Royalties Explained

Royalty streams are created during the drug discovery and development process through licensing agreements negotiated between parties including inventors, academic and research institutions and life sciences companies. Royalties are created when an individual or an organization “the Licensor” licenses intellectual property or other rights to a third party. As consideration for the use of this intellectual property in the development, manufacture or sale of products, the Licensor is entitled to receive a royalty stream equal to a percentage of net sales of such products.

Royalties can also be created where one did not previously exist. The marketer of a drug can sell a portion of future revenues on its commercialized products, thus creating a synthetic royalty. In this scenario the marketer of the drug would best compare to the ‘licensee’ and the buyer to the ‘licensor’ of a traditional royalty.

Each of these parties have different motivations for monetizing their royalty entitlements:

Inventors

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Inventors

Typically seeking to mitigate risk because their royalty entitlement often makes up a substantial portion of their net worth. They also sell royalties to accelerate cash flows for estate planning purposes or to pursue personal endeavors such as philanthropy.

Academic and
research institutions

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Academic and
research institutions

Often monetize royalty streams to mitigate risk, to generate funds that can be re-invested in research, to fund capital projects or to remove perceived conflicts.

Life sciences companies

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Life sciences companies

View royalty monetization and revenue interest transactions as an attractive financing alternative to support the companies’ research and development efforts, to bridge cash flow needs, and to accelerate the recognition of royalty revenues.