HealthCare Royalty Trust IPO to yield 6%

With global pharmaceutical sales totaling $1 trillion (£700 billion) in 2014, it was only a matter of time before an investment vehicle cashed in on royalties driving such colossal revenue. Now, an experienced team at HealthCare Royalty Trust is raising £200 million via an IPO, which could shelter investors from current market volatility, give exposure to an industry on steroids, and generate a 6% dividend yield.

In the healthcare industry, drug companies are increasingly opting to buy licenses for drug products from others rather than spend billions of their own cash on research and development. A number of these products are already making money and generating royalties.

American firm HealthCare Royalty Trust will either buy an interest in the licensing agreement, or provide either debt financing or funding capital in return for a stream of cash flow payments.

HealthCare Royalty Partners, the trust's investment manager, has been around for a decade, and a team of industry veterans has overseen billions of dollars of royalty financings. In the 30 months to December, it had identified about 370 possible deals worth $25 billion.

Relying on near-term cash flows from big players like GlaxoSmithKline and Pfizer, the portfolio will launch with 10 diverse assets, including products for infertility, HIV, vaccines and "hard to manage" pain. All will be bought from HealthCare's existing private funds.

A promising yield

Income seekers should like management's aim to achieve a 6% dividend yield based on the issue price, returning cash to shareholders each quarter. Over the medium-term, they target net total return in excess of 10%.

Crucially, the trust's returns are based on pharmaceutical sales, not corporate earnings or equity markets, and management promises to mitigate downside risk and sales underperformance.

This alternative use of royalty funding is becoming increasingly common, with healthcare royalty transactions estimated to have grown at a compound annual growth rate of 26% over the last 15 years. And that $1 trillion of industry sales is tipped to keep growing at 4-5% a year until 2020.

"We believe this growth can only continue, driven by an increasing acceptance of royalty finance as an alternative source of funding, the growing trend of larger pharmaceutical companies to in-license and further exciting advances in the sector," says HealthCare Royalty Management managing partner Todd Davis.

The IPO prospectus should hit the stands later this month, with the issue closing in March. Trading of the shares should begin on 23 March.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.