06/09/2010

OrbiMed Designs First Drug-Patent Play

OrbiMed is about to begin marketing a fund that would invest in drug-royalty revenues.

The New York shop will seek at least $300 million for the vehicle, OrbiMed Royalty Opportunities Fund, and is assembling a management team specifically for the effort. Greenhill & Co. is serving as placement agent.

The new fund follows a two-pronged strategy: acquiring the rights to collect royalties via outright purchases of pharmaceutical patents, and writing loans secured by borrowers' patents. The approach could allow OrbiMed to take stakes in a greater range of products than the firm would be able to access under just one of the components.

OrbiMed is focusing on drugs that are already in wide use and are producing reliable revenues, as opposed to newer products. That has become a more popular tactic lately, as investors seek to minimize risk and look for plays that aren't correlated to the see-sawing stock market. "You've got proven drugs, and obviously you're not dealing with some of the early- to later-stage drug devices or discovery strategies," one source said.

A number of drug-royalty funds have been in the market recently. DRI Capital finished shopping its latest vehicle in April, beating its $700 million equity target. Capital Royalty and Cowen Healthcare Royalty are also raising capital.

For OrbiMed, drug-royalty investing is a natural move. The $5 billion firm already operates a range of vehicles with healthcare or life-science concentrations, including a line of venture capital funds. The most recent of those entities, Caduceus Private Investments 4, finished its fund-raising process in March with $550 million - beating its equity target by $50 million.

OrbiMed Royalty Opportunities Fund is projecting a 20%-plus rate of return. The team running the vehicle includes OrbiMed managing partner Samuel Isaly, along with general partner W. Carter Neild, Fortress Investment alumnus Tadd Wessel and Matthew Rizzo, who came on board earlier this year from Ikaria Holdings.

CORRECTION (6/16/10): This article has been corrected. The original version misidentified the placement agent for OrbiMed's OrbiMed Royalty Opportunities Fund. Greenhill & Co. has the assignment.