It may be Dublin-based, but Royalty Pharma was unknown even here until it announced its interest in acquiring Elan, Ireland's largest indigenous pharma manufacturing company.
The idea was simple. Following the sale of Tysabri to its US partner Biogen in a $3.25 billion deal, Elan was little more than a company operating on a stream of royalty income. That was Royalty's speciality.
Founded in 1996, it had built a major business by procuring the rights to royalties of some of the major drugs in the market, including Humira, Januvia, Lyrica and Remicade.
The idea started when Pablo Legorreta, an engineer by training who was working in the M&A business for Lazard, came across an innovative scheme pioneered by Paine Webber bankers.
Rather than selling their innovation to big pharma companies, Paine Webber encouraged smaller firms to raise money through private investors – many of them doctors familiar with the novelty of some of the evolving therapies – in a limited partnership.
Royalty income
In return, the investors secured future royalty income from the products. One of the first participants was a small biotech business called Amgen – now an $8 billion powerhouse in the sector, which was assiduously, and ultimately successfully courted by IDA Ireland.
Legorreta was intrigued by the simplicity of the model and decided to become a player himself. “I started buying the royalties from those early investors, the doctors. We were doing it small scale with a few friends and it worked out well.
“Then, in 1996, I decided to leave Lazards and start Royalty Pharma. What had piqued my interest was the realisation that there were many royalties in the hands of academic institutions and research hospitals. They had those royalties because discoveries were made ... and I realised we can help these institutions monetise these assets.”
And in what Legorreta terms the win-win approach he likes to adopt in all deals, he started allowing the inventors, hospitals and academic institutions from which he acquired the royalties to reinvest some of the money back into Royalty Pharma, effectively securing access to a more diversified portfolio.
Initially established as a US partnership, with a Bermuda offshoot for ex-US investors, the company moved its headquarters to Dublin in 2003 "because Ireland has been so visionary in trying to set up this company as a domicile for asset management businesses, because you have good laws, and obviously very advantageous taxation and you have all the service providers", says Legorreta.
“We have been here for 10 years and we have built a business here that is three to five times bigger than Elan if you look at the revenues we have and the cash flow we have.”
No strangers
Elan and Royalty are no strangers. "We had been talking with Elan," Legorreta says. "We had a history with them. It is my business to know what is going on in this space so we meet, myself and the team, every year with 300 or so companies. That included Elan.
Last year, Legorreta says, he got a call ahead of the data release of Alzheimer’s drug bapineuzumab “and he [Elan CEO Kelly Martin] said let’s get together when we know what the data is”.
Bapi, it turned out was a bust. Shortly after, Martin and Legorreta met in New York with others. For the first time, the prospect of merging with Elan was raised. Legorreta insists that the initial reaction of Martin and Elan chairman Bob Ingram was very positive. What changed, Legorreta says, were the dynamics of a deal.
First up, Royalty was the bigger company and he insisted it would need that reflected in any eventual entity.
A bigger issue was tax.
“We found there were some issues with us doing this. The structure we have allows us to have no taxes because we are a fund, like any fund. They are a corporation and they pay 12.5 per cent taxes.
“And there is the view of some really smart tax people here that a royalty in a corporation like Elan should be paying 25 per cent taxes because it is a passive asset.
“I do not know if one of the reasons they kept ELND-005 at Elan and it did not go with Prothena [the spun out drug discovery business] was because they wanted to keep Elan as an active business so that they could reserve the 12.5 per cent tax rate.”
Fund model
In any event, merging the Royalty fund model into Elan's corporate shell would have major tax implications for Royalty. Legorreta decided a better option would be a straight takeover.
Before Christmas, he says, “we sort of made a formal offer”. It wasn’t in writing as such, more a presentation on slides. Elan discussed it at board level, he says, but it had cooled on the idea which would have marginalised most of the existing executives.
“He [Martin] came back in December and said we are going to pursue other things, but you are welcome to make an offer. If you want to make an offer, the board is open. That’s literally what he said,” recalls Legorreta. When the market reacted adversely to the Biogen deal in February, he decided to do just that.
