Memorial Sloan-Kettering Cancer Center is gearing up to sell a $250 million piece of its future foreign patent royalties from cancer treatment drug Neupogen/Neulasta. Among the likely bidders are several firms with a history of securitizing pharmaceutical royalty receivables.

Should Sloan-Kettering be unable to secure a satisfactory price, the research center is exploring the option of securitizing the assets on its own, sources said.

Neupogen is a first-generation white blood cell booster for cancer patients receiving chemotherapy, and needs to be taken every day. Neulasta serves the same purpose, but only needs to be taken once every seven to 14 days.

Last January, Sloan-Kettering sold an 80% interest in its U.S. royalties from Neupogen/Neulasta to Royalty Pharma AG for $263 million, which subsequently added that royalty stream to its Royalty Pharma Finance Trust securitization vehicle. Sloan-Kettering kept the remaining 20% U.S. royalty interest and picked up a $7 million equity interest in Royalty Pharma. Once again, JPMorgan Securities is the probable arranger on the upcoming transaction, said a source familiar with the situation.

Royalty Pharma is a leading contender, however, the field of prospective buyers is more crowded this time around, sources said. At least two new issuers have brought pharmaceutical royalty-backed transactions to the securitization market in the interim, including private equity firm Paul Capital and Canada-based Drug Royalty Corp., and both entities are presumed to be interested in Sloan-Kettering's offering (see side bar).

Capital Royalty LLC, a Houston-based acquirer of these types of revenue streams, is also in the running, market sources said. The yearling company - which recently raised $300 million in equity capital - is led by the former principals of Drug Royalty.

Sources also reported a growing interest from private equity firms and hedge funds - as well as from progressive insurance companies - and not just those that specialize in buying royalty streams.

"The first time out, there were five logical buyers; now there are 35," said a source close to the deal. "The market niche has expanded dramatically, and a number of firms now have the expertise to evaluate these transactions and make investments."

Nonetheless, one market observer expects that it will come down to the usual suspects at the finish line. "The initial group of people chasing spread, and the search for opportunities in non-correlated assets like this, are broad enough that there will likely be a bigger initial look group, but the final bidders will probably still be [Royalty Pharma, Paul Capital and Drug Royalty] plus a couple more," the source said.

Sloan-Kettering would have sold both the foreign and U.S. royalties in one package, had demand been sufficient. The market wasn't big enough to absorb a deal of that size, said a source familiar with the transaction, adding that Sloan-Kettering had considered chopping the royalty stream into more manageable portions if there were no buyers. Its unwieldy size was not the only hurdle as foreign sales of Neulasta, the newer of the two drugs with a longer patent life, were not yet strong enough.

With foreign sales now reaching a critical mass, Sloan-Kettering believes the time is right, the source said. While a tough spread environment and increased market awareness have doubtless whetted appetites, Sloan-Kettering is still prepared to arrange a more palatable offering if necessary. "If there is not a player willing to do the whole transaction, [Sloan-Kettering] might set up some kind of structure . . . to slice and dice it," the source said.

While there are currently several universities and smaller drug companies looking to monetize their patent royalty streams to capture cash early, the impetus behind the Sloan Kettering transaction is risk avoidance. "As the royalty grows, it becomes a huge risk. [Sloan-Kettering] wants to reduce their risk from an asset allocation and diversification standpoint. You can't sell the drug short, but you can sell the royalty or monetize it in some way," the source said.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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