Bonds backed by drug-royalty cashflows make a return
NEW YORK, March 5 (IFR) - A rare securitization backed by royalties flowing from pharmaceutical patents on established drugs is about to enter the asset-backed market, according to investors.
Credit Suisse (structuring lead) and Wells Fargo have been mandated as joint bookrunners on DRI Capital's upcoming US$195m Drug Royalty LP1 transaction.
The offering will be rated Baa2 (sf)/ BBB (sf) by Moody's/S&P. It will be backed by the cashflows of 18 royalty streams on 14 patent-protected drugs.
DRI Capital purchases royalty streams on established pharmaceutical products developed to treat chronic, critical, and rare diseases. The partners in the company have been investing together for nearly ten years.
The largest percentage of discounted royalty value in the securitized portfolio comes from the product Enbrel (32% of portfolio), a rheumatoid arthritis and psoriasis medication from Pfizer.
The second highest concentration (13%) is from the drug Remicade, a rheumatoid arthritis and Crohn's disease drug from Johnson & Johnson and Merck.
About 76.7% of drug companies represented by the portfolio have long-term AA/AA- or Aa1/Aa2/Aa3 ratings.
The fund's portfolio is comprised of very seasoned drugs that have been in the marketplace for many years.
DRI Capital will be the servicer, and the expected weighted average life of the transaction is 2.70 years. Overcollateralization is approximately 34% at closing.
The company issued a previous drug-royalty securitization in 2007.
In aggregate, despite broader market turmoil, the actual royalties received on the portfolio have performed 10% better than DRI's original forecasts.
There have only been a handful of drug-royalty ABS transactions based on diversified pools of pharmaceutical patent royalties in the last 10 years. Therefore, it is considered an "esoteric" asset class, distinguishing it from commoditized consumer ABS asset classes such offerings backed by auto-loan or student-loan payments.
The BioPharma Royalty Trust, the Royalty Pharma Trust, Paul Capital's Royalty Securitization Trust and the DRI Capital Inc. transactions are the best-known examples of this type of securitization, according to the law firm Dechert.
"With the worldwide pharmaceutical market generating approximately US$800bn annually, securitization of drug royalty payment rights remains a field ripe for exploration," wrote Malcolm Dorris, a partner at Dechert, in a research article from last year.
Adam Tempkin
adam.tempkin@thomsonreuters.com
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