If you had the opportunity to exchange the potential of a lucrative long-term royalty stream for a huge windfall right now, would you take it? An increasing number of TTOs and the organizations that support them are entertaining just such a proposition, and quite a few of them are opting for the sure money. Why? The universities involved may face pressing financial obligations or wish lists, and others are opting for the less risky approach, taking a guaranteed payout now rather than betting on future royalties for IP that could fail to meet financial expectations or face new competition down the road. The reasons for choosing to monetize a valuable royalty stream vary widely, but there is no question that interest in this approach is rising among both buyers and sellers.
To be sure, only a select number of high-value innovations are ripe for this type of transaction. But experts tell TTT that such agreements are becoming increasingly sophisticated to suit all the parties involved. And while royalty buyers clearly favor innovations with established revenue streams, they are beginning to take an interest in earlier stage innovations as well.
Data show a 10-fold increase
Royalty monetization transactions have taken place in a number of different industries. However, there is particular interest in this type of arrangement in the medical device and pharmaceutical arenas. Further, there is ample evidence that both the frequency and size of these transactions are accelerating.
“From 2000 to 2003 there were a total of about $500 million in royalty monetizations. In the last four years, from 2004 to 2007, there have been $5 billion in royalty monetizations – a 10-fold increase,” stresses Louis Berneman, CLP, managing director of the Center for Technology Transfer at the University of Pennsylvania from 1995 until
2005, and is now lead advisory for nonprofit institutions on the Strategic Advisory Board at Cowen Healthcare Royalty Partners in Stamford, CT. Berneman also heads Texelerate, LLC, a technology transfer consulting firm focusing on assisting institutions, investors, entrepreneurs, and companies with licensing transactions, royalty monetizations, and creating financing for start-ups. “In fact, I believe royalty monetization is going to increasingly become a post-license value-creating mechanism because institutions frankly can do far better by monetizing a portion of a future royalty stream, and then reinvesting those dollars to recruit new faculty for start-up programs, build out new labs, or launch translational research.”
Clearly, that is how Atlanta, GA-based Emory University viewed the approach in 2005 when it cut a $540 million deal with Gilead Sciences and New York City-based Royalty Pharma for 100% of the royalty stream associated with emtricitabine, a blockbuster treatment for HIV which is sold as Emtriva. “Any time one monetizes an asset there is a risk that you’ll be receiving less money up front than you would over time,” admits Steve Sencer, senior vice president and general counsel at Emory University. “The imperative for Emory was that this was money we could use now and invest in Emory’s programs, and that is what we are doing.”
In 2007, Northwestern University inked a deal with Royalty Pharma that was even larger than Emory’s. The institution sold a portion of its worldwide royalty interest in Lyrica, a drug manufactured by Pfizer, Inc. that is used to treat nerve pain associated with diabetes and shingles, and to manage pain in fibromyalgia patients. The pact gave Northwestern an immediate payout of $700 million, and since the institution only sold a portion of its royalty interest, it stands to continue to receive some royalties on sales of the drug, although the specifics of the deal have not been made public.
Susie Wuorinen, assistant general counsel at Northwestern, says the school structured the deal this way to maximize benefits to the university while also diversifying risk. “If you look at the industry, there are certain drugs that do really well, and then something occurs [such as introduction of competing products] that creates a reduction in the royalty stream that would come from those drugs,” she explains. “At the same time, if you have a blockbuster drug like Lyrica, you might want to retain some of the royalty stream coming in, and Northwestern elected to do that so that it could keep taking advantage of the opportunities presented by the large market for the drug.”
Deal structures have evolved
In recent years, financiers have come up with new methods for better meeting the needs of both buyers and sellers when structuring royalty monetization deals. In some cases, for example, the seller may just offer up one tier of the royalty stream, or up front payments may be reduced but supplemented by milestone payments due to the seller when sales reach certain targets.
“Both parties now understand that the buyer is going to need to make some money, and the seller is going to have to take a little bit of a discount. So the focus is on structuring a deal that it is fair, and both parties know what they are getting,” explains Berneman, noting that such provisions free buyers and sellers from having to focus so much energy on predicting the market for a product.
In addition, some royalty stream purchasers have adapted the royalty monetization concept so that it can also be used for products that are earning revenue but have no related royalty stream. “All a royalty consists of is a percentage of end-user sales, so if you don’t have a royalty generating revenue, but you have a product generating revenue, and you want to sell us 5% of end-user sales, that is what we call a synthetic royalty,” says Walter Flamenbaum, MD, a founding partner of Paul Capital Healthcare. “It has the same economic characteristics as a true royalty.”
All of these newer monetization structures should be familiar territory for most TTOs, according to Flamenbaum, because they are based on the license agreement model.
Smaller players get involved
The size and scope of the Emory and Northwestern deals are unusual for universities, and most TTOs do not have those kinds of assets. However, there is no question that these high-profile deals have prompted tech transfer directors to take a more serious look at royalty monetization and what it could potentially do for their institutions.
“What we did early on is … put a program in place to visit these institutions and their TTOs so that they would get to know us and understand the proposition we have to offer. We have direct relationships with most of the country’s research institutions and their TTOs,” explains Mike Herman, senior VP of investments at Royalty Pharma, one of the biggest players in the royalty monetization arena. In fact, Herman points out, buyers are often happy to give TTOs an idea of what a particular asset’s royalty stream is worth at no charge. “There is no harm in considering a transaction. Just getting a quote or a bid from someone does not require [the TTO] to continue the pursuit of the transaction,” he says.
Further, Herman maintains that while deals worth hundreds of millions of dollars get most of the press, smaller transactions can make sense as well. And you don’t have to be a major research institution to get in the game. “There is a fair level of serendipity involved in creating or patenting technology that turns out to be a commercial success, so we’ve seen these assets held by institutions who you might not think may have a patent on a scientifically important technology, but they do,” he says. Along with some deals with major research universities, Royalty Pharma has inked deals with smaller institutions such as the University of Cincinnati, Children’s Hospital in Boston, and the Philadelphia-based Wistar Institute, Herman reports.
However, both small and large players should understand that executing a royalty monetization agreement can take months of work, complex negotiation, and involve multiple experts, some of whom may require a percentage of the deal. For example, when there are multiple suitors for a particular asset, investment bankers are typically utilized to hold an auction and accept bids for the TTO and its sponsoring organization to consider. Given the expense of the process, some smaller deals will not make financial sense for either the buyer or the seller, but market potential is a big factor. “If you have a million dollars coming in per year, it is not going to lend itself to monetization,” says Webster. “However, if you have something that is small and will grow to $10 million or $20 million a year, that is a different matter.”
Nonetheless, all the investment in biotechnology and medical device research that took place in the 1980s and 1990s is now coming to fruition, and this is expected to fuel continued growth in royalty monetization in coming years, according to Todd Davis, managing director of Cowen Healthcare Royalty Partners, based in Stamford, CT. “Many of those technologies were born in start-up companies and universities, and as those products have been commercialized, we’re seeing more and more royalties — which means that the total available market of royalties is growing,” he says. “That is compounded by the fact that there is growing awareness of [royalty monetization] as an alternative, and a growing level of comfort with this as an alternative.”
Contact Berneman at firstname.lastname@example.org or 215-275-8492; Sencer at email@example.com or 404-727-6123; Wuorinen at firstname.lastname@example.org or 847-491-4838; Webster at email@example.com or 713-209-7350; Herman at firstname.lastname@example.org or 212-883-0200; Davis at email@example.com or 646-562-1168.
Royalty monetization firms
110 East 59th St. – 33rd FL
New York, NY 10022
Paul Capital Healthcare
Two Grand Central Tower
140 E. 45th St. – 44th FL
New York, NY 10017
DRI Capital, Inc.
22nd St Clair Ave. East, Suite 200
Toronto, Ontario M4T 2S5 Canada
Capital Royalty L.P.
Houston, TX 77002
Cowen Healthcare Royalty Partners
177 Broad St.
Stamford, CT 06901