Healthcare product companies have intensive capital requirements. While this has historically been a challenge for small and
mid-sized pharmaceutical and biotech companies, the current chaos in the financial markets poses a significant barrier to
the growth and viability even of larger companies. Now more than ever, pharma companies need to consider alternative approaches
to accessing the capital they need to grow and thrive.
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For many pharma and biotech companies, one particularly attractive alternative is the sale of future revenue—either in the
form of royalties or product revenue. Such sales, known as royalty monetization and revenue interest transactions, provide
flexible alternatives to standard equity and debt financing, and can be customized to meet a company's near-term financial
needs, as well as long term growth objectives, corporate priorities, and time lines. By converting future revenue into present
value, these transactions provide capital today that can be invested in achieving tomorrow's growth potential.
While royalty monetization and revenue interest financing have long been available, they have become increasingly popular
in the past few years. Deal flow, which historically was measured in the low hundreds of millions of dollars annually, now
exceeds $1.5 billion.
What was once a unique way for small companies to raise $20 million to $50 million has now been adopted by progressively larger
entities with greater capital requirements. It is clear from the increasing number and size of these transactions that they
will be part of healthcare companies' capital formation strategies for the foreseeable future. No longer a stopgap measure
to be used in chaotic markets, royalty monetization and revenue interest financing have become viable strategies for balancing
near-term financial needs with long term growth objectives. The Value of Future Revenue
The growth of the market for product revenue financing reflects the numerous potential benefits these transactions offer to
small and medium-sized pharmaceutical companies seeking capital to achieve a variety of strategic objectives. These vehicles
can benefit almost every company at some stage of the corporate life cycle, and in today's market conditions they are useful
to a growing number of companies. Royalty monetization and revenue interest financing transactions are typically less expensive
than traditional public or private equity. Additionally, because they do not involve equity, they do not dilute the ownership
stake of a company's existing investors.
Royalty monetization and revenue interest financing transactions can be used to achieve a variety of strategic objectives.
To date, their use in the pharmaceutical industry has included:
» Defraying the cost and risk associated with launching new products
» Increasing the amount of capital available for near-term R&D initiatives
» Strengthening a balance sheet through monetization of a passive royalty
» Resolving potential Federal Trade Commission (FTC) issues associated with the acquisition of companies with competing products
Royalty monetization and revenue interest financing are quite similar: In both cases, the company receives near-term cash
in exchange for all or a portion of a future income stream. There are, however, some differences in the structure of deals
and the flow of cash.
Figure 1: A comparison of cash and intellectual property (IP) flows between a licensing agreement (A) and a royalty monetization
transaction (B)
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Royalty monetization converts a future income stream generated by an intellectual property asset or licensing deal into cash today. This reduces
risk by shifting future revenue streams to the investor and allowing for greater "predictability" of cash flows to the company.
In a royalty monetization transaction, a company sells all or a portion of a royalty stream in exchange for agreed-upon payments.
Royalty payments that would typically flow to the company may be placed in a "lock box" account, with the agreed-upon portion
of those payments flowing to the investor, and the remainder (if any) flowing back to the company. (See Figure 1.)
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