The news that two venture capital firms, Aisling Capital and Clarus Ventures, have committed close to $50 million apiece to share in Royalty Pharma’s recently purchased revenue stream of a yet to be approved cancer drug comes as a bit of a surprise—mostly because it is unusual, but also because of the sums involved.
It’s also unusual for Royalty Pharma to invest in the royalty stream of a drug that has not yet been approved. It teamed up with the VCs in order to evaluate its potential investment, first announced in July. In return, the VCs are each buying approximately 10 percent of the royalty stream.
Aisling Capital and Clarus Ventures partnered with Royalty Pharma in its $485 million acquisition of Quest Diagnostics’ royalty interest in ibrutinib, a breakthrough cancer drug that could receive U.S. regulatory approval as early as the end of this year. But is it a good deal for the VCs? Most analysts expect ibrutinib to be approved and many expect it to reach blockbuster status, with sales predicted to reach $3.5 billion a year at its peak. The Pink Sheet reported that the royalty interest is in the mid-single digits. If each VC firm holds about a half percent interest, sales would have to reach $10 billion for each firm to recoup its investment.
InVivo Blog reports both venture firms are investing from older funds, raised in 2008 and 2009. Thus they may need to see a quicker return on their investment than would be possible if they invested in development stage companies. Revenue from the royalty stream investment could begin as early as next year, and with investment in royalty streams gaining favor in the life sciences, they could also turn around and sell their interest to other buyers after the pre-commercial risk is removed.
The ibrutinib transaction is the third such deal for a company that has had great success buying royalty streams of already approved drugs, including many blockbusters. “The Clarus and Aisling teams’ expertise in early-stage and development-stage companies and therapies added real value during the course of our collective consideration of this opportunity,” says Pablo Legorreta, founder and CEO of Royalty Pharma.
Ibrutinib is being developed by Pharmacyclics and J&J unit Janssen Pharmaceutical, which filed with the U.S. Food and Drug Administration in July 2013 for approval of ibrutinib in relapsed/refractory mantle cell lymphoma and relapsed/refractory chronic lymphocytic leukemia after receiving Breakthrough Therapy Designation from FDA earlier in the year.
Legorreta hopes to continue working with the VCs in other pre-clinical deals saying that they are “an excellent complement to Royalty Pharma’s core business of acquiring royalty assets on approved drugs.”
Regardless of what the VCs ultimately do with their royalty interest, investing in the royalty stream is likely a way to shorten the time between investment and liquidity, something that most venture capital limited partners are demanding.
August 16, 2013