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$1 billion for 'synthetic' pharma royalties

January 5, 2012: 10:22 AM ET

A new way for cash-starved biotechs to raise money.

Cowen Healthcare Royalty Partners today is expected to announce that it has closed its second fund with a whopping $1 billion in capital commitments.

This is the Connecticut-based firm that spun out of Paul Capital in 2007, and subsequently raised $506 million for its debut fund. It also secured a $300 million overflow fund to focus on larger deals -- $100m+, compared to its $20m-$100m sweet spot – but didn't end up calling any of it down.

Cowen's basic strategy is to create synthetic royalties and structured financings around pharmaceutical products. For example, yesterday it entered into a $20 million loan agreement with Dyax Corp. (DYAX), while in November it provided a $25 million synthetic royalty for AcuFocus, a privately-held developer of corneal inlays.

Cowen reports that the royalty market reached record levels in 2011, with 24 publicly-announced deals valued at around $2.5 billion.

Clarke Futch, a co-founder of CHRP, explains the increased popularity:

"In the pharma industry it used to be that Pfizer and GSK and Novartis developed all their drugs internally. Now most of the innovation occurs outside of big pharma, at the universities or at startups. So those outside groups license their products out to big pharma in exchange for a royalty, and as less and less innovation occurs at big pharma there are more outside royalties to buy. Also, the capital markets have been choppy (at best), so synthetic royalties are an alternative for smaller biotech companies that want to raise capital to develop new products."

Chris McFadden, a managing partner with CHRP limited partner Health Evolution Partners, says that he looked at around 10 healthcare royalty funds over the past 6 months before settling on CHRP. "It is a good place to be right now because the IPO market is difficult and traditional sources of credit to biotech have stepped back some of their lending commitments."

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Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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