Alere , a medical products company focused on integrating rapid diagnostics with health management, has completed its offering of $450 million aggregate principle amount of senior notes. The senior notes carry an interest rate of 7.250% per year, which is payable every six months on Jun 15 and Dec 15, until maturity on Jul 1, 2018 (unless redeemed earlier).
The debt financing will help Alere redeem its outstanding $250 million aggregate principal amount of 7.875% senior notes due 2016. Moreover, Alere plans to use the rest of the proceeds to repay the outstanding revolving borrowings under its credit agreement. The amount left will be utilized as working capital and for general corporate purposes, to ensure sufficient liquidity.
According to the company, the rest of the funds will be used to finance potential buyouts, share repurchases and capital expenditures. Alere also plans to make earn-out payments for acquisitions completed earlier.
Exiting the third quarter, Alere had a debt-to-capital ratio of 61.7% compared with peers’ mean of 30.9%. Following the completion of the senior note offering, the ratio increased to 63.3%. However, Alere’s high dependence on debt financing with a higher debt-to-capital ratio that towers over its peers’ mean, remains a matter of concern.
Net interest expense in the third quarter was $55.9 million, down 76% year over year. Given Alere’s solid cash position (cash and cash equivalents of $302.3 million, up 9.2% year over year), we believe that the company will be able to meet its higher interest expense going forward. However, the higher interest expense might be a drag on Alere’s bottom line.
The company continues to grow revenues through the organic and inorganic route. Further, Alere’s product pipeline is strong, which has developed through a combination of product innovation and serial acquisitions. We currently have a long-term ‘Neutral’ recommendation on the stock, which carries a short-term Zacks #3 Rank (Hold). Its peer in the professional diagnostic market, Johnson & Johnson (JNJ - Free Report) carries a Zacks #2 Rank (Buy).