Structuring Royalty Monetizations - Bankruptcy and the Risk of Contract Rejection

Structuring Royalty Monetizations - Bankruptcy and the Risk of Contract Rejection

February 2024, Covington Alert

A biotech company discovers a novel compound that could lead to a promising new drug. After several years of development, the company licenses patents on the compound to a pharmaceutical company for further development. In return, the pharmaceutical company agrees to pay royalties on sales of the product to the biotech company if the drug is successfully commercialized. The drug is approved and brought to market, performs well, and begins to generate royalties. In order to raise funds for its other activities, the biotech company sells the future royalty stream (a “royalty monetization”) to a buyer in exchange for an upfront cash payment.

The biotech company that sold the royalty stream later files for bankruptcy protection. What happens to the royalty payments?