The invisible capital market: how the pharmaceutical industry learned to raise billions without ever calling it finance

Alison Leroy
Partner, UGGC Law firm, France
a.leroy@uggc.com

Introduction

The collaboration and licence agreement is the most widely used financing instrument in the life sciences sector, and among the least understood as such. It does not appear in any capital markets statistics, generates no prospectus, and operates, for the most part, outside the perimeter of financial regulation. And yet, in the five years between 2020 and 2024, more than 133 royalty-linked transactions were tracked in the sector, representing aggregate deal value in excess of US$32bn as of early 2026. This market finances early-stage biotechnology companies, refinances commercial-stage pharmaceutical groups, and has given rise to a class of specialist investors built entirely from contractual claims on future drug revenues. It is not invisible because it is marginal. It is invisible because it conceals itself in the language of scientific partnership.

Understanding this market means following the life of a single contractual document across three successive transformations: from a negotiated set of rights into a structured asset, from that asset into an instrument that a specialist investor will underwrite, and from that instrument into a financing structure that survives the full arc of a drug's commercial life, including the disruptions that no term sheet anticipates.

From notebook to balance sheet: how the contract creates the asset

The starting logic is simple. A company possesses technology but lacks the capital or infrastructure to develop it. It transfers rights to a partner that has both, by contract, and it is that contract which creates the asset. The asset in question is not the technology itself. It is the structured combination of rights and financial flows that the contract organises around that technology: the innovator who grants a licence over its platform does not sell its laboratory, but a delimited right of exploitation, within a defined territory, for defined indications, accompanied by precisely calibrated payment obligations. Its value depends entirely on the precision with which the contract defines it.

The foundational model is that of Genentech and Eli Lilly in 1978, documented by Hughes in her history of Genentech's early years: an innovator without commercial resources, an industrial partner with capital and infrastructure, and a contract that circulates risk and value between the two. This model, commonly described as a BigCo/SmallCo arrangement, rests on four payment mechanisms, each fulfilling a distinct financial function.

The upfront payment is immediate, unconditional, and functionally equivalent to a non-dilutive capital contribution. In April 2024, TreeFrog Therapeutics received US$25m at signing from Vertex Pharmaceuticals, alongside an equity investment and Research and Development (R&D) funding, in exchange for a licence over its C-Stem platform for type-1 diabetes, plus up to US$215m in development milestone payments and up to US$540m in commercialisation milestone payments. It fills the operational gap without altering the capitalisation table.

The milestone payment is the risk-sharing mechanism: each milestone achieved, whether a clinical validation, a regulatory submission, or a sales threshold, releases an additional tranche of capital, replicating the logic of staged drawdowns in a conditional credit facility. In the collaboration between GSK and Flagship Pioneering, concluded in July 2024, GSK committed up to US$150m to fund an initial exploration phase, secured exclusive options over up to ten programmes, and agreed to pay up to US$720m in milestone payments per programme upon option exercise, together with royalties. The milestone schedule is a capital deployment plan mapped onto a biological risk curve.

The royalty stream is the most durable mechanism. Rates range from the low single digits to the high teens as a percentage of net sales. Once established against a commercial-stage product, it becomes an asset in its own right: a contractual claim on future revenues that can be sold, pledged as collateral, or structured into a securitisation to generate immediate capital for reinvestment in pipeline development. The legal effectiveness of each of these uses depends entirely on the quality of the contractual drafting and the proper establishment of the relevant rights under applicable law.

The minimum guaranteed royalty is the provision that transforms the stream into a subscribable instrument. Without a floor, a royalty is a contingent claim on commercial performance; with one, it becomes a fixed-income instrument with a variable coupon, whose floor component can be modelled and subscribed independently of the variable component, and it determines whether the asset created by the contract can advance to the next stage: becoming financeable.

When the contract becomes an instrument: the three conditions of financeability

Creating a contractual asset is one thing. Making it financeable is another. That transformation rests on three cumulative conditions.

• First – precise definition of the cash flow: An investor who purchases or takes security over a right to future royalties subscribes to a calculable, auditable stream resistant to manipulation. The net sales definition is the critical variable: every authorised deduction, whether returns, chargebacks, rebates, or managed care adjustments, reduces the base on which the royalty is calculated. An imprecise definition at signing translates into a disputed stream at scale. This is why specialist investors treat the net sales definition as a credit variable, in the same manner as an interest rate in a loan agreement.
• Second – legal security of the underlying asset: A royalty stream is only financeable if the intellectual property rights on which it rests are robust, enforceable, and properly registered. Most major jurisdictions require that transactions affecting rights attached to a patent, including assignments, licences, and security interests, be recorded in the relevant national or regional register to be enforceable against third parties. This registration requirement is not a post-closing formality: it determines whether the investor's claim benefits from the protections of a property right or remains confined to a contractual position. In most systems, recording a transaction gives notice and establishes priority, but does not itself guarantee the validity or effect of the underlying document. That determination remains a matter for the courts.
• Third – a contractual structure adapted to monetisation: A collaboration agreement drafted solely with industrial partnership in mind may contain provisions that render the royalty stream non-transferable, non-pledgeable, or conditional on elements over which the investor has no control. An unqualified anti-assignment clause, a change-of-control provision triggering automatic termination of the licence, or a sublicensing restriction preventing isolation of the stream in a special-purpose vehicle may each suffice to render a monetisation transaction impossible. In several jurisdictions, contractual restrictions on the transfer of financial receivables are not fully enforceable against a secured party, and blanket reliance on boilerplate anti-assignment language carries meaningful legal risk in a financing context.

When these three conditions are met, the royalty stream can access increasingly sophisticated forms of financing. In their most direct form, monetisation transactions consist of selling all or part of the stream to a specialist investor at a discount to its expected present value. Where structured as a true sale, the transaction does not give rise to a debt obligation on the licensor's balance sheet, though mechanisms that cap the investor's return or preserve the licensor's exposure to the downside may affect that characterisation.

The synthetic royalty represents the next stage: a company with no pre-existing stream contractually creates a right of participation in its future revenues. In June 2025, Revolution Medicines concluded a US$2bn agreement with Royalty Pharma comprising up to US$1.25bn in synthetic royalty financing and a separate senior credit facility of up to US$750m. That same month, BridgeBio raised US$300m by monetising 60 per cent of its European royalties on acoramidis, marketed as BEYONTTRA for the treatment of transthyretin amyloid cardiomyopathy, against the first US$500m in annual net sales, subject to a cap of 1.45 times the upfront amount. A contractual asset, correctly structured, can raise capital on a scale comparable to that of debt or equity markets, without recourse to those markets.

Where deals are won or lost: the drafting imperatives

The royalty finance market has a visible bottleneck, located systematically at the drafting of the original agreement. Every monetisation transaction that fails to close, every royalty-backed loan priced at a steep discount, every structure requiring extensive legal remediation before signing traces its difficulties back to decisions made during negotiation of the original licence: the net sales definition left vague; the minimum guaranteed royalty removed as a last-minute concession; the intellectual property registration never completed; the change-of-control provision copied from a prior agreement without analysis of its effect in a monetisation context.

Scope: the boundaries of the financed asset

Drafting the scope provisions is the first discipline. The field of use, the territory, the exclusivity perimeter, and the sublicensing rights are not commercial parameters; they are the boundaries of the financed asset. Ambiguity in scope is ambiguity in value. An investor in royalties who cannot determine with precision the extent of the rights it is purchasing cannot value them. Also, a dispute over scope, several years after signing, can reduce to nothing the value of an otherwise well-constituted royalty portfolio.

Milestones: subscribable or litigious

Drafting the milestone definitions is the second discipline. A milestone tied to a precisely defined regulatory event is a payment obligation that an investor can model. A milestone tied to the successful completion of a clinical study without further specification is a payment obligation whose triggering conditions will be contested. The quality of milestone drafting directly determines whether the obligation is subscribable or litigious.

Insolvency: the risk that no term sheet prices

The insolvency dimension deserves particular attention in any cross-border transaction. Several jurisdictions have developed protective mechanisms for intellectual property licensees in insolvency proceedings, preserving their right to continue exploiting the licensed technology notwithstanding the licensor's insolvency, but those protections vary considerably across jurisdictions and are not uniform across all categories of intellectual property rights. Rights in patents and trade secrets may be treated differently from rights in trademarks, and a collaboration agreement bundling all of these into a single licence may expose the licensee to asymmetric risk. These considerations must inform, from the outset, the drafting of continuity provisions, step-in rights, and arrangements relating to access to data and underlying technological assets.

Registration: a closing deliverable, not a formality

Intellectual property registration, finally, must be treated as a closing deliverable rather than an administrative formality. The chain of title, the registrations in the relevant national or regional registers, and the coherence between the rights granted by the contract and the rights actually registered determine whether the investor's claim benefits, in the event of dispute, from the priority of a property right or from the fragility of a contractual position.

Conclusion

The collaboration and licence agreement is the life sciences industry's preferred financing instrument because it is flexible, non-dilutive, and calibrated to the binary risk profile of drug development. It fulfils that function only when the lawyers who draft it understand each of these successive transformations: the contract does not merely finance a partnership, it creates an asset; that asset becomes financeable only when precise legal conditions are met; and those conditions can only be satisfied at the time of initial drafting, never afterward. The market is built one contract at a time. And every poorly drafted contract is an asset that will never know its second life.

References

Royalty Finance in Life Sciences: Market Update 2026; Royalty Report: Royalty Finance Transactions in the Life Sciences, 2020–2024: available at www.gibsondunn.com.

Vertex Pharmaceuticals and TreeFrog Therapeutics, Press Release, 23 April 2024: available at https://news.vrtx.com.

GSK plc, Press Release, 29 July 2024: available at https://us.gsk.com/en-us.

Revolution Medicines, Inc., Press Release, June 24, 2025: available at https://ir.revmed.com.

BridgeBio Pharma, Inc., Press Release, June 30, 2025: available at https://investor.bridgebio.com/overview/default.aspx.

Sally Smith Hughes, Genentech: The Beginnings of Biotech (University of Chicago Press, 2011), pp 91–105.