Paul Capital Partners: Growth Capital Providers for the Biotech Industry




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Video title: Paul Capital Partners: Growth Capital Providers for the Biotech Industry
Released on: August 05, 2008. © PharmaVentures Ltd
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In this interview, filmed during the recent BIO conference in San Diego, Fintan Walton speaks with Ken Macleod, partner in the well-known Paul Capital Partners, located in London. He tells how the company differs from traditional venture capitalist funds by providing funding based on royalty interests and revenue interests. Using these methods, Paul Capital is able to provide non-dilutive funding to companies that are looking to grow their operations in a variety of ways—providing cash for products in the pipeline, expanding their sales force, or launching new products. Their investments focus on companies that are already producing revenue or have products that are close to producing revenue, and their risk sharing model involves taking commercial risks rather than clinical or regulatory risks. Last year, financing of this kind provided over $2 billion in funds to the biotech and pharma industry and Paul Capital believes this number will continue to grow as companies look to use the potential of their royalty and revenue streams in ever more flexible ways.
The origins of the company and how the company differs from traditional venture capitalist funds by providing funding based on royalty interests and revenue interests.
Fintan Walton:
Hello and welcome to PharmaVentures business review here in San Diego, California. On this show I have Ken Macleod, who is a Partner of Paul Capital Partners based in the UK. Welcome to the show.
Ken Macleod:
Thank you very much.
Fintan Walton:
Ken Macleod, Paul Capital Partners is a reasonably well known organization"
Ken Macleod:
Yeah.
Fintan Walton:
Involved in royalty financing, could you tell us a little bit about the origins of Paul Capital Partners?
Ken Macleod:
Yeah, well Paul Capital Partners was founded in 1991 and at that point we started very much in the area of secondary private equity acquisition of portfolios and the like, and gradually over time our business has evolved through that into venture capital funded funds and now into a specific focus on healthcare financing. And how that came about was that " we were approached by pharmaceutical company with a view to acquiring a royalty, which they were getting no appreciable value for, as far as in the eyes of the public market, and they felt that buying and selling that royalty they could actually take that cash and apply it to a project with a higher net present value and so doing something like that ended up being done and that's how we got into the " into this area of the business. Our investors then asked us to raise a series of funds to specifically address that market and that's what we've done. And over a period of time our healthcare investing has involved as well.
Fintan Walton:
So the attraction to a company to seek the type of financing that you can provide is that " if they have a cash flow and that normally is a " and originally was a royalty of that could be coming into that company?
Ken Macleod:
Yeah.
Fintan Walton:
It gives "it provides them with a way in which they can get use for money that could come in the future of today and then starting using that money immediately to get even a better position?
Ken Macleod:
Absolutely. The best way to " to sort of illustrate this is to use a real life example. So we bring capitals [ph] down into what we call royalty interest and then what we call revenue interest. So basically " probably it's best to start with a description of the royalty interest first"
Fintan Walton:
Sure.
Ken Macleod:
And use a live example over there. So if " a good example would be the US biotech company Avant Immunotherapeutics. They had a product called RotavirusVaccine, [PharmaDeals ID = 20457], [PharmaDeals ID = 17292] which they had licensed out to GSK, now they were looking to " to find, to for financing to focus on that early stage portfolio and they realized that obviously if they could retain ownership of that earlier stage pipeline for longer, when they did subsequently license it out then they would be able to get better royalty rates, better up fronts and better milestones. Now unfortunately the -- the royalty stream that was gonna come from " from the GSK product was gonna come in over, over an extended period of time. So what they were looking for was a means of monetizing that royalty stream. So that they could effectively pull all of that " that royalty, that revenue stream forward, so they could focus their cash on the " the early stage pipeline and develop the products and retain them for longer before they license them out. And so what you could " with that precisely what happened and we funded them to the $261 million. And so that's a good example of a pharmaceutical -- a biotechnology company using a royalty as a means of providing financing for it's needs today.
Fintan Walton:
And it's also non-dilutive?
Ken Macleod:
And it's absolutely it's non-dilutive so they didn't have to go answer the public market to raise that money. So that's what our description about of a royalty interest would be, now to contrast that is with a revenue interest and in that situation that's usually where a company is doing it's own sales and marketing, it's generating it's own revenues through the sales and marketing of its own particular product, now may have an requirement for cash for many different reasons. And what we'll do is we will inject cash at a point in time and the way we get our return is that what we do as we take a percentage, we take a strip of sales that from the sales of the company is generating themselves. And there is a quite a wide range of examples of deals that have been done in that way. And you know with as well " let's just pick a couple of examples, this one we did -- we completed very recently in the UK with Plethora Solutions [PharmaDeals ID = 30125]. Now Plethora is a company, have a US subsidiary, which is a marketing organization selling a medical device in the US. They had two products which were in Phase III, and then they had an earlier stage pipeline of products. And what they were looking for was financing to develop the two products to finish off the Phase III work on the two products that were in development, and to fund an expansion of their sales force in the US. And so they were looking to do that in a way that was non-dilutive to their equity. So we entered into an agreement with them, which will potentially deliver them $28 million, 15 of that is going " is in upfront and that is being used to develop " to finish off the Phase III product and to expand the sales force in the US. So they haven't had to go to the public markets, the equity markets just to raise that cash, and they now that they've that cash available to them, to grow their business. And I think probably in that situation one " some people ask us you know how we define, what we doing? whether we are a venture capitalist, and I say that's exactly what we are " we are not venture capitalist work with growth capital providers and we will provide financing for companies that are in and looking for some of its transform transforming.
Fintan Walton:
How is that appear on the balance sheet, how does the financing the type that you've described "
Ken Macleod:
Yeah.
Fintan Walton:
In both cases, how does that appear on the balance sheet?
Ken Macleod:
Well it depends to some existence on the sort of transaction that we completed. In some " some cases it can be a true sales like can be booked as revenue, but otherwise it will appears as that.
Fintan Walton:
Right, okay. So by you can actually have some degree of flexibility around the type of deal?
Ken Macleod:
Source of transactions that we are done yeah.
Fintan Walton:
Right. Now clearly in both of those cases there is this free cash flow coming through the company, that's one of the key criteria?
Ken Macleod:
Yeah.
Investments focus on companies already producing revenue or having products that are close to generating revenue
Fintan Walton:
You don't invest or take financing on things that don't have a cash flow associated with them today, or do you?
Ken Macleod:
No, we don't. what we do is that our model is based on " a risk sharing with the company on the basis of taking commercial risk. What we don't generally do is take sort of clinical risk or regulatory risk, what we " and our business model is very much towards taking commercial risk. So if you look at the vast majority of deals that we've done companies either have some products which are revenue generating at the moment or it will certainly be revenue generating in the very near future.
Fintan Walton:
And when it comes to the amounts of money that you've prepared to invest against the future revenue stream"
Ken Macleod:
Yeah.
Fintan Walton:
That's worked on a risk adjusted discount of cash flow analysis?
Ken Macleod:
Absolutely, yeah. So what we will do is we'll each individual deal will address the what we perceive to be the different levels of risk associated with that, and it's priced accordingly. And to some extent the company itself will take out our term sheet and they will plug the numbers into their own model and they will work out how this stacks up against the other alternative forms of financing.
Fintan Walton:
Do you take options on the equity at all as part of the deal structure?
Ken Macleod:
Not usually, I mean we have the facility to do some equity as part of our fund, but it will only ever be a small part and it's never done in isolation, that's always done as a small part of a deal with it.
Fintan Walton:
So how is the, the financing actually secured then? And what is it secured, just purely on the future revenues?
Ken Macleod:
Yes, absolutely yeah.
Fintan Walton:
Or future cash flows that are coming through the pipeline?
Ken Macleod:
Absolutely yeah, yeah.
Fintan Walton:
So in the end the cash flow may not necessarily have to come from the, this specific royalty?
Ken Macleod:
No absolutely, I mean there are certain occasions where " if you take the Avant Immunotherapeutics example as a " is a good example the company themselves are actually utilizing that money on developing a portfolio of drugs that we have no interest in, our interest purely comes from the royalty that is generated by GSK.
Deal making and risk sharing financing model
Fintan Walton:
Right. So how do you then see yourselves fitting within the, the different forms of financing, clearly this is equity financing and there is some debt financing going on in the biotech?
Ken Macleod:
Yeah.
Fintan Walton:
In the biotech sector, you are somewhat closer to the " to the debt financing model and obviously a equity based financing. So do you actually work closely with some of the investors of these companies"
Ken Macleod:
Absolutely.
Fintan Walton:
Or work very closely with the venture capital firms?
Ken Macleod:
Well what we would see is " we see ourselves has been complementary. And there will be times in a company's development when it's appropriate to take straights up, the appropriate times when it's perfect and raise equity, and there will be other occasions when the form of financing that's most appropriate, is to use some form of revenue based. And clearly we'll work along side the " the equity investors, because to certain thing they have to be content that this a good, good transaction for them. And generally everyone ends up, there as being been very happier at the end of the day. And as I say it's more designed that it's complementary and we'll work with other providers. And there are instances where companies we've done transactions where companies raised equity at the same time as it's been doing " from an external sources.
Fintan Walton:
Sure.
Ken Macleod:
At the time as it's raised cash from us on the basis of a revenue interest as well.
Fintan Walton:
Okay. So it's part of a portfolio financing "
Ken Macleod:
Absolutely yeah.
Fintan Walton:
That a company "
Ken Macleod:
Absolutely yeah.
Fintan Walton:
Can consider. When it comes to companies gone into a deal with you"
Ken Macleod:
Yeah.
Fintan Walton:
Things take off for them and they're doing extremely well, is there option for these companies to actually buyback the revenue stream probably?
Ken Macleod:
Absolutely yes. And that's happened, that's happened yes.
Fintan Walton:
Right. And is that within the, the agreement or is it that just something " that comes around, when it comes around?
Ken Macleod:
It's usually, a right up front. It's something that's part of the agreement.
Fintan Walton:
Sure.
Ken Macleod:
And so the company goes into the agreement knowing precisely what the " the exit requirements were been.
Fintan Walton:
Right.
Ken Macleod:
But it's our intention generally when we do deals, we do these deals as on the buy and hold basis, we see out these deals going right through to the end of the life. But there is always that option if the company wishes to buy it out.
The future activities of Paul Capital Partners
Fintan Walton:
Yeah. Now obviously Ken, you're " because you are very close to the happenings in the pharmaceutical industry and biotech industry --
Ken Macleod:
Yeah.
Fintan Walton:
Just want to ask you what's your thoughts are on the current activity, lots of acquisitions going on, biotech companies are being brought by big pharma companies and so forth and looking it from a Paul Capital Partners point of view, what do you see happening now over the next year or so, and what's happened in the last year, and then " and what's happen over the next few years, and where do you think Paul Capital Partners activities will be focused?
Ken Macleod:
Well one of the things " I think is very clear is that the " the number of transactions that have been done in the royalty and the revenue interest base has gone up in each year. And people are often surprised when under our calculations last year there was about just under $2 billion of financing raised using some kind of royalty or revenue based financing. So what's happening is with increasing acceptability of this is a form of financing, we see that revenue interest and royalty interest continuing to be a significant part in the " in what goes on in " in the biotech and pharma space. And I think what will change is that we will see more flexibility in terms of the thought patterns of the companies in terms of how they want to use it. So for example we've seen companies and we've done deals where companies have used that form of financing for launching a product, expanding a sales force, acquiring a product. And that could just as easily be acquiring a company as well. So you know, in this background where there is lots of M&A going on it's just as possible " it's just possible that part of that financing could be some kind of revenue based transaction as well. So we see ourselves continuing to be a major player in what's going on in the " what is a very vibrant industry at the moment.
Fintan Walton:
Excellent. And then just in terms of the funds themselves, what " how long are those funds for really [ph] 5-year, 10-year funds?
Ken Macleod:
That are 10-year fund, they are classic sort of private equity style of fund.
Fintan Walton:
Okay. Ken Macleod, thanks a lot for coming on the show and for us telling more about Paul Capital Partners and the type of business you are involved in. Thank you very much.
Ken Macleod:
Thank you very much then. Thank you.
Ken Macleod
Partner
Ken Macleod, Ph.D. joined Paul Capital Partners in 2004 and is responsible for sourcing, evaluating and negotiating European and Asian investment opportunities for Paul Capital Healthcare. Based in London, Dr. Ken Macleod previously held senior management positions over a 15-year career at Serono, Abbott Laboratories, and Beecham Pharmaceuticals. Prior to joining Paul Capital Partners, Dr. Ken Macleod was a Venture Partner at Schroder Ventures Life Sciences where he was responsible for deal sourcing, evaluation, and negotiation of pharmaceutical investment opportunities. Dr. Ken Macleod earned his Ph.D. from the University of York, UK and his B.Sc. with honors in Biology from the University of Manchester, UK.
Paul Capital Partners
Paul Capital Partners established Paul Capital Healthcare in 1999 to meet the financing needs of healthcare companies, institutions and inventors. Today, the firm manages one of the largest dedicated healthcare funds globally with a total of $1.4 billion in assets under management. The Fund focuses on commercial stage healthcare products and investment opportunities in North America, Europe, and Asia. To date Paul Capital Healthcare has closed more than 30 investments in the pharmaceutical, biotechnology, medical device, and diagnostics areas. Public and private companies, research institutions and universities, and individual inventors have all benefited from the flexibility of Paul Capital Healthcare's investment approach. This capital has enabled them to transfer product risk, finance clinical and commercial development projects, acquire new products, fund university programs and capital needs, avoid conflicts of interest, unlock shareholder value, and monetize product royalties.