Friday, December 12, 2008

Deals of the Year Nominee: Vertex/Undisclosed Investors

Ah, awards season. Why should film critics have all the fun? And voting! It's not just for presidential elections. This year your IN VIVO Blog team is nominating a handful of alliances, acquisitions, financings, regulatory negotiations and legislative compromises in our First Annual DOTY competition. And then you, dear readers, will vote (early and often, we hope) for the winner. Imaginary federal and international biopharmaceutical statutes prohibit us from awarding a monetary prize. But our winners, when they die, on their deathbeds, they will receive total consciousness. So they've got that going for them, which is nice.

Your next DOTY nominee is the best example we can think of from 2008 of a phenomenon that will surely gather steam as biotech firms search around for non-dilutive sources of capital: Vertex's June 2008 sale of the royalty stream on its HIV protease inhibitors (which are marketed by GSK) to a group of undisclosed investors.

How much for that money in the window? This time, $160 million. We discuss the concept of royalty and revenue financing in-depth in this IN VIVO feature from June.

Vertex's deal is part of its plan to dispose of non-core assets and shore up its balance sheet as it invests in its hepatitis C franchise; back in June the need to secure capital was less obvious, so Vertex also gets serious points for timing. (What's more, in September, before the economy really began circling the drain, Vertex finalized the terms of a $25.50/share follow-on public offering which eventually netted the biotech $220 million.)

"Receiving a $30 million royalty in 2011 is less relevant for the company" compared to potential future product revenues, Vertex CFO Ian Smith told us back in June. "Our belief is that we should get that money on the balance sheet now, and invest it in R&D. Money that has less significance to us in two or three years," when Vertex could be marketing its own blockbuster HCV protease inhibitor, lowers the company's financial risk today, he pointed out.

Amprenavir (Agenerase) and fosamprenavir (Lexiva) royalties totalled $34 million on sales of $242 million in 2007, but it wasn't like the market was attaching significant value to that royalty stream. Other biotechs are recognizing similar unappreciated or underappreciated revenue or royalty streams and looking to sweep up some cash while they can. Hey it beats selling shares or scrounging for debt, now more than ever.

And there's no shortage of buyers. Beyond the specialists like Paul Capital Healthcare and Cowen Royalty Partners et al., hedge funds are getting into the game as well (see TPG-Axon's April 2008 purchase of half the royalty stream to CV Therapeutics' A2A adenosine receptor agonist regadenoson (Lexiscan), the injectible stress agent, for $185 million).

Expect to hear much more in 2009 about this brand of alternative financing. The phenomenon is by no means new--but it's gathering steam, and it's not just cash-desperate biotechs that might find such deals beneficial, as Vertex's $160 million demonstrates.

"We've never been busier," Paul Capital Healthcare partner Lionel Leventhal told the audience at this years' PSA meeting. "The pharmaceutical industry is a vociferous user of capital and it doesn't matter how the markets are doing - they still need capital." With equity markets down and debt less than an ideal way for the industry to obtain the money it needs, royalties and revenue-interest financing is become more mainstream, he added.

image of bank$y graffiti art by flickr user guano used under a creative commons license.

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