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 6 0.0/1.0 point (graded) At the end of 2006, Royalty Pharma purchased Cambridge Antibody Technology's (Cat) passive royalty interest in Abbott's Humira. This occurred as part of AstraZeneca's $1.3 billion purchase of the remaining 81% of Cat it did not already own. Since the non-core passive asset was not as useful as upfront capital for AstraZeneca, it sold the royalty interest to Royalty Pharma for $700 million. Consider the following term sheet from 2006 for the Humira royalty acquisition opportunity: Product: Humira : (subcutaneous injection) Compound: Adalimumab (biologic, monoclonal antibody) Product Type: TNF Inhibitor Indications: Rheumatoid Arthritis (RA), Psoriatic Arthritis (PSA), Early RA Marketers: WW (excl. Japan): Abbott - A1/AA, $64bn market cap, NYSE- listed O Japan: Eisai Launch Dates: - US: January 2003 (RA) - EU: September 2003 (RA) es. o US: January 2003 (RA) EU: September 2003 (RA) Royalty Holder: Cambridge Antibody Technology (CAT) o AstraZeneca (AZ) expected to close the acquisition of CAT in June 2006 Royalty Terms: o CAT receives 2.688% on worldwide sales Duration: December 2017 (US and Non-US) The figure below reports the worldwide sales for Humira from 2007 to 2017: Worldwide Humira Sales ($ billions) $20 $18.4 $16.1 $15 $14.0 $12.5 $12 $10.7 $9.3 $7.9 $8 $6.5 $5.5 $4.5 54 $3.0 $- 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Given the $700 million purchase, and the subsequent royalties, what is the internal rate of return of this deal from Royalty Pharma's perspective? Assume all royalties occur at the end of the year so the first payment is received exactly 1 year after the $700 million purchase. (Note: Your answer should be a number in percentage form. Do not enter '%'.) % Hint. A spreadsheet can be used to solve this question. Alternatively, an online solver such as Wolfram Alpha can be used to solve the equation for the IRR. 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 6 0.0/1.0 point (graded) At the end of 2006, Royalty Pharma purchased Cambridge Antibody Technology's (Cat) passive royalty interest in Abbott's Humira. This occurred as part of AstraZeneca's $1.3 billion purchase of the remaining 81% of Cat it did not already own. Since the non-core passive asset was not as useful as upfront capital for AstraZeneca, it sold the royalty interest to Royalty Pharma for $700 million. Consider the following term sheet from 2006 for the Humira royalty acquisition opportunity: Product: Humira : (subcutaneous injection) Compound: Adalimumab (biologic, monoclonal antibody) Product Type: TNF Inhibitor Indications: Rheumatoid Arthritis (RA), Psoriatic Arthritis (PSA), Early RA Marketers: WW (excl. Japan): Abbott - A1/AA, $64bn market cap, NYSE- listed O Japan: Eisai Launch Dates: - US: January 2003 (RA) - EU: September 2003 (RA) es. o US: January 2003 (RA) EU: September 2003 (RA) Royalty Holder: Cambridge Antibody Technology (CAT) o AstraZeneca (AZ) expected to close the acquisition of CAT in June 2006 Royalty Terms: o CAT receives 2.688% on worldwide sales Duration: December 2017 (US and Non-US) The figure below reports the worldwide sales for Humira from 2007 to 2017: Worldwide Humira Sales ($ billions) $20 $18.4 $16.1 $15 $14.0 $12.5 $12 $10.7 $9.3 $7.9 $8 $6.5 $5.5 $4.5 54 $3.0 $- 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Given the $700 million purchase, and the subsequent royalties, what is the internal rate of return of this deal from Royalty Pharma's perspective? Assume all royalties occur at the end of the year so the first payment is received exactly 1 year after the $700 million purchase. (Note: Your answer should be a number in percentage form. Do not enter '%'.) % Hint. A spreadsheet can be used to solve this question. Alternatively, an online solver such as Wolfram Alpha can be used to solve the equation for the IRR