Royalty Pharma understands the distinct nature of each situation; the structure of each transaction is usually defined by a combination of factors including: the terms of the license agreement, the short and long term needs of the royalty holder and the valuation of the royalty stream. The following case studies are based on actual acquisitions made by Royalty Pharma and illustrate how the Company uses its flexibility and creativity to ensure that each agreement is mutually beneficial.
In the late 1990s, Royalty Pharma (RP) met several times with Memorial Sloan Kettering (MSK) to discuss a possible sale of the institution’s royalty in Neupogen®/Neulasta®. Neupogen® (filgrastim) and Neulasta® (pegfilgrastim) are white blood cell stimulants used to prevent neutropenia in patients undergoing chemotherapy. Sold by Amgen in the US and most countries around the world, this global franchise reached sales of $4.6bn in 2009.
MSK hired a financial advisor to assist with a transaction. Initially, MSK explored a securitization transaction to borrow using the royalty stream as collateral. RP demonstrated to MSK and its advisor that a sale of the asset provided the institution with significantly more up-front capital and eliminated the risks it was looking to mitigate. A securitization would have resulted in only about half the up-front proceeds and would have actually magnified the downside risk.
In two transactions in January 2004 and August 2005, MSK sold 80% of its Neupogen®/Neulasta® royalty to RP for $400mm, valuing 100% of the royalty at $500mm. Prior to the sale of the royalty, MSK had an endowment with $1.6bn of assets – therefore the institution held $2.1bn of financial assets, $1.6bn of which were in the endowment, well diversified among different asset classes, and $500mm in a concentrated royalty. The funding of the hospital’s R&D had become fully dependent on the royalty stream.
Representing around 25% of MSK financial assets, a sale of 80% of the royalty enabled the hospital to diversify and complete some important capital projects, including the construction of a new research facility (see below left) and provided MSK with the ability to budget more effectively. Alternatively MSK was considering funding the construction of the building by leveraging; this would have caused a potential downgrade of MSK’s credit quality, impacting the institution’s overall financial condition. MSK retained 20% of the royalty streams and shares in royalties and financial upside should they exceed expectations.
RP offered MSK the possibility of reinvesting a portion of the $400mm received in RP. MSK’s endowment invested in RP’s portfolio and, as a result, converted a large investment in a single product royalty into cash up-front that they could then invest on a more diversified basis, and an investment in a diversified portfolio of royalties. MSK receives quarterly dividends from RP’s portfolio and has benefited from capital appreciation over the years.
Royalty Pharma (RP) had multiple discussions in 2004 and 2005 with Emory University’s (Emory) management and Board of Trustees regarding a purchase of their emtricitabine royalty, which led to an initial formal offer by RP in early 2005. Emtricitabine is a key compound in Truvada® and Atripla®, Gilead’s $4.9bn leading HIV/Aids franchise.
The emtricitabine royalty was 40% owned by three inventors, with the remaining 60% by their laboratory and Emory’s medical school. The royalty represented a substantial portion of the inventors net worth, as well as a significant portion of the laboratory’s and medical school's financial assets, exposing the holders to meaningful single-product risk over extended periods of time. Similarly, the long-term time horizon (fifteen years) over which the value of the asset is realized was not appropriate for these holders. Conceptually, the royalty asset could have been an attractive asset for the Emory endowment; however, at a value of $525mm, it would have been too large a position for the Emory endowment as well. Lastly, the transfer of the royalty from its original holders to the Emory endowment would have resulted in significant conflicts of interest.
RP’s initial offer led Emory to hire a financial advisor and start a formal process to monetize the royalty. RP also approached Gilead, the marketer of the drug, and eventually RP and Gilead announced in July 2005 the acquisition of Emory’s emtricitabine royalty for $525mm.
RP provided the holders with an opportunity to diversify out of a highly concentrated asset, whose value would have been realized over fifteen years and to redeploy capital on a current basis.
RP offered the inventors and Emory the possibility of reinvesting a portion of the $525mm received into Royalty Pharma. The inventors and Emory’s endowment invested a meaningful amount of capital in RP and, as a result, converted a large investment in a single product royalty into cash up-front they could then invest on a more diversified basis and an investment in a diversified portfolio of royalties. The inventors and Emory receive quarterly dividends from RP’s portfolio and have benefited from capital appreciation over the years.
RP’s expertise in dealing with academic institutions and companies enabled an expeditious closing of the transaction - RP was instrumental in solving issues generally present in licensee/licensor relationships.
Emory was able to accomplish many of its stated goals as a result of this transaction at more rapid pace.
Royalty Pharma (RP) had evaluated a purchase of Cambridge Antibody Technology (CAT) by itself or with a partner since 2004.
In 2005, AstraZeneca (AZ) signed a collaboration agreement with CAT to jointly develop antibody products and subsequently acquired 19% of CAT via a $190mm equity infusion.
On May 15, 2006, AZ launched a tender offer to acquire the remaining 81% of CAT it did not own at a $1.3bn valuation, representing a 90% premium relative to CAT's approximate $700mm market value.
On May 15, 2006, RP made an offer to AZ to acquire CAT’s passive royalty interest in Abbott’s Humira®.
On October 26, 2006, RP and AZ jointly announced the sale by AZ of the Humira® royalty to RP for $700mm.
AZ’s strategic interest in CAT was to acquire the antibody technology platform and pipeline drugs. Nonetheless, in acquiring CAT for $1.3bn, AZ also purchased a royalty interest in Abbott’s Humira®, a non-core passive financial asset. Partnering with RP optimized AZ’s acquisition of CAT:
RP acquired the Humira® royalty for $700mm in cash up-front.
As a result, AZ’s net acquisition cost of CAT’s technology platform and pipeline was ultimately reduced to only $300mm after adjusting for the $700mm value of the Humira® royalty and approximately $300mm of CAT cash.
When AZ launched the CAT tender offer, analysts and investors reacted positively to the strategic rationale and fit, but questioned the valuation and high premium. Following the announcement of the sale of the Humira® royalty to RP and upon a re-analysis of the transaction, analysts and investors applauded the outcome – evidenced by an increase in the AZ stock price.