The biopharma industry is facing significant challenges to their existing business models because of expiring drug patents, declining risk tolerance of venture capitalists and other investors, and increasing complexity in translational medicine. In response to these challenges, new alternative investment companies have emerged to bridge the biopharma funding gap by purchasing economic interests in drug royalty streams. Such purchases allow universities and biopharma companies to monetize their intellectual property, creating greater financial flexibility for them while giving investors an opportunity to participate in the life sciences industry at lower risk. Royalty Pharma is a privately owned alternative investment company that focuses on the acquisition of these pharmaceutical royalty interests. The company invests in products after regulatory approval and, more recently, also in the late stages of clinical trials. By the end of 2013, its portfolio consisted of royalty interests in 39 approved and marketed biopharmaceutical products, and 2 products in clinical trials and/or under review by the FDA and/or EMA. With such a large portfolio diversified across multiple therapeutic indications, it is the global leader in dedicated royalty investment entities. In this case study, we analyze Royalty Pharma's unique financing structure and business model. Problem 2a 0.0/0.5 points (graded) Royalty Pharma finances its acquisitions by an approximately even mixture of debt and equity: $4.2 billion and $4.0 billion, respectively. In doing so, the fund is able to gain access to low-cost debt capital. The reduced cost of capital allows Royalty Pharma to pay higher prices for royalties while still providing attractive returns to investors. Suppose the debt, which is held primarily by banks and other institutions, is split across various maturities: $1.7 billion with an interest rate of 3.00% per year maturing in 3 years, $1.9 billion with an interest rate of 3.25% per year maturing in 4.5 years, and $600 million with an interest rate of 3.5% per year maturing in 5 years. Assume Royalty in 5 years. Assume Royalty Pharma operates with a total debt to EBIDTA ratio of 4-to-1, and the median earnings to interest expense ratios (EBITDA/interest expense coverage ratio) of US rated industrial companies are as follows: Rating Coverage Ratio AAA 100 36 A 12 BBB 8 BB 6 B 4 What will be Royalty Pharma's interest expense in Year 1 (this upcoming year)? (Note: Your answer should be expressed in units of millions of dollars.)