BioWorld Today Contributing Writer

OrbiMed Advisors LLC has closed a new fund dedicated to acquiring health care royalty streams and providing minimally dilutive debt capital to companies in the health care sector. The $600 million fund will provide an alternative to financing through the equity markets for companies with approved products or products close to approval. The fund has already made two investments: XOMA Ltd. and Velico Medical Inc.

According to Carter Neild, OrbiMed general partner, the group has been active in health care royalties for about five years, but this is its first fund dedicated to the strategy.

"We've been investing in royalty streams out of our hedge fund Caduceus Capital for the past few years. We made the decision to launch a dedicated fund as a result of the significant amount of investment opportunities we were seeing and a desire to grow our team and the pool of capital that we had available for this area," he told BioWorld Today.

OrbiMed, of New York, is the largest health care-dedicated investment firm in the world, with approximately $6 billion in assets, managing everything from seed-stage venture capital to public equity funds, mutual funds and hedge funds.

"We can pretty much cover every type of company," Neild said.

The investment strategy involves identifying royalty streams and offering the owner an up-front payment in exchange for receipt of those cash flows over time. Discounts on future repayments out of royalty streams provide a return for the up-front liquidity.

In addition to those types of transactions, OrbiMed does structured royalty deals, providing debt capital to companies in the form of loans and buying bonds from companies that are collateralized by an approved product or royalty stream.

"For any company that has an approved product or a royalty stream, it offers an alternative to equity," Neild explained.

The scope of OrbiMed's new fund is a bit broader than traditional royalty funds, according to Neild.

"We think there's a real shortfall in capital for companies. Health care private equity funds have had a hard time raising capital. . . . Even the venture community retrenched because of the financial crisis."

The one thing OrbiMed's fund can't do is invest in early stage opportunities. "Basically any patent-protected product," Neild said. "That's the key for us. It's our collateral when we make the loan."

On Aug. 18, 2010, XOMA, of Berkeley, Calif., sold its royalty interest in Cimzia (certolizumab pegol) to OrbiMed for an up-front payment of $4 million. Cimzia is approved for Crohn's disease and rheumatoid arthritis, and is marketed by UCB SA. XOMA is turning that up-front payment around to support its candidate XOMA 052, for Type II diabetes.

OrbiMed also recently purchased royalty rights from Velico Medical that it owns through a license agreement with a biosurgical products company. Velico will continue to enjoy rights to use the technology in its own business and in the development of products. It will use the up-front payment, an undisclosed amount, to advance its product candidates. Its lead product candidate is a technology for spray-drying plasma.

Royalty deals have become increasingly popular as the equity markets have faltered. Data from New York-based Royalty Pharma, a leader in pharmaceutical royalty acquisitions, showed the firm raised $400 million in 2006, about $500 million in 2007, and $1.7 billion in 2008. (See BioWorld Insight, Nov. 1, 2010.)

Once the province of specialized investment firms, royalty deals are showing up in transactions between biotech companies, or biotech and traditional pharma companies. In August, NPS Pharmaceuticals Inc. settled its 15.5 percent secured class B notes through a $145 million advance on royalties for Sensipar/Mimpara (cinacalcet HCL) from its partner Amgen Inc., in a deal considered beneficial to both companies. Amgen will take repayment of the loan out of future royalties at a 9 percent per annum discount. (See BioWorld Today, Aug. 17, 2011.)

Another example is Vertex Pharmaceuticals Inc. Just as the housing and financial markets were heading for catastrophic crashes in 2008, Vertex sold royalty rights for two HIV protease inhibitors to Lexiva and Agenerase for $160 million. (See BioWorld Today, June 4, 2008.)

Royalty streams are viewed as reliable and lucrative by investors because they are not vulnerable to fluctuations in the financial markets. They are solid investment at times when markets are uncertain and venture capitalists are cautious.