Structured Notes Tied to Celgene, Gilead Hit Record High

Investors are buying U.S. structured notes tied to biotechnology companies such as Gilead Sciences Inc. and Celgene Corp. at a record pace, as innovative drugs help power share growth.

Banks issued $531.2 million of notes linked to the 20 companies in the Nasdaq Biotechnology Index with the largest market capitalizations this year, more than 2.5 times the total for 2013. Investors snapped up $191.1 million of securities linked to Gilead and $101.4 million of notes tied to Celgene this year, the most for each company since at least 2010, according to data compiled by Bloomberg.

Gilead’s stock has jumped 19 percent this year and Celgene’s has risen 26 percent. Shareholders are looking to the success of Gilead’s hepatitis C treatments Sovaldi and Harvoni, and Celgene’s multiple myeloma treatment Revlimid to fuel more share price gains, said Geoffrey Porges, senior biotechnology research analyst in New York at Sanford C. Bernstein & Co.

“Biotech stocks have been tremendously strong for the last four years,” said Porges, who has an outperform rating on both stocks. “They’re large-cap growth companies, and there’s a scarcity of large-cap growth companies.”

Dependence on a few key products causes the stocks to be more volatile, according to Porges. Volatility levels, as measured by three-month option prices, were 36.6 for Celgene and 40.2 for Gilead at day’s end on Dec. 19. Both are more than twice the level for the VIX, as the Chicago Board Options Volatility Index is known.

Better Terms

The larger fluctuations in share price allow banks to create notes that have more attractive terms.

Credit Suisse sold five-year notes tied to Celgene on Dec. 12 that pay 8 percent yearly if shares don’t fall more than 49 percent, according to a prospectus filed with the Securities and Exchange Commission. The same day the bank issued similar-maturity securities linked to Cisco Systems Inc. that pay 7 percent, with less than half the level of protection against a stock decline.

Celgene’s three-month implied volatility is 1.72 times that of Cisco.

Nicole Sharp, a spokeswoman for Credit Suisse, declined to comment on the notes.

Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts with values derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

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