OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to the approximately $57 million County of San Diego, CA limited revenue obligations series 2015A and 2015B issued on behalf of Sanford Burnham Prebys Medical Discovery Institute (the Institute).

The Rating Outlook is Stable.

The $54.5 million tax exempt fixed rate series 2015A and $2.7 million taxable fixed rate series 2015B bond proceeds will be used to refund the Institute's outstanding debt. The bonds are expected to price the week of Oct. 26 via negotiation.

SECURITY
The bonds are secured by a pledge of unrestricted revenues.

KEY RATING DRIVERS

RESEARCH ORGANIZATION IN TRANSITION: The Institute adopted its current 10-year strategic plan in 2014, which emphasizes translational research and building on its basic science research by collaborating with partners and accelerating drug discovery. Fitch views this business strategy positively since it could diversify the Institute's revenue stream. A new CEO (from a pharmaceutical company) as of August 2014 is leading the execution of this plan.

GOOD BALANCE SHEET METRICS: Available funds have significantly grown over the last two years due to the receipt of several major gifts. Available funds relative to expenses (122%) and debt (276%) are solid for the rating level (at June 30, 2015; draft audit).

RECENT PHILANTRHOPIC SUCCESS: The Institute received a $50 million gift in 2010, a $275 million gift in December 2013 (which will be spent when received through 2024), and a $100 million gift in June 2015 (unrestricted). These gifts were attributed to the work of the long tenured President, who has been at the Institute since her postdoctoral training in 1992 and became President in 2010. The Institute also just hired a Chief Philanthropy Officer, and there are plans for a feasibility study for a capital campaign.

EXPOSURE TO RESEARCH FUNDING ENVIRONMENT: Inherent to its research business is exposure to fluctuations in federal grant research funding, which has become increasingly competitive, The Institute's grant revenue has declined over the last five years. Grant research funding accounted for 47% of the Institute's FY 2015 revenue of which, 75% was from NIH. The Institute is a NCI designated cancer center, which Fitch views positively. The Institute ranks in the top five of NIH awards to independent research organizations.

RATING SENSITIVITIES

AVAILABLE FUNDS BALANCE: Fitch will monitor Sanford Burnham Prebys Medical Discovery Institute's available funds balance due to the significant recent growth mainly from major gifts. Fitch expects available funds ratios to remain relatively stable. Negative rating action could be driven by sustained operating losses, significant declines in available funds, or increased debt burden.

MANAGING EXPENSE BASE: Fitch expects that Sanford Burnham Prebys Medical Discovery Institute will manage its expense base in line with available revenue sources.

CREDIT PROFILE

Sanford Burnham Prebys Medical Discovery Institute was founded in 1976 and is an independent, nonprofit organization dedicated to basic biomedical research. The main research campus is in La Jolla, CA and an additional campus in Lake Nona, FL opened in 2007. Total unrestricted revenue in fiscal 2015 was $207.5 million.

The Institute
As of June 30, 2015, the Institute has 79 PIs/faculty members and including their research teams, the total scientific staff is 830. The Institute also offers a PhD in Biomedical Sciences. The La Jolla campus is organized into six major centers, the NCI Designated Cancer Center, Neuroscience and Aging Center, Infectious and Inflammatory Disease Center, Sanford Children's Health Research Center, Center for Stem Cell Biology and Regenerative Medicine and Conrad Prebys Center for Chemical Genomics. The Lake Nona campus focuses on multidisciplinary translational research on metabolic origins of type 2 diabetes and other obesity related diseases to identify new modes of prevention and treatment.

Florida Operations
The development of the Lake Nona campus was driven by the State of Florida's interest in building a biotechnology industry, resulting in substantial funding to establish research operations in Florida. The Lake Nona facility was funded by state and local government entities; however, the Institute owns the building. The Institute also has a funding agreement ($155 million) from the state for 10 years based on certain milestones and fiscal 2016 is the last year of this funding. Management reports that it is evaluating the long term plan for the Florida operations since the state funding is ending and the operations are unprofitable. However, there is $59 million of cash and investments as of June 30, 2015 designated to support the Florida research operations.

Strategic Plan
The Institute has historically pursued drug discoveries; however, the strategic plan now places greater emphasis in this arena. A continued focus on translational research is expected to diversify the Institute's revenue base over time from royalty, licensing, intellectual property and other revenues. A focus of the plan is building relationships with partners such as pharmaceutical companies and healthcare related entities. Plan implementation has only recently begun.

Philanthropy
Recent major gifts have grown the Institute's balance sheet resources. A portion of these major gifts are expected to be retained as quasi endowment; as such, annual endowment draws would be made according to the spending policy. The Institute's spending policy is 5% of the three year average of its investment portfolio (Dec. 31 market value), which Fitch considers standard among U.S. non-profit organizations.

The recent major gifts include $50 million in 2010, which has all been received; $275 million in December 2013, of which $40 million has been received to date; and a $100 million unrestricted gift in June 2015 with $50 million received to date. The $275 million gift will support the strategic plan, and management projects to receive the remainder of the gift annually from fiscal 2016-2024 in the amounts of $10-$30 million. The remaining $50 million of the $100 million unrestricted gift is expected in fiscal 2016.

The success in attracting in the major gifts was done without a fundraising staff and a development officer position was recently added in fiscal 2015. The Chief Philanthropy Officer will be conducting a feasibility study for a capital campaign and ongoing fundraising is expected to be an area of opportunity.

Investments
The Institute's investments are in a basic portfolio (60% equities/40% fixed income). With the recent growth in its asset base, the Institute is evaluating an outsourced Chief Investment Officer, which is expected to move the asset allocation of the investments into a more diversified and managed portfolio similar to other endowment related organizations.

Available funds (defined as cash and investments less permanently restricted net assets) totaled $185.5 million at June 30, 2015 compared to $82.8 million at June 30, 2011. Available funds as a percentage of unrestricted operating expenses and debt were 122.2% and 276.6%, respectively at June 30, 2015 compared to 43.9% and 86.1%, respectively at June 30, 2011. Fitch views the available funds ratios as strong for the rating level.

Potential Capital Needs
The Institute has longer-term capital plans to demolish three of its older buildings on the La Jolla campus to make room for larger, more modern laboratory space. Management reports no firm plans regarding timeline or funding of these needs and at this time there are no additional debt plans. The impact of additional debt on the rating, if any, will be evaluated at the time of issuance.

Financial Profile
Total unrestricted revenue in fiscal 2015 was $207.5 million and includes $73.5 million from federal grants and contracts, $98.1 million net assets released from restrictions, $24.6 million from private and other government grants, $7 million from royalties, rent revenue and other, and $3 million from contributions. Only $1.2 million was from its spending policy.

Federal grant revenue has declined from $96.7 million in fiscal 2011 due to increasing research competition and a flat federal funding environment. The Institute's indirect cost recovery rate is quite strong at 95% and the average grant is for four years.

The bottom line (excludes changes in fair market value of interest rate swap) has fluctuated significantly due to the receipt of the large gifts, with periodic spikes in net assets released from restrictions. The excess of revenues over expenses (unrestricted) was $55.6 million in fiscal 2015 compared to $3.4 million in fiscal 2014, negative $344 thousand in fiscal 2013, negative $1.1 million in fiscal 2012 and $383 thousand in fiscal 2011. The state funding for the Florida operations also flows through net assets released from restrictions and totaled $18.5 million in fiscal 2015, $21.4 million in fiscal 2014, $23.2 million in fiscal 2013, $27 million in fiscal 2012, and $30 million in fiscal 2011.

Debt Profile
The Institute currently has a variable rate direct bank loan and fixed rate series 2006 bonds outstanding. In addition, there is a floating to fixed rate swap. Post issuance, the series 2015 bonds will be only debt outstanding and the Institute will terminate the outstanding swap. The par amount of the series 2015 bonds is only $57 million due to the release of the debt service reserve fund ($4 million) on the series 2006 bonds in addition to $7 million of bond premium, which will be used to refund $65 million of debt, fund $2.7 million for the termination of the swap, and pay costs of issuance.

MADS is approximately $5.4 million and debt service is level through maturity in fiscal year 2031. Debt service accounted for 2.7% of total unrestricted revenue in fiscal 2015.

There is an unrestricted revenue fund pledge, which covenants that the amount of unrestricted revenues together with other moneys available to the Institute, is sufficient to cover all operating and maintenance expenses of the Institute and annual debt service due in a fiscal year. The failure to meet this covenant is not an event of default. There is also an additional bonds test.