Bankrupt Biotech Royalty Auctions: Navigating Royalty Sales

Disclaimer: This article is for informational purposes only and does not constitute legal, financial, or investment advice. The author is not a lawyer or financial adviser. All information is derived from publicly available sources and may not be complete or current. Details regarding transactions, royalty structures, and financial arrangements may change. Readers should conduct their own due diligence and consult with appropriate legal and financial professionals before making any decisions.

The pharmaceutical industry has experienced a dramatic spike in biotech bankruptcies in recent years, triggering a wave of asset liquidations across the sector. When a drug developer collapses, the aftermath extends far beyond physical assets. Intangible properties—drug licenses and royalty streams—frequently hit the auction block alongside laboratory equipment and office furniture. Chapter 11 proceedings commonly feature court-approved sales of these assets, sometimes under Section 363 of the Bankruptcy Code, as a means to raise cash quickly and satisfy creditors.

Specialized investors and royalty funds have learned to monitor Chapter 11 dockets with hawk-like vigilance, scanning for any indication that valuable royalty rights might be available. These bankruptcy auctions present unique opportunities to acquire drug royalties at deep discounts, though they come with substantial risks that separate sophisticated investors from the merely opportunistic.

Consider the striking example of Achaogen, a small antibiotic maker that filed Chapter 11 in 2019. Achaogen's main asset was Zemdri (plazomicin), its newly approved antibiotic that had once been touted as a potential blockbuster. In the bankruptcy auction, all of the company's assets—including drug rights and associated royalties—were sold for barely $16 million in total, a staggering comedown for a product once projected to generate $500 million in revenue.

Cipla Ltd. won the global rights (excluding China) to Zemdri for just $4.65 million upfront plus a promise of modest future royalties if the drug succeeded. Another buyer obtained the China rights for $4.5 million, and lab equipment was sold separately. Royalty streams that investors once hoped would generate steady income were abruptly monetized for pennies on the dollar in a distress sale.

These outcomes illustrate precisely why investors keep a keen eye on bankruptcy dockets. Notices of bidding procedures or asset purchase agreements signal that royalty interests are in play. By tracking court filings—often via PACER or claims agent websites—funds can identify and evaluate these opportunities before the auction closes. In Achaogen's case, the auction was publicly announced and conducted in June 2019, with details available through the court-appointed claims agent. This transparency gave potential buyers—from pharma companies to royalty funds—a chance to evaluate the asset and submit competitive bids.

Savvy investors essentially treat Chapter 11 dockets as deal pipelines, scouting for any motion to sell royalty rights or IP licenses. Given the uptick in biotech failures, this has become a specialized niche strategy in 2024–2025, with dedicated teams at investment firms monitoring bankruptcy filings daily.

Valuing Royalty Streams When the Sponsor Vanishes

Pricing a royalty stream in bankruptcy presents unique challenges, especially when the original product sponsor is no longer around to champion the drug. Under normal circumstances, a biotech receiving royalties would reinvest in product support, develop new indications, or collaborate on marketing with its commercial partner. But once the royalty owner enters bankruptcy, confidence in the drug's future can erode rapidly, depressing the stream's value considerably.

Buyers must grapple with a fundamental question: Will the product continue to generate sales at the same pace without its developer? If the licensee or commercial partner is a large pharmaceutical company with established distribution networks and marketing capabilities, royalty buyers may take some comfort that sales will continue. However, if the bankrupt biotech was itself the marketer or the key scientific driver behind the product, the drug might languish post-bankruptcy—reducing or even eliminating future royalties.

Valuation approaches in these auctions therefore lean heavily on downside scenarios. Bidders typically apply steep discounts to projected cash flows to account for the loss of sponsor support, potential supply disruptions, or negative market perception once the biotech is gone. The Achaogen auction illustrates this dynamic perfectly: more than $200 million had been invested in developing Zemdri, yet the rights sold for a tiny fraction of that investment. The low price implicitly acknowledged that without Achaogen's continued involvement, the antibiotic's commercial prospects were bleak—a sadly common story in the challenging antibiotics market.

Industry analysts noted that Achaogen's fire-sale "implied zero market value" for the drug, sending shockwaves through the antibiotic investment ecosystem and raising troubling questions about the viability of antibiotic development as a commercial enterprise.

The valuation calculus shifts when a larger company's royalty is at stake. Consider cases where a mid-size pharmaceutical company owes royalties on a product it acquired—valuations may hinge on the product's performance independent of the bankrupt seller. The Mallinckrodt case illustrates this dramatically: Mallinckrodt PLC filed Chapter 11 and sought to shed billions in royalty obligations tied to Acthar Gel. While Acthar continued to generate sales, Mallinckrodt argued the royalty payments to the original seller were an unsecured debt it could discharge through bankruptcy.

Mallinckrodt ultimately succeeded in cutting off those future royalties, leaving the seller with only a minuscule claim recovery. For investors, this set a precedent that a royalty stream's value can be obliterated if treated as an unsecured claim. Any bid to purchase such a royalty in bankruptcy would factor in the high risk of non-payment. Buyers will pay more for a royalty backed by strong sales and legal enforceability post-bankruptcy, and far less—if anything—if the royalty may legally vanish through the bankruptcy process.

Case Studies: Royalties in Recent Biotech Bankruptcies

Achaogen (2019) – The Royalty Sell-Off

Achaogen's bankruptcy auction provides a textbook example of how royalty rights are liquidated. The China licensee—initially Qilu, later Xuanzhu—negotiated to eliminate future royalty obligations entirely. It paid $4.5 million to convert its regional license into a royalty-free, perpetual license. This meant Achaogen's estate received a one-time payment while Qilu/Xuanzhu would owe no ongoing royalties whatsoever.

Such deals demonstrate how counterparties often leverage bankruptcy situations to buy out royalty streams cheaply. The U.S. rights buyer, Cipla, similarly paid a small upfront sum and agreed only to contingent royalties if sales hit certain benchmarks. Achaogen's bankruptcy effectively wiped out the high hopes of future royalties—they were either sold off at significant discounts or extinguished via lump-sum deals.

Melinta Therapeutics (2019–2020) – Restructuring and Royalty Obligations

Melinta, another antibiotic developer, took a different path through bankruptcy. It filed Chapter 11 in late 2019 but emerged via reorganization under its secured lender, Deerfield, rather than through a piecemeal asset auction. Melinta had previously acquired a suite of antibiotics from The Medicines Company with deferred royalty and milestone payments built into the deal.

When Melinta entered bankruptcy, those contingent payment obligations became unsecured claims in the proceeding. The reorganization plan canceled existing equity and gave control to Deerfield, while unsecured creditors—including any royalty claimants—received only token recovery. Melinta's bankruptcy allowed it to shed or renegotiate its royalty payment duties effectively. Any royalties Melinta was owed from partners were likely used as bargaining chips or financing sources during the reorganization.

The company continued operating, presumably retaining any inbound royalties from its own out-licenses, though those were minimal given Melinta's limited partnerships. The key takeaway is that in a successful reorganization, a company might keep its royalty-generating assets while discharging royalty obligations it owes to others—a double-edged outcome depending on which side of the transaction you're on.

Recro/Baudax (2023–2024) – Returning the Asset to Avoid Royalty Debt

Recro Pharma offers a cautionary tale about structuring royalty deals. In 2015, Recro bought rights to an IV meloxicam drug from Alkermes, agreeing to hefty milestones and royalties upon commercialization. Recro later spun out this program into Baudax Bio, which launched the drug as Anjeso but struggled financially from the start.

By early 2023, rather than face ongoing royalty obligations it couldn't pay, Baudax struck a deal to transfer all Anjeso rights back to Alkermes. In this transfer, Baudax gave Alkermes the intellectual property, clinical data, and even the NDA for Anjeso. In exchange, Alkermes released Baudax from any further payment obligations. Baudax essentially handed the royalty stream and the drug back to the original owner in exchange for canceling the debt.

This pre-bankruptcy maneuver demonstrates a creative solution: the company avoided a protracted bankruptcy fight over royalties by ceding the asset to the royalty holder. Despite that effort, Baudax still filed Chapter 11 in 2024 for its remaining business—but at least the Alkermes royalty liability was off the table. Had Baudax not executed this transfer, a bankruptcy court likely would have treated Alkermes's milestone and royalty rights as an unsecured claim, much like the Mallinckrodt situation, leaving Alkermes with little and the asset potentially free for new owners. The Baudax case underscores how royalty-linked assets can boomerang back to original licensors when a project fails commercially.

Mallinckrodt and the Precedent-Setting Ruling

The Mallinckrodt case (2020–2022), involving a larger specialty pharmaceutical company, has become infamous in legal circles for its handling of a billion-dollar royalty-like obligation for Acthar Gel. The Third Circuit's 2024 ruling confirmed Mallinckrodt could discharge that future payment stream entirely in bankruptcy, because the obligation was deemed an unsecured, pre-bankruptcy claim.

The court explicitly noted the deal could have been structured as a license or secured interest to protect the seller, but it wasn't—so Mallinckrodt's estate was free to sell the drug without paying the seller its share of revenue, leaving the seller with approximately 4% recovery on its claim. This outcome has sent shockwaves through royalty financing circles, emphasizing that deal structure is paramount. We'll explore this further in later sections.

PhaseBio and Control Disputes

Another illustrative example is PhaseBio (2022), a biotech whose bankruptcy involved a contentious fight with its development partner SFJ Pharmaceuticals over rights to a drug candidate. SFJ had funded PhaseBio's clinical trial in exchange for a revenue share and certain license rights. When PhaseBio entered bankruptcy, it attempted to auction the drug to a new buyer, while SFJ claimed its contract gave it ownership or licensing rights due to PhaseBio's default.

The dispute highlighted the legal complexities that arise when a development partner tries to reclaim an asset versus the debtor's right to sell it under bankruptcy law. The matter was ultimately settled with SFJ taking control of the drug. The lesson for investors: when royalty or revenue-sharing agreements deteriorate, bankruptcy can become a battleground for control of the underlying asset, with outcomes that aren't always predictable from the contract terms alone.

Legal Complexities: Executory Contracts and Royalty Obligations

Royalty streams typically originate from contracts—license agreements, asset purchase agreements, co-development deals—which are subject to special rules in bankruptcy. In U.S. Chapter 11, these contracts are usually considered executory contracts, meaning both sides still have material ongoing duties to perform. The debtor can choose to "assume" (continue) or "reject" (breach and terminate) such contracts per Section 365 of the Bankruptcy Code. This power plays a pivotal role in how royalty obligations are treated in bankruptcy proceedings.

When the Bankrupt Company Pays Royalties

If a bankrupt company is paying royalties as a licensee or asset buyer, it may seek to reject the contract to stop future payments. The unpaid future royalties then become simply a pre-petition damage claim for the royalty receiver. As we saw with Mallinckrodt, U.S. courts have held that even contingent royalty obligations are dischargeable claims arising from the original contract signing.

Rejection doesn't unwind past transfers of intellectual property, but it relieves the debtor of ongoing payment duties. The royalty provider is left with an unsecured claim, often recovering only cents on the dollar. This represents a nightmare scenario for licensors—essentially, the bankruptcy severs the royalty stream, and the buyer gets the IP free and clear of the royalty burden. To avoid this outcome, deal lawyers now attempt to structure sales as secured arrangements or license agreements, retaining a lien or reversionary interest that might survive better in bankruptcy.

When the Bankrupt Company Receives Royalties

If a bankrupt company is receiving royalties as a licensor or seller, the concern shifts to whether those contracts can be assumed or assigned to a buyer so that royalties continue flowing. Here, Section 365(n) of the Bankruptcy Code offers some protection to licensees of intellectual property. It provides that if a debtor-licensor rejects an IP license, the licensee can elect to continue using the IP for the duration of the contract, as long as it keeps paying royalties.

In practice, this prevents a trustee from simply canceling a licensee's rights to secure a better sale price elsewhere—the licensee can hold onto its license. However, Section 365(n) does not force the licensor (debtor) to perform any services or support, and it only covers existing IP, not future improvements. So a licensee can keep selling the product and paying royalties, even if the licensor goes bankrupt and rejects the contract.

This is generally good news for royalty investors if the payor goes bankrupt: as long as the payor wants to keep the license, royalties should continue flowing. Post-petition royalties are often treated as administrative expenses that get priority payment. However, if the payor instead rejects the license—deciding the product isn't commercially viable—the royalty stream may die unless another buyer for the license emerges.

Royalty Pharma's SEC disclosures underscore this risk: if a marketer licensee files bankruptcy, royalty payments due pre-filing become unsecured claims (likely unpaid) and post-filing payments could be delayed or halted pending resolution. The debtor's automatic stay would prevent any enforcement action by the licensor, and the debtor might reject the license entirely—a scenario where the licensor's only recourse is a claim for damages.

Assignment and Assumption of Royalty Contracts

The assumption and assignment of royalty-bearing contracts presents additional complications. A bankrupt licensor can generally assign a license agreement to a buyer even if the contract forbids assignment, thanks to Section 365(f), except when applicable law excuses the counterparty from accepting performance from someone else under Section 365(c). In the case of patent licenses, U.S. law treats them as personal to the licensee in many jurisdictions, meaning a debtor-licensee often cannot assign its license without consent.

However, a debtor-licensor usually can assign the license, since the licensee merely has to continue paying royalties to a new owner. Most royalty contracts in bankruptcy ultimately are either assumed by the debtor if it reorganizes, or assigned to whoever buys the IP assets. Buyers typically insist on obtaining the royalty revenue streams free and clear of encumbrances, which can raise objections if the original royalty seller argues it still has rights.

Courts examine whether the royalty was truly sold previously or is merely a contract right. The Mallinckrodt case drew a sharp line: an unsecured contractual royalty right will be treated as a dischargeable claim, whereas a "royalty securitized by an interest in IP or structured as an ongoing license" might have more protection.

International Differences in IP and Royalty Treatment

Different jurisdictions handle intellectual property and royalties in insolvency in vastly different ways. The above discussion reflects U.S. law, which is relatively friendly to debtors shedding burdensome contracts but also provides specific licensee protections through Section 365(n). In contrast, many European insolvency regimes historically allowed more leeway to terminate IP licenses outright.

Under German insolvency law, for example, a bankruptcy administrator can decide whether to continue or terminate a license granted by the insolvent licensor. If they terminate it, the licensee's rights cease and the licensee is left with only an unsecured claim for damages—essentially no equivalent of Section 365(n) protecting continued use. The administrator can then attempt to resell the IP to someone else.

This means a royalty stream that a European biotech licensor was receiving could be disrupted if the company enters insolvency, since the license might not survive the proceedings. Not all EU countries follow this approach; for instance, UK law after recent updates is somewhat more favorable to preserving contracts, and an EU-wide directive is being considered to harmonize protections for IP licenses. Still, the uncertainty in non-U.S. insolvencies makes cross-border royalty investments riskier.

A fund might prefer a U.S.-based royalty payor or at least require contractual clauses that preempt termination upon insolvency—so-called "ipso facto" clauses, though these may not be enforceable in some jurisdictions. For investors and attorneys, the key is understanding the local insolvency law: in the U.S., a licensee can continue paying and keep the license, whereas in Germany the license could be canceled and auctioned to a new owner. This disparity can significantly affect the stability of a royalty stream in a bankruptcy scenario.

U.S. vs. Europe: Different Outcomes for Royalty Streams

Because of these legal differences, the fate of royalty streams in bankruptcy can diverge significantly between the U.S. and Europe. In the U.S., Chapter 11 provides a relatively structured and predictable process. Royalty assets can be sold "free and clear" to maximize value for the estate, and licensees or partners have defined rights—or at least clearly established claims if cut off. We've seen multiple U.S. examples where royalties were swiftly auctioned or restructured: investors understand the rules of engagement, even if the results (like unsecured claims) can be harsh.

The U.S. framework also encourages rescue financing and even royalty monetization during bankruptcy. For instance, a debtor might finance its stay in Chapter 11 by selling future royalty rights via a court-approved sale. There's a degree of predictability that attracts participants like Royalty Pharma or Ligand to at least consider bids or debtor-in-possession (DIP) financing deals in these cases.

In Europe, insolvency proceedings are generally more fragmented, varying significantly by country, and often lean toward liquidation. There is no exact analogue to Chapter 11's debtor-in-possession model in many EU jurisdictions—often it's an administrator calling the shots rather than existing management. As noted, IP licenses in some countries can be unilaterally terminated by the administrator, which may upend long-term royalty deals.

However, Europe is increasingly adopting non-dilutive financing trends that have been popular in the U.S., including royalty-based funding. This means going forward we may see more European companies with royalty streams at stake in insolvencies. The EU has proposed a directive to harmonize insolvency laws, including specific IP license protections in Article 27 of the draft directive, though that's still in progress amid some pushback.

Currently, an investor in a European royalty must navigate each country's distinct rules—for example, a French insolvency might treat a license differently from a German one. In practice, many European biotech failures result in outright asset sales or liquidations, similar to Chapter 7 in the U.S., often with less transparency. The royalty assets would be sold by the administrator if they have value, but there may be more procedural hurdles, such as needing consent of a counterparty or court permissions that vary by jurisdiction.

A comparison could be drawn to the U.K.'s administration process: it allows asset sales, but contracts might be disclaimed if deemed onerous. The U.K. has recently outlawed certain "ipso facto" termination clauses to help preserve contracts in restructuring, which edges its approach closer to the U.S. model in spirit.

Overall, the U.S. regime provides more clarity for investors on how royalty streams will be handled, albeit not always in the investor's favor (as the Mallinckrodt ruling warns). The EU landscape remains more varied; a royalty fund dealing internationally must be adept in cross-border insolvency to protect its interests. For instance, if a European licensor of a drug goes bankrupt, a U.S.-based royalty holder might suddenly find its stream interrupted or need to bid for the asset itself to secure continuation.

This uncertainty is one reason royalty financing historically thrived more in the U.S.—the legal infrastructure allowed creative structuring to minimize insolvency risk. But as Europe adopts these financing methods, it is gradually adapting its laws to balance debtor and creditor (including licensee) rights in insolvency.

Royalty Finance Funds: Managing Bankruptcy Risk and Opportunities

Royalty financing firms—like Royalty Pharma, HealthCare Royalty, Blackstone Life Sciences, and others—have built substantial businesses around acquiring or funding drug royalty streams. These sophisticated players are acutely aware of bankruptcy risk and have developed comprehensive strategies to manage it on both the front and back ends of deals.

Deal Structuring to Mitigate Risk

The first line of defense is structuring the royalty transaction as a "true sale" of an asset, rather than a loan. By purchasing the royalty outright, often via a special-purpose vehicle (SPV), the fund aims to ensure that if the seller later files bankruptcy, the royalty payments are not considered part of the bankruptcy estate. In essence, the fund becomes the legal owner of the royalty stream, with payments flowing directly to it rather than to the bankrupt company.

Proper documentation and notice are critical—for example, giving notice to the commercial partner to pay the fund directly helps cement the fund's ownership. If done correctly, even if the biotech that sold the royalty enters bankruptcy, the payments should bypass the estate and go directly to the fund. However, pitfalls remain: if the sale is not ironclad, a bankruptcy court might recharacterize it as a financing arrangement (debt), which would put the fund back in the pool of unsecured creditors.

To guard against this risk, royalty agreements often include security interests as a fallback. Some deals also involve the royalty fund taking a partial ownership stake or exclusive license in the IP as additional insulation. The Mallinckrodt court explicitly noted that had the original Acthar seller retained a security interest or licensed the IP instead of transferring title, it could have been better protected.

Royalty funds took that lesson to heart—recent "synthetic royalty" financings by biotechs now frequently incorporate collateral or IP licenses to survive a bankruptcy scenario. For example, a royalty fund might structure an investment as a license of the product to an SPV, which then sublicenses back to the company. If the company fails, the license rights—and thus product control—revert to the SPV/fund, not the estate. These complex structures aim to prevent the scenario of being left with only a claim and no continuing royalty.

Diversification and Partner Quality

Royalty funds also carefully diversify their portfolios and prefer royalties coming from reliable payors. Many of Royalty Pharma's largest royalty interests are on products sold by major pharmaceutical companies—AbbVie, Johnson & Johnson, Pfizer, and others. The risk of those marketers going bankrupt is extremely low, and even if one did, the product would likely continue generating sales through reorganization.

This is a conscious strategic choice: a royalty paid by a strong commercial partner is far safer than one dependent on a fragile single-product biotech. When funds do deals involving smaller partners, they either keep the exposure limited or price in the risk accordingly. For instance, Royalty Pharma has some deals where it provides financing to a biotech in return for a royalty on that biotech's own future sales. In such cases, they will carefully examine the company's solvency outlook and often require covenants or step-in rights.

Royalty Pharma's SEC filings acknowledge that a licensee's bankruptcy could delay or reduce royalty receipts, and that pre-bankruptcy unpaid royalties would likely not be recovered fully. Knowing this, funds set higher required returns on those riskier streams or avoid them altogether.

Monitoring and Active Engagement

Royalty funds keep a close watch on the bankruptcy arena for two distinct reasons: offensive and defensive. Offensively, a fund like Royalty Pharma may swoop in to bid on a royalty asset being sold out of bankruptcy. These funds often have the capital and expertise to value drug royalties quickly, giving them an edge in auctions for such niche assets. There have been instances where royalty funds or investment firms acted as "stalking horse" bidders for royalty portfolios from bankrupt estates, sometimes packaged with the underlying product IP.

Defensively, if a company whose royalty they own is in Chapter 11, the fund will participate actively in the proceedings to protect its rights. This might mean filing motions to lift the automatic stay to receive post-petition royalties, objecting to any sale that doesn't honor their royalty assignment, or even providing debtor-in-possession (DIP) financing to influence the process.

An example of proactive engagement was Ligand Pharmaceuticals' role in the Navidea Biopharmaceuticals bankruptcy (2023). Ligand, itself a holder of drug royalties and pipeline interests, agreed to act as a stalking-horse purchaser for Navidea's assets, which included a diagnostic agent and related royalty streams. By setting the floor bid, Ligand could secure a favorable deal or at least drive the price up if outbid. Royalty funds are opportunistic in this way: a distress situation can be a chance to acquire royalties that were previously not for sale, often at valuations reflecting distress rather than true long-term potential.

Royalty Pharma's approach exemplifies many of these practices. The firm maintains in-house legal and restructuring experts and regularly hires top law firms to design its deals and handle any insolvency situations. As an illustration of industry foresight, after the Mallinckrodt decision in late 2022 put the spotlight on unsecured royalty risk, virtually no public biotech has launched an unsecured royalty financing deal since. Instead, structures have evolved—likely with input from firms like Royalty Pharma—to ensure better protection.

Moreover, the fund's scale allows it to weather isolated storms. If one royalty stream falters due to a partner's bankruptcy or rejection of a license, the diversified portfolio lessens the impact. Nonetheless, in their investor communications Royalty Pharma does highlight concentration risks and the importance of their top products continuing to perform. They also carry insurance and maintain credit facilities as buffers. Managing bankruptcy risk is simply part of the royalty investing business model.

Finally, it's worth noting that some royalty investors have a long-term outlook and relationships that can turn crisis into opportunity. For example, a royalty fund might support a distressed partner by restructuring the royalty agreement—perhaps temporarily reducing payments to help the partner avoid bankruptcy, in exchange for a bigger share later. Alternatively, if bankruptcy is inevitable, the fund might team up with other creditors to propose a reorganization plan or even sponsor the reorganization itself.

These tactics go beyond passive investing—they resemble private equity or creditor committee strategies. The end goal is to protect the royalty stream's value. For lawyers representing such funds, creativity in both contract drafting and bankruptcy advocacy is crucial.

Conclusion: Key Takeaways for Investors and Counsel

The turbulent biotech financing environment of 2024–2025 has laid bare the critical importance of understanding royalty considerations in bankruptcy. Investors and lawyers dealing with drug royalties should heed several core lessons that emerge from recent cases.

Monitor Early and Often. If you hold or covet a royalty interest, keep tabs on the financial health of the payor. If bankruptcy looms, follow the docket with vigilance. Many royalty asset sales are announced with little lead time, and being prepared to act quickly can make the difference between securing a valuable asset and missing the opportunity entirely.

Structure is Everything. The fate of a royalty in Chapter 11 largely hinges on deal structure. A royalty that is purely a contractual right to payment from a bankrupt debtor will be treated as an unsecured claim "like most contract claims"—meaning it can be wiped out or paid at pennies on the dollar. To avoid that outcome, structure transactions to either transfer an interest in the underlying IP or secure the royalty obligation with collateral.

This might slightly complicate deals upfront, but it pays dividends—literally—if bankruptcy occurs. As one court bluntly stated, the original seller of Acthar "could have protected itself" by structuring the deal differently. Those words should be emblazoned on every life sciences term sheet.

Expect Fire-Sale Pricing in Distress. When buying royalties out of bankruptcy, expect bargain prices—but also understand why they're cheap. The discount reflects both uncertainty and the absence of competitive bidders. If you're a creditor, be aware that your debtor might only fetch a fraction of prior estimated value for these assets. For investors, this represents a chance to deploy capital if you have specialized knowledge—for example, understanding that a particular drug still has viable sales potential under new ownership and management.

Legal Complexities Abound. Cross-disciplinary expertise is essential. Bankruptcy law, IP law, and contract law all intersect in these situations. Issues like executory contract rejection, Section 365(n) elections, and foreign insolvency treatment of licenses can drastically alter outcomes. Investors should involve legal counsel early to map out scenarios and develop contingency plans. Likewise, attorneys must get creative with solutions—whether it's negotiating for adequate protection, buying assets via credit bid, or crafting reorganization plans that accommodate royalty streams while maximizing value for all stakeholders.

Bankruptcy Is Not the End for the Drug. Often, a bankrupt biotech's products and associated royalties will find new life with a new owner. The Chapter 11 process, though painful for the company and its equity holders, can actually reallocate the drug to parties better positioned to maximize its value—whether that's a large pharmaceutical company, another biotech, or an investor group with specialized expertise. Patients may eventually benefit if the drug remains on the market under new stewardship, and the royalty stream may resume under new terms.

However, that transition period can be messy and unpredictable. Partners will sometimes use the bankruptcy to negotiate more favorable terms—as seen when partners pick up licenses royalty-free or for nominal sums. It's a reminder that in distress, leverage shifts dramatically, and cash today becomes far more valuable than promises of future payments.

Royalty financing in biotech is a high-stakes game that doesn't end at bankruptcy's door—it merely enters a new and often more complex phase. Investors and lawyers who understand this niche can navigate the bankruptcy auction scene to either rescue value or capitalize on opportunity. With many biotech firms still starved for cash and some inevitably bound to fail, the coming years will likely see more royalty auctions appearing on court dockets.

Whether you are an investor looking to buy distressed assets, a creditor looking to salvage value from a failed investment, or a lawyer guiding clients through the storm, a nuanced grasp of how royalty assets are handled in insolvency is essential. By learning from cases like Achaogen, Melinta, Recro/Baudax, and Mallinckrodt, stakeholders can better protect themselves and maybe even find silver linings in the bankruptcy cloud. After all, one company's end can be another's beginning—and nowhere is that more evident than in the trading of royalty streams from bankrupt biotechs.