Northwestern University last month sealed one of the largest royalty monetization deals in history for a university-developed technology when it nabbed $700 million in cash for an undisclosed portion of its worldwide royalty rights to Pfizer’s blockbuster pain drug Lyrica.
NWU’s decision to sell only a portion of the royalty rights is designed to buffer it in case of a slowdown in the sales of Lyrica, which generated more than $1.2 billion in sales through the first nine months of 2007, while ensuring that it continues to pocket residuals for inventing the compound on which the drug is based, a spokesperson for the school said last week.
Lyrica, approved in the US in 2006 for treating fibromyalgia, a kind of neuropathic pain, plays in a market estimated to be worth $1.7 billion and expected to triple to $5.5 billion by 2015, according to estimates from stock research firm Datamonitor.
Lyrica is also used to treat nerve pain associated with diabetes and shingles. Pfizer sold about $1.2 billion worth of the drug in 2006, its first year on the market. Pfizer reported that Lyrica revenues grew 37 percent to $465 million in the third quarter of 2007 compared to the prior-year period, and sales of the drug through the third quarter of 2007 had already topped the 2006 watermark of $1.2 billion.
The underlying compound for the drug was synthesized by NWU professor of chemistry Richard Silverman and Ryszard Andruszkiewicz, a former postdoc in Silverman’s lab, each of whom will receive an undisclosed portion of the upfront payment as per NWU’s faculty inventor policy.
NWU will deposit the rest of the windfall from the Royalty Pharma sale into its endowment, thereby ensuring that it will continue to reap annual financial benefits. According to Alan Cubbage, NWU’s vice president for university relations, the school’s endowment was worth about $6.6 billion as of the end of November 2007.
“I think it is financially prudent that NWU put that money into the endowment, where it will then spin off on an annual basis,” Cubbage told BTW. “So instead of having $700 million that we’re giving up all at once, you put that into the endowment, and that throws off … about 5 percent every year, and then those funds can be used to fund research, financial aid for undergrads and grads, laboratory facilities, et cetera. So it does provide a continuing stream of revenue.”
He said that to get the ball rolling, NWU “made it known that we were interested in such a deal” but “did not say that we were definitely going to do it. We received proposals from a variety of financial companies … [and] made a judgment as to which would be the most beneficial to the university.”
Cubbage said that the school eventually chose Royalty Pharma for its experience in monetizing university royalty streams.
In fact, Royalty Pharma brokered one of the first and best-known deals of this type in 2000 when it bought from Yale University the projected royalty stream associated with the HIV drug Zerit, which was developed at the school.
The deal turned out to be prescient for Yale, as it was able to use the money from that deal to construct a new classroom and research complex for its School of Medicine, while sales of Zerit suffered due to a variety of safety concerns and competing drugs.
NWU’s tactic has become more common in recent years as universities seek to insulate themselves against the risk of declining sales of drugs in which they have royalty stakes.
Universities have picked a few regular partners for such deals. In late 2003, Royalty Pharma paid more than $400 million for approximately 80 percent of Memorial Sloan-Kettering Cancer Center’s US and international royalty stake for the Amgen drugs Neupogen and Neulasta. Last year it bought New York University’s royalty interest in Johnson & Johnson’s Remicade for $650 million (see BTW, 5/14/2007); and (along with Gilead) purchased Emory University’s royalty interest in Gilead’s Emtriva for $525 million (BTW, 3/5/2007).
“Obviously there may have been more money if we had just ridden it all the way through, but the university made a judgment that there is value in getting a certain amount of it as a cash payment now.”
Meanwhile, Royalty Pharma competitor Drug Royalty Corporation last year acquired the University of Michigan’s future royalties related to FluMist, an intranasal flu vaccine marketed by AstraZeneca. That deal could be worth as much as $35 million to the school (BTW, 7/16/2007).
In addition, DRC bought the future royalties on sales of the Amgen and Wyeth monoclonal antibody Enbrel from Massachusetts General Hospital (BTW, 5/14/2007). DRC had also acquired royalty rights to Remicade from its NYU-affiliated inventor several years before Royalty Pharma bought a portion of NYU’s interest in the drug.
While most of these deals involve a complete buyout of the school’s future royalty rights to a drug, some schools have begun opting to retain at least a small portion of their future royalties to ensure that a royalty stream doesn’t completely dry up in the future.
“It’s a question of monetizing an asset,” Cubbage said. “Basically the university made a decision to take an immediate cash payment for a portion of those royalties rather than let the royalty stream play out.
“Obviously there may have been more money if we had just ridden it all the way through, but the university made a judgment that there is value in getting a certain amount of it as a cash payment now,” he added. “For us, it was simply a decision of how much … the university want[ed] to hedge its bets. It was strictly a financial decision.” Cubbage declined to disclose the percentage of future royalties that Royalty Pharma acquired.
According to Todd Sherer, associate vice president for research and director of the office of technology transfer at Emory University, the same amount of effort goes into evaluating the worth of a projected royalty stream regardless of the portion a university wants to off-load.
“If you think you’re getting a fair price and can get that in a one-time payment, then that’s great,” said Sherer. “But I think there is another factor in that universities want to make sure that they have some revenue coming in to help offset the expense of the tech-transfer operation going forward, so that would be a driver in retaining some portion of the royalties.”
Sherer added that Emory balanced its decision to sell the entire royalty stream to Emtriva with the fact that it retained the royalty rights to another HIV drug originally developed at the university and sold by GlaxoSmithKline.
Although tech-transfer offices have beefed up their staff and business savvy in recent years to enable such deals, many still lack the resources to conduct the in-depth market analyses needed to determine a fair price for future royalty streams.
As such, many offices turn to outside financial advisors. Although NWU enlisted such expertise, it was also able to mitigate this issue by tapping into some other internal resources.
“We have very good internal resources, such as our tech-transfer office and our VP for investments, but in a situation like this we also retained outside counsel in terms of financial advice and legal advice,” Cubbage said. Morgan Stanley served as structuring advisor and Covington & Burling LLP as legal advisor to NWU for the sale.
“We’re also very fortunate in that we have an extraordinarily good investment committee on our board of trustees,” Cubbage added. “Obviously the advice and counsel of the members of our board was extremely important to us.”