When Northwestern sold off an undisclosed portion of its royalties from blockbuster drug Lyrica last month, it not only made a hefty profit, but also a bit of history. Other universities had pulled off similar sales in the past, trading the potential for future returns on a major drug discovery for an up-front payment. But at $700 million, NU's deal with Royalty Pharma is the largest of its kind.
Since the Food and Drug Administration approved Lyrica in 2005, NU's administrators have had high hopes for the drug's profit potential. The pain-relief pill, originally created to treat diabetes and later epilepsy, was developed by NU chemistry Prof. Richard Silverman in 1989. Drug giant Pfizer helped bring the treatment to market, hashing out an agreement that entitled NU to 6 percent of the drug's yearly profits. The drug's sales earned $1.2 billion in 2006, and in June 2007 it was approved to treat fibromyalgia, making Lyrica the only drug to treat common chronic, widespread pain in the U.S. As a partial request, its sales leaped 60 percent to $564 million in the fourth-quarter of last year, and increased 58 percent to $1.8 billion for 2007, according to Pfizer's earnings statement. As a company spokesman says, it's a "priority product" for the pharmaceutical manufacturer.
Was now the right time to sell a portion of the royalities, which seem to be increasing in value? After discussions with NU's decision-makers, universities who have been through the process before and indsutry watchers, it seems to be anybody's guess.
This idea that a university can make millions selling off royalty rights to a drug is relatively new. In 2001, Yale University pioneered the territory when it sold a portion of its share of AIDS treatment Zerit for $115 million to pharmaceutical company Bristol-Myers Squibb. Jonathan Soderstrom, managing director of Yale's Office of Cooperative Research and an NU graduate school alumus, proposed the idea in the fall of 1999 because he says Yale's medical school needed to build more space for faculty research. He figured the deal could deliver "a sizeable bonus." Yale knew it had eight more years until its patent expired, he says, but alternative AIDS therapies were also in the works that could cut into Zerit's profits. "The question was when they would come on the market and how much of the market share they'd take away from Zerit," Soderstrom says. As important was the potential that unknown side effects would pop up, forcing the FDA to issue a "black box" warning.
Yale decided to sell a portion of its stake. "We were the first university to actually propose doing this," Soderstrom says. "So we had to go solicit bids from different groups because this was an unusual circumstance." Yale eventually sold 80 percent of its share; soon after, Soderstrom says the FDA issued "a couple" of black box warnings for Zerit.
Other universities soon realized Yale's example was worth following. In 2005, Emory University set a new profit record when it sold all 20 percent of its share of proceeds for the HIV drug Emtriva for $540 million. Like Yale's, Emory's decision involved multiple considerations. The value of Emtriva was "intimately intertwined" with other drugs, and the future of those other drugs meant Emtriva could take a hit as well, says chemistry Prof. Dennis Liotta, one of Emtriva's inventors, who helped propose the option to Emory's administration. "We decided that the prudent thing for us was to simply sell our interest and not have to worry about continuing potential pitfalls that were unforeseen," Liotta says.
According to Vice President of Business and Finance Eugene Sunshine, NU's decision to sell part of its Lyrica stake was not influenced by the Emory deal or the ones that preceded it. "Our circumstances are our circumstances," he says.
NU began pursuing the idea of a sale between the end of 2006 and the beginning of 2007, when Lyrica was already proving to be a huge money-maker. But the school wanted to diversify its assets. "The prudent thing for us to do was not to have all of our eggs in one basket," Sunshine says. He emphasizes NU still owns part of the royalties, though the university will not disclose how much. "We're achieving diversification, but at the same time we're having a large amount of the royalty flow associated with the drug," Sunshine says. "We have the best of both worlds."
Ultimately, the profits are expected to make their way into NU's endowment, which will go toward increasing undergraduate financial aid, granting more fellowships for graduate students, improving the research opportunities for faculty and students and funding the upkeep of university buildings. It's a markedly different direction than at Yale or Emory; the former funneled its profits immediately into its medical school, while Emory placed its money in long-term investments. Emory plans to spend the money during a 10-year period rather than putting the funds into its endowment.
"We felt that over a period of time, jumpstarting a whole set of strategic initiatives for the university to advance our programs and attract excellent people would pay off for us in the long run more than just simply spending it in the endowment," says Michael Mandl, Emory's executive vice president for finance and administration.
Emory's Liotta, who says he and the other inventors were involved in the financial matters from start to finish, was surprised NU chose to put the money in the endowment, which he called a "slow boat."
"It's a more conservative approach than we took," he says. "We figured the new initiatives would put us in a position to use the money." Either way, NU's deal has closed at a time when global markets are on unsteady ground, and many in finance are wondering openly about the possibility of a U.S. recession, a potential disaster for Wall Street. NU President Henry Bienen says NU shares those concerns, but has acted appropriately: "(We're) nervous about the markets-both the stock and private equity markets." As of now, only about one quarter of the money has made it into the endowment. NU put roughly 75 percent of the money it received in low-risk investments, such as short-term U.S. treasury bills, where it will stay for three to five months. The school wanted to reduce the risk of loading the endowment while the market is instable, Sunshine says. The 25 percent that went straight to the endowment was put into hedge funds and private equity funds, which still have less risk than stocks generally do, Sunshine adds. Although Sunshine says it might seem "counterintuitive" for NU to sell off part of its royalties as Lyrica seems to be peaking, he says this is the best time to get the greatest value in the marketplace. He admits NU might not be receiving the maximum amount of money possible, but he says the university "can't gamble (or) take risks beyond what's reasonable." "(We're) really pleased with our position here," he says. "If we weren't so positive, we would've sold off more." Some outside observers seem to agree. Zack Miller, a former equity analyst for Oasis Capital Management and writer for a stock-analysis blog, says Lyrica will face competition, as two generic equivalents have filed with the FDA and might be approved this year. Miller, Kellogg '03, adds that other drugs are being used to treat fibromyalgia, including aspirin in the U.S. and marijuana in Europe. Drug profits also come with an expiration date, says John Eade, an analyst with Argus Research. When Lyrica's patent ends in 10 to 15 years, a generic drug company can come out with the same compound at an 85 percent discount, says the 1986 Medill graduate and former editorial staff member of The Daily. Instead of waiting an unknown number of years to receive hundreds of millions of dollars, NU received one $700 million check, all risk-free. Like Yale's Zerit, there's always the chance harmful side effects will be discovered down the line. In Lyrica's case, there is talk of the validity of fibromyalgia as a diagnosis. A Jan. 14 article in The New York Times questioned the conditions altogether, saying some doctors believe "the disease does not exist and that Lyrica and other drugs will be taken by millions of people who do not need them." Even the most careful predictions can ultimately miss the mark. Kent Alexander, senior vice president and general counsel to Emory University, says that if the university had a crystal ball, it would have waited longer to sell all of its royalties. Gauging a drug's money-making potential is a bit like scouting for sports talent, he says: No one can predict a Michael Jordan. "You have to deal with the facts as you've got them," Alexander says. "I tend not to look back." Regardless of how NU's decision pans out, Alexander says it is hard to complain about having hundreds of millions of dollars "dropping into your university's coffer." "A deal like this puts Northwestern, Emory and others in a rarified air that's very nice to breathe," he says. "It's very easy for folks to criticize 'Oh, things should have been done this way, should have been done that way,' but I think other universities will look at Northwestern and wish it were them." Or as Sunshine, who has been working at NU for 11 years, puts it: "We may never get anything remotely like (Lyrica) ever again."
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