The amount of capital provided for royalty/revenue monetization deals over the past five years has doubled since the period between 2000 and 2005. [© Bobby4237 - Fotolia.com]
When FDA sought more data on Dyax’ lead candidate, Kalbitor®, for hereditary angioedema (HAE) back in 2006, the drug developer needed to come up with some quick cash, without the dilution of ownership wrought by traditional equity financing or the financial and operating constraints of traditional debt financing.
Dyax won an up-front payment of $30 million by entering into a royalty interest assignment agreement with a fund established by Paul Capital Healthcare. In return Dyax assigned the company, Paul Royalty Fund Holdings, an undisclosed portion of milestones, royalties, and license fees it receives under its phage display Licensing and Funded Research Program (LFRP) through 2017.
The deal was the first of two Dyax arranged with Paul Capital Healthcare. Last year the company sold its rights to royalties and other payments from the commercialization of a drug by Pfizer, a licensee under LFRP, to another investment fund managed by Paul. The drug was Xyntha®, a recombinant product for control and prevention of bleeding episodes in patients with hemophilia A.
In the transaction Dyax received an up-front cash payment of $10 million and became eligible for milestone fees totaling up to $2 million based on sales in 2010 and 2011. Dyax used some of the initial money toward debt obligations under LFRP and for other required payments. In the end Dyax netted about $6.8 million and used that money to launch Kalbitor.
Dyax is one of a relatively small but growing number of drug developers that have monetized their royalties by selling off all or part of these income streams to investors. Companies that market their own products and lack royalties may opt instead to sell off a percentage interest in their revenues.
“The growth in royalty monetization and revenue interest financing is really a factor of, number one, the fact that companies have growing needs for capital, and number two, that the royalty monetization and revenue interest financing as an alternative source of capital have just become more understood over the last 10 years,” Lionel Leventhal, a founding member of Paul Capital Healthcare and partner in Paul Capital, pointed out to GEN.
“When we entered the market in 2000, it took a very sophisticated CFO to basically understand the sale of a royalty or one of these synthetic revenue interest deals,” Leventhal explained. “Today, both in the U.S. and in Europe, most CFOs understand that this is an attractive alternative—effectively, a third form of financing that we created.”
Interest and activity in royalty monetization have both grown in recent years. On September 20, New Health Capital Partners reported that it had closed on a private equity fund, New Health Capital Partners Fund I. It was launched with $150 million and will include royalty monetization among ways to invest in life science companies.
The rise of royalty monetization is less a result of the weak economy than of the difficult market that life sciences companies face as they scramble to raise capital, according to Leventhal. Andrew Coronios, a partner with Chadbourne & Parke, echoed the sentiment, stating, “Just as operating companies use receivables financings as an added borrowing source in a credit constrained environment, smaller cap life science companies can use royalty/revenue monetizations as an alternative source of capital.” For investors, he explained to GEN, “in a credit crunch, asset-based financing becomes more attractive and therefore a more available source of capital.”
“The order of magnitude of deals being done when we entered the market was maybe $100 million to $200 million a year. Now there have been billions of dollars of capital provided for this type of financing over the past four or five years,” Leventhal added. “Between roughly 2000 and 2005, there might have been somewhere between $1 billion and $2 billion of financing. And then from 2006 to the present, there might have been two or three times that much.”
Royalty Pharma Finance Trust, also active in royalty monetization deals, said its revenue from royalties multiplied five-fold between 2005, when the firm finished with $161.2 million, to 2010, when revenues zoomed to $808.5 million. In July, Astellas Pharma’s Prosidion subsidiary sold its patent estate and associated royalty stream relating to the use of dipeptidyl peptidase IV (DPP-IV) inhibitors for the treatment of type 2 diabetes to Royalty Pharma for $609 million.
Subsequently, in August, Arisaph was paid $17 million in cash by Royalty Pharma in exchange for amending terms to milestones payable under a cross-license agreement between the companies that Royalty obtained with the purchase of Astellas’ patent estate. The deal includes future contingent payments to Arisaph of up to $9.25 million.
Up and Downside
Companies are most likely to pursue royalty monetization deals, Coronios said, “when sufficient clinical trials have been performed to give the investor comfort that the product will be approved by regulators, likely to be a commercial success, and likely not to have negative effects that would pull the product off the market. Usually this is Phase III. For the company, this allows capital infusion at an early stage and mitigates risk of ultimate commercial failure or underperformance of the product.”
Besides protecting against downside risk, other attractions of royalty and revenue monetization deals to companies include cutting the cost of launching new products; delaying future partnership deals until commercialization efforts are further along, raising the value of eventual deals; and reducing ownership dilution compared with equity.
There are negatives as well, however. “Because a royalty/revenue monetization is still a relatively expensive source of capital, to the extent a company can raise conventional debt, that conventional debt will likely have more attractive terms,” Coronios said. Benefits include lower transaction costs and the ability to retain more of the deal’s upside should a product prove commercially successful.
Do you think entering royalty and revenue monetization transactions is a good strategy for a cash-strapped firm?
Academia Also in the Game
Also doing royalty monetization deals are institutional generators of life science IP. According to Coronios, many universities, research hospitals, and independent research institutes may be limited, by law, in their ability to borrow. “Institutions with immediate capital funding needs may prefer a royalty or revenue monetization to having to sell financial assets in a down market,” Coronios explained.
In February, Ohio University, a faculty member, and a graduate student sold partial royalty income rights to their license for the growth hormone antagonist Somavert®, approved in 2003, to DRI Capital. The five-year agreement could net up to $52 million for the university and inventors John Kopchick, Goll-Ohio professor of molecular biology, and graduate student Wen Chen.
The deal with DRI would land the university and inventors at least $39 million, in the form of a lump sum payment for five years’ worth of royalty revenue plus up to $13 million if the Somavert market grows. Ohio University said it would invest funds in new translational medicine research programs and efforts to commercialize technologies. Specifically, it would support three to four endowed professorships and several grad student fellowships.
In a much larger royal monetization deal, Northwestern University generated $700 million cash in 2007 when it sold a portion of its worldwide royalty interest in the Pfizer drug Lyrica® to Royalty Pharma; net proceeds were placed in the University’s endowment. As part of the deal an undisclosed portion of the payment to Northwestern went to the researchers responsible for the chemical compound that serves as the basis for Lyrica, a drug indicated for fibromyalgia, among other disorders.
As long as the credit and venture capital markets remain off limits to many early-stage biotech companies hungry for cash, royalty and revenue monetization deals will fill at least part of the financing gap. When those markets finally start to recover, though, biopharma entrepreneurs and investors may well think twice about a strategy that tempts them with quick cash today only to be married to an investor they may or may not want for years to come.