Liens in Pharmaceutical Royalty Financing Transactions
2025-2026 Market Overview: Record Volume Reshapes the Landscape
Before diving into the technical intricacies of liens, it is worth pausing to appreciate the sheer scale of the market these security interests now protect. The pharmaceutical royalty financing market reached a historic $10 billion in announced transaction value in 2025, fundamentally reshaping how liens and security interests protect these investments.
┌─────────────────────────────────────────────────────────────────────────────┐
│ ROYALTY FINANCING MARKET EVOLUTION │
│ 2020 - 2025 │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ TOTAL MARKET VALUE ($B) │
│ │
│ $10B ─────────────────────────────────────────────────────── ████████████ │
│ │ 2025 │
│ $8B ───────────────────────────────────────────── │ │
│ │ │
│ $6B ────────────────────────────────────── ████████████████ │ │
│ │ 2024 │ │
│ $4B ─────────────────────── │ │ │
│ │ │ │
│ $2B ─────────────── │ │ │
│ │ │ │
│ $0 ┴──────────┴──────────┴──────────┴─────┴────────────────┴──────────┤
│ 2020 2021 2022 2023 2024 2025 │
│ │
│ KEY 2025 STATISTICS: │
│ ──────────────────── │
│ • Royalty Pharma alone deployed $4.7B (40% market share) │
│ • Average transaction size: $225.9M (+2.4% YoY) │
│ • Average upfront payment: $114.9M (-28.4% YoY) │
│ • Synthetic royalties: 47% of total market value │
│ • 87% of biopharma execs would consider royalty financing │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
According to Royalty Pharma's January 2026 J.P. Morgan Healthcare Conference presentation, the company deployed $4.7 billion across transactions in 2025, capturing approximately 40% market share. Deloitte's September 2025 market study, commissioned by Royalty Pharma, revealed that 87% of biopharma executives would consider royalty financing for capital-raising over the next three years, with 80% specifically interested in creating synthetic royalties.
Major Market Participants and Consolidation
The competitive landscape shifted dramatically in 2025. KKR acquired a majority stake in HealthCare Royalty Partners (HCRx) in July 2025, bringing institutional private equity capital to the sector's second-largest dedicated player. OrbiMed closed its $1.86 billion Royalty & Credit Fund V in August 2025. These developments signal deepening institutional conviction in royalty-based strategies and will likely accelerate structural innovation in lien arrangements.
┌─────────────────────────────────────────────────────────────────────────────┐
│ MAJOR ROYALTY FINANCING PLAYERS (2025) │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ PLAYER 2025 AUM/ KEY DEALS NOTES │
│ DEPLOYMENTS │
│ ─────────────────────────────────────────────────────────────────────────│
│ │
│ Royalty Pharma $4.7B deployed Revolution Medicines Largest │
│ (NASDAQ: RPRX) Denali, Cytokinetics player │
│ │
│ HealthCare Royalty ~$2B+ deployed GSK Shingrix/QS-21 KKR │
│ Partners (HCRx) BridgeBio BEYONTTRA acquired│
│ │
│ Blue Owl Capital $1B+ deployed XOMA Vabysmo loan Credit │
│ BridgeBio deal focused │
│ │
│ OrbiMed $1.86B Fund V Multiple deals New fund│
│ │
│ Blackstone Life Sciences $700M+ Merck sac-TMT deal Big │
│ │
│ Sagard Healthcare $500M+ deployed Nuvation Bio pharma │
│ taletrectinib deals │
│ │
│ Sixth Street Partners Active Clinical funding Workout │
│ structures focus │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
The Post-Mallinckrodt Paradigm Shift
The most significant structural shift in the market stems from the Third Circuit's April 2024 affirmance in In re Mallinckrodt PLC (99 F.4th 617). This landmark decision has made secured structures essentially mandatory for sub-investment-grade issuers. As Covington noted in May 2025:
"The trend since 2023 is for transactions with less than investment-grade companies to always be secured. Such security is typically over the IP and assets relating to the product that is the subject of the synthetic royalty."
Since the December 2022 district court decision in Mallinckrodt, no unsecured synthetic royalty financings by public biotech companies have been executed. This represents a fundamental transformation in market practice, making liens not just prudent but effectively mandatory.
┌─────────────────────────────────────────────────────────────────────────────┐
│ THE MALLINCKRODT PARADIGM SHIFT │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ TIMELINE: │
│ ───────── │
│ │
│ Dec 2022 ─────► District Court rules future royalty obligations │
│ │ from outright sale are dischargeable unsecured claims │
│ │ │
│ │ MARKET REACTION: Unsecured synthetic royalties │
│ │ immediately cease │
│ │ │
│ Apr 2024 ─────► Third Circuit AFFIRMS (99 F.4th 617) │
│ │ │
│ │ HOLDING: Royalty obligations not tied to IP license │
│ │ are dischargeable unsecured claims │
│ │ │
│ May 2025 ─────► Covington analysis confirms: "always secured" now │
│ standard for sub-investment-grade issuers │
│ │
│ ─────────────────────────────────────────────────────────────────────────│
│ │
│ COURT'S GUIDANCE (what investors SHOULD have done): │
│ ────────────────────────────────────────────────── │
│ ┌─────────────────────────────────────────────────────────────────────┐ │
│ │ "To protect itself, [the seller] could have structured the deal │ │
│ │ differently. It could have: │ │
│ │ │ │
│ │ 1. Licensed the rights to the drug │ │
│ │ 2. Kept a security interest in the intellectual property │ │
│ │ 3. Set up a joint venture to keep part ownership" │ │
│ └─────────────────────────────────────────────────────────────────────┘ │
│ │
│ RESULT: Every synthetic royalty deal now includes security interests │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Royalty Financing 101: Why Security Interests Matter
Royalty Financing in Pharma
Royalty financing broadly refers to transactions where an investor provides upfront capital in exchange for rights to a portion of future product sales or royalties. These deals can be structured either as an outright sale of royalty rights (often called royalty monetization) or as a loan secured by royalty streams (sometimes called royalty-backed debt).
┌─────────────────────────────────────────────────────────────────────┐
│ ROYALTY FINANCING STRUCTURE COMPARISON │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ ROYALTY SALE (Monetization) ROYALTY-BACKED LOAN │
│ ───────────────────────── ────────────────────── │
│ │
│ ┌─────────┐ $$$ ┌─────────┐ ┌─────────┐ $$$ ┌──────┐ │
│ │ Biotech │ ────────── │Investor │ │ Biotech │ ────── │Lender│ │
│ └────┬────┘ └────┬────┘ └────┬────┘ └──┬───┘ │
│ │ │ │ │ │
│ │ Royalty Rights │ │ Royalty as │ │
│ └──────────────────────┘ │ Collateral │ │
│ └────────────────┘ │
│ │
│ • Investor OWNS royalty • Company OWES debt │
│ • Pass-through payments • Repayment obligation │
│ • Risk transfers to buyer • Risk remains with company │
│ │
└─────────────────────────────────────────────────────────────────────┘
In practice, the economic outcome can be similar – the investor gets a cut of future drug sales – but the legal character matters immensely. If structured as a sale, the company's obligation is to pass through royalties as they come; if a loan, the company must repay a debt (often capped by the royalty performance) as noted in Gibson Dunn's analysis.
Regardless of form, investors have become keenly aware that just calling a deal a "sale" doesn't make it so. U.S. bankruptcy courts scrutinize these arrangements to decide if they are truly sales or disguised financings. The litmus test is which party bears the risk of the asset. If the company has effectively promised to make the investor whole regardless of product success – through guarantees, broad recourse or fixed buy-back obligations – a court might recharacterize the "sale" as a loan. That outcome could drag the investor into a bankruptcy as a mere creditor, rather than an owner of the royalty.
Thus, investors insist on robust lien protection as both belt and suspenders: if a royalty transfer is ever deemed a secured loan, it will at least be a secured loan, with the investor holding perfected security interests in valuable collateral.
The True Sale vs. Secured Loan Eight-Factor Test
The true sale versus secured loan characterization issue remains governed by the eight-factor test from In re Shoot the Moon, LLC (2021). Understanding these factors is essential for structuring liens that will hold up in bankruptcy:
┌─────────────────────────────────────────────────────────────────────────────┐
│ TRUE SALE vs. SECURED LOAN: THE EIGHT-FACTOR TEST │
│ (In re Shoot the Moon, 2021) │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ FACTOR SUGGESTS SALE SUGGESTS LOAN │
│ ──────────────────────────────────────────────────────────────────────── │
│ │
│ 1. Right of Recourse None or limited Broad recourse │
│ (can buyer come back?) to seller │
│ │
│ 2. Seller's Servicing Buyer controls Seller continues │
│ & Fund Commingling collection servicing │
│ │
│ 3. Buyer's Independent Buyer does own Buyer relies on │
│ Investigation due diligence seller representations│
│ │
│ 4. Right to Excess Buyer keeps Excess returns │
│ Collections upside to seller │
│ │
│ 5. Seller's Repurchase None or limited Mandatory or │
│ Option broad repurchase │
│ │
│ 6. Buyer's Ability to Buyer can adjust Seller controls │
│ Alter Pricing unilaterally terms │
│ │
│ 7. Seller's Power to No ability to Seller can settle │
│ Compromise Asset compromise or modify rights │
│ │
│ 8. Language & Conduct "Sale" language, "Loan" language, │
│ of Parties buyer as owner UCC shows "debtor" │
│ │
│ ──────────────────────────────────────────────────────────────────────── │
│ │
│ PRACTICAL IMPLICATIONS: │
│ • Mandatory true-up payments → suggests LOAN │
│ • Recourse provisions → suggests LOAN │
│ • Capped returns → suggests LOAN │
│ • Uncapped economics → suggests SALE │
│ • Buyer assumes full downside → suggests SALE │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Defining Liens in this Context
In royalty financings, a lien typically means a first-priority perfected security interest in the royalty payment stream and often in related assets (such as the underlying patents or the drug's regulatory approvals). "First-priority" indicates no other creditor has a superior claim on that collateral, and "perfected" means the investor has taken all legal steps (like UCC filings or equivalent registrations) to put the world on notice of its lien.
┌─────────────────────────────────────────────────────────────────────┐
│ LIEN TERMINOLOGY DECODER │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ FIRST-PRIORITY PERFECTED │
│ ────────────── ───────── │
│ │
│ Payment Waterfall: UCC-1 Filing Process: │
│ │
│ ┌───────────────┐ ┌─────────────────────┐ │
│ │ FIRST LIEN │ ◄── Gets paid │ 1. Security Agree │ │
│ │ HOLDER │ FIRST │ 2. File UCC-1 │ │
│ ├───────────────┤ │ 3. State records │ │
│ │ SECOND LIEN │ ◄── Gets paid │ 4. Public notice │ │
│ │ HOLDER │ SECOND └─────────────────────┘ │
│ ├───────────────┤ │ │
│ │ UNSECURED │ ◄── Gets what's ▼ │
│ │ CREDITORS │ LEFT "World is on notice of │
│ └───────────────┘ the investor's claim" │
│ │
└─────────────────────────────────────────────────────────────────────┘
For example, under U.S. law, rights to future royalties are treated as payment intangibles or accounts, and Article 9 of the Uniform Commercial Code (UCC) requires filing a financing statement to perfect either an outright sale or a security interest in those rights according to Gibson Dunn. In effect, even when a royalty is sold, the buyer often files a UCC-1 statement as if it were a lender – a prudent step to fend off any competing claims or a bankruptcy trustee's reach. As a Covington legal summary dryly notes, many royalty monetizations historically were done on an unsecured basis, but the evolving legal landscape has made liens the norm for newer deals.
Case in Point – Risk of No Lien
A cautionary tale comes from a 2021 case, CapCall LLC v. Foster (In re Shoot the Moon), involving the sale of restaurant receivables (not pharma royalties but analogous in structure). The court recharacterized the "true sale" as a loan because the deal looked and smelled like a financing: the contract granted extremely broad security interests over all assets of the seller, took personal guarantees, and even labeled the UCC filing with the seller as "debtor" rather than "seller."
By keeping so much recourse and collateral, the buyer had insulated itself from risk – a hallmark of a lender, not a purchaser. The lesson for royalty financiers is clear: if you want sale treatment, you must give up real risk; but if you secretly hold on to recourse, the court will treat you as a lender anyway. And if you're a lender, you had better have a perfected lien.
First-Priority Perfected Security Interests
In 2025's royalty financings, the gold standard is a first-priority perfected security interest in the royalty and associated assets. Practically, this means the royalty investor's claim comes ahead of all others on specifically identified collateral, and all legal steps (filings, recordings, notices) have been taken to solidify that claim. Nearly every major royalty deal now explicitly includes such a lien.
Scope of Collateral
The collateral package typically goes beyond just the stream of royalty payments per se. Investors often secure an interest in: (i) the defined royalty receivables (the cash flow from product sales that generate the royalty), and (ii) critical related assets such as the intellectual property (patents and know-how) and regulatory rights (FDA approvals, drug registrations) for the product.
┌─────────────────────────────────────────────────────────────────────┐
│ TYPICAL COLLATERAL PACKAGE │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ ┌─────────────────────┐ │
│ │ ROYALTY STREAM │ │
│ │ (Cash Payments) │ │
│ └──────────┬──────────┘ │
│ │ │
│ ┌────────────────┼────────────────┐ │
│ │ │ │ │
│ ▼ ▼ ▼ │
│ ┌─────────────────┐ ┌───────────┐ ┌──────────────────┐ │
│ │ INTELLECTUAL │ │ PRODUCT │ │ REGULATORY │ │
│ │ PROPERTY │ │ PROCEEDS │ │ APPROVALS │ │
│ ├─────────────────┤ ├───────────┤ ├──────────────────┤ │
│ │ • Patents │ │ • Revenue │ │ • FDA Approvals │ │
│ │ • Know-how │ │ • Accounts│ │ • EMA Approvals │ │
│ │ • Trade secrets │ │ • Proceeds│ │ • Registrations │ │
│ └─────────────────┘ └───────────┘ └──────────────────┘ │
│ │
│ WHY INCLUDE IP & APPROVALS? │
│ ─────────────────────────── │
│ • Lien "runs with the land" if drug is sold │
│ • Binds new owners to royalty obligation │
│ • Prevents transfer without satisfying investor's claim │
│ │
└─────────────────────────────────────────────────────────────────────┘
By taking a lien on the IP and approvals, the investor guards against scenarios where the underlying product might be sold or transferred – the lien ensures the royalty obligation "runs with the land," so to speak, binding whoever owns the drug. This way, even if the original royalty seller goes bankrupt and the drug is sold by a trustee, the investor's lien can attach to the proceeds or enforce rights against the new owner.
Under UCC Article 9, a security interest in general intangibles (like patents or regulatory authorizations) is perfected by a simple central filing, although many creditors belt-and-suspenders their approach by also recording notices with the Patent and Trademark Office or regulatory agencies. The end result is a publicly discoverable claim on those assets, deterring others from trying to grab them.
Example – Sagard's Lien in Nuvation Bio (2025)
A marquee deal in 2025 illustrates this clearly. In March 2025, Nuvation Bio struck a $250 million financing with Sagard Healthcare, comprising a $150 million royalty interest purchase and a $100 million term loan. As part of this deal, Nuvation granted Sagard a comprehensive lien to secure the royalty payments.
According to Nuvation's SEC filing, the company's obligations under the royalty financing are "secured, subject to customary permitted liens and…an intercreditor agreement, by a perfected security interest in (i) accounts receivable arising from U.S. net sales of [the drug] taletrectinib and (ii) intellectual property, product registrations and regulatory approvals related to [taletrectinib] in the United States."
┌─────────────────────────────────────────────────────────────────────┐
│ SAGARD / NUVATION BIO DEAL STRUCTURE │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ SAGARD HEALTHCARE PARTNERS │
│ ───────────────────────────── │
│ │
│ ┌──────────────────┐ ┌──────────────────┐ │
│ │ $150M Royalty │ │ $100M Term Loan │ │
│ │ Interest Purchase│ │ (Senior Secured) │ │
│ └────────┬─────────┘ └────────┬─────────┘ │
│ │ │ │
│ └──────────────┬───────────────┘ │
│ │ │
│ ▼ │
│ ┌──────────────────────────────┐ │
│ │ NUVATION BIO │ │
│ └──────────────────────────────┘ │
│ │ │
│ ▼ │
│ ┌──────────────────────────────┐ │
│ │ COLLATERAL GRANTED │ │
│ ├──────────────────────────────┤ │
│ │ • U.S. Sales Receivables │ │
│ │ (Taletrectinib) │ │
│ │ • U.S. Patents & IP │ │
│ │ • FDA Approvals │ │
│ │ • Product Registrations │ │
│ └──────────────────────────────┘ │
│ │
│ RESULT: Sagard has first-priority claim on Taletrectinib's │
│ entire U.S. commercial franchise │
│ │
│ UPDATE (June 2025): FDA approved taletrectinib (IBTROZI), │
│ triggering the funding and activating the lien structure │
│ │
└─────────────────────────────────────────────────────────────────────┘
In plainer terms, Sagard obtained a first-priority claim on both the cash from U.S. sales of taletrectinib and the U.S. patents and FDA approvals for taletrectinib. This collateral was carefully chosen: if Nuvation defaults or ends up in bankruptcy, Sagard can enforce its lien by intercepting the drug's U.S. sales revenue and even blocking transfer of the drug IP absent its royalty stake being honored.
Sagard's lien was perfected by the usual means – filing UCC financing statements, likely in Delaware (Nuvation's incorporation state), describing the collateral in detail. The intercreditor agreement referenced suggests that Sagard's two roles (royalty investor and term loan lender) had to be contractually managed, a point we'll revisit under subordinated liens. But critically, Sagard's security interest in taletrectinib's royalty stream is first-priority – Nuvation could not simply use the same royalty or IP as collateral for another loan without Sagard's consent. The Nuvation deal epitomizes the 2025 trend: even when the headline is a "royalty purchase," the fine print is a heavy security agreement.
Update: The Nuvation deal also featured time-based escalating caps on investor returns: 1.6x by June 2031, 1.75x by June 2034, and 2.0x thereafter. This structure balances investor return requirements against company liquidity constraints at different development stages – a structural innovation that has been replicated in subsequent deals.
Example – XOMA's Royalty-Backed Loan (2023–24) and 2025 Updates
Royalty aggregators themselves also use first-priority liens when they leverage their portfolios. XOMA Corporation, a biotech royalty aggregator, raised $130 million in late 2023 via a non-recourse, royalty-backed loan from Blue Owl Capital. The loan was explicitly secured by XOMA's rights to a stream of royalties from the ophthalmology drug Vabysmo – a product for which XOMA had acquired royalty rights from Novartis.
The terms make clear that Blue Owl's only recourse for repayment is the Vabysmo royalty itself: "until the royalty-backed loan is repaid, Vabysmo royalty payments will be directed to Blue Owl (with semi-annual interest at 9.875%); once repaid, the Vabysmo royalties revert back to XOMA."
┌─────────────────────────────────────────────────────────────────────┐
│ XOMA / BLUE OWL NON-RECOURSE STRUCTURE │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ ┌──────────┐ $130M Loan ┌──────────┐ │
│ │ BLUE OWL │ ────────────────────────── │ XOMA │ │
│ │ CAPITAL │ │ │ │
│ └────┬─────┘ └────┬─────┘ │
│ │ │ │
│ │ First-Priority Lien on: │ │
│ │ ┌─────────────────────┐ │ │
│ └──────►│ VABYSMO ROYALTIES │◄────────┘ │
│ │ (and ONLY Vabysmo) │ │
│ └─────────────────────┘ │
│ │ │
│ ▼ │
│ ┌───────────────────────┐ │
│ │ PAYMENT FLOW │ │
│ ├───────────────────────┤ │
│ │ │ │
│ │ Roche ──► Blue Owl │ (Until loan repaid) │
│ │ (9.875%) │ │
│ │ │ │
│ │ Roche ──► XOMA │ (After loan repaid) │
│ │ │ │
│ └───────────────────────┘ │
│ │
│ KEY: Non-recourse = Blue Owl can ONLY look to Vabysmo royalties │
│ If XOMA fails, Blue Owl's claim is shielded from creditors │
│ │
└─────────────────────────────────────────────────────────────────────┘
In effect, XOMA and Blue Owl structured the deal so that Blue Owl holds a first-priority lien on the Vabysmo royalty stream and no other XOMA assets. This isolation, coupled with UCC perfection, assures Blue Owl that even if XOMA ran into trouble, Blue Owl's slice of Vabysmo sales is shielded from other creditors.
Non-recourse, asset-specific financings like this are essentially mini-securitizations: the lender's lien is so tightly focused that it stands or falls on the royalty's performance alone. Many such loans involve a special purpose subsidiary owning the royalty, which grants a security interest to the lender and keeps the royalty payments in a segregated account – making enforcement cleaner if needed. The XOMA/Blue Owl deal underscores how first-priority liens underpin even the most "innovative" royalty financings with very traditional secured lending principles.
2025 Performance Update: According to XOMA's Q3 2025 financial results, interest expense on the Blue Owl loan totaled $10.0 million year-to-date, with cash receipts of $43.9 million including $30.3 million from royalties and commercial payments. No amendments or restructurings were reported – the lien structure is performing as designed.
December 2025 Innovation: XOMA also executed a creative December 30, 2025 transaction with Takeda: exchanging reduced Mezagitamab royalty obligations for royalty and milestone payments across a basket of nine development-stage assets in Takeda's externalized portfolio. This represents a novel portfolio diversification approach in royalty financing, where concentrated single-asset exposure is traded for diversified positions across multiple development-stage assets.
If a Blanket Lien Already Exists…
Often, biotech companies seeking royalty financings already have a general-purpose credit facility or venture debt with a blanket lien on all assets, which would include royalty rights and IP. In those cases, achieving first priority for the new royalty investor requires some legal juggling.
┌─────────────────────────────────────────────────────────────────────┐
│ CLEARING PRE-EXISTING LIENS FOR ROYALTY DEALS │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ SCENARIO: Biotech has existing credit line with blanket lien │
│ │
│ BEFORE: AFTER (with Intercreditor): │
│ ─────── ────────────────────────── │
│ │
│ ┌────────────┐ ┌────────────┐ │
│ │ BANK LIEN │ │ BANK LIEN │ │
│ │ (ALL ASSETS) │ (ALL ASSETS│ │
│ │ │ │ EXCEPT │ │
│ │ • Cash │ │ Royalty) │ │
│ │ • IP │ │ │ │
│ │ • Royalties│◄─ Problem! └────────────┘ │
│ │ • Equipment│ │ │
│ └────────────┘ ▼ Subordinated on │
│ Royalty Collateral │
│ ┌────────────┐ │
│ │ ROYALTY │ │
│ │ INVESTOR │ ◄─ First Priority │
│ │ LIEN │ on Royalty & │
│ │ │ Related IP │
│ └────────────┘ │
│ │
│ SOLUTION OPTIONS: │
│ ───────────────── │
│ 1. Carve-out: Bank releases claim on specific royalty/IP │
│ 2. Subordination: Bank agrees to junior position on that slice │
│ 3. Intercreditor Agreement: Documents the priority split │
│ │
└─────────────────────────────────────────────────────────────────────┘
Typically, the existing lender must consent to carve out the specific royalty and related IP from its collateral (releasing its claim on those assets) or agree to subordinate its lien on that slice to the royalty investor's lien. This is done via an intercreditor agreement or amendment to the loan.
For instance, if Nuvation Bio had a prior credit line secured by all assets, Sagard would have insisted that lender subordinate or release any claim on taletrectinib royalties and IP before closing the deal. The need for such intercreditor arrangements is common in practice (though often kept behind closed doors), ensuring the royalty financier's interest is truly first in the pecking order. In short, first-priority liens in royalty deals often require clearing away any pre-existing claims – a process that highlights how negative pledge covenants and subordinations come into play, as we discuss below.
The Revolution Medicines Paradigm: Hybrid Structures Combine Royalty Economics with Secured Debt
The June 24, 2025 transaction between Royalty Pharma and Revolution Medicines – valued at up to $2 billion – established a new paradigm for how liens protect royalty investments by combining synthetic royalties with senior secured debt. This hybrid architecture may become the template for large-scale pre-approval financings.
┌─────────────────────────────────────────────────────────────────────────────┐
│ REVOLUTION MEDICINES HYBRID DEAL STRUCTURE │
│ (June 24, 2025) │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ ROYALTY PHARMA │
│ │ │
│ ┌───────────────┴───────────────┐ │
│ │ │ │
│ ▼ ▼ │
│ ┌─────────────────────┐ ┌─────────────────────┐ │
│ │ $1.25 BILLION │ │ $750 MILLION │ │
│ │ SYNTHETIC ROYALTY │ │ SENIOR SECURED │ │
│ │ │ │ TERM LOAN │ │
│ ├─────────────────────┤ ├─────────────────────┤ │
│ │ • 5 tranches of │ │ • SOFR + 5.75% │ │
│ │ $250M each │ │ • 3.5% floor │ │
│ │ • Tiered royalty │ │ • 6-year maturity │ │
│ │ rates on global │ │ • First-priority │ │
│ │ net sales │ │ lien on assets │ │
│ └─────────────────────┘ └─────────────────────┘ │
│ │ │ │
│ └───────────────┬───────────────┘ │
│ │ │
│ ▼ │
│ ┌─────────────────────┐ │
│ │ REVOLUTION MEDICINES│ │
│ │ (Daraxonrasib) │ │
│ └─────────────────────┘ │
│ │
│ ─────────────────────────────────────────────────────────────────────────│
│ │
│ ROYALTY RATE STRUCTURE (SALES CEILING INNOVATION): │
│ ────────────────────────────────────────────────── │
│ │
│ Annual Net Sales Royalty Rate │
│ ────────────────── ──────────── │
│ $0 - $2 billion 4.55% │
│ $2 - $4 billion 3.00% │
│ $4 - $6 billion 1.50% │
│ $6 - $8 billion 0.50% │
│ Above $8 billion 0.00% ◄── Sales ceiling preserves upside │
│ │
│ TOTAL POTENTIAL: Up to $2 billion in funding │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
The deal comprises two components: a $1.25 billion synthetic royalty across five $250 million tranches, and a $750 million senior secured term loan priced at SOFR + 5.75% (3.5% floor) with six-year maturity. The synthetic royalty applies tiered rates to worldwide net sales of daraxonrasib (a RAS inhibitor for pancreatic cancer): 4.55% on the first $2 billion of annual sales, stepping down to 3.0% ($2-4B), 1.5% ($4-6B), 0.5% ($6-8B), and zero on sales above $8 billion.
This sales ceiling structure preserves company upside while providing investors exposure to blockbuster potential. The senior secured loan introduces explicit collateral protection absent from pure synthetic structures. Royalty Pharma retained flexibility to syndicate all or a portion of the loan, suggesting potential intercreditor complexity if different lenders hold the debt versus synthetic components. Goodwin Procter and Maiwald advised Royalty Pharma; Latham & Watkins advised Revolution Medicines.
Implications for Lien Practice
The Revolution Medicines structure has several important implications for lien practice:
┌─────────────────────────────────────────────────────────────────────────────┐
│ REVOLUTION MEDICINES STRUCTURE: LIEN IMPLICATIONS │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ 1. DUAL-LAYER SECURITY │
│ ────────────────────── │
│ • Synthetic royalty: backup security interest per Mallinckrodt │
│ • Term loan: explicit first-priority lien on company assets │
│ • Result: investor protected regardless of characterization │
│ │
│ 2. INTERCREDITOR COMPLEXITY │
│ ────────────────────────── │
│ • Royalty Pharma may syndicate the term loan │
│ • Different lenders could hold debt vs. synthetic components │
│ • Requires careful intercreditor documentation │
│ │
│ 3. SALES CEILING INNOVATION │
│ ───────────────────────── │
│ • Zero royalty above $8B aligns incentives │
│ • Company retains full upside on blockbuster scenario │
│ • Investor gets substantial participation in base case │
│ │
│ 4. TRANCHE STRUCTURE │
│ ──────────────────── │
│ • 5 x $250M tranches = milestone-linked funding │
│ • Each tranche may have separate collateral release triggers │
│ • Complexity in tracking which tranches are outstanding │
│ │
│ 5. SYNDICATION FLEXIBILITY │
│ ───────────────────────── │
│ • Term loan can be syndicated to other lenders │
│ • Requires assignment provisions in security documents │
│ • Agent bank typically holds collateral for benefit of syndicate │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Major 2025-2026 Deals: A Comparative Analysis
The following table summarizes the major royalty financing transactions announced in 2025 and early 2026, with a focus on their lien structures:
┌─────────────────────────────────────────────────────────────────────────────────────────────────────────┐
│ MAJOR ROYALTY DEALS 2025-2026 │
├─────────────────────────────────────────────────────────────────────────────────────────────────────────┤
│ │
│ COMPANY/ DATE AMOUNT INVESTOR STRUCTURE LIEN TYPE CAP/CEILING │
│ DRUG │
│ ───────────────────────────────────────────────────────────────────────────────────────────────────────│
│ │
│ Revolution Jun 25 $2.0B Royalty Hybrid: 1st priority Zero above │
│ Medicines Pharma $1.25B royalty on all assets $8B annual │
│ (Daraxonrasib) + $750M loan + backup sales │
│ │
│ Blackstone/ Nov 25 $700M Blackstone Synthetic 1st priority Not disclosed │
│ Merck Life Sci royalty on on sac-TMT │
│ (sac-TMT ADC) ADC program assets │
│ │
│ BridgeBio/ Jun 25 $300M HCRx/ 60% of EU 1st priority 1.45x of │
│ BEYONTTRA Blue Owl royalties on EU rights purchase price │
│ │
│ Nuvation Bio/ Mar 25 $250M Sagard Hybrid: 1st priority 1.6x-2.0x │
│ Taletrectinib Healthcare $150M royalty on U.S. IP (time-based) │
│ + $100M loan & receivables │
│ │
│ Denali/ 2025 $275M Royalty Synthetic 1st priority Not disclosed │
│ (DNL788) Pharma royalty on product │
│ assets │
│ │
│ XOMA/Takeda Dec 25 N/A N/A Royalty N/A (basket N/A │
│ (Mezagitamab exchange for diversification) │
│ swap) 9-asset basket │
│ │
│ ───────────────────────────────────────────────────────────────────────────────────────────────────────│
│ │
│ KEY TRENDS: │
│ • ALL deals include first-priority security interests (post-Mallinckrodt) │
│ • Hybrid structures (royalty + term loan) increasingly common for large deals │
│ • Sales ceilings and time-based caps gaining traction │
│ • Big pharma (Merck, Takeda) now active participants │
│ │
└─────────────────────────────────────────────────────────────────────────────────────────────────────────┘
Springing Liens and Backup Security Interests
While first-priority liens are taken upfront in most deals, there are scenarios where a lien might be delayed or contingent – the so-called springing lien. A springing lien is a security interest that activates only upon certain triggers, rather like an airbag that deploys in an accident. In pharmaceutical royalty financings, springing liens serve as a safety mechanism to protect investors under specific adverse conditions, notably bankruptcy or deal recharacterization.
┌─────────────────────────────────────────────────────────────────────┐
│ HOW SPRINGING LIENS WORK │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ NORMAL STATE TRIGGERED STATE │
│ ──────────── ─────────────── │
│ │
│ ┌─────────────┐ ┌─────────────┐ │
│ │ ROYALTY │ │ ROYALTY │ │
│ │ SALE │ │ SALE │ │
│ │ │ │ (deemed │ │
│ │ No lien │ │ a LOAN) │ │
│ │ needed - │ TRIGGER │ │ │
│ │ investor │ ────────────────► │ LIEN │ │
│ │ owns the │ • Bankruptcy │ ACTIVATES │ │
│ │ royalty │ • Recharacterization │ │
│ │ │ • Covenant breach │ Investor │ │
│ └─────────────┘ │ becomes │ │
│ │ SECURED │ │
│ ┌────┐ │ CREDITOR │ │
│ │ 💤 │ Dormant └─────────────┘ │
│ └────┘ │ │
│ ▼ │
│ ┌─────────────┐ │
│ │ UCC-1 was │ │
│ │ filed at │ │
│ │ closing │ │
│ │ (already │ │
│ │ perfected!)│ │
│ └─────────────┘ │
│ │
└─────────────────────────────────────────────────────────────────────┘
Backup Liens for "True Sale" Transactions
Consider a pharma company that believes it has accomplished a true sale of a royalty stream to an investor – meaning the investor is now the owner of that royalty and not a creditor. If that holds, no security interest is technically needed; the investor's ownership would be respected even in bankruptcy. However, if a court later decides the transaction was really a loan, the investor could be caught without the shield of collateral unless a backup plan was in place.
For this reason, most royalty purchase agreements nowadays include backup security provisions that effectively say: if, despite the parties' intent, the transfer is deemed to create a debt, then the company grants a security interest in the royalty and related assets to the investor to secure the repayment of that debt.
Investors do not leave this to chance – they typically file UCC-1 statements at closing anyway (since Article 9 covers outright sales of payment intangibles per Gibson Dunn), thereby perfecting a security interest ab initio. In substance, the lien is already sitting there; it "springs" to life only in the legal sense when needed. As Gibson Dunn attorneys noted, "most royalty purchasers will seek a backup security interest in at least the acquired royalties, and in certain cases… also in the underlying intellectual property [and] regulatory approvals."
These backup liens are often explicitly documented in the deal. For instance, a synthetic royalty agreement might include a clause that, upon a bankruptcy filing of the company, the royalty buyer is automatically granted (or deemed to have) a first-priority lien on the royalty stream and all pertinent assets, to the extent not already granted.
Post-Mallinckrodt: Market Practice for Backup Security
Following the Mallinckrodt decision, market practice for backup security has become significantly more rigorous. According to Covington's May 2025 analysis, the standard requirements now include:
┌─────────────────────────────────────────────────────────────────────────────┐
│ POST-MALLINCKRODT BACKUP SECURITY REQUIREMENTS │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ ELEMENT STANDARD PRACTICE │
│ ─────────────────────────────────────────────────────────────────────────│
│ │
│ UCC-1 Financing Statements Filed at closing, perfecting the │
│ true sale of royalty streams as │
│ "accounts" under Article 9 │
│ │
│ Backup Security Interest Explicit grant over underlying │
│ product assets (patents, FDA │
│ approvals, manufacturing rights) │
│ │
│ Bankruptcy-Remote SPV Collateral isolated in special │
│ purpose vehicle to shield from │
│ originator bankruptcy risk │
│ │
│ Direct Payment Obligations Licensees/payors directed to pay │
│ directly to royalty purchaser or │
│ segregated account │
│ │
│ IP License Linkage Security interest tied to license │
│ agreement to avoid Mallinckrodt │
│ dischargeable claim outcome │
│ │
│ ─────────────────────────────────────────────────────────────────────────│
│ │
│ COURT'S MALLINCKRODT GUIDANCE: │
│ "To protect itself, [the seller] could have... kept a security interest │
│ in the intellectual property, or set up a joint venture to keep part │
│ ownership." │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Covenant-Based Springing Liens
Another use of springing liens is tied to negative pledge covenants (discussed more below). Sometimes, a company's bond or loan will say: "You may not pledge certain key assets to new lenders; but if you do, then our debt automatically gets an equivalent lien on those assets." In effect, breaching a negative pledge triggers a springing lien for the protection of the existing creditor.
In a pharma context, imagine a company has unsecured notes with a negative pledge on intellectual property. If the company later does a secured royalty deal pledging that IP, a springing lien clause could give the noteholders a parallel lien to keep them in parity. This isn't common in small biotech financings (unsecured note issuances with such covenants are more common in larger corporate deals), but the principle shows how springing liens can enforce priority indirectly.
Regulatory or Timing Constraints
Occasionally, springing liens are used when an immediate lien grant is not feasible. For example, a government agency or particular contract might prohibit an outright lien on a development-stage project – funders might then agree to hold off on attaching a lien until a milestone is reached or a default occurs.
A real-world illustration comes from a state innovation loan program document from NJEDA, which noted that "protected intellectual property [was] required as a negative pledge and springing lien in event of default." In essence, the company could retain freedom to operate its IP without encumbrance unless and until it defaulted, at which point the lender's lien would crystallize over that IP. This approach can sometimes appease regulatory concerns or counterparty restrictions in the short term, while preserving the lender's rights in extremis.
Skepticism on Enforceability
It must be said that springing liens can get legally tricky. If not properly structured, a springing lien might be vulnerable – for instance, if it's not perfected in time before a bankruptcy (a lien that "springs" the day of a bankruptcy filing could be seen as a voidable post-petition transfer or subject to automatic stay issues).
┌─────────────────────────────────────────────────────────────────────┐
│ SPRINGING LIEN PERFECTION STRATEGY │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ WRONG WAY (Vulnerable): RIGHT WAY (Protected): │
│ ────────────────────── ──────────────────── │
│ │
│ Day 1: Deal closes Day 1: Deal closes │
│ No UCC filing ┌─────────────┐ │
│ │ │ UCC-1 FILED │ │
│ ▼ │ (covering │ │
│ Day 100: Bankruptcy │ contingent │ │
│ │ │ interest) │ │
│ ▼ └──────┬──────┘ │
│ Day 101: Lien "springs" │ │
│ │ ▼ │
│ ▼ Day 100: Bankruptcy │
│ PROBLEM: Post-petition │ │
│ transfer - may be ▼ │
│ voidable! Day 101: Lien "springs" │
│ │ │
│ ▼ │
│ PROTECTED: Priority │
│ dates back to Day 1 │
│ filing! │
│ │
└─────────────────────────────────────────────────────────────────────┘
Thus, careful investors often structure the lien to exist from the get-go, albeit dormant. One common strategy: filing a UCC financing statement covering the collateral at closing (which perfects any contingent interest), even if the security agreement says the lien attaches only upon a future trigger. That way, when the lien springs, it is instantly perfected with priority dating back to the original filing.
In sum, springing liens in royalty deals act as a legal seatbelt – rarely noticed when things go well, but crucial if an accident happens. They reflect a healthy paranoia among investors: trust the deal's form but verify with collateral in reserve.
Negative Pledges and Covenant Protections
If liens are the weapons in an investor's arsenal, negative pledges are the fortifications. A negative pledge is a covenant by which a borrower (or royalty seller) promises not to encumber certain assets or not to permit any liens that would be senior to the investor's claim. In pharmaceutical royalty financings, negative pledge clauses ensure that the royalty investor's collateral remains unburdened and exclusively dedicated to that investor.
Where They Appear
Negative pledge covenants show up in both loan agreements and royalty purchase agreements. In a loan, the company might covenant that it "will not incur any liens on [defined collateral] other than permitted liens." In a royalty purchase, the company similarly often agrees not to pledge or sell the same royalty stream to anyone else, nor to encumber the related IP in ways that would undermine the royalty buyer's rights.
┌─────────────────────────────────────────────────────────────────────┐
│ NEGATIVE PLEDGE MECHANICS │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ WHAT IT SAYS: │
│ ───────────── │
│ "Company shall NOT incur any liens on [Collateral] other than │
│ Permitted Liens, nor pledge, sell, or encumber the Royalty │
│ Stream or related IP to any third party." │
│ │
│ ┌─────────────────────────────────────────────────────────────┐ │
│ │ │ │
│ │ ┌─────────────────┐ ┌─────────────────┐ │ │
│ │ │ ROYALTY │ ◄───── │ INVESTOR'S │ │ │
│ │ │ COLLATERAL │ Ring- │ EXCLUSIVE │ │ │
│ │ │ │ Fenced │ TERRITORY │ │ │
│ │ │ • Royalty $ │ │ │ │ │
│ │ │ • Drug IP │ │ NO OTHER │ │ │
│ │ │ • FDA Rights │ │ CREDITORS │ │ │
│ │ │ │ │ ALLOWED │ │ │
│ │ └─────────────────┘ └─────────────────┘ │ │
│ │ │ │
│ │ ╳ Bank Loan? NO ENTRY │ │
│ │ ╳ New Bonds? NO ENTRY │ │
│ │ ╳ 2nd Lien? NO ENTRY │ │
│ │ │ │
│ └─────────────────────────────────────────────────────────────┘ │
│ │
│ CONSEQUENCE OF BREACH: Acceleration, Put Rights, Default │
│ │
└─────────────────────────────────────────────────────────────────────┘
These covenants protect against the classic danger of double-pledging or overselling an asset – a risk that is more than theoretical, given distressed companies' occasional desperation. A negative pledge is essentially the company's promise: "This asset is yours (or yours to secure) – I won't later use it as bargaining chip for someone else."
Covenant-Lite Synthetic Royalties: A Market Trend
Interestingly, while negative pledges remain universal, synthetic royalty structures have become increasingly "covenant-lite" compared to traditional debt. Per Covington's analysis, financial covenants are "exceedingly rare" in synthetic royalty transactions. Unlike venture or growth lending, synthetic royalties typically feature:
┌─────────────────────────────────────────────────────────────────────────────┐
│ SYNTHETIC ROYALTIES vs. TRADITIONAL DEBT: COVENANTS │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ FEATURE SYNTHETIC ROYALTY TRADITIONAL DEBT │
│ ─────────────────────────────────────────────────────────────────────────│
│ │
│ Financial Covenants "Exceedingly rare" Common (min. EBITDA, │
│ (min. liquidity, etc.) leverage ratios, etc.) │
│ │
│ Negative Pledge on ALWAYS Usually │
│ Product Assets │
│ │
│ Development Covenants Common (milestones, Rare │
│ commercialization) │
│ │
│ Warrant/Equity Upside None Often included │
│ │
│ Information Rights Extensive (sales Standard financial │
│ reports, etc.) reporting │
│ │
│ Prepayment Flexibility Usually restricted Often with penalties │
│ (caps/puts) │
│ │
│ ─────────────────────────────────────────────────────────────────────────│
│ │
│ WHY COVENANT-LITE? │
│ • Royalty investor's return tied to product performance, not company │
│ • Development covenants more relevant than financial metrics │
│ • Investor wants product to succeed, not to constrain company operations │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Example – Covenants in Sagard's Royalty Deal
Again, Nuvation Bio's 2025 financing provides a concrete example. The Revenue Interest Financing Agreement with Sagard contained restrictive covenants on Nuvation's ability to incur additional debt or grant liens on the taletrectinib IP and related rights.
In fact, Nuvation disclosed in its 8-K that the agreement "contains certain restrictions on the Company's ability to incur indebtedness and grant liens on intellectual property, product registrations and regulatory approvals related to taletrectinib in the United States."
This is a textbook negative pledge: Nuvation essentially pledged not to borrow against or otherwise encumber the U.S. taletrectinib franchise that was generating Sagard's royalty. Even if Nuvation were flush with other assets, it couldn't use taletrectinib's IP as collateral for a new bank loan, nor secure new bonds with it, unless Sagard permitted it (which it likely wouldn't, or would require being paid off first). The covenant thereby locks in Sagard's senior position on those assets.
Enforcement and Remedies
While a negative pledge is a contractual promise (not a lien itself), it usually goes hand-in-hand with remedies and monitoring. Royalty investors will typically require periodic certifications that no forbidden liens exist, and they often obtain the right to accelerate the obligation or trigger a default if the negative pledge is breached.
As noted, sometimes debt agreements give bondholders a springing lien if the issuer violates a negative pledge by securing other debt. In the context of royalty deals, a breach could allow the investor to call a default and enforce its existing lien immediately or, if structured as a sale, demand repurchase of the royalty interest at a contractually stipulated price.
For instance, Sagard's deal with Nuvation included "Put Option Events" allowing Sagard to force Nuvation to repurchase the royalty interest if covenants are breached or if certain major events occur. One such trigger is "non-compliance with the covenants in the Financing Agreement" – which would include violating the negative pledge on the taletrectinib assets.
┌─────────────────────────────────────────────────────────────────────┐
│ SAGARD'S PUT OPTION ENFORCEMENT │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ TRIGGER EVENTS: │
│ ─────────────── │
│ • Non-compliance with covenants (incl. negative pledge) │
│ • Material adverse change │
│ • Bankruptcy filing │
│ • Other specified events │
│ │
│ ┌───────────────────────┐ │
│ │ TRIGGER OCCURS │ │
│ └───────────┬───────────┘ │
│ │ │
│ ▼ │
│ ┌───────────────────────┐ │
│ │ SAGARD EXERCISES │ │
│ │ PUT OPTION │ │
│ └───────────┬───────────┘ │
│ │ │
│ ▼ │
│ ┌───────────────────────┐ │
│ │ NUVATION MUST │ │
│ │ REPURCHASE AT: │ │
│ │ │ │
│ │ 175-200% of original │ │
│ │ investment │ │
│ │ (depending on timing)│ │
│ └───────────────────────┘ │
│ │
│ RESULT: Sagard exits with hefty payout │
│ Nuvation left with royalty + large debt-like obligation │
│ │
└─────────────────────────────────────────────────────────────────────┘
The consequence is severe: Sagard could demand Nuvation buy back its interest at the agreed put price (which, as per the contract, could be up to 175–200% of the original investment in later years). In essence, if Nuvation tried to sneak another lien onto Sagard's turf, Sagard could hit the eject button and walk away with a hefty payout, leaving Nuvation with full ownership of the royalty but also a large debt-like obligation. Such terms strongly discourage any management team from even thinking about violating a negative pledge.
Negative Pledge in Bonds vs. Royalty Deals
It's worth noting that large pharmaceutical companies with outstanding bonds often have negative pledge clauses to protect bondholders from subordination via secured borrowing. These tend to cover major IP as well. However, most royalty financings involve smaller biotechs whose capital structure is simpler (usually no public unsecured bonds). In those cases, the negative pledges are specifically crafted in the royalty or loan agreements in favor of the royalty investor.
That said, when a big pharma is on the other side of a royalty monetization (for example, if a university or biotech sells royalties on a drug marketed by Big Pharma), the license agreement itself might have restrictions. Many pharma license contracts prohibit the licensor from assigning or granting rights under the license without consent. Royalty monetization thus sometimes requires either obtaining the pharma company's consent or structuring the deal as a contractually tolerated "payment direction" arrangement.
UCC Article 9 steps in helpfully here: under certain conditions, Article 9 overrides anti-assignment clauses for purposes of creating a security interest in payment rights (see UCC 9-408). In plain English, even if a license says "you can't assign your royalties," a lien on the royalty payments may still attach notwithstanding that clause. However, the licensor cannot delegate duties or affect the licensee's obligations without consent, so these deals are navigated carefully.
Negative pledge covenants, in any event, are a way for all parties to be clear: the royalty is spoken for, and no other encumbrances are allowed.
Subordinated Liens and Intercreditor Arrangements
Not all liens in royalty financings are equal – some are subordinated, meaning they rank behind other liens in terms of payment priority and enforcement rights. Subordination comes into play when multiple parties have or want security interests in overlapping collateral.
In the context of royalty deals, this typically arises in a few scenarios: (1) an existing senior lender allows a royalty investor to take a second-priority lien (or vice versa), (2) a royalty investor providing additional capital takes a junior position to an earlier tranche, or (3) the royalty financier itself splits its deal into tranches with different priorities (e.g., an SPV issuing both senior and mezzanine notes backed by the royalty). Understanding subordinated liens is crucial, as they dictate who gets paid first from collateral and who controls the enforcement in distress.
Intercreditor Agreements
Whenever there is more than one creditor claiming a lien on the same assets, an intercreditor agreement is typically the governing document that spells out the pecking order and rights. It will specify, for example, that Creditor A's lien is "first-priority" and Creditor B's lien is "second-priority" (subordinated), and detail what each can do.
┌─────────────────────────────────────────────────────────────────────┐
│ INTERCREDITOR AGREEMENT BASICS │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ PURPOSE: Define rights when multiple creditors have liens on │
│ overlapping collateral │
│ │
│ ┌─────────────────────────────────────────────────────────────┐ │
│ │ SAME COLLATERAL │ │
│ │ │ │ │
│ │ ┌─────────────────────┼─────────────────────┐ │ │
│ │ │ │ │ │ │
│ │ ▼ ▼ ▼ │ │
│ │ ┌──────────┐ ┌──────────┐ ┌──────────┐ │ │
│ │ │ CREDITOR │ │ CREDITOR │ │ CREDITOR │ │ │
│ │ │ A │ │ B │ │ C │ │ │
│ │ │ (Senior) │ │ (Junior) │ │(Unsecured│ │ │
│ │ └──────────┘ └──────────┘ └──────────┘ │ │
│ │ │ │
│ └─────────────────────────────────────────────────────────────┘ │
│ │
│ KEY TERMS: │
│ ────────── │
│ • Payment Waterfall: A gets paid first, then B, then C │
│ • Standstill: B cannot enforce until A is paid or time passes │
│ • Cure Rights: A may cure B's defaults to prevent enforcement │
│ • Voting: A controls decisions in restructuring │
│ • Release: If A releases collateral in sale, B must release too │
│ │
└─────────────────────────────────────────────────────────────────────┘
Often, the junior creditor agrees not to take enforcement action or seize collateral until the senior is paid in full or a certain time passes after default. In royalty financings, one common arrangement is between a royalty investor and a traditional lender to the company. If a biotech has a bank line secured by all assets, the bank might insist on retaining a senior claim on everything, but could carve out a portion of proceeds for the royalty deal. Conversely, the royalty investor might demand seniority at least with respect to the royalty stream itself, with the bank relegated to second position on that stream (while remaining first on all other assets). The intercreditor contract makes these nuances enforceable.
2025 Canadian Case: Dynamic Technologies Warning
A significant 2025 Canadian case issued an important warning for royalty holders relying on intercreditor agreements. In Dynamic Technologies (Court of King's Bench of Alberta, 2025), the court refused to enforce an intercreditor agreement provision that would have prevented DIP financing, holding that flexibility for a lender to support going-concern transactions may override pre-negotiated intercreditor terms.
As Norton Rose Fulbright noted, this creates "material impact on the stream or royalty holder's recoveries, which may be limited only to a subordinated monetary claim rather than a continuing right in the assets post-transaction."
┌─────────────────────────────────────────────────────────────────────────────┐
│ DYNAMIC TECHNOLOGIES (2025): INTERCREDITOR WARNING │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ FACTS: │
│ • Intercreditor agreement prohibited certain DIP financing │
│ • Company entered insolvency and sought DIP financing │
│ • Junior creditor invoked intercreditor restrictions │
│ │
│ HOLDING: │
│ Court REFUSED to enforce intercreditor agreement provision │
│ │
│ RATIONALE: │
│ • Flexibility for going-concern transactions may override │
│ pre-negotiated intercreditor terms │
│ • Insolvency proceedings prioritize business preservation │
│ • Private agreements cannot indefinitely block restructuring │
│ │
│ IMPLICATIONS FOR ROYALTY HOLDERS: │
│ ───────────────────────────────── │
│ • Intercreditor rights may be limited in Canadian insolvency │
│ • Recovery may be "subordinated monetary claim" only │
│ • Continuing rights in assets post-transaction not guaranteed │
│ • Need to consider jurisdiction-specific enforcement risks │
│ │
│ TAKEAWAY: Intercreditor agreements are not bulletproof │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Example – Sagard as Both Senior and Junior?
The Nuvation Bio case again offers an illustrative twist: Sagard provided both the royalty financing and a $100 million senior secured term loan to Nuvation. In effect, Sagard wore two hats – a creditor with a blanket lien on Nuvation's assets (via the loan) and an "owner" of a royalty stream with a specific lien on that stream and IP (via the royalty agreement).
Obviously, Sagard didn't want to compete with itself or trip over cross-collateralization issues, so Nuvation's 8-K disclosed that an intercreditor agreement was in place between Sagard (as lender) and Sagard (as royalty investor).
┌─────────────────────────────────────────────────────────────────────┐
│ SAGARD'S DUAL-HAT PRIORITY STRUCTURE │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ SAGARD HEALTHCARE PARTNERS │
│ ───────────────────────────── │
│ │
│ ┌──────────────────────┐ ┌──────────────────────┐ │
│ │ HAT #1: ROYALTY │ │ HAT #2: TERM LOAN │ │
│ │ INVESTOR │ │ LENDER │ │
│ └──────────┬───────────┘ └──────────┬───────────┘ │
│ │ │ │
│ ▼ ▼ │
│ ┌──────────────────────────────────────────────────────────┐ │
│ │ INTERCREDITOR AGREEMENT │ │
│ │ │ │
│ │ TALETRECTINIB COLLATERAL: ALL OTHER COLLATERAL: │ │
│ │ ───────────────────────── ───────────────────── │ │
│ │ │ │
│ │ 1st Priority: Royalty 1st Priority: Term Loan │ │
│ │ Interest │ │
│ │ │ │
│ │ 2nd Priority: Term Loan 2nd Priority: Royalty │ │
│ │ Interest │ │
│ │ │ │
│ └──────────────────────────────────────────────────────────┘ │
│ │
│ RESULT: Sagard bifurcates its own claims to create clear │
│ priority structure on different collateral pools │
│ │
└─────────────────────────────────────────────────────────────────────┘
This likely means that Sagard bifurcated its claims: the royalty agreement's collateral (taletrectinib sales receivables and IP) might effectively be senior for the benefit of Sagard's royalty investment, whereas the term loan's lien, though covering all assets, would be subordinated on that particular collateral. Conversely, for all the other assets of Nuvation (cash, other IP, etc.), Sagard's term loan lien would be first in line since the royalty deal doesn't encumber those.
In substance, Sagard created a tailored priority structure: first priority on taletrectinib-related assets goes to satisfying the royalty obligation; first priority on everything else (and second priority on taletrectinib assets) goes to the term loan. All this is internal to Sagard's funds, but it had to be contractually and procedurally clear – hence the intercreditor agreement. It's an elegant solution to having one creditor provide two layers of capital.
Other multi-tranche deals in 2025 likely had similar setups, especially the blockbuster Revolution Medicines funding (up to $1.25 billion royalty and $750 million secured loan from Royalty Pharma), where Royalty Pharma presumably structured senior/junior claims among its own provided capital or with any syndicate partners.
Subordination to Unsecured Claims?
A curious situation can arise if a royalty financier's return is extremely high or its structure too equity-like: a bankruptcy court might consider pushing it behind even general unsecured creditors (so-called "subordination in bankruptcy"). This isn't the typical negotiated subordination, but a judicial remedy in cases of, say, usurious or inequitable conduct.
We saw hints of this in the Clovis Oncology bankruptcy in 2023. Clovis had received a $175 million "clinical development funding" from Sixth Street Partners, structured as a secured obligation entitling Sixth Street to up to $350 million (a 2× cap) from future sales of a cancer drug. When Clovis filed Chapter 11, the unsecured creditors' committee cried foul on the $350 million claim, arguing the accelerated payoff was an unenforceable penalty and even suggesting the arrangement should be recharacterized as an equity investment (which would put it last in priority, behind unsecured claims).
They pointed to the "exceedingly high rate of return" and lack of a fixed maturity or interest rate as evidence it was more like a venture investment than debt. Ultimately, Clovis and Sixth Street settled the dispute, so the court didn't formally subordinate the claim. But the episode was a shot across the bow: if a royalty or funding deal stretches too far (e.g., demanding double your money back even in bankruptcy), a court might subordinate that "secured" claim on equitable grounds. Royalty financiers must therefore calibrate their structures – enforcing their liens strictly but not overplaying their hand to the detriment of other creditors, lest they invite a judicial backlash.
Update: The Clovis Oncology case was resolved in October 2024 with a Final Decree closing the case. Novartis acquired FAP-2286 assets for $50 million upfront (potential $681 million total). While no appellate decisions on royalty treatment emerged, the case established precedent for pharma royalty bankruptcy procedures.
Subordination in Structured Royalty Securitizations
Another area where subordinated liens surface is in structured finance vehicles that issue multiple classes of notes backed by a pool of royalties. For example, Royalty Pharma or DRI Capital might securitize a bundle of royalty streams, issuing senior asset-backed notes and junior notes according to S&P. The senior notes have first-priority liens on the royalty collateral, while junior noteholders have second-priority liens and only get paid after seniors are satisfied.
┌─────────────────────────────────────────────────────────────────────┐
│ STRUCTURED ROYALTY SECURITIZATION │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ ┌─────────────────────────────────────────────────────────────┐ │
│ │ ROYALTY POOL (Multiple Assets) │ │
│ │ ┌─────────┐ ┌─────────┐ ┌─────────┐ ┌─────────┐ │ │
│ │ │ Drug A │ │ Drug B │ │ Drug C │ │ Drug D │ │ │
│ │ │Royalties│ │Royalties│ │Royalties│ │Royalties│ │ │
│ │ └────┬────┘ └────┬────┘ └────┬────┘ └────┬────┘ │ │
│ │ └────────────┴────────────┴────────────┘ │ │
│ │ │ │ │
│ │ ▼ │ │
│ │ ┌───────────┐ │ │
│ │ │ SPV │ │ │
│ │ └─────┬─────┘ │ │
│ │ │ │ │
│ └──────────────────────────┼──────────────────────────────────┘ │
│ │ │
│ ┌───────────────┼───────────────┐ │
│ │ │ │ │
│ ▼ ▼ ▼ │
│ ┌──────────────┐ ┌──────────────┐ ┌──────────────┐ │
│ │ CLASS A │ │ CLASS B │ │ CLASS C │ │
│ │ (Senior) │ │ (Mezzanine) │ │ (Junior) │ │
│ │ │ │ │ │ │ │
│ │ 1st Lien │ │ 2nd Lien │ │ 3rd Lien │ │
│ │ AAA rated │ │ BBB rated │ │ Unrated │ │
│ │ Lower yield │ │ Medium yield │ │ Higher yield │ │
│ │ Gets paid 1st│ │ Gets paid 2nd│ │ Gets paid 3rd│ │
│ └──────────────┘ └──────────────┘ └──────────────┘ │
│ │
└─────────────────────────────────────────────────────────────────────┘
These internal structures are beyond our main scope (as they relate to broader economics of pooling royalties), but they mirror the same principle: differing lien priorities to reflect different risk-return tiers.
In summary, subordinated liens and intercreditor agreements in royalty financings ensure that when multiple financing sources intersect, there is a clear hierarchy. 2025 saw more jumbo deals (like Revolution Medicines' $2 billion package) that required careful priority splitting. For professionals, the key is to get it in writing: who ranks first on what collateral, and what rights the junior party waives (usually many) in deference to the senior. When structured well, even skeptical observers must concede these deals have an orderly framework for otherwise complex capital stacks.
Legal Framework: U.S. Article 9 and International Considerations
The backbone of lien practice in U.S. royalty financings is Article 9 of the Uniform Commercial Code (UCC). Article 9 provides the rules for creating, perfecting, and enforcing security interests in personal property – including the intangibles at issue here. A few key points under U.S. law:
Royalties as Collateral under UCC
Future royalty rights and license payment streams are categorized as either "accounts" (if they arise from the sale of goods or services) or "payment intangibles" (a catch-all for general intangible rights to payment) under UCC §9-102.
Importantly, Article 9 expressly applies to sales of accounts and payment intangibles (UCC §9-109(a)(3)), not just pledges of them. This means even if a transaction is a true sale of a royalty, the buyer must follow Article 9's rules to perfect its interest per Gibson Dunn.
┌─────────────────────────────────────────────────────────────────────┐
│ UCC ARTICLE 9: KEY CONCEPTS │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ ROYALTY CLASSIFICATION UNDER UCC §9-102: │
│ ───────────────────────────────────────── │
│ │
│ ┌──────────────────┐ ┌──────────────────┐ │
│ │ ACCOUNTS │ OR │ PAYMENT │ │
│ │ │ │ INTANGIBLES │ │
│ │ (from sale of │ │ (general rights │ │
│ │ goods/services) │ │ to payment) │ │
│ └────────┬─────────┘ └────────┬─────────┘ │
│ │ │ │
│ └───────────┬───────────────┘ │
│ │ │
│ ▼ │
│ ┌───────────────────────┐ │
│ │ ARTICLE 9 APPLIES │ │
│ │ TO BOTH SALES AND │ │
│ │ SECURITY INTERESTS │ │
│ └───────────┬───────────┘ │
│ │ │
│ ▼ │
│ ┌───────────────────────┐ │
│ │ PERFECTION VIA │ │
│ │ UCC-1 FILING │ │
│ │ │ │
│ │ • State of debtor's │ │
│ │ incorporation │ │
│ │ • Describes collateral│ │
│ │ • Gives public notice │ │
│ └───────────────────────┘ │
│ │
└─────────────────────────────────────────────────────────────────────┘
Perfection typically is achieved by filing a UCC-1 financing statement in the appropriate state (usually the debtor's state of incorporation for intangibles). The financing statement gives notice of the buyer's or lender's interest in the collateral. For example, Royalty Pharma buying a royalty from a Delaware-based biotech would file a UCC-1 in Delaware describing the collateral (e.g., "all rights to receive payment of royalties on Drug X under License Agreement Y, and all proceeds thereof"). Once filed, the buyer's interest is perfected and will have priority over any later creditors. Failing to perfect can be disastrous: an unperfected buyer could theoretically lose the royalty to the seller's bankruptcy estate or a lien creditor. Thus, UCC filings are ubiquitous in these deals – a small bureaucratic step that underpins millions in value.
New York Adopts 2022 UCC Amendments (December 2025)
A significant development occurred on December 5, 2025, when New York became the most significant jurisdiction to adopt the 2022 UCC Amendments following Governor Hochul's signing of Assembly Bill 3307-A/Senate Bill 1840-A. According to Orrick, the amendments take effect June 3, 2026, with a transition period ending June 5, 2027. As of December 2025, 33 states plus D.C. have enacted the 2022 UCC Amendments, including California, Florida, and Delaware.
┌─────────────────────────────────────────────────────────────────────────────┐
│ 2022 UCC AMENDMENTS: KEY CHANGES │
│ (Effective in NY: June 3, 2026) │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ NEW ARTICLE 12: CONTROLLABLE ELECTRONIC RECORDS (CERs) │
│ ────────────────────────────────────────────────────── │
│ │
│ • Creates comprehensive framework for digital assets │
│ • Defines "control" for electronic records │
│ • Establishes perfection rules for CERs │
│ │
│ ARTICLE 9 UPDATES: │
│ ────────────────── │
│ │
│ • Clarifies perfection and priority by control │
│ • "First to control" priority rule for certain assets │
│ • Secured party perfecting through control has priority over │
│ parties perfecting only by filing │
│ │
│ "SUPER-PRIORITY" RISK: │
│ ────────────────────── │
│ │
│ ┌─────────────────────────────────────────────────────────────────────┐ │
│ │ │ │
│ │ "Qualifying purchaser" who obtains CONTROL: │ │
│ │ • For value │ │
│ │ • In good faith │ │
│ │ • Without notice of competing claims │ │
│ │ │ │
│ │ Takes FREE of prior-perfected claims lacking control │ │
│ │ │ │
│ │ IMPLICATION: UCC-1 filing alone may be insufficient │ │
│ │ │ │
│ └─────────────────────────────────────────────────────────────────────┘ │
│ │
│ PEB COMMENTARY (February 2025): │
│ ─────────────────────────────── │
│ • Commentary No. 30: Clarifies "first to file or perfect" rules │
│ - Buyers of receivables (incl. royalties) treated as "secured parties" │
│ • Commentary No. 32: Addresses "buyer in ordinary course" status │
│ - Clarifies possession requirements relevant to royalty assets │
│ │
│ ACTION ITEMS FOR ROYALTY INVESTORS: │
│ ──────────────────────────────────── │
│ □ Review existing UCC-1 filings before June 2026 │
│ □ Consider whether "control" perfection is necessary │
│ □ Update security documentation for 2022 Amendment compliance │
│ □ Monitor state-by-state adoption (33 states + D.C. as of Dec 2025) │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
The new Article 12 creates a comprehensive framework for "Controllable Electronic Records" (CERs), while updated Article 9 provisions clarify perfection and priority by control. Most critically for royalty financing, the amendments establish a "first to control" priority rule: a secured party perfecting through control has priority over parties perfecting only by filing. A "qualifying purchaser" who obtains control of a CER for value, in good faith, and without notice of competing claims takes free of such claims—creating potential "super-priority" status over prior-perfected UCC-1 filers lacking control.
Royalty purchasers should file or amend UCC-1s in states adopting the 2022 Amendments before applicable adjustment dates to preserve pre-existing priorities against potential control-based super-priority claims.
Priority and PMSI Analogy
Royalty financiers often liken their position to a purchase-money secured party – akin to a lender who financed the acquisition of an asset and thus takes first priority in that asset. While royalties aren't exactly tangible goods, the concept holds: the investor's money enabled the company to bring the product to market (or at least provided runway), so it is fair for the investor to have a first claim on the fruits (the royalties).
Article 9's first-to-file-or-perfect rule generally governs priority. In practice, royalty investors typically file as early as possible (often immediately upon signing or at closing) to win any possible "race of the filing." If the company had a prior blanket lien, a subordination or release is obtained because otherwise that prior creditor might claim a senior interest in the royalties by virtue of an earlier UCC filing covering general intangibles.
Article 9 does allow carve-outs: for instance, a prior blanket lender might authorize a partial release of its lien on specific collateral, enabling the new investor's filing to be first on that asset. Alternatively, if treated as inventory or accounts financing, Article 9's purchase-money rules could give the new creditor priority for that collateral even over a prior floating lien (though this is more commonly invoked for tangible assets than for general intangibles like royalties).
Enforcement under UCC
If a royalty financing goes into default, Article 9 provides the secured party (the investor) a menu of remedies. They can notify the royalty payor (e.g., the commercial partner paying the royalty) to start making payments directly to the investor – effectively redirecting the cash flow. This is a form of self-help remedy that does not require court intervention, allowed when the debtor is in default (UCC §9-607).
┌─────────────────────────────────────────────────────────────────────┐
│ UCC ENFORCEMENT REMEDIES │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ UPON DEFAULT: │
│ ───────────── │
│ │
│ OPTION 1: PAYMENT REDIRECTION (Self-Help) │
│ ───────────────────────────────────────── │
│ │
│ BEFORE: AFTER DEFAULT: │
│ │
│ Pharma ──$──► Biotech Pharma ──$──► INVESTOR │
│ Partner Company Partner (Secured Party) │
│ │
│ • No court needed │
│ • Just send notice to pharma partner │
│ • "Please redirect royalty payments to us" │
│ │
│ ───────────────────────────────────────────────────────────── │
│ │
│ OPTION 2: FORECLOSURE │
│ ────────────────────── │
│ │
│ ┌────────────────┐ │
│ │ UCC SALE │ • Auction the royalty right │
│ │ │ • Buyer steps into company's shoes │
│ └────────────────┘ │
│ │
│ ┌────────────────┐ │
│ │ STRICT │ • Creditor accepts collateral │
│ │ FORECLOSURE │ in satisfaction of debt │
│ └────────────────┘ • Subject to conditions │
│ │
└─────────────────────────────────────────────────────────────────────┘
The secured party can also foreclose on the royalty asset itself, either by holding a UCC sale of the royalty right or by accepting the collateral in satisfaction of the debt (strict foreclosure) if certain conditions are met. Foreclosing on a royalty means the investor (or a third-party buyer at auction) would step into the company's shoes to receive the royalties going forward.
Of course, practical challenges exist – for instance, if the royalty is tied to a license, the licensee might object to a new party unless the contract allows free assignment. But legally, the UCC foreclosure transfers whatever rights the debtor had, and many license agreements nowadays are drafted to permit assignment of payment rights for financing purposes. An example of foresight: in some deals, the company will give the investor a contingent power of attorney to enforce the license or collect royalties if the company fails to do so, smoothing enforcement.
True Sale vs. Secured Loan – UCC Doesn't Decide
It's notable that while Article 9 covers both sales and loans of intangibles, it does not itself tell us whether a given transaction is a "true sale" or a "secured financing." That question is left to common law and court analysis of the facts (as in the Shoot the Moon case discussed earlier). UCC Official Comment 4 to §9-109 explicitly says Article 9's inclusion of sales is for purposes of perfection only, not to resolve the sale/loan distinction.
Thus, the parties must structure their deal carefully and be prepared for either characterization. In a wry sense, the UCC's message is: "File first, argue later." The filing will protect you either way, but it's up to the courts to classify the deal if it ever becomes contested. For royalty financiers, this means every deal is effectively structured twice – once as a sale, and once in the alternative as a secured loan (via that backup lien) – to ensure they are covered come what may according to Gibson Dunn.
International Lien and Enforcement Issues
Pharmaceutical royalty transactions often span multiple jurisdictions – for instance, a U.S. biotech may sell rights on global sales, including Europe and Asia, or an EU company may monetize royalties that include U.S. payors. Each jurisdiction has its own laws on security interests, assignments, and enforcement, making the picture more complex than the neat uniformity of the UCC in the fifty states.
Cross-Border Royalty Financing Expansion (2025)
Cross-border royalty financing expanded significantly in 2025, with more than one in five deals in the past two years involving European companies including GENFIT (France), Heidelberg Pharma (Germany), and Ferring Pharmaceuticals (Switzerland). According to Inside EU Life Sciences, synthetic royalty structures are "growing in Europe" as a funding mechanism.
┌─────────────────────────────────────────────────────────────────────────────┐
│ CROSS-BORDER ROYALTY FINANCING GROWTH │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ EUROPEAN COMPANIES USING ROYALTY FINANCING (2024-2025): │
│ ───────────────────────────────────────────────────────── │
│ │
│ COMPANY COUNTRY DEAL PARTNER STRUCTURE │
│ ──────────────────────────────────────────────────────────────────────── │
│ GENFIT France Multiple Synthetic │
│ Heidelberg Pharma Germany Various Development │
│ Ferring Pharma Switzerland Undisclosed Royalty sale │
│ BridgeBio (EU) US/EU HCRx/Blue Owl EU royalty │
│ │
│ KEY CONSIDERATIONS FOR CROSS-BORDER LIENS: │
│ ────────────────────────────────────────── │
│ • Each jurisdiction has different security interest rules │
│ • Enforcement mechanisms vary significantly │
│ • Choice of law provisions critical │
│ • Consider localizing cash collection through U.S. entity │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Common Law Jurisdictions (e.g. UK, Canada)
In countries like the UK, there is no direct equivalent of UCC Article 9, but security can be achieved through a combination of charges and assignments. A royalty interest could be subject to a fixed charge or an outright assignment by way of security. For example, an English law royalty monetization might have the seller assign the royalty payments to the investor, with a provision that the assignment reverts upon repayment (mirroring a secured loan).
The security would be perfected by notifying the royalty payor (if required by debtor-creditor law) and by registering the charge at Companies House in the UK (for an English company) within the statutory period. Failure to register can void the security against an administrator or liquidator. Thus, diligence for a 2025 deal involving a UK entity requires checking that charges were properly filed.
Canadian provinces have PPSA statutes similar to the UCC in concept, making perfection of security interests in intangibles more familiar, though nuances differ (and Quebec, under civil law, has its own regime).
Civil Law Jurisdictions (e.g. Germany, France, Japan)
Security over intangibles can be trickier. Some countries allow assignment of receivables with relatively straightforward notice filings (France's Dailly Act facilitates assignment of trade receivables to banks, for example), but for royalties which might be future and contingent, one may need to use general contract pledge principles.
Germany, for instance, typically would use an assignment of claims (Forderungsabtretung) to the creditor as security. The assignment might be an abstract transfer effective upon default. Moreover, if the royalty payor is a German entity, German law would govern the relationship and an investor might choose to notify the payor in Germany to cut off the debtor's ability to redirect payments (the timing of notice can affect priority under German law).
In many civil-law countries, enforcement of a security interest (especially if not a straightforward money claim) requires a court process or notarized instruments. Self-help as under Article 9 is often not available – instead, the secured party might petition a court for an order transferring the royalty rights or appointing a receiver to collect payments. These extra steps mean that cross-border royalty financings must be structured with local counsel input, to either localize the collateral (e.g., perhaps have a U.S. parent company be the nexus for collecting worldwide royalties, so that a U.S. lien can reach the cash before it goes overseas) or comply with multiple regimes.
Treaties and International IP
Patent rights, being territorial, require local security filings if one wants a lien noted on the patent itself. The European Patent Office, for example, allows recordation of a security interest on a European patent application or patent, but the effect is governed by national laws where validation occurs.
In practice, many investors rely on grabbing the cash rather than foreclosing on foreign patents, given the complexity. However, for a critical drug, taking security on the patents in major markets (US, EU5, Japan) might be advisable for maximum leverage. In some high-stakes cases, financiers have obtained deeds of security assignment governed by local law for, say, a UK patent, in addition to the main agreement, and have them ready to enforce if needed.
Enforcement Variability
How one enforces a lien can differ wildly. In the U.S., as noted, you can calmly notify the royalty-paying pharma company "please redirect the royalty checks to us now" after default. In contrast, in a country without such self-help, the secured party might have to sue either the royalty seller or the payor in local court to garnish or attach the payment stream.
Some jurisdictions permit appointment of a receiver (e.g., UK courts appointing a receiver or administrator who can collect revenue). The time and cost of these procedures factor into an investor's risk analysis and often into the deal's economics (higher return demanded if enforcement is uncertain or slow abroad).
┌─────────────────────────────────────────────────────────────────────┐
│ INTERNATIONAL ENFORCEMENT COMPARISON │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ JURISDICTION PERFECTION ENFORCEMENT │
│ ──────────── ────────── ─────────── │
│ │
│ USA (UCC) UCC-1 filing Self-help: notify │
│ in state of payor to redirect │
│ incorporation payments. No court │
│ needed. │
│ │
│ UK Companies House Court may appoint │
│ registration + receiver. Notice to │
│ notice to payor payor typical. │
│ │
│ Germany Notify payor Court process often │
│ (timing matters required. No self- │
│ for priority) help. │
│ │
│ France Dailly Act for Court intervention │
│ receivables may be needed. │
│ │
│ Japan Various regimes Court process │
│ depending on typically required. │
│ collateral type │
│ │
│ Switzerland Varies by canton Court process │
│ and asset type typically required. │
│ │
│ ───────────────────────────────────────────────────────────── │
│ │
│ STRATEGY: Localize cash collection through U.S. entity where │
│ possible, so U.S. liens can reach proceeds first │
│ │
└─────────────────────────────────────────────────────────────────────┘
In sum, while the concept of a lien is universal – a right over an asset to secure payment – the execution is local. A sophisticated 2025 royalty deal will have a mosaic of lien implementations: UCC filings in the U.S., security charge registrations in the UK or Canada, contractual assignments in civil law countries, and choice-of-law provisions that try to maximize the reach of the most creditor-friendly regime available.
As the market has grown global, so has the complexity of lien management. But regardless of jurisdiction, the fundamental goal remains the same: to put the royalty investor in the driver's seat (or at least the front passenger seat) when it comes to the collateral, ensuring their claim is satisfied before others. In the words of one seasoned finance lawyer, "Trust but verify" has become "Trust but secure and perfect" in the royalty world – a prudent evolution as deal sizes increase and cross-border elements become routine.
2025-2026 Bankruptcy Cases: Testing Royalty Lien Structures
Several bankruptcy proceedings during 2025 and early 2026 illuminated how royalty financing liens perform in distress, providing valuable lessons for practitioners.
Omega Therapeutics (February 2025)
This clinical-stage biotech filed Chapter 11 in Delaware after Banc of California swept $14.7 million from company accounts in January 2025, leaving Omega unable to operate. The case provides a cautionary tale about the intersection of bank lending liens and royalty financing structures.
┌─────────────────────────────────────────────────────────────────────────────┐
│ OMEGA THERAPEUTICS BANKRUPTCY (2025) │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ TIMELINE: │
│ ───────── │
│ Jan 2025 Banc of California sweeps $14.7M from accounts │
│ Feb 2025 Chapter 11 filed in Delaware │
│ Feb 2025 Flagship Pioneering (majority shareholder) offers credit bid │
│ 179 days Total time from petition to substantial consummation │
│ │
│ KEY FACTS: │
│ ────────── │
│ • Novo Nordisk collaboration valued at up to $532M in potential royalties │
│ • Flagship acquired substantially all assets via $14M credit bid │
│ • Novo Nordisk collaboration transferred with the assets │
│ • Company disputed lender's right to accelerate │
│ │
│ LESSONS FOR ROYALTY FINANCING: │
│ ────────────────────────────── │
│ 1. Bank sweep rights can destabilize companies overnight │
│ 2. Pre-existing relationships facilitate rapid resolution │
│ 3. Credit bids can acquire valuable royalty assets at discount │
│ 4. Collaboration agreements (with royalty potential) follow assets │
│ │
│ IMPLICATION: Royalty investors must monitor company bank relationships │
│ and sweep risk in intercreditor arrangements │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
The company disputed the lender's right to accelerate. Flagship Pioneering, the majority shareholder, acquired substantially all assets via a $14 million credit bid—demonstrating how pre-existing relationships can facilitate rapid resolution. The Novo Nordisk collaboration (valued at up to $532 million in potential royalties) transferred with the assets. The case resolved within 179 days from petition to substantial consummation.
Active Disputes: Royalty Pharma vs. Vertex
The most significant active controversy involves Royalty Pharma's dispute with Vertex Pharmaceuticals over royalties on Alyftrek (the next-generation cystic fibrosis triple combination). According to Royalty Pharma's disclosures, the company believes it is contractually entitled to approximately 8% royalty on Alyftrek, based on its position that deutivacaftor equals ivacaftor for royalty purposes. Vertex has paid only approximately 4%.
┌─────────────────────────────────────────────────────────────────────────────┐
│ ROYALTY PHARMA vs. VERTEX: ALYFTREK DISPUTE │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ ROYALTY PHARMA POSITION: VERTEX POSITION: │
│ ───────────────────────── ──────────────── │
│ • Deutivacaftor = Ivacaftor • Deutivacaftor is different │
│ for royalty purposes compound │
│ • Entitled to ~8% royalty • Only ~4% royalty owed │
│ • Based on existing CF drug • Different royalty terms │
│ royalty agreements apply │
│ │
│ STAKES: │
│ ─────── │
│ • Vertex accounts for 33% of Royalty Pharma's current royalty assets │
│ • Alyftrek is next-generation CF treatment │
│ • Potential billions in royalties at stake │
│ │
│ TIMELINE: │
│ ───────── │
│ Q2 2025 Dispute resolution procedures commenced │
│ End 2026 Resolution expected (per Royalty Pharma guidance) │
│ │
│ MARKET IMPLICATIONS: │
│ ──────────────────── │
│ • Outcome will set precedent for "follow-on" compound royalty treatment │
│ • Liens on "related IP" may not clearly cover derivative compounds │
│ • Contract drafting for future deals will be affected │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Royalty Pharma commenced dispute resolution procedures in Q2 2025, with resolution expected by end of 2026. Given Vertex accounts for 33% of Royalty Pharma's current royalty assets, the outcome carries substantial market implications for how liens on "related IP" cover derivative compounds.
XOMA Securities Investigation (January 2026)
XOMA's aggressive acquisition strategy drew regulatory scrutiny in January 2026. Following the December 2025 announcement that partner Rezolute's Phase 3 study of ersodetug failed to meet its primary endpoint, XOMA shares fell 22.76%. Pomerantz LLP announced a securities fraud investigation, questioning whether XOMA adequately disclosed royalty portfolio risks—the first major litigation challenging the royalty aggregator business model.
Structural Innovations Beyond Traditional Collateral
Several novel lien and collateral innovations emerged during 2025 and early 2026:
┌─────────────────────────────────────────────────────────────────────────────┐
│ STRUCTURAL INNOVATIONS 2025-2026 │
├─────────────────────────────────────────────────────────────────────────────┤
│ │
│ 1. SALES CEILING STRUCTURES (Revolution Medicines model) │
│ ───────────────────────────────────────────────────────── │
│ • Zero royalty obligations above predetermined annual sales thresholds │
│ • Preserves company upside on blockbuster products │
│ • Provides investors substantial participation in typical commercial case │
│ • Aligns incentives differently than traditional capital multiples │
│ │
│ 2. TIME-BASED ESCALATING CAPS (Nuvation/Sagard model) │
│ ────────────────────────────────────────────────────── │
│ • Return caps that increase over time (1.6x → 1.75x → 2.0x) │
│ • Balances investor return requirements against company constraints │
│ • Provides flexibility for different development stage timelines │
│ │
│ 3. MULTI-ASSET BASKET STRUCTURES (XOMA/Takeda model) │
│ ───────────────────────────────────────────────────── │
│ • Trading concentrated single-asset exposure for diversified positions │
│ • Spread risk across multiple development-stage assets │
│ • May become standard for royalty aggregators │
│ │
│ 4. BIG PHARMA PARTICIPATION (Blackstone/Merck model) │
│ ──────────────────────────────────────────────────── │
│ • Large pharmaceutical companies using synthetic royalties │
│ • Portfolio de-risking and strategic capital optimization │
│ • Previously province of capital-constrained biotechs │
│ │
│ 5. HYBRID ROYALTY + DEBT (Revolution Medicines model) │
│ ────────────────────────────────────────────────────── │
│ • Combining synthetic royalty with senior secured term loan │
│ • Dual-layer security protection │
│ • Intercreditor complexity managed through single investor │
│ │
└─────────────────────────────────────────────────────────────────────────────┘
Conclusion: Liens as the Skeletal Structure of Royalty Deals
Stripped of their technical intricacies, pharmaceutical royalty financings are, at their core, a trade of immediate cash for a slice of future hope. But hope is not a strategy, as the saying goes, and that is why liens form the skeletal structure supporting these deals. They provide legal certainty (to the extent law can) that the investor's bargain will hold even if fortunes turn.
The year 2025 saw royalty financings continue to flourish amid volatile equity markets, and with that growth came a sharpening of focus on lien structures. First-priority perfected liens on royalty streams and drug IP have become de rigueur, springing liens offer contingency plans for worst-case scenarios, negative pledges keep the collateral ring-fenced, and carefully crafted subordinations sort out the rights among multiple financiers.
┌─────────────────────────────────────────────────────────────────────┐
│ COMPLETE LIEN TOOLKIT SUMMARY │
├─────────────────────────────────────────────────────────────────────┤
│ │
│ ┌─────────────────────────────────────────────────────────────┐ │
│ │ ROYALTY FINANCING DEAL │ │
│ └─────────────────────────────────────────────────────────────┘ │
│ │ │
│ ┌─────────────────────┼─────────────────────┐ │
│ │ │ │ │
│ ▼ ▼ ▼ │
│ ┌───────────┐ ┌───────────┐ ┌───────────┐ │
│ │ OFFENSIVE │ │ DEFENSIVE │ │ STRUCTURAL│ │
│ │ TOOLS │ │ TOOLS │ │ TOOLS │ │
│ ├───────────┤ ├───────────┤ ├───────────┤ │
│ │ │ │ │ │ │ │
│ │ First- │ │ Negative │ │ Inter- │ │
│ │ Priority │ │ Pledges │ │ creditor │ │
│ │ Liens │ │ │ │ Agreements│ │
│ │ │ │ Springing │ │ │ │
│ │ UCC │ │ Liens │ │ Subordin- │ │
│ │ Perfection│ │ │ │ ation │ │
│ │ │ │ Put │ │ │ │
│ │ Collateral│ │ Options │ │ Priority │ │
│ │ Packages │ │ │ │ Waterfalls│ │
│ └───────────┘ └───────────┘ └───────────┘ │
│ │ │ │ │
│ └─────────────────────┴─────────────────────┘ │
│ │ │
│ ▼ │
│ ┌───────────────────┐ │
│ │ SECURED INVESTOR │ │
│ │ PROTECTION │ │
│ └───────────────────┘ │
│ │
└─────────────────────────────────────────────────────────────────────┘
All of this reflects a dry reality often lost in the hype of "alternative financing" – that at the end of the day, royalty investors are lenders or buyers who want assurance, not just upside. They may speak the language of partnership and shared success, but their contracts read like banking documents because, effectively, they are wearing a banker's belt and suspenders. And as any good skeptic would appreciate, those suspenders (and belts, and maybe an extra pair of braces for good measure) are there for when gravity inevitably reminds everyone of the risks involved.
To be sure, liens do not address every concern in royalty deals. They don't guarantee the drug will succeed (nothing can, short of a crystal ball), and they don't eliminate the nuanced bankruptcy questions of true sale vs. loan (those will continue to be litigated and dissected). What liens do is ensure that if things go awry, the royalty investor has tangible rights in hard or semi-hard assets to enforce – a claim to funnel the cash or seize the property that generates it. In a world where intellectual property and contracts are the coin of the realm, that is the closest one gets to a mortgage on a house or a security interest in a piece of equipment. It's an old concept adapting to a new asset class.
The tone of the modern royalty financing market, much like a Bartleby column, carries a hint of cynicism: everyone smiles about the "win-win" nature of non-dilutive funding, but everyone also quietly files their UCC statements and drafts their intercreditor agreements. As a result, the market has achieved a level of professionalism and standardization. Royalty financings are no longer Wild West novelty deals; they are structured transactions operating within a framework of UCC provisions, SEC filings, and negotiated lien priorities, as we have seen with examples from Royalty Pharma's big-ticket deals to XOMA's portfolio leverage to Sagard's biotech forays.
Each deal's press release may tout innovation and partnership, but the accompanying legal agreements show the real foundations: liens, covenants, and collateral descriptions long enough to make any seasoned banker nod in approval.
Disclaimer: The author is not a lawyer or financial adviser. This content is for informational purposes only and does not constitute investment, legal, or financial advice. Readers should consult qualified professionals before making any investment or legal decisions.
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