Biotech Royalties 💊💵

Author

Owen
September 28, 2025

Welcome to Alternate Universe!

In today’s edition:

  • Biotech royalties - a fundraising alternative 💊

  • Job opportunities at recently funded European startups 👇

  • New day, new tariffs 😱

The Crux 🔴

Source: Gibson Dunn

Biotechs are having a tough time fundraising.

The rate of biotech IPOs has plummeted massively since COVID - down nearly 80% from 2014 levels - creating a capital crunch that has left the sector searching for alternatives.

The savior?

Royalty financing.

I knew nothing about this area, but after seeing one too many references in my information diet, I decided to dig in.

Buckle up – we’re going down a biotech royalty financing rabbit hole, folks.

🐰🕳️⌚

What 🧐

Source: Gibson Dunn

Before jumping into royalty financing, a quick detour to set the stage.

What is a license in biotech?

A license is a deal where a small biotech hands over rights to its drug to a big pharma company that can develop and sell it. In return, the biotech gets upfront cash, milestone payments as the drug progresses, and royalties on future sales. Think of it like an author and a publisher; the publisher does the heavy lifting, while the author collects a share of the sales.

These royalty streams are often the backbone of financing deals, since biotechs can sell part of them to investors for cash today.

When people talk about royalty deals, it helps to know there are two buckets:

Origination transactions: when a biotech sells the rights to future royalty streams directly to an investor (selling tomorrow’s cash flows today).

Resale transactions: when an investor who already holds royalty rights trades them to another buyer.

Within origination, there are three main structures you’ll come across:

  1. Traditional Royalty

    The biotech has already licensed a drug and is entitled to royalties. Instead of waiting years, it sells those rights to an investor for upfront cash. It’s cashing out a predictable revenue stream early.

  2. Synthetic Royalty

    In this case, no royalties exist yet. An investor provides cash upfront, and in return gets a cut of the biotech’s future sales.

  3. Royalty-Backed Loan

    This is closer to debt. The biotech borrows money today and agrees to repay with future royalty income as collateral. The lender’s return is capped, but the biotech keeps the upside if sales surprise.

The key distinction across these structures is whether the investor’s return is capped or uncapped. Capped deals behave more like debt, with predictable but limited payoffs. Uncapped deals behave more like equity, with higher risk but with the chance to ride a blockbuster.

Now that the financial jargon soup is done, we can look at why this asset class is attractive.

Attractiveness ✨

Source: Sagard

For investors, healthcare royalties are an unusual mix: they offer predictable income streams, low correlation with the broader economy, and insulation from messy risks like failed clinical trials or shrinking profit margins. Because royalties are tied to top-line drug sales, an area that tends to grow with aging populations and medical innovation, they behave more like asset-backed cash flows than speculative biotech bets.

Add in inflation protection and some upside if a drug finds new uses, and you have an asset class that sits somewhere between private credit and venture capital, but with a smoother ride.

Risks ⛔

Royalty financing is not risk-free. Forecasting drug sales is tricky, and overestimating demand or patent life can leave both sides worse off. Contracts are complex, with potential pitfalls if a biotech goes bankrupt or if IP protections are weaker than expected. Biotechs also risk giving up too much upside if a drug turns into a blockbuster, while investors face capped returns and limited liquidity compared to equity. In today’s higher-rate environment, the upfront cash from selling royalties can look less generous once future payments are discounted.

Investment Implications 🤑

Let’s look at the options available for retail investors.

Royalty Pharma is the diversified blue-chip choice with long-dated cash flows but a modest yield. DRI Healthcare leans toward income, distributing more of its royalty cash from established blockbusters. Ligand and XOMA sit at the riskier end because they reinvest or rely on milestones, which makes them better suited to growth-oriented investors rather than those seeking steady payouts.

A fifth option (not shown), BioPharma Credit, differs again: it lends against approved drugs, so its payouts behave more like a healthcare bond fund, with predictable coupons but limited upside. The choice ultimately comes down to whether you prefer a stable yield, growth potential, or a combination of both.

Dig Deeper ⛏️

P.S. Liking this issue? Forward to a friend 🧑‍🤝‍🧑

Headhunted 🦅

Recently funded private companies need talent! Scout jobs at recently funded European startups, ahead of your competition. 💪

  1. Nothing 🇬🇧 - The consumer tech company raised a $200m Series C. Multiple roles in finance, tech, design and marketing. (link)

  2. Corintis 🇨🇭 - The semiconductor cooling startup closed a $24m Series A. Various engineering positions open. (link)

  3. Light 🇬🇧 - UK-based AI native finance platform raises a $30m Series A. Open positions in engineering and accounting. (link)

  4. TerraOne 🇩🇪 - The developer of grid-scale battery storage systems has raised €150m in fresh financing. Multiple roles open. (link)

  5. Seon 🇭🇺 - Fraud prevention provider raises $80m. GTM, finance and engineering roles open. (link)

Interestingness📔 

📚 New to investing? Grab a PDF copy of my ebook here.

As always, the financial disclaimer!

This is not investment advice. I am not a financial advisor. Make sure to conduct your thorough research before purchasing or selling financial products.