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Royalty monetization and revenue interest financing are turning tomorrow's revenue stream into today's capital

Pharmaceutical Executive



Figure 2: A comparison of cash flows between a non-monetized revenue stream (A) and a revenue interest financing transaction (B). Revenue interest transactions create a "synthetic" royalty based on product sales revenue, which is paid to the revenue interest buyer in return for near-term cash
Revenue interest financing converts all or a portion of an existing or future income stream from revenue on product sales into a significant source of up-front capital without impacting reported revenues or EBITDA. This provides an opportunity to use future cash flows to accomplish shorter term objectives and accelerate company growth. In this sort of transaction, a company in effect "borrows" funds and then uses revenues from product sales to "repay" the debt in the form of a synthetic royalty on sales to the investor. (See Figure 2.) The transaction may be also structured to include other financing elements such as equity and/or traditional debt.

Royalty monetization and revenue interest financing transactions offer unparalleled flexibility and customization with respect to the interest being sold, the percentage of the interest sold, the territories covered by the agreement, and the duration of the agreement. Transactions can be structured to comprise royalty or revenue streams derived from a single product or a suite of products, and/or specific geographic territories. Similarly, a transaction can be a straight sale or a structured sale. For the latter, the structure can comprise a percentage and/or tier of royalty or revenue stream, and may include a cap on aggregate payments, either over the life of the transaction or annually, with surplus flowing to the seller. After the term of the agreement is completed, the entire revenue or royalty stream once again flows to the seller.

These transactions can be structured to enable companies to retain a large portion of the upside if the sales generating the royalty or revenue stream exceed expectations. Additionally, revenue interest transactions give a company the opportunity to repurchase revenue interest when additional capital becomes available, preserving long term value and growth potential.

The ability to tailor the duration of an agreement allows for consideration of near-term and long term corporate financing needs, as well as the potential of the product underlying the revenue stream and the changing condition of the financial markets. In today's financial environment, a transaction with an 18- to 24-month horizon provides shelter from the current stormy market conditions while providing maximum financing flexibility once the equity and debt markets become more favorable. In addition, the option for structures with longer time horizons provides companies with an important tool for managing future capital requirements.

This flexibility of structure, interest(s) sold, and length of the transaction enable pharmaceutical companies to meet their near-term capital needs while preserving substantial long term opportunities and growth potential.

Most significantly, the buyer in a product revenue financing transaction is more like a partner than an investor because there's a shared ambition for the success of the product underlying the revenue stream. Generally, the success of an individual product is predicated on the long term overall health of the company with product marketing responsibility. This provides the buyer with strong motivation to establish transaction terms that consider the various development and commercialization needs of specific products and companies on a case-by-case basis. Ultimately, alignment of the seller's and the buyer's objectives under these circumstances better supports long term corporate success than typical debt transactions do.

It's important to note, however, that the realization of these potential benefits is dependent on working with an investor who understands the risks and benefits inherent in developing and commercializing life sciences products. Companies should seek an investor with a level of expertise in the technology, development, manufacture, commercialization and product potential that is commensurate with their own. The growing number of successfully completed royalty monetization and revenue interest financing transactions should help companies identify qualified investors.


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Source: Pharmaceutical Executive,
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