By William Hoffman
NEW YORK, Sept 25 (IFR) - Gilead Sciences generated huge investor demand for a new US$7.25bn seven-part US dollar bond deal to fund its US$21bn acquisition of Immunomedics.
The biopharmaceutical company hopes the M&A deal will fast-track its ambitions to build up a substantial oncology business through Immunomedics' breast cancer antibody drug called Trodelvy.
Wednesday's bond offering was Gilead's first since 2017, according to IFR data, and that scarcity value and a strong credit story helped bookrunners build demand to over US$32bn by midday, according to an investor and sources close to the trade.
Gilead was expected to fund the deal with US$6bn of newly issued debt and US$15bn in cash on hand, according to a company press release. But outsized demand helped management take more size, closer to the US$8bn predicted by S&P and research firm CreditSights.
Bookrunners Barclays and Wells Fargo priced two floating-rate note tranches – US$500m of one-years at three-month Libor plus 15bp and US$500m of three-year non-call ones at plus 52bp.
The other five tranches were fixed-rate notes, comprising a US$2bn 3NC1 at 60bp over Treasuries, a US$750m seven-year at 75bp over, a US$1bn 10-year at 100bp over, a US$1bn 20-year at 120bp over and a US$1.5bn 30-year at 140bp over. Initial price thoughts were set in the area of Treasuries plus 80bp, 110bp, 125bp, 150bp and 165bp, respectively.
Gilead is rated A3/A, but S&P made it clear in a report last week that it intends to downgrade the company by two notches to BBB+ with a negative outlook once the new debt financing is completed.
"Our expectation for the rating reflects our base case for adjusted debt leverage to generally remain in the 2x–2.5x range, significantly above prior levels," S&P wrote in the report.
S&P focused on the Gilead's net leverage and is worried about the company's cash position after it uses a substantial sum for the acquisition.
However, one investor said the buyside typically prefers to focus on gross debt to Ebitda metrics, and looking at it from that perspective the erosion is not as material.
Additionally, printing US$3.75bn at seven years or less along Gilead's credit curve is a strong commitment to deleveraging in the near term, the investor added.
In a presentation to investors ahead of the announcement Andrew Dickinson, CFO of Gilead, said that the company's free cashflow, minimal near-term maturities and history of deleveraging after previous large acquisitions give it ample runway to bring down debt.
In the second quarter, Gilead reported some US$8.6bn of free cashflow over the last 12-month period (down 10% year-on-year), according to CreditSights. The company has no bonds maturing this year and just US$2.25bn due next year, according to Refinitiv data.
Furthermore, the company was able to deleverage in the wake of a US$11.9bn acquisition of Kite Pharma in 2017 and a US$11bn buyout of Pharmasset in 2011.
"We knew a downgrade by S&P was a possibility given their focus on net debt," Dickinson said. "This debt composition paired with our free cashflow generation gives us ample flexibility to reduce leverage as appropriate."
However, the investor noted that there remains substantial M&A risk with the name.
According to the investor, management had guided that even after this US$21bn acquisition it maintains the ability to execute another M&A deal in the US$20bn range.
Dickinson on the roadshow presentation tried to roll that statement back, saying the company cannot rule out large M&A completely, but it has no plans to execute such a deal in the foreseeable future.
"They are going to migrate down to a Triple B credit across the board, because I don't think the Moody's rating holds long-term," the investor said.
"If you're a buy-and-hold investor buying this deal today, I would make sure you're comfortable holding it more as a high Triple B name as opposed to a low Single A name."
Investors piled in despite those risks, noting this was the company's first issue since pricing a three-part US$2.25bn bond sale in 2017 and the first opportunity to take duration at the 30-year part of the Gilead curve since 2015, according to IFR data.
A sparse secondary curve made new issue concessions hard to calculate, but CreditSights noted that the bonds should be priced close to AbbVie (Baa2/BBB+) and Amgen (Baa1/A–/BBB+) outstanding bonds.
Looking at those same comparables, the investor said spreads tightened in line with fair value on the seven, 20 and 30-year notes but noted there was some 5bp of premium on the 10-year.
But despite the tight spreads, M&A risks and coming downgrades, the buyside sees high growth potential in the acquisition, the investor said.
"It's in the cancer space, which is an area of high unmet medical need," the investor added.
"Immunomedics has only one drug approved for breast cancer but there is an ability to expand the use to other forms of cancer, so I think people are focused on the long-term potential and its ability to help diversify Gilead, which is pretty reliant on the HIV space right now."
(This story will appear in the September 26 issue of IFR Magazine.)
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