Investing in Healthcare Royalties: Evaluating Growth, Stability, and Strategic Opportunities for Investors in the Biopharmaceutical Sector

Executive Summary

The biopharmaceutical sector presents significant growth opportunities, driven by continued innovation in drug development and an aging global population. One of the most attractive investment strategies within this industry is healthcare royalty investing, which allows investors to gain exposure to the financial upside of pharmaceutical products without directly taking on the risks of development. This whitepaper evaluates the growth potential, stability, and strategic opportunities that healthcare royalties offer, particularly in the context of the evolving biopharma landscape. Healthcare royalties involve receiving a percentage of sales generated by a pharmaceutical product, often over a defined period. These royalties are typically secured through agreements with drug developers, manufacturers, and marketers. For investors, royalties provide a steady stream of cash flows that can be highly predictable and often less correlated with broader market trends compared to traditional investments in stocks or bonds. The biopharmaceutical sector’s growth drivers include expanding global healthcare needs, innovations in drug modalities, and the shift towards specialty and rare disease treatments. Royalty investments offer access to these growing markets, providing an opportunity for long-term, compounding returns. The stability of royalty income is further bolstered by the longevity of successful drugs and strong intellectual property protections.

This whitepaper explores the strategic advantages of healthcare royalty investing. The ability to invest in a diversified portfolio of royalties across various therapeutic areas, such as oncology, immunology, and neurology, mitigates risk. Furthermore, royalty investors can benefit from strategic acquisitions, including synthetic royalties, as an alternative to traditional financing methods. With favorable market trends, an increasingly innovative pipeline of new drugs, and the continued expansion of biopharma R&D, healthcare royalties represent a compelling investment opportunity for those seeking growth, stability, and attractive risk-adjusted returns in the biopharmaceutical sector.

Introduction

The biopharmaceutical sector has long been a driving force in healthcare innovation, addressing the needs of an ever-growing global population with a demand for advanced medical treatments. The sector’s rapid growth, particularly in specialized medicines and rare disease therapies, is reshaping the landscape of healthcare delivery. As biotechnology and pharmaceutical companies develop cutting-edge therapies, the need for capital to fund research and development (R&D), clinical trials, and commercialization efforts has never been greater. For investors, this evolving environment presents substantial opportunities, but also significant challenges. One such opportunity is investing in healthcare royalties. A royalty is a payment made by a licensee (such as a pharmaceutical company) to a licensor (often an investor, research institution, or other entities) based on the revenue generated from the sale of a product or service. In the biopharmaceutical industry, royalties are often tied to the sales of drugs or therapies that are developed, marketed, and sold by biopharma companies. These agreements can provide investors with a steady stream of income while minimizing exposure to the high risks associated with drug development and commercialization.

Healthcare royalties are increasingly viewed as an attractive asset class for investors seeking to diversify their portfolios and generate consistent returns. With the rising demand for specialty medicines, biologics, and gene therapies, as well as an increasingly complex regulatory landscape, healthcare royalties offer a unique opportunity to capitalize on the ongoing growth of the biopharmaceutical industry. This whitepaper aims to explore the strategic opportunities available through healthcare royalty investments, evaluating their potential for growth, stability, and long-term value generation. By examining key factors driving the biopharmaceutical sector, the structure of royalty agreements, and successful case studies, we will outline why healthcare royalties are a compelling investment strategy for both institutional and individual investors seeking to tap into the expanding biopharma market.

Table 1: Top Healthcare Royalty Investors (2024)

Source: Company Websites and DBMR Analysis

Healthcare Royalties as an Investment Vehicle

Healthcare royalty investments have become a strategic tool for investors seeking to capitalize on the growing demand for biopharmaceutical products while mitigating risks commonly associated with direct investments in drug development. By acquiring royalties from pharmaceutical companies, investors gain exposure to a wide range of products, therapeutic areas, and revenue streams without being directly involved in the manufacturing or commercialization processes. This chapter will explore the key aspects of healthcare royalty investments, their benefits, and how they align with the overall growth trajectory of the biopharmaceutical sector.

• Overview of Healthcare Royalty Investments

Healthcare royalty investments typically involve the acquisition of future royalty payments from pharmaceutical companies, typically in exchange for an upfront lump sum payment. These royalties are often tied to the sales of specific drugs or products, with terms that may span multiple years or even decades. The investor receives a percentage of the product's sales, which generates a stable cash flow stream over time. This type of investment allows investors to access high-quality assets that are already in the market, with a focus on drugs that have proven commercial potential. The royalties can be structured in various ways, such as tiered percentages based on sales thresholds or uncapped royalties that provide long-term upside potential. By participating in healthcare royalties, investors gain exposure to the biopharma sector's growth without assuming the risk of early-stage drug development.

Benefits of Healthcare Royalty Investments

• Stable and Predictable Cash Flow
  

  Healthcare royalties are often associated with long-term contracts tied to established products that generate recurring revenue. As many of these products have already achieved commercial success, investors can benefit from a relatively predictable income stream. For instance, in the portfolio provided, the total cash royalty receipts as of March 31, 2024, amounted to USD 168.1 million, with significant contributions from therapeutic areas such as oncology and hematology. This predictable revenue stream is especially appealing for investors seeking stable cash flow.

• Diversification of Investment Portfolio
  

  Healthcare royalty investments offer diversification by exposure to multiple therapeutic areas and products. In the case of the provided portfolio data, investments are spread across various therapeutic areas, including oncology (58.2 million), hematology (17.7 million), ophthalmology (18.3 million), and neurology (16.5 million). This diversification reduces risk by spreading investments across different market segments and reducing dependence on any single drug or therapeutic area. For investors, this creates a well-rounded exposure to biopharma’s growth, while mitigating the potential impact of challenges in a particular sector.

• Access to Established, Commercialized Products
  

  Unlike venture capital or private equity investments that focus on early-stage companies and drug development, healthcare royalty investments allow investors to participate in the commercial success of established drugs. For instance, drugs like Omidria and Orserdu, both included in the provided data, have already been approved and are generating substantial sales. This reduces the investment risk, as these drugs are past the clinical trial phase and have demonstrated market demand.

• Non-Dilutive Financing for Drug Developers

From the perspective of biopharma companies, royalty transactions provide a form of non-dilutive financing. By selling future royalties, companies can fund research, development, and commercialization without issuing new equity or taking on significant debt. This is particularly valuable for biotech firms, which often face challenges in raising capital through traditional means. In the case of the Trust's investments, royalties from successful products like Orserdu II and Vonjo provide upfront capital to support ongoing innovation and product development.

• Types of Healthcare Royalty Agreements

Healthcare royalty agreements vary in structure and payout. Common types include:

• Traditional Royalties: Investors receive a fixed percentage of sales from an established product, offering predictable income.
• Synthetic Royalties: Created by drug marketers as non-dilutive financing, these often include milestones alongside sales percentages. For example, the Orserdu II agreement combined upfront payments and potential milestones.
• Uncapped Royalties: These agreements offer unlimited upside based on sales growth. The Omidria expansion replaced caps with an uncapped royalty, allowing greater exposure to sales growth.
• Tiered Royalties: Investors’ share increases as sales surpass specific thresholds. This structure incentivizes both parties to drive higher sales, as seen in the Orserdu I and II agreements.

Case Studies of Successful Royalty Transactions

Several successful royalty transactions highlight the potential for significant returns in the healthcare sector. One notable example is the Omidria expansion transaction, where a USD 115 million upfront purchase was made, along with up to USD 55 million in potential milestone payments. This transaction offered a 30% royalty rate on U.S. net sales through December 31, 2031. Omidria, a mature product, had stable sales with predictable growth, and the expansion removed annual sales caps, providing greater upside exposure. This deal is projected to generate substantial cash flows from 2024 through 2031, significantly enhancing the portfolio's value.

Another successful case is the Orserdu I and II royalty transactions, with Orserdu I involving an USD 85 million upfront purchase and mid-single-digit tiered royalties on worldwide net sales, and Orserdu II adding USD 130 million upfront plus a potential USD 10 million milestone. Orserdu, approved by the FDA in January 2023, offers a significant progression-free survival benefit for advanced/metastatic breast cancer patients with ESR1 mutations. The royalties are collected on a one-quarter lag, and the Trust is entitled to additional regulatory and sales-based milestones. These transactions offer uncapped royalties on a long-duration asset, with strong growth potential due to Orserdu's promising clinical profile and market adoption. The Vonjo II royalty transaction is also a standout example. A USD 66 million purchase price was paid for a tiered royalty on worldwide net sales of Vonjo, which was approved by the FDA in February 2022 for Myelofibrosis with severe thrombocytopenia. The product’s first year of sales exceeded analyst expectations, and the Trust is entitled to up to USD 107.5 million in milestone payments. The deal increased exposure to Vonjo’s long-term sales potential, further solidifying its value within the portfolio.

GENFIT has announced a non-dilutive royalty financing agreement with HealthCare Royalty (HCRx) worth up to USD 208.21 million, including USD 146.34 million upfront and up to USD 61.91 million in milestone-based instalments. The deal monetizes a portion of future royalties from global sales of Iqirvo (elafibranor), a liver disease treatment developed with Ipsen. HCRx will receive capped royalty payments until specified returns are achieved, after which all royalties revert to GENFIT. The funding is expected to extend GENFIT’s cash runway beyond 2027 and support the development of its Acute-on-Chronic Liver Failure (ACLF) pipeline. To facilitate the transaction, GENFIT is seeking bondholder approval to amend and repurchase its 2025 OCEANE convertible bonds, allowing it to pledge royalty receivables as security. This financing strengthens GENFIT’s balance sheet without diluting shareholders and enables continued investment in its R&D programs. The deal reflects growing investor confidence in GENFIT’s assets and long-term strategy.

Heidelberg Pharma and HealthCare Royalty (HCRx) amended their royalty financing agreement, resulting in a USD 20 million upfront payment to Heidelberg and elimination of a 2025 sales milestone. The FDA approval milestone was reduced from USD 75 million to USD 70 million, with further reductions for delays. The cap on cumulative royalties was adjusted to allow Heidelberg to regain royalties earlier. This non-dilutive financing, totaling up to USD 90 million including future payments, extends Heidelberg’s cash runway into 2027 and supports development of TLX250-CDx, a PET imaging agent for clear cell renal cancer.

Conclusion

Healthcare royalty investments represent a compelling and underutilized strategy for investors seeking exposure to the biopharmaceutical sector with a balance of growth, stability, and risk-adjusted returns. As demonstrated by the diverse portfolio data and case studies presented ranging from tiered and uncapped royalties on oncology assets like Orserdu and Vonjo, to recent royalty financings involving GENFIT and Heidelberg Pharma royalty streams can offer attractive, predictable income with significant upside linked to the success of underlying therapies. These investments are often backed by FDA- or EMA-approved products addressing critical unmet medical needs, further enhancing their resilience and long-term value.

Compared to traditional equity investments, healthcare royalties mitigate dilution and offer uncapped or milestone-based returns aligned with commercial success. Additionally, portfolio diversification across therapeutic areas and geographies allows for risk spreading and access to a broad range of innovation. As global demand for specialized treatments and orphan drugs continues to rise, healthcare royalty financing is poised to remain a strategic capital solution for biotech companies and a valuable asset class for institutional and sophisticated investors.