By Toni Clarke
Time will tell if TPG's bet pays off.
stable returns in a volatile market.
What are royalty and revenue interest investments?
Investors seeking to capture the promise of new drugs while decreasing risk are turningto royalty investment funds. Some facts about how royalty interest investments work: • The royalty market is made up of two main • Investors in such funds include big institutions types of investment: royalty interest and rev- and endowment funds such as OMERS Capital Partners, New York Life Insurance Company andThe Travelers Companies.
• A royalty interest is an asset acquired when a fund pays an up-front lump sum for future royal- • By putting money in a fund that acquires royalty ties on a pharmaceuticals product. For example, streams, investors are not exposed to fluctua- a fund might acquire a royalty that is paid by a tions in a company's stock price. They make pharmaceuticals company to a university that money if sales of a drug exceed the expectations discovered the drug. The university might use of the fund and the amount paid for the royalty the funds to build a new wing or fund scholar- stream over a certain period. They lose money if • A revenue interest, also known as a synthetic • Returns on investments in royalty funds tend to royalty, is a royalty created by a fund where remain in a fairly narrow band. They do not none had previously existed. In such cases, the increase if a company's stock takes off, neither fund provides non-dilutive financing for compa- do they plunge if a company suffers a setback.
nies looking to finance their business, such as to Returns are tied to broader political and demo- develop new products or fund acquisitions. The companies receive an upfront payment in returnfor a percentage of future sales.
• The following are the most prominent private equity funds that specialize in healthcare royalty • Cowen Healthcare Royalty Partners estimates the market for traditional royalties at $12 billion to $20 billion a year and estimates the market for synthetic royalties at $120 billion a year.
— Royalty Pharma— Capital Royalty Partners • The investments give companies an alternative fund-raising mechanism to PIPEs, mezzanine — Non-specialist hedge-funds such as TPG- financing, traditional bank and venture debt and Axon Capital and Deerfield are also step- (Reporting by Toni Clarke; Editing by Daniel Trotta) CHRONOLOGY:
Chronology of recent royalty financing deals
Drug royalty financing is increasing as biotechnology companies find themselves lockedout of the capital markets and investors seek to reduce risk.
• December 2007 — Royalty Pharma acquired a • April 2008 — TPG-Axon agrees to pay biotech- portion of Northwestern University's royalty nology company CV Therapeutics up to $185 mil- interest in Lyrica, a drug to treat nerve pain and lion for rights to 50 percent of the company's pain caused by fibromyalgia, for $700 million.
royalty on North American sales of Lexiscan, an Lyrica is marketed by Pfizer Inc. Northwestern agent used to help in the detection of coronary retained a portion of the rights and said it would artery disease. CV Therapeutics receives a royal- use the money from the sale to support financial ty on the product from Astellas Pharma.
aid for students and to fund construction of newbuildings.
• April 2008 — Vivus Inc announced it entered a • January 2008 — DRI Capital launches a $300 mil- Management in which Deerfield agreed to pro- lion structured finance fund, a hybrid debt and vide funds for a late-stage clinical trial program equity fund to provide capital to life sciences for avanafil, a treatment for erectile dysfunction.
companies in exchange for an interest in future Vivus granted Deerfield a royalty interest on sales of its existing Muse product for ED.
Deerfield will also receive a royalty on sales of • January 2008 — Artes Medical Inc enters rev- enue financing agreement with CowenHealthcare Royalty Partners for $21.5 million in • July 2008 — Cowen Healthcare Royalty Partners return for an interest in ArteFill, the company's announces closing of its fund at $500 million, injectable dermal filler to correct "smile line" substantially exceeding its initial target size of • March 2008 — DRI Capital Inc agreed to pay $10 • August 2008 — Dyax Corp enters $50 million million to Nanogen Inc in return for all future loan agreement with Cowen Healthcare Royalty royalties from Applied Biosystems ABI which Partners, secured by the company's drug devel- molecular detection and diagnostics.
(Reporting by Toni Clarke; Editing by Daniel Trotta) Copyright 2008 Reuters. Reprinted with permission from Reuters. Reuters content is the intel ectual property of Reuters or its third party content providers. Any copying, republication or redistribution of Reuters content is expressly prohibited without the prior writ en consent of Reuters. Reuters shal not be liable for any errors or delays in content, or for any actions taken in reliance thereon. Reuters and the Reuters Sphere Logo are registered trademarks of the Reuters group of companies around the world. For additional information about Reuters content and services, please visit Reuters website at


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