Royalty financing is a strategy that allows (typically) a small cap company to gain access to capital for launching a product in exchange for a percentage of sales generated after launch. Essentially, a financing group agrees to pay a company a set amount of money up front in exchange for an agreed upon percentage of net sales. This benefits the company launching the product by providing the capital needed to hire the sales force, implement infrastructure, and market an approved product. This also allows the company to retain the rights and ability to develop the drug candidate themselves whereby if they had licensed it to a different company, they could lose control of the drug. On the flip side, the financing group seeks to recoup their investment over a longer period of time as the product begins selling. Some of the large financing groups in the royalty financing space include HealthCare Royalty Partners and Royalty Pharma. Luckily, those who may be interested in investing in the financing groups, Royalty Pharma is publicly traded and trades under the ticker RPRX.
An example of a royalty financing deal would be the deal between BioCryst Pharmaceuticals (ticker: BCRX) and Royalty Pharma (ticker: RPRX). Under the terms of this agreement, Royalty Pharma provided BioCryst a payment of $125 million in exchange for 8.75% of annual net sales of Orladeyo (berotralstat) up to $350 million, 2.75% of annual net sales between $350 million and $550 million, and no royalties on annual sales above $550 million. Additionally, Royalty Pharma would receive a percentage of sublicense revenue (royalty revenue BioCryst receives from other companies selling the drug in other countries) and a 1% royalty on global net sales of BioCryst’s candidate BCX9930 (if approved). Thus in this example, BioCryst retains all the commercial rights to its products while giving up a share of revenue. Had they opted to license a candidate out, they would have lost commercial and development opportunities which in the long run could be a large opportunity lost if the candidates became blockbuster drugs in the future.