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.
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.