Two transactions announced yesterday focused attention on the arcane world in which biotech companies look to monetise, or more occasionally buy out obligations to pay, the royalty streams on future sales of their products.
ImmunoGen sold a portion of its royalty interest in Roche’s Kadcyla for $200m to avoid a fundraising that would otherwise have had to come from issuing shares. Infinity Pharmaceutical meanwhile bought out Takeda’s pretty heavy-duty royalty interest in its lead product duvelisib for a seemingly bargain price of $52.5m.
ImmunoGen’s deal was with TPG, a financial investor, and transfers rights to receive all of its 2-5% royalty on Kadcyla up to a certain threshold, and 15% of the royalty payments thereafter. Surprisingly, EvaluatePharma’s NPV of the Kadcyla royalty stream owed to ImmunoGen is much higher, at $634m, than the consideration paid, but the complex deal is designed to allow ImmunoGen to retain much of the long-term value of the product.
It seems likely that the unexpected negative outcome of the Marianne study last year, when Kadcyla showed no clear advantage over Herceptin in the initial treatment of breast cancer, has slowed the sales trajectory of this drug to the extent that ImmunoGen can no longer rely on the royalty payments (Roche sings so long to Kadcyla in first-line breast cancer, December 19, 2014). ImmunoGen has described the deal as non-dilutive, highlighting the fact that it avoided issuing equity. Investors appreciated the move, as the shares rose by 5% on the news.
Infinity had a more urgent need to buy out Takeda’s 7-11% royalty interest in its lead programme and managed to achieve an attractive price. It secured the option deal last year, ahead of its partnering deal with AbbVie, and the exercise was widely expected; as a result, its shares were largely unmoved on the news.
A back-of-an-envelope calculation of the consideration, including the $5m paid to secure the option in the first place, would suggest Takeda’s NPV of duvelisib must have been of the order of $575m – dividing the consideration by an assumed blended royalty rate of 10%. EvaluatePharma’s NPV based on consensus forecast revenues for duvelisib is a much higher figure, at around $1.7bn.
Quite how Infinity persuaded Takeda to accept such a price is unknown, but it suggests the Japanese firm had either a lower assessment of its probability of success or a more pessimistic view of the commercial potential than is prevalent on the sell-side. Interestingly, the current market price for Infinity seems to concur more with Takeda’s valuation for duvelisib: Infinity’s market cap is around $694m and enterprise value is $530m, based on the mid-point of guided year-end 2015 cash of $145m-$165m.
A number of similar royalty transactions have been concluded in recent months (see table), most notably the monster deal in which Royalty Pharma, the best known of the financial investors in this market, acquired from the US Cystic Fibrosis Foundation its interest in Vertex’s Kalydeco and combination products, paying $3.3bn. A number of charitable groups hold such royalty interests on products having funded the original research at academic institutions, and may be sitting on valuable assets.
One of the best known of the latter type of deal, where biotech companies buy out a royalty obligation, was pulled off by Puma Biotechnology last year. In this deal, Puma persuaded Pfizer, the originator of the product, to forgo certain legacy R&D obligations in exchange for a lower royalty rate on neratinib. Puma relieved Pfizer of the need to fund some $30m of R&D expenditure in exchange for a reduced royalty rate, fixed in the low to mid teens rather than the previous range of up to 20% (Puma leaps to biotech’s aid, 23 July 2014).
What was most surprising was that just 15 minutes after announcing the transaction, Puma disclosed that results from a huge phase III clinical trial of neratinib in the extended adjuvant breast cancer setting were positive, propelling its shares to a 270% rise on the day. It would seem that for agreeing to an additional spend of $30m, Puma had managed to relieve Pfizer of perhaps a 5 percentage point royalty interest in a product that EvaluatePharma data now suggest is worth $5bn.
For biotech firms, the motivation for entering such royalty transactions are very simple: selling a royalty can reduce the need to raise money via equity, and buying out a royalty obligation can improve the economics in a product. Both types of transaction can create value if done carefully, but this needs careful scrutiny of sales forecasts.
|Recent royalty transactions|
|Buyer||Seller||Product (Company)||Royalty interest||Date||Terms|
|Infinity Pharmaceuticals||Takeda||Duvelisib (Infinity/AbbVie)||7-11% of net sales||Mar-15||$52.5m (option acquired for $5m in July 2014)|
|TPG||ImmunoGen||Kadcyla (Roche)||3-5% of net sales||Mar-15||$200m for 100% of Kadcyla royalty up to $235m-$260m, falling to 15% thereafter.|
|Royalty Pharma||Cystic Fibrosis Foundation||Kalydeco (Vertex)||Nov-14||$3.3bn|
|PDL||University of Michigan||Cerdelga (Sanofi)||Nov-14||$65.6m|
|Royalty Pharma||Vendors of Fumapharm||Tecfidera (Biogen Idec)||Nov-14||$510m|
|Puma Biotechnology||Pfizer||Neratinib (Puma)||Cut from 10-20% to fixed low/mid teen||Jul-14||Novation of c$30m of R&D funding commitment|