Could this be a resurgence of IP securitization? Financial Times has reported a large IP securitization deal worth $250M executed by Morgan Stanley with Vertex Pharmaceuticals. Investors’ return will be based on milestone royalty payments received from sales of a drug that hasn’t even been approved yet. Before the recession, securitizing intangibles was becoming somewhat popular. Many are aware of the Dunkin Donuts deal that hit headlines everywhere. Still, these deals, along with most other deals, have dried up. The Vertex deal shows that banks like Morgan Stanley may be jumping back into the structured products market, and even enough courage exists to test the edge of this market with products as risky, yet promising, as intellectual property. The FT article asserts the following with regard to these deals:
“We think other holders of royalties will start to avail themselves of this technology and the rationale,” said Thomas Cahill, co-head of Morgan Stanley’s structured products group. “The products are bespoke, but we believe there are enough investors prepared to do their own homework for the deals to become more common.”
For investors the attraction is high yields - the deals often carry double-digit coupons - and the chance to own assets that are not closely correlated with other asset classes or the wider economic outlook.
Companies like the deals because they get to keep the assets - and any upside from other sales and licence agreements - and do not have to dilute their equity. Nor do they have to bear the risk if the drug fails because the deal is structured in a special purpose vehicle with no recourse to the actual company.
This is exciting stuff, to say the least. A fledgling market such as the IP transactions market, and especially IP securitization, has been rumored to have been all but dead. The cynics saw the sale of Ocean Tomo’s transactions business and its latest auction’s poor numbers as a sign that the best days had come and gone. I knew these were cynics being cynics. There is too much promise in the growth of intellectual property as stand-alone tradable assets. Let’s hope more Dunkin Donuts/Hertz/Vertex IP securitization deals come along . . . or maybe more musicians will be as daring as David Bowie.