Specialist drug-maker Covis Pharma is having a rough time in the primary market, with lack of investor demand forcing it to reduce the size of a euro note, completely scrap a proposed dollar bond and offer more generous terms on its loan package.
Almost two weeks ago, the B2/B rated issuer announced it was looking to print US$475m and US$375m-equivalent euro five non-call two-year senior secured notes to refinance existing debt as well as debt incurred through its acquisitions of drugs from AstraZeneca. Lead Barclays had signalled that the tranches were expected to price on January 28.
But despite what some analysts saw as attractive IPTs of 7.5% and 7% areas for the dollar and euro notes respectively, the issuer has had to completely remove the dollar tranche and downsize the euro leg to US$350m-equivalent, according to market sources. Concerns around concentration of its product portfolio and growing competition in key markets have played on investors' minds
"There are several specific risks to price in, including the significant drug concentration in the portfolio, the challenges facing the three key brands, and also some subordination compared to the senior secured term loans,” said Remi Ramadou, senior credit analysts at Spread Research.
Ramadou highlighted the fact that diversification in both the company’s products and end-markets is very low. Its top three drugs account for over 66% of total sales, whereas in the case of peer Cheplapharm, only 27% of its totals sales are from its top three products.
Sales of some of the firm’s key drugs are also coming under pressure from increased competition. Take Feraheme, a drug used to treat low levels of iron and one of Covis’s biggest sellers. Competitor Sandoz last year introduced a generic version of the drug, reducing Covis’s market share by 33% and forcing the company to cut prices to stay competitive.
“The entrance of the Sandoz generic is expected to have a material impact on Feraheme’s business activity level and market share,” said Ramadou. “We estimate that Feraheme’s sales will be halved following the introduction of the generic.”
Analysts at both Moody’s and S&P agree that sales of the drug will likely drop by 50% over the course of the year, which will have a considerable impact on Covis’ finances, given that Feraheme represents almost a third of the firm’s total sales.
Not everyone is as negative on the new issue and some see 7% for the euro tranche as an attractive level to take on exposure to the credit.
“We see fair value on the euro senior secured bonds closer to the 6.5% area, following the recent softening in the secondary market,” said Si Yong Ng, an analyst at Lucror Analytics. “Still, we view the IPT of 7% as attractive, and recommend investors participate in the bond offering at the current price talk.”
To compensate for the reduction in size of the overall bond offering, Covis has increased the size of a five-year TLB to US$550m from US$350m, and added a US$300m seven-year second-lien term loan.
“Clearly, in the context of rates and inflation, loans have had a better start to 2022 than fixed-rate bonds, so it is not too surprising to see more issuers pivot towards them, especially when they become a bit stuck on the bonds side,” said one leveraged finance banker.
But in a sign that concerns around the prospects of Covis’s business are not limited to bond investors, the issuer has had to considerably alter the terms of its five-year TLB and investors have said that they believe that both the bonds and the loans have been struggling.
Pricing has been widened to 650bp over SOFR, from a guidance of 625bp, and the discount adjusted to 93, from 98-99. The call protection has also been extended to 12 months, from six months, according to Lucror Analytics. Pricing of the new debt package is now expected later this week.
Barclays declined to respond to a request for comment.