positions we're going to be switching them to SOFR also over time. It shouldn't have a big impact. Still the spread is huge between what we're charging Collegium and what we're paying.
Sorry, one more from me. What's your appetite to increase the leverage from here in terms of what you see in your pipeline, or are you going to sort of wait for some of the debt to, in the existing portfolio to amortize before doing further deals?
Right now we have, again, the accordion goes up to $300 million, right? Anything in excess of that will have to be renegotiated with JP Morgan. We can go up to 25% gearing, which would be $350 million, right? Without board approval. With board approval, we could go up to 50% gearing. To be honest, I do think there's room to increase the leverage. Right at this instant, there's no intent to go beyond the 25%.
Thanks.
Great. We have some questions online. One from Tom Furlong at Jefferies. Are you able to give any details on the open offer warrants, where the strike price was lowered in October 2021?
The exact strike price of those warrants?
I think any details around that.
The warrants were restruck to the share price at the time that we got the new warrants. I do not remember exactly what the price was, but I can follow up with that.
No problem. A question here a reminder on the performance fee arrangements on the trust.
Yes. The performance fee is calculated annually, and it's based on the total income, including change in NAV, for the fund, during the year. The performance fee's 10% of income, subject to a 6% hurdle and a 50% catch-up, meaning that at less than 6% there's nothing. Between 6% and, I believe something like 8.2%, we're not getting our full incentive comp. I think after 8.2% we start to get the full 10%.
Great. One final question from online. Could you just remind us, the LIBOR rate, used for the interest rates?
Three-month.
Three-month. Perfect. That concludes all the questions that we have online. Are there any further in the room?
Thanks. Shonil Chande with Liberum. Just curious in terms of the lifetime of the fund and whether you've seen. You mentioned that there's not a specialized debt market, and there's not that much competition from or there aren't many large dedicated lenders. Have you seen that evolve much over that five, six years? Or do you think that this is a particularly specialized area of the market? Just building on that, are you seeing any kind of difference in the competition you face when it comes to origination?
Sure. We have seen, over the 13 years that we've been in business, competitors come in from different sides. Most of our competition. Well, we always say that our biggest competitor is the convertible bond market, right? Excluding that, our largest competitors are either the large equity funds, healthcare equity funds that have teams like ours that really understand the science of the products that do debt from time to time, as well as hedge funds, large royalty funds that are also healthcare dedicated, similar to us, that are doing all sorts of investing, including debt from time to time. What differentiates us from them is that, number 1, they're targeting higher returns because they're taking greater risk. Number 2, they are doing it with twice our fees, right?
They are 2 on 20 funds, while we're a 1 on 10 fund, which means that we tend to have a much lower cost of capital, so that whenever we come across a transaction that we really like from a credit perspective, we tend to win. Doesn't mean that we win every time. That would be a problem, right? But we do tend to win. However, the market works because we say no very frequently, right? We, we don't do every deal. We say no 8x out of 10. When we say no, our competitors will most likely do those transactions at slightly higher rates than what we would normally do. That works very well because that's helping,
that's using up our competitors' capital, and that's also helping fund companies that maybe today I don't feel comfortable lending to, but in 2, 3 years' time, I might want to have another look to refinance that more expensive debt with cheaper debt. In fact, some of the positions in our portfolio are precisely refinancings of deals that we said no to originally. There's also been some marginal entrants from other, more plain vanilla lenders, right, that are dabbling into the Life Sciences space from time to time. I mean, I think that was expected. To date, it hasn't affected our rates of return. It hasn't affected the quality of our underwriting. Maybe we've missed a couple of deals that we would have done otherwise, but that doesn't hurt the returns. Sure. Yeah, Sajid.
What's your risk tolerance for concentration risk? 'Cause I guess I thought you had one large loan. Chances of doing another large loan was probably quite low. I'm just wondering, does that mean that any future capital that's recycled might be smaller position sizes, or would you do a 15% or a 20% position if it came up?
We're open to whatever comes, right. I mean, we to give you an idea of what's happening with Collegium, right. Collegium, before this transaction, if you add BDSI. I'm sorry, I'm going back on the slides, back to Slide 8 for those that are on the webcast. If you go back to Slide 8, Collegium and BDSI are these two, right. They made up more than 10%. Collegium has already amortized a lot, and BDSI has already amortized a lot. The two positions combined, when they started, would have been something like 18%, right. What we're doing is we're replacing that with a single position to Collegium that is backed by the same products.
As lenders, we're way better off lending to one company that has all of these products than two loans to these companies with these products, right? There's higher default risk if you have the products split across two borrowers as opposed to all these products in just one borrower. When you look at the number of the deals that we're doing, right? We did Coherus, which was $300, Evolus $100, UroGen $100. We continue to do that type of deals. We continue to have that expectation that most of our transactions will be in that range. We should never say no to a good opportunity that arises. No.
Excellent. Thank you.
If we do another large deal, then it's going to make Sarepta and Collegium much smaller, right, as a percentage. It's going to be helping decrease the concentration.
Fantastic. Thanks, Pedro. That concludes the Q&A. I'll pass back to yourself for any closing remarks.
Okay. No, thank you, everyone again for spending some time with us. We look forward to updating you about the closing of the Collegium BDSI acquisition, as well as any future investments. Thank you.