When biotech firms need money, the public and private markets - known to be dilutive and restrictive - are not always the answer.

And sometimes a share of product sales seems a small price to pay.

That's where Paul Royalty Fund II LP (PRF) comes in, offering operating capital in return for a small royalty. Pharming Group NV, for example, Friday announced the signing of a $30 million partnership with affiliates of PRF, in return for a share of its lead hereditary angioedema product's sales.

The goal of PRF is to allow biotech and other companies "to have the opportunity to utilize capital in a way that is not equity holding," said Walter Flamenbaum, a managing partner with Paul Capital Partners, which manages the fund. "We aren't diluting equity at the beginning of our investment."

Since its introduction six years ago, the fund has invested $650 million in 18 companies and nine academic institutions or individuals. Essentially, it buys a share of royalties - instead of stock - in return for investment dollars. It bought in May a share of Needham, Mass.-based Avant Immunotherapeutics Inc.'s royalties for Rotarix, a vaccine being developed for rotavirus, for $61 million. In January, it purchased a royalty interest for the same drug from three researchers at Cincinnati Children's Hospital Medical Center. (See BioWorld Today, May 19, 2005.)

The royalties often are for marketed products, but the firm, which has offices in New York, San Francisco, Paris, London and Toronto, has a health care team of 14 people that will evaluate late-stage clinical candidates.

"Obviously, we have a very exhaustive process of due diligence when we're investing in a drug that is not yet on the market," said Kenneth Macleod, principal of the fund. "We have to look at not only the clinical data, but also make a very good observation of market opportunity."

The opportunity with Pharming's product for hereditary angioedema could translate into millions annually for PRF - which now holds a single-digit royalty on revenues of the recombinant human C1 inhibitor, rhC1INH. Leiden, the Netherlands-based Pharming expects to file for U.S. approval in the second half of this year and already has started the filing process in Europe through a compassionate-use procedure in certain countries.

The hereditary angioedema market is estimated to be more than $500 million between the U.S. and Europe. The genetic disease affects one in 30,000 people, or 22,000 total in the Western world. Patients suffer frequent attacks of swelling in the hands, face, feet, abdomen and throat because of a shortage in activity of the blood protein C1 inhibitor, a key regulator of the inflammation system. Currently used androgens are not suitable treatments for acute attacks, Pharming said, and they may cause serious side effects, such as excessive hair growth in women, menstrual disorders, infertility, hepatitis and liver cancer.

There's competition in the space, though, as Dyax Corp. and Genzyme Corp., both of Cambridge, Mass., began in December patient treatment in their pivotal Phase III trial of Dyax's recombinant plasma kallikrein inhibitor, called DX-88. The trial, labeled EDEMA3, is studying DX-88 in patients with hereditary angioedema and is being conducted to confirm efficacy of a subcutaneous administration in patients suffering from moderate to severe acute HAE attacks.

Pharming estimates the average patient has seven attacks a year, and rhC1INH would cost "roughly $4,000 per acute attack treatment," said Samir Singh, Pharming's chief business officer, making it an attractive asset to PRF.

Under terms of their agreement, Pharming has received an up-front payment of $18.5 million, consisting of $15 million for development work to date on rhC1INH and the continued development and commercialization of related products, as well as a $3.5 million equity investment. Pharming previously had received a $1.5 million investment upon signing the term sheet with PRF.

The company also is eligible to receive up to $10 million in milestone payments based on FDA approval and the launch of rhC1INH in the U.S. The deal gives PRF not only single-digit royalties on the lead product, but also on other Pharming products that reach the market over the 10-year term of the agreement.

The company is working at the preclinical stage with recombinant fibrinogen, recombinant lactoferrin and recombinant collagen, and was looking for ways to advance all of its programs without exhausting its cash position. In late January, Pharming raised €17.1 million (US$20.6 million) in a share placement with new institutional investors, and when added to the investment from PRF, the company has more than three years worth of operating cash.

"Given that strong financial position, we'll be in the best place to negotiate favorable terms on our products and technology," Singh told BioWorld Today, adding that the company intends to partner rhC1INH before a potential 2007 launch.

A major reason Pharming conducted the transaction with PRF was to obtain funding while keeping its flexibility to complete regional distribution agreements. The deal also positions rhC1INH for prospective partners that might view PRF's investment as a validation of the technology.

A "tremendous asset" of PRF, Macleod said, is its ability to "make introductions and facilitate an awful lot of those partnering opportunities."

Pharming also retains an option to repurchase the royalty rights from PRF at any time, and it has provided the fund with a security in the case of a financial insolvency. As a result, the fund is receiving about 815,000 warrants with an exercise price of €4 per share.

"For us, the advantage is by including not just rhC1INH in the royalty stream," Singh said, "we have the opportunity to pay Paul Capital back in terms of their investment in Pharming sooner by combining revenues from other products, as well."

While the company did not necessarily need the investment to take rhC1INH through development and into a U.S. regulatory filing, the freedom and contacts it offered proved to be more appealing than another public offering or private placement.

"We probably would have been fine with our existing cash position," Singh said. "But it was very important to us to send a clear signal to the market and our various stakeholders that we were going to be very aggressive in taking the business forward."

Pharming trades on the Euronext exchange, which combines the exchanges of Amsterdam, Brussels, Paris and Lisbon, under the symbol "PHARM." It has a $400 million market cap.

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