It was learned last week that a follow-up deal to BioPharma Royalty Trust is in the works and could emerge in the next several weeks.

Unlike the first BioPharma, which was tied to the royalty of HIV drug Zerit, the pending deal will tap the cash flow associated with a pool of patents, allowing diversification to improve the structure.

The originator in both deals is Royalty Pharma A.G., a Swiss-American owned firm that purchases royalty interest in various pharmaceutical brands. Officials at Royalty were not reachable as of press time. According to the firm's Web Site, Royalty Pharma owns interests in at least 14 different pharmaceutical royalty streams.

Meanwhile, as sources close to the transaction had anticipated, the senior notes of the first Zerit BioPharma deal began a rapid amortization payment schedule this year. The $57.15 million Standard & Poor's A' rated notes breached covenants for the third consecutive quarter late last year. Currently, the senior noteholders are receiving regular sequential quarterly payment plus any excess cash flow to pay down principal.

Cash flow to the mezzanine tranche has been cut off. The notes were originally rated AA' based on a guaranty from ZC Specialty Insurance Co., a subsidiary of Center Re. The current rating of the mezzanine class is A+', reflecting the downgrade of ZCSI. ZCSI is absorbing the losses the sub debt class, though equity noteholders were wiped out some time ago.

S&P has not taken action on the senior class. According to the agency, if there continues to be excess cash in the quarterly payments, the deal should payout before maturity in July 2006.

BioPharma priced in August 2000. The $60 million deal was brought by WestLB London. Patent holder Yale University had sold the rights to its portion of the revenue stream to Pharma. Zerig, or DT4, is licensed by Bristol-Myers Squibb. Bristol was paying the university a cash stream as a function of the overall revenue that the drug brings in annually.

The lower than expected cash flow to deal was associated with Bristol-Myers selling its entire inventory at a discount to wholesalers during the second half of 2001. The move was considered an effort to achieve corporate financial benchmarks. As a result, there was a significant slip in sales for the drug during subsequent quarters. Bristol-Myers corporate rating was downgraded by S&P in July of this year, partially as a result of the wholesale inventory issue. The company is currently rated AA' by S&P and was AAA' at the close of BioPharma

Copyright 2003 Thomson Media Inc. All Rights Reserved.


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