Case Studies in Customization

A number of recently completed royalty monetization and revenue interest financing transactions demonstrate the flexibility, utility, and diverse applications of these vehicles. The following case studies provide real-world perspective on the ways in which innovative companies throughout the pharmaceutical and biotechnology industries use these transactions to achieve a variety of strategic objectives.

Reducing the cost and risk of launching a new product Typically, pharmaceutical companies directly pay for contract services from contract development and commercialization organizations. However, a leading provider of these services has developed the capacity to offer a variety of risk-sharing deals. In a 2004 transaction with Eli Lilly & Co., a leading contract pharmaceutical development and commercialization company agreed to provide Lilly with five years of sales services in return for royalties on US net sales of Cymbalta (duloxetine), Lilly's antidepressant and pain reliever. The development and commercialization company also invested $110 million in marketing and milestone payments into the pre-approval Cymbalta program. The structure of the transaction allowed Lilly to establish new revenue streams without taking on the full cost or risk of launching a new product in multiple indications.

Offsetting R&D expenses Glenmark Pharmaceuticals (GPI), a wholly owned subsidiary of India-based Glenmark Pharmaceuticals, was looking to establish a portfolio of generic dermatology products for the US market in order to advance its niche products strategy into new indications and expand its offerings in the US generics space. The company sought non-dilutive access to capital to fund research and development for 16 dermatology products. GPI monetized a portion of the future revenues of these 16 products in return for $27 million, which was provided along with development milestones to match actual clinical development expenses. With this funding, GPI was able to offset its R&D expenses while building its US franchise.

Delaying a partnership to maximize value SkyePharma is a specialist drug delivery company that develops oral and inhaled therapies. The company needed $30 million to fund Phase III trials of its sustained-release morphine product DepoMorphine (now DepoDur). Although SkyePharma intended to find a commercialization partner, the company wanted to delay partnering until Phase III trials were complete in order to optimize its partnering economics.

The company entered into a hybrid monetization plan for a portion of its royalty/revenue interests on four of its products (three smaller products already on the market and DepoMorphine). SkyePharma estimated that delaying the partnership until after Phase III trials enabled the company to receive significant milestones and a higher royalty rate on sales of DepoMorphine than if the partnership had been established at the completion of Phase II trials.

Acquiring a new product Oscient Pharmaceuticals needed capital to acquire US rights to Antara (fenofibrate), a drug indicated for the treatment of high cholesterol and triglycerides. The company wanted a flexible financing vehicle that would be neither too dilutive to equity nor have a heavy impact on near-term cash flow.

Oscient undertook a hybrid financing transaction—consisting of a revenue interest, debt, and equity—that monetized a portion of the sales revenue that would be generated by Antara after its acquisition, as well as a portion of the revenue generated by Factive (gemifloxacin), an antibiotic already marketed by the company. In exchange for portions of the revenue streams, Oscient received $40 million in cash, $20 million in mezzanine debt, and $10 million in equity financing.

The acquisition of Antara transformed the company, leveraging its existing sales force to generate an expanded revenue base and accelerating its path to profitability.

Divesting a royalty to clear the way for a strategic acquisition Prior to approval of the 2004 acquisition of Aventis by Sanofi-Synthelabo, the US Federal Trade Commission required that Aventis divest itself of a future royalty it was entitled to receive from Sepracor on US sales of Lunesta (eszopiclone). This divestiture was required because Sanofi marketed Ambien (zolpidem), the market-leading sleep product. At the time of the proposed acquisition, FDA had not yet approved Lunesta. The US market for prescription sleep products at that time was approximately $1.8 billion and was expected to exceed $3 billion by 2010.

Aventis sold the entire Lunesta royalty stream in return for fixed and milestone payments totaling up to $115 million, payable after commercial launch of Lunesta in the US. Through this royalty monetization, Aventis met the FTC's requirements, allowing Sanofi to successfully complete its $64 billion acquisition of Aventis in December 2004. That same month, the FDA approved Lunesta for the treatment of insomnia.