The nascent asset class in London-listed royalties funds poised for expansion as Canada’s DRI Capital aims to raise $350m (£268m) for new ‘alternative income’ investment company targeting pharmaceutical cash flows.
The nascent asset class in London-listed royalties funds is poised for further expansion after Canada’s DRI Capital announced it wanted to raise up to $350m (£268m) for a new ‘alternative income’ investment company targeting pharmaceutical cash flows.
DRI Healthcare (DHP) will aim to provide a 7% dividend yield from a portfolio of royalties that drug companies pay to patent-holders on ‘best-in-class pharmaceutical products’. It anticipates some capital growth to lift annual total returns to 8-10%.
If the launch - scheduled for 6 March - is successful, it will give Biopharma Credit (BPCR ) its first direct rival. The £1.3bn investment company launched nearly three years ago and also yields 7%, although it largely generates its income from loans secured on drug product sales, with only one royalty in its portfolio.
The concept is also similar to Hipgnosis Songs (SONG ), a £650m investment company currently yielding 4.7% from a rapidly expanding portfolio of income-producing pop music royalties.
Toronto-based DRI Capital traces its history to the launch of the Drug Royalty Corporation in 1992. It describes itself as ‘a pioneer and global leader in healthcare royalty investing’ with around $2bn of assets in three funds.
The attraction of royalties is that they should be relatively uncorrelated to mainstream equity and bond markets, although there are competitive threats to pharmaceutical sales and political risks in the form of increased regulation in the US where drug prices have become controversial in recent years.
‘DRI Capital focuses on sustainable royalties on proven and speciality medicines that benefit from strong intellectual property and regulatory protection,’ said chief executive Behzad Khosrowshahi.
‘With global healthcare spending expected to reach US$1.5 trillion by 2023, we continue to see compelling growth opportunities in the pharmaceuticals sector,’ he stated.
The firm plans to invest $290m in a seed portfolio of 20 healthcare royalties currently held in its three existing funds.
Like Biopharma, the new company is set to have a concentrated portfolio. If the fund raises $325m then 28% of its assets would initially be invested in Spinraza, a treatment for spinal muscular atrophy sold by Biogen (BIIB.O). It is expected this exposure would reduce over time.
In its first year the company would aim to pay dividends of 5.5 cents a $1 share, rising to 7 cents as it fully invests. Gearing - or borrowing - of around 25% will be used to enhance returns.
DRI Capital plans to invest up to $20m in the initial public offer. Numis Securities is acting as sponsor and joint bookrunner along with Jefferies, which is the global coordinator. A prospectus is available on the company’s website.