Why Academia Takes Profits Over Wonder

"In academia’s continuing pursuit of profit, the wonder of simple serendipitous discovery has been left on the curb."

- Janet Rae-Dupree, "When Academia Puts Profit Ahead of Wonder", New York Times, September 6, 2008 (link)

Over the weekend, the NYT's hand wringing editorial over the "corporatization" of university research has sparked debate in the patent community (see Patently-O, Patent Docs, Patent Hawk, IPBiz). While there are considerable points of argument over the merits of the article and the Bayh-Dole Act, the fact remains that some universities are are getting paid on their patents. Big time.

The Deal published a recent article titled "A Seller's Market," which looked at private equity investors and hedge finds, who are joining established players in funding pharmaceutical research. While the equity-academia relationship has been around for a little while, some recent activity has produced eye-popping numbers that prompted one investment manager to state that "the real biotech boom of the late '80s and early '90s has now come to fruition." From the article:

• Children's Hospital Foundation, the parent company of the Children's Hospital of Philadelphia, sold its royalty interest in sales of the oral gastroenteritis vaccine RotaTeq to Royalty Pharma of New York for $182 million in cash.

• Earlier this year, in the biggest college royalty deal to date, Northwestern University sold a portion of its worldwide royalty stake in the blockbuster pain drug Lyrica to Royalty Pharma for $700 million in cash, earmarking the proceeds for the scientists responsible for the chemical compound, the university's endowment, financial aid, research and construction of new buildings and laboratories.

• Since 2004, money spent on royalty deals with research institutions has skyrocketed almost eightfold, says Jim Webster, an early investor in healthcare royalties and managing partner and co-founder of Capital Royalty LP in Houston. In 2004, these institutions monetized royalty interests totaling about $260 million. That jumped to $750 million in 2005 and to $1.9 billion in 2007. "There are not many royalty monetizations less than $50 million," he says. Since 2004, private equity involvement in university research has boomed.

The money keeps coming, and new players continue to emerge:

• With its 15 employees scouring for deals, Paul Capital has bought royalties from a handful of research houses, including Aston University and Imperial College . . .The firm closed its first fund in April 2000 with about $300 million in equity capital commitments and three years later closed its second fund with about $650 million in capital. Paul Capital buys royalties not only from universities and other institutions but also from companies. It looks at the quality, remaining patent life and safety profile of the product and how it has performed in the marketplace . . . Capital Royalty in Houston got its start in 2003 after Webster and Harry Loveys left Toronto-based Drug Royalty Corp. (now DRI Capital Inc.) to help start the firm. The firm has established a $325 million fund for doing deals.

• Cowen, the newest royalty shop, formed its practice in January 2007, and the firm employs seven professionals, a chief financial officer and two support staffers. It began raising its first fund in November 2007 and in nine months closed on more than $500 million in capital commitments. The fund was oversubscribed by $150 million. The firm has done five royalty deals so far -- all with companies -- and committed more than $260 million in capital, though its founders, previously employed at Paul Capital Healthcare, have done deals with nonprofits and universities.

Read Cheryl Meyer, "A seller's market" in its entirety here (link)