Lender appetite for exposure to the resilient global pharmaceutical, medical and biotech (PMB) sector ensured a strong interest in leveraged loans and high yield bonds across the industry in 2021.
PMB borrowers took advantage of robust leveraged loan and high yield bond markets to secure capital at attractive rates and shore up cash reserves. Moving into 2022, the focus is expected to shift to M&A, as PMB companies emerge from the pandemic and focus once again on growth.
In the US, leveraged loan issuance by PMB borrowers climbed from US$76.7 billion in 2020 to US$133.7 billion by the end of 2021. In Western and Southern Europe, loan issuance in the sector doubled from US$17.3 billion to US$38.4 billion over the same period, while loan issuance in the PMB sector in the Asia-Pacific region (excl. Japan) (APAC) climbed from US$11.6 billion in 2020 to US$18.1 billion in 2021.
High yield bond PMB issuance in the US was US$31.9 billion for 2021 versus US$35.3 billion for 2020, while, in Western and Southern Europe, issuance climbed almost five-fold, from US$1.9 billion in 2020 to US$10.1 billion for 2021.
In APAC, PMB borrowers raised US$475 million on high yield bond markets in 2021, compared to US$343.9 million in 2020.
High levels of refinancing activity accounted for more than half of PMB issuance in North American, European and APAC loan markets, as borrowers saw a window to extend maturities and lock in lower financing costs.
For example, Stada, the pharmaceuticals manufacturer backed by Bain Capital and Cinven, secured a US$350 million loan refinancing priced at 3.5% over Euribor, while medical dermatology group LEO Pharma refinanced a US$1.7 billion syndicated loan that allowed it to expand the size of the facility and extend its maturity to 2026.
M&A to drive issuance in the year ahead
In the next 12 months, deal-linked issuance is expected to account for a larger share of PMB activity. After building up their cash reserves in 2021 and securing optimal rates on borrowings through refinancings, PMB players are now seeking opportunities to consolidate the market, reposition portfolios and invest in new patents and technology.
For example, consumer multinational Unilever made a bid of £50 billion (US$68 billion) for the consumer healthcare arm of pharmaceutical company GlaxoSmithKline (GSK) as part of a plan to expand its healthcare and hygiene business. The Unilever bid came after GSK announced plans to spin-off its consumer healthcare business as a separate listed business.
GSK rebuffed initial offers from Unilever, which in turn indicated that it will not up its offer, creating an opening for private equity (PE). A spin-off or sale to Unilever may still be on the table, but banks have already made preparations for a debt package that could be as large as US$34 billion should a PE bid materialize, creating significant deal flow in loan and bond markets.
Deal-linked issuance had already begun to accelerate in H2 2021, as observed when buyout firms Blackstone, Carlyle and Hellman & Friedman raised just under US$15 billion in debt to fund the US$30 billion buyout of Medline, a US-based medical equipment group.
M&A momentum has carried into 2022. For example, Belgian pharmaceutical company UCB agreed to a US$1.9 billion deal to buy US seizure and rare disease drug developer Zogenix, and various PE houses are expected to bid for retail pharmacy chain Boots, which Chicago-based owner Walgreens Boots Alliance is readying for sale.
According to Debtwire Par, M&A activity in the PMB space is expected give the sector a dominant role in debt markets in the coming months, with approximately €40 billion in deals already in the pipeline in Europe alone.
ESG appetite is strong
PMB lending is also expected to see continued growth in the issuance of environmental, social and governance (ESG)-linked debt facilities.
At the end of 2021, Israeli generic drug maker Teva Pharmaceuticals raised a record US$5 billion in debt tied to ESG metrics. The debt, which will be used to pay back outstanding borrowing and for general corporate purposes, is linked to improving access to medicine in low and middle-income countries and reducing greenhouse gas emissions.
Other notable ESG-linked financings in the PMB sector include pharmaceutical multinational Pfizer pricing a US$1 billion sustainability bond at 1.75%, with proceeds going toward COVID-19 vaccine research and development; and Elsan, the largest private hospital group in France, indexing all of its existing borrowings to ESG-targets, based on its proximity to local communities, patient care, environmental performance and investment in its staff.
The huge growth in sustainability-linked bonds—which grew almost eight-fold last year according to Bloomberg—is expected to encourage more PMB companies to attach ESG KPIs to borrowings and signal ESG credentials to shareholders and investors.