Primary Preview: Buysiders Considering Clinigen’s £410M, £200M TLBs Highlight Concerns Over Revenue Visibility for Services, Declining Revenue for Owned Products; High Barriers to Entry, Low Capex, Strong FCF Positives

Buysiders considering U.K.-headquartered pharmaceutical services and products company Clinigen’s £410 million euro-equivalent and £200 million seven-year first lien term loan Bs highlighted difficulties with revenue visibility and a lack of comparable issuers for the services side of the company’s business, in addition to revenue decline for the group’s owned products segment as concerns. High barriers to entry, low capital expenditure and free cash flow generation were seen as positives.

The company’s activities can be grouped into two broad areas - one that provides supplies and services to healthcare professionals and the pharmaceutical/biotech sectors, particularly for clinical trials, and another that provides a portfolio of medications owned by Clinigen. The owned products part of the business generated about 23.3% of the company’s £459 million net revenue in 2021. This part of the business has a high gross profit margin, which came to 81.5% during the period, because of relatively low selling costs. However, within this segment, the majority of revenue is generated by a small number of products, each of which is facing headwinds, lenders highlighted.

Because the majority of the company’s owned products are focused on cancer treatment, Clinigen has argued that it will benefit from a normalization of cancer treatment levels after two years during which cancer diagnoses were lower than usual because healthcare services were more focused on treating Covid-19, lenders said. However, the impact of the return to normal cancer treatment levels may not be as pronounced as the group hopes, one lender noted.

Meanwhile, each of the company’s most important owned medications faces significant competition from other medications, lenders said. For example, one of the key drugs in the company’s owned medications segment, Foscavir, an antiviral for the treatment for herpes virus infections, is facing revenue decline following the launch of a competing generic product last year, one lender said.

Meanwhile, another important owned drug, Proleukin, a biologic medication used to treat kidney or skin cancer, was the main cause of Clinigen’s profit warning last year which resulted in a 25% drop in the company’s share price in early June. The negative impact of Covid-19 is primarily due to the global reduction in hospital-based oncology treatments and delays to clinical trials, and demand for Proleukin was “significantly weaker than expected in recent months,” the company is reported to have said at the time.

Meanwhile, another product has faced a production stoppage because of particularly complex manufacturing, ratings agency Moody’s said in a report. In Clinigen's own portfolio of drugs, near-term challenges will result in a revenue decline of around 20% in fiscal 2022 with some year-over-year variability thereafter but generally no growth, Moody’s concluded.

Meanwhile, on the services side of the business, the company is very different from other pharmaceutical companies, which makes finding comparable issuers difficult, some lenders noted. However, when considering this part of the business, it is important to think of Clinigen as a business services company rather than a traditional pharmaceutical company, another lender countered. Clinical trials are expected to pick up pace as the impact of the Covid-19 pandemic subsides, however the unusual and very niche nature of some of the services provided means that revenue visibility for this part of the business is limited, one buysider said.

The company’s services include five areas: clinical supplies management, comparator sourcing, managed access programs, on-demand and partnered. The clinical supplies segment provides packaging, labeling, blinding and logistics needed for clinical trials. Comparator sourcing provides comparator drugs to compare the effectiveness of an existing treatment to a new clinical trial drug. Managed access provides access to clinical trial drugs for patients with unmet medical needs.

Finally, the last two services are less focused on clinical trials. The on-demand segment sources drugs that have faced supply shortages. And, because often pharmaceutical companies decide it is uneconomical to seek global approval for a drug that has been approved in one country, if a patient in a country in which a specific drug has not been approved could benefit from its use, Clinigen’s partnered segment can provide the medication.

The new debt is being raised to support the company’s take-private by Triton, which acquired Clinigen earlier this month under an all-cash deal of 925 pence per share, valuing the company’s equity at £1.3 billion, representing an enterprise value of about £1.6 billion. The deal also includes a pre-placed £140 million eight-year second lien facility, and the company also raised a £75 million-equivalent, six-and-a-half-year multicurrency RCF, which it will use for general corporate purposes.

Clinigen’s net revenue grew at a compound annual growth rate, or CAGR, of 20% from 2018 to reach £459 million in 2021. EBITDA grew at a CAGR of 16% during that period to reach £116 million last year, which was roughly equally divided between the owned products and services segments.

Net leverage is 4.6x through secured debt and 5.7x in total based on pro forma adjusted EBITDA for the 12 months ended December 2021 of £134 million, with some lenders saying there is some room for this to decline.

The deal includes a sizeable equity contribution of £878 million, representing 53% of capitalization. However, this means the sponsor may consider making an acquisition soon after the deal closes, which may also result in additional debt being raised, one lender cautioned.

Buysiders did, however, note a number of positive points to the deal. Firstly, barriers to entry across the business are high because of the requirement for regulatory knowledge and a well-developed network of contacts in the pharmaceutical, healthcare and biotech sectors. Meanwhile, the manufacturing process of Proleukin also has high barriers to entry because it is an intravenous, biologic medication that is harder to produce than a chemical pill, one lender said.

Ultimately, many of the services the company provides are activities that pharmaceutical companies could do themselves, but would rather outsource, the same lender noted. But other pharmaceutical services companies, including contract research or manufacturing organizations could seek to enter Clinigen’s niches, Moody’s noted.

Meanwhile, there is potential for Proleukin to also be used in conjunction with tumor-infiltrating lymphocytes (TILs), which are an experimental cell therapy being developed for treating solid tumors, the company told lenders. These treatments are being developed by biotechnology companies Iovance Biotherapeutics and Instil Bio for metastatic melanoma. The treatment requires a high dose of interleukin-2 medications like Proleukin following TIL injections. Clinigen signed a supply agreement with Iovance to supply Proleukin in early 2020. Now Iovance’s melanoma and cervical cancer trials are well advanced, and the company’s TIL drug, Lifileucel, is expected to be approved by the U.S. medication regulator, the Food and Drug Administration, around the end of this year, lenders explained. Clinigen expects that the launch of TIL therapies will require additional Proleukin, lenders said.

Clinigen also benefits from ‘stickiness’ because, as long as the services are provided in an efficient and consistent manner, pharmaceutical and biotech companies are unlikely to switch service providers, one buysider commented. Customer concentration is also moderate, with the top 10 customers accounting for about 40% of revenue, Moody’s said.

The company’s FCF generation is robust, with FCF from operations totalling £35 million, £47 million, £34 million and £42 million in each of the fiscal years from 2018 to 2021. Cash conversion, excluding expansion capex, averaged about 75% over the four-year period despite fiscal 2020 cash flow being lower than normal because of high working capital requirements. Expansion capex is low, averaging 3% of revenue over the period, and recurring capex also amounted to only about 2% of revenue during the same years. Moody’s expects Clinigen to generate FCF of at least £30 million per year going forward under private ownership despite the higher interest burden and ongoing working capital use to support revenue growth.

Price talk for the £410 million euro-equivalent seven-year first lien term loan B is in the 98.5 to 99 range, tightening from 98 previously. The margin remains at Euribor+475 bps, in line with the previous price talk.

The price talk and OID of the £200 million seven-year first lien term loan B are SONIA+575 bps and 98.
Both loan portions have a 0% floor.

The commitment deadline was brought forward to 12 p.m. BST on Wednesday, April 20, from 5 p.m., although one lender noted that for an unfamiliar credit the original deadline was already aggressive.

The company is rated B2 by Moody’s, B by S&P and B by Fitch. The first lien facilities are rated B2/B+/B+ by the same rating agencies.

Credit Suisse and JPMorgan are physical bookrunners. Other bookrunners are Barclays, HSBC, Investec and NatWest. Credit Suisse and JPMorgan were contacted, but both banks declined to comment.

Clinigen's capital structure is below:
 
– Beatrice Mavroleon