Synthetic Royalty and Drug Development Financing Study

The cost for research and development of new drugs has increased exponentially since the 1950s. The reasons for the increase may be subject to debate, but what is not in question is that the cost to obtain FDA approval for novel pharmaceutical products can run into the hundreds of millions of dollars.

Many of these new medicines are developed by biotech companies, who have historically financed their businesses with equity and debt capital, and out-licensing transactions with large pharmaceutical companies.

However, there is a relatively new form of financing that avoids the dilutive impact of equity and convertible debt financings, the required interest and principal payments of debt, and the loss of control that may result from out-licensing. In exchange for the agreement by a biotech company to pay milestone and/or royalty payments, specialized investors are willing to provide significant amounts of capital in the form of “synthetic royalty” or drug development financings.

The market for these transactions has developed significantly over the last decade, but still remains opaque. In order to shed some light on the transaction architecture, we have reviewed financings of this type of at least $25 million entered into by public biotech companies in the last four calendar years (January 1, 2019 to December 31, 2022).

Although commercially sensitive information was redacted from some of these publicly filed documents, the agreements include sufficient information on material terms to provide a good sense of the state of the market. 

If you would like to learn more details about our study and this growing market, please feel free to reach out to our team. In addition, for a primer on synthetic royalty financings, please see the recent article we authored for IAM Media.