NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the following series of bonds to be issued by the California Infrastructure and Economic Development Bank on behalf of The Scripps Research Institute (TSRI or Scripps):
--Approximately $146,990,000 revenue and revenue refunding bonds, series 2016.
The bonds are expected to sell via a negotiated sale in July 2016. Proceeds will be used to finance projects on TSRI's California campus, including a portion of the cost associated with replacement laboratory and administrative space and associated parking, the costs of remodeling and equipping current facilities, and funding some deferred maintenance needs. In addition, proceeds will also be used to refund outstanding series 2000, 2005A and 2005B bonds and pay the costs of issuance.
In addition, Fitch downgrades the rating on the outstanding bonds to 'A+' from 'AA-'. These bonds will be refunded with this transaction.
The Rating Outlook is Stable.
The series 2016 bonds are secured by loan payments made by TSRI or Scripps, and these payments are an unsecured general obligation of TSRI payable from revenues of the California campus only, and nonrecourse to the Florida campus.
The security on the currently outstanding bonds that are being refunded with this issuance is broader, and includes available resources of the consolidated entity.
KEY RATING DRIVERS
ORGANIZATION IN TRANSITION: The downgrade is the result of continuing weak operations that have coincided with frequent leadership change. However, a new executive management team is in place as of September 2015 and Fitch believes these experienced leaders have the ability to implement a new strategic plan and effectively manage through this transitional period; however, uncertainty remains.
DECLINING BALANCE SHEET RESOURCES: The decline in balance sheet resources over the last three years combined with continued operating losses no longer provides support for the 'AA-' rating. Further declines in the resource base may affect the rating over time.
OPERATIONAL WEAKNESS: TSRI continues to draw from its reserves to supplement weaker operations. The operating weakness is due mainly to declining federal research funding as well as the expiration of annual funding from a broad rights agreement with a pharmaceutical company.
EXECUTION RISK: The rating is sensitive to management's ability to execute on its strategic plan, with the successful growth in translational research that provides The Scripps Research Institute with a more diverse and growing revenue stream.
REVENUE VOLATILITY: Scripps' operations are currently dependent upon the receipt of federal grant and drug royalty revenue. Should either of these sources experience further declines that cannot be managed budgetarily, the rating and/or Outlook may be negatively affected.
TRANSFORMATIONAL SUCCESS: Should Scripps be successful in its transformational plan and receive increased federal funding and royalty revenue, along with enhanced philanthropic support, there may be positive rating movement beyond the Outlook period.
The Scripps Research Institute (TSRI or Scripps) is a leading private, nonprofit biomedical research organization, with campuses in La Jolla, CA and Jupiter, FL. While TSRI's roots can be traced back to 1924 with the founding of the Scripps Metabolic Clinic, the organization was separately incorporated in 1991. Operations expanded in 2004, when TSRI opened its Florida campus.
The organizational focus is on the creation of basic knowledge in the biosciences for the application of medical discoveries, and scientific advances through interdisciplinary programs and collaborations. Education is emphasized at TSRI and it offers graduate and post-graduate programs through The Scripps Research Institute Graduate Program. TSRI currently has 12 Institutes and Centers, two located at Scripps Florida and 10 located at Scripps California. Scientists who have appointments in Institutes and Centers also have joint appointments in a scientific Department. As of March 2016, there were approximately 2,700 employees, students and post-doctoral fellows, with the majority (2,100) located on the La Jolla, CA campus.
Scripps' educational activities, which occur on both campuses, include the training of post-doctoral fellows, graduate education and community outreach. There were more than 400 post-doctoral fellows on the California campus and 177 on the Florida campus, at Sept. 30, 2015. The graduate program is very selective, having received 861 applications, accepting only 19%, and enrolling 45 students (27% matriculation rate) in 2016. Class size typically ranges from 40-60 students.
NEW ORGANIZATIONAL LEADERSHIP
Over the past year there have been a number of changes to the Board of Trustees (the board), in addition to the executive management team. The number of board members was recently reduced from approximately 22 to 12, although management believes the board's participation will increase going forward, given the focus on translational research, including greater philanthropic support. The current board chair is Richard Gephardt - former majority and minority leader of the U.S. House of Representatives. His chairmanship likely serves the organization well when dealing with legislative matters.
The board has delegated day-to-day responsibilities to TSRI's executive management team. The CEO, Dr. Peter Schultz, and Dr. Steve Kay, President, were appointed to their respective positions in September 2015. While new to their roles, Dr. Schultz joined Scripps in 1999 and Dr. Kay was employed by TSRI earlier in his career. Fitch will monitor this team's ability to execute on its strategic plan.
In recent years, Scripps has been evaluating the possibility of partnering with another organization. The intended goal would be for the two organizations to work closely together in order to be able to develop a "bench to bedside" model for biomedical research. TSRI's appointment of Dr. Schultz as CEO is likely to further spur the achievement of this goal, as he is the founder of nine biotech/tech companies.
SHIFTING STRATEGY INCLUDING INCREASED FOCUS ON PHILANTHROPY
The organization's overall strategy is to create a new model for self-sustaining biomedical research. This model is expected to focus basic biomedical research on areas that have a high human impact and align that with the expertise and infrastructure of translational research in order to develop and lower the cost of new drugs. TSRI scientists focus on the underlying cause of disease, and an alliance/partner will develop therapeutic strategies for treatment. The organizations have a pipeline of new drug discovery programs and it is expected that a royalty revenue stream will be generated to reinvest in research operations.
There is an increased emphasis on philanthropy and the procurement of major gifts, and TSRI is building the infrastructure to support this endeavor. Senior leadership is working to increase participation by board members that have the capacity to financially support the institutional mission. The increased enthusiasm associated with the focus on translational research, which can make discoveries that impact patient health more quickly, is expected to further improve philanthropic results.
To date, TSRI's campaign to fund 25% of project costs of the new research buildings has been successful. The initial goal was $33 million and $26 million has been received in cash. Fitch views favorably the recent fundraising success and management's increased focus on this important revenue stream.
FINANCIAL RESOURCES PARTIALLY OFFSET WEAK OPERATIONS
Given that the series 2016 bonds are secured by loan payments made by TSRI, and that these payments are an unsecured general obligation of TSRI payable only from revenues of the California campus, only the financial position of this campus is included in the analysis
Over the past few years operations have been negative, due in part to declining federal research funding as well as the expiration of annual funding ($20 million) from a broad rights agreement with a pharmaceutical company. In fiscal 2015, Fitch calculated operating margin was (6.8%), versus the prior year's (3.6%), although the change partially reflects volatility in investment returns.
On a budgetary basis, management is anticipating another deficit in fiscal 2016 (FYE September 30). The loss is anticipated at approximately $20 million based on seven months of operations, above the loss of $16.6 million originally budgeted, versus a $13.8 million loss in 2015 and $14.3 million loss in 2014. Management is developing a 10-year strategic plan to address operations, which includes increasing the focus on philanthropy and royalty/licensing payments. On the expense side, there may be a gradual reduction of faculty in California, by attrition and retirement.
While the weak operating results are a credit negative, the level of balance sheet resources, as compared to both debt and operations partially mitigates this concern, at the 'A+' rating level in the near term. In fiscal 2015, available funds totaled approximately $206 million, equal to 69% of expenses and 166% of long-term debt (which includes non-cancellable operating leases).
Upon issuance, the 2016 bonds will be Scripps' only debt outstanding, and there are no additional debt plans currently anticipated. However, TSRI has a number of non-callable operating leases outstanding, though the larger leases will be expiring over the next few years, which will coincide with the completion of the new building. Management anticipates that the new facility will allow for greater collaboration between researchers and may serve to help in recruitment and retention of staff, and lower costs.
Additional information is available at 'www.fitchratings.com'.
This rating action was additionally informed by information provided by the Bank of America Merrill Lynch, as underwriter.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Institutions Rating Criteria (pub. 05 Jun 2015)
Dodd-Frank Rating Information Disclosure Form