Why Biotech is Mortgaging Its Future

TLDR Biotech sat down with Julien Willard, MD, a diplomat turned leading strategist and economist in the life sciences sector, to get his take on the recent royalty financing spree happening in the biotech space.

2025 has evolved into a upswing year for biotech as evidenced by the recent uptick in M&A and financing, with a less well-known vehicle emerging to serve the latter - royalty financing.

According to Julien Willard, a former diplomat turned health economist who now serves as chief economist at a market entry consulting and competitive intelligence firm, the first half of 2025 witnessed an "unprecedented surge" in royalty-based financing, with approximately $3.4 to $3.5 billion in disclosed upfront volume.

"Royalty Financing actually moved from niche to mainstream," Willard extols, noting that this year marks a fundamental shift in how biotech companies think about funding their futures.

What Does Royalty Financing Actually Mean?

Before diving into why this funding mechanism has taken off, it's worth understanding what royalty financing actually entails.

When Willard describes it, he uses a comparison that resonates: "This is basically a mortgage of the future cash flows that biotech is trying to obtain."

In practical terms, companies are selling rights to a percentage of their future drug revenues in exchange for immediate capital.

Unlike traditional equity financing where companies issue new shares (diluting existing shareholders), or debt financing where they take on loans with interest payments, royalty financing allows biotechs to access capital without giving up ownership or taking on traditional debt obligations.

"These companies are essentially borrowing money from the future to fund their product launch or expand indications now, rather than make an alternative gamble and finance some unproven science," Willard explains.

The big players in the royalty financing space, including creatively-named firms like Royalty Pharma or HealthCare Royalty Partners, provide upfront cash in exchange for a slice of future sales, typically ranging from 2.5% to 7.5% of revenues for a defined period.

The appeal for this scheme becomes clearer when compared to financing alternatives, those being diluting shareholders through equity raises, taking on expensive debts, or losing control of their assets by partnering/selling to big pharma.

One recent example is Revolution Medicines, where they partnered with Royalty Pharma for $2 billion in “flexible funding”.

As aptly put by Royalty Pharma’s CEO, “In contrast to a conventional pharma partnership, this large scale and flexible funding agreement enables Revolution Medicines to retain control of the clinical development of daraxonrasib, as well as the ability to capture significant value creation that would result from the successful clinical development and commercialization of its pipeline.“

Why Biotechs Are Trading Tomorrow's Revenues for Today's Survival

The surge in royalty financing is a direct response to the "biotech bear market", where traditional funding routes have become increasingly hostile to companies seeking capital.

"We have a very weak equity market, and we have tightening credit across the board," Willard notes. This combination has created a particularly painful dynamic: biotech stock valuations have dropped significantly, making equity raises "very much painfully dilutive," while rising interest rates have made traditional loans "much costlier."

This has led to royalty financing moving from a niche option to "a lifeline for biotech companies who need access financing."

The numbers tell the story of this transformation. Between 2018 and 2022, the total value of royalty financing grew at approximately 40% compound annual rate, actually outpacing equity raises during that period. 

2025 has seen this trend accelerate even further, with companies explicitly stating their motivations in press releases. Heidelberg Pharma, for instance, openly acknowledged their need to extend their cash runway when they amended their royalty financing deal with HealthCare Royalty.

Phase 3 is Getting Funded and Everything Else Isn’t

A good source to use to monitor the royalty financing landscape is Gibson Dunn's royalty financing tracker. Looking over the entries, perhaps the most striking characteristic of 2025's royalty financing boom is what's not getting funded.

According to Willard's analysis, exactly 0% of disclosed deals this year have involved pre-Phase 2 assets. Zero.

"Nobody wants to take any risk," Willard emphasizes. "Everybody wants to invest into something that really will pan out."

Half of all royalty deals involved candidates in Phase 3 trials or awaiting FDA approval, while the remaining half targeted products already on the market or recently approved. This represents a shift in risk appetite, where investors are essentially betting on commercialization success rather than clinical development outcomes.

The therapeutic focus is equally telling. Oncology assets dominated, capturing approximately 70% of total disclosed funding. Rare genetic diseases followed at 15%, with immunology and inflammation rounding out another 15%. As Willard notes, "Oncology assets often have very large revenue potential, and they also have very active interest from financial players."

This seems to put early-stage biotech out of the royalty financing race, as they must either pursue other funding avenues or structure deals around future milestones rather than sales-based royalties.

The Art of Not "Constantly Bleeding Cash"

Another notable trend in 2025's royalty deals has been the aggressive use of caps and time limitations. "Almost every single transaction this year included terms to cap the total payments to the investor or limit the royalties' duration," Willard observes.

This structure ensures that successful drugs don't become perpetual cash drains. The BridgeBio deal exemplifies this approach, as their $300 million financing was capped at 1.45 times the investment. Once investors receive $435 million in aggregate payments, their rights to the drug's royalties terminate.

"Basically, what we're seeing is that these caps ensure that if the drugs are very successful, the royalty owner still makes a lot of money, but then the biotech company that issues these royalties eventually regains the full revenue stream," Willard explains. "So you're not constantly bleeding cash to someone else."

The Revolution Medicines deal took a different approach with no dollar cap, but instead a 15-year time limit on their $2 billion arrangement. They’ll be paying tiered royalties ranging from 2.5% to 7.5% of global net sales, but after 15 years, they regain full revenue rights regardless of how much Royalty Pharma has earned.

Geographic structuring adds another layer of sophistication. BridgeBio's deal, for instance, only covers 60% of European net sales royalties on the first $500 million of annual sales in Europe. "BridgeBio still has the American market and other regions like Asia-Pacific completely untouched by this deal," Willard points out, highlighting how companies can maintain flexibility while accessing needed capital.

When Big Pharma Breaks Its Own Rules: The Biogen Surprise

Perhaps the most eyebrow-raising deal of 2025 came from an unexpected source: Biogen, a large-cap pharmaceutical company, entering into a royalty financing arrangement for its lupus drug development.

Biogen's deal with Royalty Pharma - $250 million paid as $30 million per quarter over six quarters - represents something unprecedented in the industry. Rather than using internal cash reserves or pursuing traditional pharmaceutical alliances, Biogen chose to "offload part of the risk of a phase 3 lupus clinical trial," using royalty financing as what Willard calls "an innovative financial engineering approach."

The structure is also quite clever, as the payments are tied to development milestones and will only convert to mid-single-digit royalties if the drug is approved. It's essentially using, as Willard puts it, "Royal Pharma's capital to underwrite a clinical trial program, something that would have been very, very unusual" for companies like Pfizer, Novartis, or Bristol-Myers Squibb.

“Rewriting the traditional playbook” feels like an overused cliche at this point but it still fits - we’re now seeing big pharma start to explore alternative financing structures traditionally reserved for cash-strapped biotechs, something unheard of even a few years ago.

The Missing Players and Future Implications

Despite the global nature of the biopharmaceutical industry, 2025's royalty financing boom has been "largely a transatlantic affair," according to Willard. The major players Royalty Pharma, HealthCare Royalty, Blue Owl Capital, and Canada's Sagard are all North American firms. Asian dealmakers, despite the region's growing biotech sector, have played a "very much reserved, very muted, direct role."

However, Willard sees this changing: "In China, biotech is very much cash-strapped, so we're starting to see elevated interest in alternative vehicles like royalty financing.”

For biotechs considering this path, Willard offers several key pieces of advice:

First, structure matters: "If it's going to be a blockbuster drug, it does make sense to make it a tiered structure, so you're still preserving a lot of your cash."

Second, scope can be limited: "You can actually stipulate that a specific region or a specific country be included within the royalty financing deal, don’t be afraid to ask for it.”

Perhaps most importantly, companies need to think about "the long-term implications - what impact this will have on future profits versus the immediate capital injection."

The New Reality

Royalty financing has evolved from a last resort to a strategic choice, even for larger pharma.

Companies like Revolution Medicines are explicitly choosing this path not just for the capital, but to maintain control of their assets.

"While we can say that biopharma is currently in dire financial straits, at the same time the growing interest in financial engineering schemes like royalty financing seem to go far beyond just ‘the market is bad and we need cash’," Willard observes.

Royalty financings is likely to continue growth - with 15+ deals already tracked this year according to Gibson Dunn's Royalty Finance Tracker, it's likely to outpace 2024's totals.

The bigger question is whether this represents a temporary adaptation to market conditions or a permanent shift in how biotech companies fund their ambitions.

For now, with traditional funding routes constrained and companies needing capital to survive, the “mortgage model” of royalty financing is a kind of new normal.

Companies are betting that giving up a slice of tomorrow's success is better than not having a tomorrow at all.

Big thanks again to Julien Willard, MD for sitting down for this interview!