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Monetizing Future Prospects Now

This article was originally published in Start Up

Executive Summary

Investors in the drug business have had to choose between high-risk, high-reward biotechnology and lower-risk, established pharmaceutical companies with predictable earnings streams. In either case, they take on development risk--the possibility that products will fail in clinical trials and affect the company working on them. But now Paul Capital Partners hopes to capitalize on the largely unexplored niche of investing only in commercial risk. It recently closed its $300 million Royalty Acquisition Fund to effectively buy out streams of royalties from marketed products, paying up-front for a drug's lifetime of royalties.

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Cambridge Antibody Technology PLC's January £55 million share-for-share offer for Drug Royalty demonstrates not only CAT's growth in the last decade but also a willingness by biotech companies to indulge in a little creative financing. The move will help CAT reduce its cash burn and ratchet up its R&D spending at a time when the pace of more traditional methods of raising cash remains sluggish. And not least important, the deal illustrates how a transparent financing transaction to improve biotech P&L can be a straightforward alternative to today's obfuscating accounting practices which, in the current climate, look disturbingly Enronian.

The Un-CRO

One company generally characterized as a CRO, but which touts itself as being much more than an outsourcing business, stands out as having actually formed the sorts of risk-sharing arrangements with its pharmaceutical clients that other R&D outsourcers only talk about. AAI is going further than most other CROS are even contemplating: it is willing to accept pre-FDA approval risk in exchange for milestone and royalty rights. AAI is also developing its own compounds, which it will outlicense for marketing.So far, however, the company's recent lackluster financial performance makes it look a lot like other CROs. AAI's management, however, argues that in the long run, its ability to provide product solutions--including the extension of current products through dosage reformulation and drug delivery improvements-- will stand it in good stead by giving pharma companies that are increasingly preoccupied with blockbusters, a way to extend the life of drugs it might otherwise abandon.

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