Paratek Pharma Convert: Well-Covered by Asset Value, with Upside

Saurabh Sud of T. Rowe Price presented his in-depth investment thesis on the convertible debt of Paratek Pharmaceuticals (US: PRTK) at Best Ideas 2019.

Thesis summary:

Paratek Pharmaceuticals (convertible debt and equity) is a misunderstood biopharma company focused on the development and commercialization of antibiotics. Paratek’s lead product candidate, omadacycline, is a novel tetracycline-derived, broad-spectrum antibiotic that received FDA approval in October 2018, for both oral tablet and intravenous formulations for use against ABSSSI (acute skin and skin structure infection) and CABP (community-acquired bacterial pneumonia).

Capital has been receding from the antibiotic sector for years, and we are at a point where resistance is moving faster than our ability to provide new antibiotics.

Paratek’s debt is likely covered 3-4x based on its asset valuation. The convertible debt recently yielded 10.7% (PRTK 4.75% 2024s), offering an asymmetric payoff as the company embarks on its commercialization journey.

With the product approval risk behind us, the market underestimates a credible management’s incentives and potential asset conversion events that mitigate downside for the convertible debt. In an upside scenario, the stock also is likely worth 2-4x but we will need the earning power of a profitable operation to confirm the potential asset valuation via good capital allocation during the commercialization phase.

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About the instructor:

Saurabh Sud is a senior portfolio manager in the Fixed Income division of T. Rowe Price, with specific expertise in credit markets. Previously, Saurabh spent about six years with PIMCO, including as senior vice president of portfolio management. He holds a B.Tech in electrical engineering from Indian Institute of Technology in Delhi and an MBA in finance from Columbia Business School.