Sarepta’s Troubles Show Risk, Investor Opportunity in Biotech Convertible Bonds

Biotechs like to issue convertible bonds, but unlike equity, they need to be repaid. (Dreamstime)

Convertible bonds can be enticing for biotech companies since they offer less dilutive financing than equity offerings and often carry low interest rates.

As a result, there are about $10.5 billion of biotech convertibles outstanding, roughly 3% of the $305 billion market, according to BofA Securities.

But Sarepta Therapeutics’s recent problems with a gene therapy for Duchenne muscular dystrophy highlight the risk of issuing convertibles. Unlike an equity offering, a convertible bond needs to be paid back.

The company recently unveile d a series of cost-cutting moves aimed at saving $400 million annually and freeing up cash to redeem a $1.15 billion convertible bond—the largest among biotech companies—in September 2027.

Sarepta’s situation got worse Monday when it voluntarily paused sales of its gene therapy Elevidys, its largest drug by revenues, after patient deaths and pressure from the Food and Drug Administration.

The convertible bond now trades for 67 cents on the dollar, for a yield to maturity of 21%. The bonds had traded around 90 at the end of May.

For investors looking to bet a turnaround at Sarepta or a potential sale of the former biotech star, the convertibles could be a better alternative than Sarepta’s depressed common stock.

Sarepta shares are up 8.5% Tuesday to $14.46 but are off 20% in the past week and 88% so far this year. The stock began 2025 above $120 and peaked at around $180 in late 2020.

The company’s market value is now around $1.4 billion and Sarepta said recently it had a cash-balance of around $850 million on June 30. Revenues were running at a $2 billion annual rate before Elevidys sales were halted. That cash balance likely will decline in the coming quarters.

Investors can essentially buy into the company at a $775 million valuation through the convertibles (67% of the $1.15 billion offering). That could be a good bet given that Sarepta had projected about $2.5 billion of 2025 revenues when it reported first-quarter results in May—before some of safety issues with its gene therapies surfaced.

The company’s existing drugs, pipeline and intellectual property could be worth more than $775 million.

Back in 2022, Sarepta sold the $1.15 billion of five-year convertibles with an interest rate of just 1.25%. At the time, the stock was around $100 and Sarepta issued the bonds with a conversion price of $141 a share. That meant lower dilution to shareholders than a similarly sized offering of stock to fund its operations.

Biotechs are sensitive to dilution since they can go for years without revenues or profits and often tap the equity markets to fund their operations. Convertibles can offer an alternative financing. The problem is that the short, five-year maturity of the converts meant that Sarepta would have to come up with the cash if its stock didn’t rally.

Other biotech convertibles have fared better than Sarepta’s deal, BofA data show. Nearly all trade around 100 and some at sizable premiums, including a deal from Alnylam Pharmaceuticals. Other sizable issuers include BridgeBio Pharmaceuticals and Halozyme Therapeutics.

Critical to Sarepta’s outlook is whether Elevidys will get back on the market. TD Cowen analyst Ritu Baral wrote Monday that the voluntary suspension could last three to six months. A bearish Mitchell Kapoor, an analyst at H.C. Wainwright wrote Monday that he expects the treatment to be permanently removed from the market and that the stock has no intrinsic value without the drug.

There’s a lot of uncertainty surrounding Sarepta, and the best play for investors bullish on its outlook could be the convertibles.

Write to Andrew Bary at andrew.bary@barrons.com