Stream Power

Royalty monetization and revenue interest financing are turning tomorrow's revenue stream into today's capital
Feb 01, 2009
By Pharmaceutical Executive

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.

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)
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.)