August 20, 2008 / 5:29 PM / 10 years ago

Factbox: What are royalty and revenue interest investments?

Aug 20 (Reuters) - Investors seeking to capture the promise of new drugs while decreasing risk are turning to royalty investment funds.

Some facts about how royalty interest investments work:

* The royalty market is made up of two main types of investment: royalty interest and revenue interest.

* A royalty interest is an asset acquired when a fund pays an up-front lump sum for future royalties on a pharmaceuticals product. For example, a fund might acquire a royalty that is paid by a pharmaceuticals company to a university that discovered the drug. The university might use the funds to build a new wing or fund scholarships.

* A revenue interest, also known as a synthetic royalty, is a royalty created by a fund where none had previously existed. In such cases, the fund provides non-dilutive financing for companies looking to finance their business, such as to develop new products or fund acquisitions. The companies receive an upfront payment in return for a percentage of future sales.

* Cowen Healthcare Royalty Partners estimates the market for traditional royalties at $12 billion to $20 billion a year and estimates the market for synthetic royalties at $120 billion a year.

* The investments give companies an alternative fund-raising mechanism to PIPEs, mezzanine financing, traditional bank and venture debt and dilutive stock sales.

* Investors in such funds include big institutions and endowment funds such as OMERS Capital Partners, New York Life Insurance Company and The Travelers Companies.

* By putting money in a fund that acquires royalty streams, investors are not exposed to fluctuations in a company’s stock price. They make money if sales of a drug exceed the expectations of the fund and the amount paid for the royalty stream over a certain period. They lose money if the drug underperforms.

* Returns on investments in royalty funds tend to remain in a fairly narrow band. They do not increase if a company’s stock takes off, neither do they plunge if a company suffers a setback. Returns are tied to broader political and demographic trends within healthcare.

* The following are the most prominent private equity funds that specialize in healthcare royalty financing:

* Paul Capital Partners

* Cowen Healthcare Royalty Partners

* Royalty Pharma

* Capital Royalty Partners

* DRI Capital

* Non-specialist hedge-funds such as TPG-Axon Capital and Deerfield are also stepping into the arena. (Reporting by Toni Clarke; Editing by Daniel Trotta)

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