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When the drugs do work: HealthCare Royalty to offer 6% yield

HealthCare Royalty Trust will be first investment trust in UK to link dividends to sales of specific drugs from big healthcare companies.

When the drugs do work: HealthCare Royalty to offer 6% yield

Royalty investments don’t have a great reputation among investment trust followers after problems at BlackRock World Mining (BRWM ) two years ago, but a US fund manager hopes to put that right with the launch of a new fund investing in healthcare royalties.

The HealthCare Royalty Trust will look to expand London’s burgeoning market in alternative income funds by offering an annual dividend yield of 6% through investments in royalties backed by approved drugs and treatments from some of the world’s biggest healthcare companies, such as GlaxoSmithKline and Pfizer.

The trust’s investment manager, HealthCare Royalty Management in Stamford, Connecticut, manages $3 billion in royalties. It claims the market has grown by 26% a year since 2000 as drugs companies, early-stage biotechs and universities commercialising medical research have used selling some of their royalties as an alternative way of financing their business to bank debt and shareholder equity.

The firms hopes to raise at least £200 million when the investment trust lists on the premium segment of the London Stock Exchange next month.

It says royalties from drug sales offer steady, long-term cash flows that are not reliant on drug company profits or share prices.

‘This will be the only UK-listed investment vehicle to provide pure exposure to this asset class which is not correlated to the broader market. This should be appealing given the current volatility that is being experienced across global markets,’ said Bryan Morton, chairman of the trust, who had a 20-year career at US drugs giant Merck before founding and selling Zeneus Pharma and EUSA Pharma in the US.

However, investors in BlackRock World Mining will remember similar arguments made by fund manager Evy Hambro when obtaining shareholder approval to invest in royalties from distressed mining companies a few years ago.

Royalty income was meant to boost the fund’s yield and broaden its appeal among income investors, echoing the US and Canada where high yielding royalty trusts have been a long-standing feature of the oil and mining industries.

The investment trust was forced to write off over £50 million it had invested in a royalty and convertible bond from London Mining after the operator of an iron ore mine in Sierra Leone collapsed, brought down by the slump in metal prices and the outbreak of Ebola in the country. After an outcry by shareholders the trust’s board restricted the amount it could hold in royalties.

By contrast HealthCare Royalty Management says the 10 seed assets the trust will start with are backed by cash flows from big pharmaceutical companies with investment grade credit ratings.

This portfolio will be bought from two of HealthCare Royalty Management’s existing funds in the US. According to the company, the assets generated $78 million (£54 million) in cash flow for the funds last year from sales of drugs treating conditions ranging from infertility, severe, chronic pain and HIV.

The new trust will be restricted from investing more than 20% of its gross assets (which include borrowing) in any single healthcare product or more than 35% in any single therapeutic category. It will also be barred from investing more than 10% in healthcare products that have not received regulatory approval and are therefore riskier.

If the launch is successful the trust will pay HealthCare Royalty Management a management fee of 0.5%. Flotation costs will be capped at 2%. A shareholder prospectus is due to be published this Thursday.

2 comments so far. Why not have your say?


Feb 23, 2016 at 11:32

Why would the likes of Glaxo sell forward royalties for a capital sum representing a yield of more than 6% when they could borrow the money so much more cheaply?

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Mar 16, 2016 at 12:41

I don't know but suspect it has to do with the drug's patent and expiry. The current yields won't be available indefinitely.

The income projections from the seed assets shown in the prospectus, appear to fall away dramatically into years 3+ and much of the forecast beyond that point is made up of huge assumptions.

The trust's continued success will depend entirely on how well the management can utilise the initial seed asset's established royalty income in the first two or three years to acquire additional, future proof, drug related royalty income streams for the years ahead.

It's an interesting prospect and I am tempted to give it a speculative slot in my income portfolio.

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