TLDR; Royalty agreements are on the rise, and threaten to eat into big pharma’s top-line and limit their role in the biopharma ecosystem.

Once little-known outside financing circles, Royalty Pharma has quietly amassed a stake in ~25% of all blockbuster drugs on the market.

Their impressive portfolio includes royalties on more than 45 commercial products, including big names like AbbVie and J&Js Imbruvica, Astellas and Pfizer’s Xtandi, Biogen’s Tysabri, Gilead’s HIV franchise, and Merk’s Januvia. 

Within their diverse portfolio, 7 of the products generate at least $3 billion a year. The jewel in their crown is their stake in Vertex’s cystic fibrosis franchise, including Kalydeco, Symdeko and Trikafta which combined brought in an eye-watering $8.4 billion revenue in 2022.

The combined royalties equate to about $2.6 billion in annual revenue for Royalty Pharma. No costs associated with development. No costs for manufacturing. No costs for marketing. 

And all this with a management team of just 35 people.

If you are feeling a degree of business model envy, you are not alone.

Royalty Pharma saw a gap in the drug venture market, and satisfied it spectacularly. 

Founded in 1996 by Pablo Legorreta, a former investment banker, Royalty Pharma spotted an unmet need to provide financing to late-stage and marketed drugs. This involves co-funding late-stage clinical trials and new product launches in exchange for future royalties, and acquiring existing royalties from the original innovators.

The company went on to forge relationships with inventors from academic institutions, research hospitals and not-for-profits through to small and mid-cap biotechs, and leading global pharma companies. 

Notable early successes included two back-to-back transactions with Memorial Sloan Kettering Cancer Centre in 2004 and 2005, whereby MSKCC sold 80% of its Neupogen/Neulasta royalty for $400 million. In 2014, Royalty Pharma paid $3.3 billion for the stake held by the Cystic Fibrosis Foundation in Vertex’s cystic fibrosis portfolio which would become their biggest source of royalty revenues.

Between 1996 and 2022, Royalty Pharma would go on to provide more than $20 billion of funding to acquire pharmaceutical royalties. The company estimates this to represent more than 50% of all royalty transactions in that period. Furthermore, the company has dominated higher value transactions, completing 11 of the 13 transactions with a value above $500 million since 1996.

In June 2020, Royalty Pharma went public and soared, raising $2.2 billion in its IPO.

However, Royalty Pharma’s dominance is waning and a wave of copy-cat competitors are finding their own niches.

Royalty Pharma has provided a roadmap for other financiers to follow. 

In late 2022, HealthCare Royalty Partners struck a deal with Atara Biotherapeutics to take royalties in exchange for $31 million upfront cash to support the launch of Ebvallo, a first-in-class allogeneic cell therapy, in Europe. 

Blackstone Life Sciences, owned by the US investment behemoth of the same name, led a whopping $2 billion deal in 2020 with Alnylam, anchored on exchange of 50% of the royalties owed to Alnylam on global sales of inclisiran, an investigational RNAi therapeutic for the treatment of hypercholesterolemia.

Other players are opening up new areas of the market. 

XOMA, which pivoted in 2017 to become a self-styled ‘royalty aggregator that thinks like a biotech’, is amassing earlier-stage royalties. It has built a diverse portfolio of candidates in early-stage development by the likes of Bayer, Takeda, Roche, Merck, Janssen and Novartis. Shanghai-based Zai Labs is a commercial-stage biotech company acquiring royalties and rights to sell drugs in China. 

Economic forces mean royalty deals are on the up, and getting earlier stage. 

Signs suggest that royalty agreements are becoming more enticing as cash-strapped biotechs stare down the rising cost and complexity of drug development. 

Clarke Futch, CEO of Healthcare Royalty Partners, told the Financial Times in December 2022 that enquiries from biotechs about royalty sales had risen 50% since the second quarter. He also observed that the companies coming forward generally had an average market cap around $2 billion, less than half the average of $5 billion 1-2 years previously.

Similarly, Pablo Legorreta of Royalty Pharma has said interest in royalty deals rose more than 50% between 2019 and 2021. In May 2022, this prompted them to almost double their capital deployment target to $10-12 billion over the next five years.

This accompanies a dramatic trend in sinking biotech valuations following a boom during COVID-19 pandemic, with biotech groups listed in 2021 trading on average 37% below their IPO price just one year on. This pressure is compounded by high demand for capital in an environment where supply from public markets has fallen away dramatically, but the pace of invention from top academic institutions has been maintained.

With royalty deals increasing, big pharma must navigate growing impact on innovation and top-lines.

Royalty aggregators hold increasing sway on the market, in the dual form of readily deployed capital and the soft power of building bridges within the wider life sciences ecosystem. 

Recent deals also suggest royalty companies are moving towards more pioneering frontier medicines. Between the end of 2022 and early 2023, Royalty Pharma acquired royalties in Amgen’s siRNA therapeutics olparsiran, and inked deals with Ionis to acquire royalty in Biogen’s Spinraza and Novartis’ pelacarsen for around $1 billion. Similarly, HealthCare Royalty Partners deal with Atara Biotherapeutics on allogeneic cell therapy Ebvallo signifies growing confidence to expand their portfolio beyond traditional oral small molecules and biologics. 

With royalty transactions at earlier stages increasing, large biopharma can expect to see more of their top-line revenue dished out to royalty holders. Typical royalty deals run between 4-10% of sales based on publicly disclosed agreements by Royalty Pharma in their S-1

However, in some cases biopharma companies can be tied into forking over astonishing sums every year. For example, Royalty Pharma is entitled to 18% of annual net global sales of Biogen’s Tysabri up to $2 billion, and 25% of any global sales above that cap, in perpetuity.

Big pharma has left this gap in the market, but also has the power to close it off. 

Interestingly, Royalty Pharma and their peers refer to pharmaceutical companies as ‘marketers’. This is an intriguingly reductive take on the role played by large pharma companies, who often like to brand themselves as scientific hotbeds and sources of innovation.

The rise of royalties may be a trigger to finally make good on that promise. 

Large pharma must proactively finance and shepherd early innovation, or risk inheriting royalty commitments with every acquisition. Offering a superior service to royalty aggregators requires two simple ingredients; access to low-cost capital, and connections to innovators in academia, non-profits and early biopharma.

Big pharma has left this gap in the ecosystem, but also has the tools to fill it and strengthen their claim as innovators.


The World in a Grain of Sand; KdT Ventures: for more on Royalty Pharma, listen to this fascinating podcast breaking down the Royalty Pharma S-1.

Royalty Pharma S-1 –