The biotech sector has been whacked during the stock market correction, but companies with approved drug products have generally fared much better than early-stage peers. That doesn't provide complete protection though.
PTC Therapeutics (PTCT) saw shares drop by 13% after announcing an up to $1 billion financing deal with the life sciences arm of Blackstone (BX). Investors were so distraught with the terms of the financing that they overlooked the company's shrinking operating losses, strong third-quarter revenues, and increased full-year 2022 revenue guidance.
Were the details really that bad, or are investors overreacting?
A Successful and Frustrating Stock to Own
Words such as "innovative" and "diverse" might come to mind when investors think of PTC Therapeutics. "Frustrating" might make the list, too.
The company has earned regulatory approval for six different drug products. Not only is that more than most drug developers achieve, but it has PTC Therapeutics on pace to generate roughly $500 million in full-year 2022 net product revenue. Despite a rare level of commercial success and a promising pipeline, the business is valued at only $3 billion.
Management expects to generate full-year 2023 net product revenue of about $500 million, although including collaboration and royalty revenue means the business is expected to generate just shy of $800 million in total revenue for the year. That's an impressive haul.
More important, the drug developer is starting to shrink operating losses, which suggests breakeven or profitable operations could be over the horizon. The business is on pace to deliver an operating loss of about $300 million in 2022. That's still a steep loss, but would mark a significant improvement from 2021.
Therein lies the challenge. Drug development is very expensive and PTC Therapeutics ended September 2022 with only $288 million in cash. That's not nearly enough to continue supporting the ramp of approved products, let alone advance drug candidates through clinical trials.
Up to $1 Billion in Funding with Strings Attached
PTC Therapeutics was always going to need to address its shortening cash runway. Deteriorating market conditions certainly didn't help, but the company can still leverage its commercial portfolio to wrestle away more favorable terms from financiers compared to precommercial peers.
The financing deal with Blackstone isn't actually that terrible, although it will result in dilution and increase the company's debt balance. The up to $1 billion in funding has four components:
- $300 million from a term loan secured by three drug products and two drug candidates
- $50 million from the purchase of common stock
- $150 million available from delayed draw debt for up to 18 months after the deal closes
- $500 million available from a credit facility
Management expects the first two components to provide $350 million in capital at deal close. The remaining $650 million is optional and may not be fully tapped.
Investors might be freaking out about using multiple assets as collateral to secure the term loan. On the one hand, that helps to lower the interest rate to 7.25% (plus the secured overnight financing rate) and extend maturity to seven years. An unsecured loan would not be as favorable. On the other hand, putting up assets as collateral is always enough to make investors a little squeamish.
The relatively small stock purchase by Blackstone is also disappointing, although it is first and foremost a credit-focused asset manager.
Not the Best Terms, but Not the Worst, Either
The simplest way to describe the financing deal is with the same word that has haunted investors for years: frustrating. The company could have raised capital in a simpler public offering or private placement of common stock--if it was more respected by Wall Street. But the lowly $3 billion market cap and souring market conditions made that a less favorable option.
The financing terms aren't terrible given the circumstances. The deal with Blackstone will provide a little over 12 months of cash up front, which the company can stretch if operating losses continue to improve in 2023 and early 2024. The remaining credit could be partially tapped to help the business navigate the coming economic downturn, too.
In other words, by the time the upcoming recession passes, PTC Therapeutics could have a clear path to at least breakeven operations. But if the product portfolio stalls or assets fail in clinical trials, then investors might be exposed to more pain.
