HealthCare Royalty Partners
Gregory B. Brown, MD. is a Co-Founder and Vice Chairman of HealthCare Royalty Partners. Dr. Brown has held positions in nearly even area of healthcare. Educated as a transplantation immunologist and trained as a thoracic and vascular surgeon, he practiced thoracic and vascular surgery, founded an HMO, lead a investment banking practice and was a partner at Paul Capital Partners He holds a BA from Yale, an MD from SUNY Upstate Medical Center and an MBA from Harvard Business School. He currently serves on the board of MonoSol Rx and is a board observer at Vanderbilt S.a.r.l., AcuFocus, and Cardiorentis AG.
1:20 – HealthCare Royalty Partners’ strategy.
2:11 – What does HealthCare Royalty Partners look for in Medtech.
2:54 – Does HealthCare Royalty Partners compete with venture debt?
4:12 – How do reluctant reimburses factor into the potential for royalty?
4:40 – How does HealthCare Royalty perform due diligence?
5:40 – What’s your assessment of the state of medtech? Any concerns about the overall health of medtech?
7:14 – How does HealthCare Royalty Partners exit an investment?
8:12 – Are direct equity investments a possibility?
9:13 – What is the population of Royalty-based funds?
10:05 – The number of royalty-based deals has grown by more than 10 times.
11:30 – Does HealthCare Royalty take board seats?
12:00 – What’s the largest deal you’ve done? Does Healthcare Royalty work with entities other than companies?
13:52 – What is HealthCare Royalty’s success rate?
14:48 – Are you immune to sagging IPO markets or weak M&A?
16:16 – What does the future hold for HealthCare Royalty Partners?
Tom Salemi: Hi, this is Tom Salemi from Healthegy TV. We are at healthcare’s hometown. It’s a term I’m just coining now, the JP Morgan conference, and I’m happy to be here with Greg Brown, Dr. Greg Brown, one of the founders of HealthCare Royalty Partners. Thanks for joining us.
Greg Brown: Thanks for having me, Tom.
TS: Now you showed me your meeting sheet, and it is full. Your dance card is full.
GB: it is a great venue for meeting companies for the first time, it’s a great venue for catching up with companies that we’ve been tracking, and for meeting with portfolio companies, as well as just about anybody in healthcare is here this week.
TS: And as we talked about you, get more meetings walking down the street, bumping into people than you do on your way to meetings. So it’s kind of meetings upon meetings.
GB: It is indeed. If Starbucks could actually get a commission for all of the chance meetings that take place and generate deals, their stock price could go up even more.
TS: There might be a royalty stream there you could invest in.
GB: We could monetize that, yes.
TS: Well, let’s talk about HealthCare Royalty Partners. I mean you invest not in the – you don’t acquire equity from companies; you get royalties for products. You do healthcare and biotech. And other industries as well?
GB: We are focused complete on FDA regulated, patent protected healthcare products. So it’s probably 80% biopharmaceutical and 20% medical devices.
TS: What is the opportunity in medtech for you? We’ll just focus on the medtech aspect, since it’s for the medtech conference. It would seem to be that there would be a lot of maturing companies there with products that have – accruing some kind of revenue. Perhaps they have FDA approval, but they are in desperate need of capital to kind of really fund their commercial operations. Is there an abundance of those companies, and is that your sweet spot? Or is your sweet spot much broader than that?
GB: You’re quite accurate, Tom. We’re looking for companies that are commercial or very near commercial. Generally, the companies that come to us are not yet profitable, but they have an approved product or a product about to be approved, and they’re ready to use capital to grow. Equity capital can be very expensive. We’re providing non-dilutive capital in an amount that can be fairly significant. Our deal sizes range from 20 million on up. And what we’re doing is providing capital to those companies that may want to do a sales force expansion, may want to acquire a product. And we have a variety of approaches and structures that we use to get that capital to them.
TS: Are you then competing more with the banks and venture debt than with venture investors?
GB: You know, it’s an interesting question. Certainly we see the venture debt parties and we know them well. Their deal sizes tend to be up to about 20 million to 30 million. Our deal sizes begin at 20 and go on up. So we’re providing a bigger quantum of capital. In general, the average term of our deals is somewhat longer, and we’re probably more flexible in the way we structure our deals. As you mentioned, if we’re providing credit to a company, we may include a royalty component as opposed to simply relying on principle and interest payments. So we have a lot more structural flexibility. And certainly if a company has an extant royalty stream, and they’re not getting credit for that, we can really monetize a royalty stream either by acquiring it or by lending against that stream.
TS: Interesting. There was a time, and it’s interesting that FDA meant royalty stream. Or meant commercial operations. You were going to get paid of what you do, and that would make your job easier. But with the challenges with payers an CMS becoming more stringent upon what they’ll pay for, has that made your job harder as to what will generate a royalty stream and what will not?
GB: It’s certainly become an increasingly dominant part of our diligence on any product. So as we look at the commercial potential of a product – and frankly, what we’re doing is monetizing commercial risk – the ability to analyze the reimbursement landscape, project what payment is going to be, and how that’s going to run into the calculus of what their true revenue potential and therefore royalty potential is has become an indispensible part of our analysis.
TS: Is your due diligence primarily financial, an Excel spreadsheet where you just look at the numbers? Or are you betting on management teams and technology and market sizes or clinical areas, etc.?
GB: Look, I think if a company wants to talk to us, they would find that it’s not unlike talking to a potential licensing partner or a strategic partner because we look at the full commercial potential. So we interview physicians, we look at the regulatory approval, we look at the reimbursement landscape, we look at the intellectual property that underlies both the patent estate and any particular know-how or other barriers to entry. We look at manufacturing. We’re very concerned to make sure that the full value chain, from a commercial point of view, is well protected over the term of our deal. And those terms tend to be fairly long in comparison with a lot of forms of financing. So we take a fair amount of care in evaluating all of those elements.
TS: I would think you have a comprehensive database of companies within the medtech space that you would see as potential targets. You track these companies; you’re not just waiting for someone to call you, obviously. You’re taking stock of the entire population and trying to find out which ones are right for you. Looking at that list in your head, you don’t have it in front of you, what’s your assessment of the state of medtech today? Do we have a lot of robust companies that are poised to do well? Or are you seeing any signs of concern that overall health of medtech is diminishing?
GB: It’s a great question. I think it’s a little bit of poverty and riches. The poverty is that the medtech space has suffered from a decline in capital available to it as a number of the venture firms and some of the institutional investors who had historically invested in medtech have backed away from the space and reduce their exposure. At the same time, the technology has become far more robust. The FDA – well, while the payers are tough, the FDA had become friendlier.
GB: And we’re seeing the opportunity set frankly be very attractive. Now if we’re a capital provider, and the main problem is a dearth of capital, then it’s actually a very interesting time for us.
GB: The one thing I would say about medical technologies is they tend to have a shorter product lifecycle. And when we’re making biopharm investments, those have an average duration of about ten years or potentially even more, depending on patent life. Our medtech investments tend to have a shorter term that’s commensurate with product lifecycles.
TS: So how do you exit your investments, then, quote unquote? Is it just a matter of we will collect a percentage of royalty for the next 6 or 7 years, and then we’re done? Is that an exit?
GB: It depends a little bit on the structure. If we have bought a royalty, those tend to be self-amortizing. So if the patent’s going to go out for another 8 years, we get our return over that 8-year period. And then when the royalty goes away because the patent expires, then we’re done. That’s our exit, if you will. In a more traditional structured credit investment, we typically have a period without amortization, kind of an interest only period, and then the credit that that starts to amortize. And when the debt’s fully repaid, then we’ve exited. And then we try to provide a lot of structural flexibility so that there are exit opportunities in the event the company wants to pursue a strategic sale, and they want to have an early exit. So a lot of flexibility and optionality built into our structures.
TS: Do you ever do just a direct equity investment?
GB: Not a standalone equity investment. We have in the past, and I think we’ll continue to consider doing equity in select investments. But it’s a small part of the investment, and it tends to be in combination either with a royalty investment or a credit investment.
TS: Is that at your behest? If you see a company that looks really promising and you want to have a stake in ownership? Or is it the investors and the executive team that said, If you want to do this, then you need to give us some equity?
GB: Tom, it’s a little bit of both. Sometimes it’s a way to differentiate us from other capital providers. And in some cases, we say, you know, it gives us a little bit of juice to the return that lets us be a little bit more forgiving on the credit portion of the investment. So it really – it’s situation dependent. And we have the flexibility. We don’t use it very often, but in those situations where we’ve used it, we’ve found it to be helpful.
TS: What is the population of royalty founds out there? Has it grown? I’ve known you since Paul and HealthCare Royalty. There are a few other here and there, but I don’t know of a great groundswell of royalty based funds. And it would seem that there would be a great opportunity for them.
GB: There is a great opportunity. If you look at a macro level, what you see is that licensing has become an increasing component of product development. And so instead of a pharmaceutical company relying on their own research labs, instead of a medtech company trying to develop every product themselves, they either acquire or in-license a lot of the technology. And with every license comes a royalty. So the number of royalties available, the absolute number is increasing. And because there’s more competition for high quality, late stage product, the royalty amounts are increasing as well. So the market opportunity is growing. As an example, in the early 2000s when the business model was nascent, we would see maybe 150 to 200 million dollars a year of royalty transactions. Over the past few years, it’s been north of 3 billion a year.
GB: And so that’s a rapid growth in market. It has attracted competition, and there are a number of dedicated royalty players. But they’re all slightly different. And I think one of the things that differentiates HealthCare Royalty Partners is that we will do certainly straight royalty deals. We will acquire in total or in part an existing royalty stream, and we’ll do structured credit deals that range from simple term loans all the up to what we would consider a synthetic royalty, where a component of our repayment is a royalty that we create on product sales, and we have the ability to do equity. So our mandate is broader in structure, and not everybody does medical devices. Some focus solely in pharmaceuticals and focus more precisely in biotech. So the therapeutic area and the sector is also one of our differentiating features. A third is geography. We will do – we’ve historically done and will continue to do about 80% of our deals in the US, about 20% in Europe. And not everybody is working across the pond. So we are geographically agnostic.
TS: Interesting. Do you ever have a role – do you take board seats? Do you have a role in the company management?
GB: Very rarely. I’d say, you know, if we have a significant equity investment or if it’s something that the company feels would be helpful, we may take a board seat. And if there are situations which require a little bit more work and a little bit more heavy lifting, we may take a board seat. But it’s probably less than 10% of our overall portfolio where we do have board positions.
TS: What’s the largest company that you’ve done a deal with? Are they all – in my head I’m thinking a privately held company, again, been around 8 to 10 years, maybe has raised a couple hundred million. Is that the profile? Or do you go a lot larger than that and deal with –
GB: You know, it’s the full gamut. So we have done deals with some of the top 3 pharmaceutical companies in the world. And we have done deals with small private companies. It ranges widely. The other audiences to think about are that there are 3 categories of people that will hold royalties. There are companies, and we’ve been focusing on that. But universities hold royalties because that’s where technology is typically generated, and the tech transfer office will license out the technology. And the person inside the university, the inventor, often has a royalty stream, and usually splits that with the university in some way, depending on whether it’s in the US, UK or Europe. So we have done transactions with universities, and we’ve done transactions with a number of inventors. And inventors are very interesting because they often have different motivations. They are concerned about tax planning, estate planning, and quite often if somebody is of a certain age, they may want to enjoy the wealth rather than having it go just to their grandchildren. Companies, whether it’s a medtech company or a biotech company, are typically looking for capital because they have an insatiable need for capital to develop new products.
TS: And when you’re dealing with those inventors or those universities, I assume those technologies have already been developed into something that’s generating revenue. You’re not doing those very – you’re not doing the spinouts or the out-licensing at that stage.
GB: That’s exactly right. We’re looking at technologies when – after they’ve worked their way through preclinical development, clinical development, and approval and product launch.
TS: And I imagine – what is your success rate like? I imagine you’re not a venture – do great with 3, it’s OK if 7 out of the ten fail you. You probably are a 10 for 10 sort of firm?
GB: We aspire to be 10 for 10. We’ve had very low loss ratios because we’ve been able to – well, we’re monetizing commercial risk. So what we think about is mathematically the difference between a continuous function – you know, just kind of how well is it going to perform – as opposed to a binary or discrete function, where there’s possibility of getting zero. We try to avoid binary risks. And what are those? If the patent goes away, the license doesn’t get paid. That’s a zero. If manufacturing is shut down, products are pulled from the market, that can be a binary outcome. So we avoid binary outcomes, and so far have been good at doing that.
TS: And are you largely immune to the things that influence equity investors, IPO markets and M&A markets? Does it matter to you whether the companies are able to – I guess if they’re able to go public, they don’t really need your services, so that would diminish demand? Decrease demand for what you do? But I guess what I’m asking, as an investor or as a player in this, do you care whether it’s this kind of market or that?
GB: It’s a great question, and I’ll answer it in two ways. First of all, our investors, who tend to be large pension funds and groups like that, view us as providing non-correlated cash flow. And that’s because the demand for medical products, whether it’s a drug or a device, that demand tends to be fairly inelastic. People are going to take their anti-cancer therapy whether the stock market’s up or down. Now, when the capital markets are closed, that tends to help our business. And so we benefit form a business development point of view from seeing more deal flow when companies have fewer alternatives. But in terms of our overall performance, if you were to track pharmaceutical sales as a proxy for royalties against GDP growth, against equity capital markets or debt capital markets, they’re virtually non-correlated. So we’re insulated form the shocks of the capital markets. But we benefit from declines in capital availability in terms of deal flow.
TS: Interesting. So last question. What does the future hold for HealthCare Royalty Partners? Is this the same course you’ll be staying on? You seem to be doing a good job with it. You raised a billion and a half dollars a couple years go. Is it just raising another fund, or are there other investment strategies that you might bring in house or might adopt?
GB: I think our core business will remain our core business. We find it an attractive, rapidly growing market with relatively constrained competition. But at the same, time, you know, we do see opportunities at either ends of the return spectrum. We continue to look at those. They’re part of our existing deal flow. And so we always look at ways to be opportunistic. I think the core will be that we will be focused on monetizing commercial risk in high quality, FDA regulated, patent protected healthcare products. And we don’t want to drift from that strategy.
TS: Sounds like a good plan. Well, thanks for squeezing us into your business schedule.
GB: Thanks very much, Tom. Really enjoyed it.