Royalty monetization involves a biotech company exchanging future royalty and milestone payments from a licensing agreement for a lump-sum payment today. A royalty aggregator, such as Royalty Pharma or XOMA Royalty, pays a “purchase price” to the company in return for all or part of the future payments from a licensing partner. This provides several advantages: First, it avoids diluting shareholders’ ownership. Second, financial risks tied to the licensed program are transferred to the aggregator, who bears the risk in case of project failures. In addition, royalty aggregators typically don’t require board seats or voting rights, allowing the company to retain control.
How is the purchase price determined?
Valuation is at the heart of royalty monetization transactions. The purchase price should reflect the risk-adjusted value of future payments from the licensing agreement. This requires careful analysis of factors such as sales forecasts, strength of the IP, clinical development stage & probability of success, the credibility of the licensing partner, and market potential.
In practice, the biotech company does not receive the full theoretical value, as the aggregator will demand a risk premium for providing capital today against uncertain future cash flows. Negotiations are also influenced by the company’s capital needs, alternative financing options available, and the asset’s strategic position in the licensee’s pipeline.
Example: BioInvent’s deal with XOMA Royalty
A concrete example of royalty monetization is BioInvent’s transaction with XOMA Royalty, announced recently. BioInvent sold its royalty and milestone rights for mezagitamab (TAK–079), an anti-CD38 antibody in Phase III for immune thrombocytopenic purpura (ITP), to XOMA Royalty for up to USD 30 million. The deal demonstrates how royalty monetization can unlock value from non-core assets while maintaining focus on strategic programs.
Royalty aggregators and investment criteria
Royalty aggregators like XOMA are financial investors specializing in acquiring royalty streams without taking responsibility for the development or commercialization. Large players often focus on approved or late-stage assets, while smaller aggregators may invest in early clinical programs. Some prioritize specific indications, such as oncology or metabolic diseases.
Recently, aggregators have started targeting early clinical assets, opening opportunities for biotech companies to monetize future revenues while retaining some upside. This is particularly relevant in a market where capital is scarce. Investment bank Jefferies recently reported that biotech funding has plummeted by over 50 percent due to uncertainties surrounding the Trump administration’s policies. Meanwhile, PitchBook noted that venture capital investments in the sector are at their lowest in over two decades.
A challenging market environment
In this environment, royalty monetization could be a powerful tool for companies seeking non-dilutive capital. Transactions like BioInvent’s deal with XOMA Royalty illustrate how this financing model can realize value from assets and enhance financial flexibility.
BioStock reached out to Cees de Wit, partner at Avance, who advised on the BioInvent-transaction, to learn more about this alternative financing instrument.
Biotech financing has been increasingly challenging in the last few years. How does royalty monetization fit into this environment?
– Royalty monetization has become an increasingly relevant tool in today’s tight biotech funding environment. With equity markets depressed and venture financing more selective, companies are turning to alternative sources of non-dilutive capital. Monetizing existing or future royalties can provide immediate funding without giving up equity or control. This allows companies to continue advancing clinical programs or extend their cash runway while avoiding down-rounds or punitive financing terms.
In what situations is royalty monetization a good financing option for a biotech company?
– Royalty monetization can be a strategic financing option for biotech companies facing challenges or having limited access to raising capital through traditional means like equity or debt. This approach is particularly helpful when companies need to fund critical activities without diluting ownership or taking on restrictive debt.
– Examples of use cases are accessing funding for R&D, product launches, acquisitions, or re-capitalizing balance sheets without dilution.
At what stage in the drug life cycle do you usually see this kind of transaction?
– Most royalty monetization deals are centered around late-stage or commercial assets, where the cash flow profile is more predictable. That said, we are seeing increased interest in monetization of earlier clinical stage partnered assets. Companies like Xoma Royalty are typically interested as of phase I partnered assets. We also see that “baskets” of partnered assets can be transacted on and these can be a mix of very early and later stage partnered assets.
– In addition, we see the rise of synthetic royalties as an alternative funding option. Synthetic royalties are a structured form of financing in which investors provide upfront capital to a biotech company in exchange for a percentage of future product revenues — typically structured as a capped royalty — even if no royalty currently exists. Unlike traditional royalty monetization, which involves selling rights to an existing royalty stream, synthetic royalties are created around self-marketed products. This can be especially of interest to mid-size regional biopharma companies or biotechs that are launching their lead asset themselves.
Some aggregators target early clinical stage assets but typically, smaller biotechs looking to advance their projects through phase II or even phase III require a lot of capital, would royalty monetization still be viable for them as a financing option?
– It can be, but it depends on the specifics. If the biotech has a royalty interest in a partnered program — even at an early stage — and the partner has a strong track record or has publicly committed to advancing the asset, that royalty stream can be monetized, though usually at a discounted value.
– For earlier-stage clinical assets, royalty aggregators typically apply a steeper discount on the value to reflect clinical and regulatory risk, as well as the broader competitor landscape impacting sales forecast, so companies must weigh the capital benefit against the potential future upside they’re giving up. This requires some in-depth valuation work and modelling to get to the right financing mix.
– An item that many people overlook is that it is a possibility to monetize only a part of the future economics. Hence, they are not selling all milestones and royalties but only a portion of those for upfront cash now. By doing so, the asset is derisked whilst the company retains a part of the future upside and positive news flow. As the asset progresses and reaches value infliction points, a biotech can then choose to monetize further (at a higher valuation).
– Another benefit of royalty monetization we see is that it unlocks value that is typically not recognized by the stock markets. In the public market, investors tend to not attribute much value to early clinical stage partnered assets, therefore monetizing a part of the license puts an external value on the remaining economics which has a beneficial effect on the overall value recognition of the biotech.
What other important considerations are there for a biotech looking into royalty monetization?
– There are a number of key considerations to take into account:
- Cost of capital: Royalty monetization can be less dilutive than equity but may carry a higher implied cost, especially for early-stage assets. However, the company only dilutes over one assets, rather than the entire pipeline.
- Timing: Companies should consider whether to monetize early (to fund development) or wait until later (to maximize value once risk is reduced).
- Flexibility in structuring: The beauty of royalty monetization is that one can tailor terms to align with strategic goals. If for instance, investors are looking for near- to mid-term milestones coming in view of their fund lives, it is possible to structure the deal more back ended (e.g smaller portion of milestone and larger portion of royalties). To utilize these possibilities it is crucial to first determine the overall strategic goals and tailor the ask before engaging with royalty aggregators.
- Complexity: the flexibility of structuring comes with financial, legal and tax complexities that typically require outside counsel to navigate properly.
- Licensee consent: In most licensing agreements the licensor needs to ask for consent of the licensee to sell part of the economics. Biotechs are often hesitant towards this step. In practice this almost always turns out to be a mere formality.
- Valuation assumptions: The biotech should carefully evaluate the assumptions used to value the royalty stream. Misalignment here can lead to difficult negotiations. Especially, market share, pricing and competitive landscape are key items in this exercise.
– Ultimately, royalty monetization is another tool in the financing toolbox that can be used to come to the appropriate capital strategy whereby it is aligned with the company’s growth trajectory and clinical priorities.
