Royalty Finance in Life Sciences: Overview and Legal Considerations Under Swiss Law

Royalty finance has emerged as a strategic alternative to equity-based funding, particularly within the capital-intensive biotech sector. This form of non-dilutive financing allows companies to raise capital by monetizing expected royalty or sales income derived from the commercialization of products. In return, investors receive the right to a portion of the future revenue streams, typically paid by a third-party licensee. For biotech companies, this structure offers a critical advantage: access to capital without the need to dilute ownership or cede strategic control. Where the seller is a Swiss company, however, investors face a key legal hurdle: Swiss insolvency law does not recognize the concept of a “true sale” in the same way common law jurisdictions do, which can leave investors exposed if the seller becomes insolvent.

While most royalty finance transactions are based on commercial-stage products with a proven revenue stream, it is important to note that pre-approval products may also qualify in which case the funding can be used to finance clinical development or commercial launch. In these cases, investors focus on the anticipated success of regulatory approval and the product’s market potential in both development-stage biotech deals and co-investment structures. Royalty finance transactions so far have ranged from anywhere between USD 1.2M to over USD 1.6bn in the United States. There are no comparable statistics available for Switzerland. However, in our experience, royalty financing transactions of Swiss companies are typically entered into with US finance parties.

Types of Royalty Finance Deals

Royalty finance transactions generally fall into one of two categories: traditional royalty monetizations and synthetic royalty finance deals.

In traditional royalty monetization, the investor acquires a legal and beneficial interest in the company’s royalty stream itself. The biotech company assigns all or part of its rights to future royalties under an existing license agreement with a third-party licensee to the investor. The investor is typically entitled to receive payments directly from the licensee, and the transaction is predominantly intended to constitute a sale rather than a loan. In some deals however, the royalty streams serve as security for a loan.

By contrast, a synthetic royalty finance deal mimics the economic effects of a royalty deal where no license agreement is in place. This is achieved by creating a contractual obligation for the company to pay a portion of future revenue streams from its own product sales in exchange for upfront capital.

Both a traditional royalty monetization and a synthetic royalty deal can be structured as a “true sale”, which is a recognized concept in common law jurisdictions. A true sale means that the royalty receivables owed by the licensee have been validly sold and transferred to the investor, such that they no longer form part of the seller’s assets in an insolvency event.

Courts in common law jurisdictions assess whether a transaction qualifies as a true sale by analyzing the transfer of economic benefits and burdens, the presence or absence of repurchase obligations, and whether the investor bears the risk of underperformance. If properly structured, a true sale ensures that the investor continues to receive royalty payments even if the seller enters into insolvency. While many traditional royalty finance deals qualify as true sales, that structure is harder to establish in synthetic royalty finance deals. This is because the royalty is not derived from an existing license agreement, but rather from a contractual obligation created specifically for the financing transaction, with payments tied to future product sales.

Structure of a Traditional Royalty Monetization as Sale

In its traditional and still predominant form, royalty finance deals are structured as transactions through a royalty purchase agreement. The key parties involved include:

• The seller – the biotech company that owns or controls the royalty interest;
• The purchaser/investor – the investor or fund providing the financing and acquiring the royalty rights; and
• The licensee – the third party that owes the royalty payments under a license agreement.

The royalty purchase agreement typically includes:

• a detailed definition of the royalty interest being transferred (e.g. specifying the license and a certain percentage of the royalty interest);
• the financing amount and possibly the breakdown of the financing amount into upfront and milestone payments;
• payment mechanics, including instructions for the licensee to make direct payments to the investor;
• representations, warranties, and covenants to protect the investor’s rights (e.g., the covenant to enter into an intercreditor agreement with future lenders or restrictions with respect to additional out-licensing);
• restrictions on the seller's ability to amend or terminate the license agreement;
• optional buy-out provisions or early termination rights; and
• information and audit rights to monitor ongoing royalty performance.

The overarching goal is to ensure that the purchaser has sufficient legal and economic control over the royalty stream to qualify the transaction as a true sale under the applicable legal framework.

Swiss Law Challenges in Royalty Finance Transactions

While the true sale model can work well under common law, it faces significant limitations under Swiss law, particularly in the context of an insolvency of a Swiss seller.

Swiss insolvency law does not recognize the concept of a true sale in the same way as common law jurisdictions. Even if a royalty transfer agreement is structured as a sale, the investor does not retain a direct right to claim royalty payments from the licensee with respect to royalty receivables that have arisen after the seller enters insolvency.

This situation can be slightly mitigated if the licensee accepts payment instructions of the seller to make royalty payments directly to the investor. In this case, the right of the investor to claim directly from the licensee survives the insolvency of the seller, but only until the earlier of:

• the license agreement being terminated (e.g. if the licensee has a termination right in the insolvency of the seller); or
• the Swiss insolvency administrator deciding to sell the underlying intellectual property to a third party, effectively terminating the license agreement.

In either scenario, the royalty stream may cease entirely, leaving the investor with a substantially impaired or worthless claim. In such a case, the investor would need to file a claim for breach of the royalty purchase agreement in the insolvency proceedings, competing with all other unsecured creditors.

Mitigating Insolvency Risk Under Swiss Law

Given these risks, investors and legal advisors must implement protective measures when the royalty seller is a Swiss entity.

One measure is to include restrictive covenants in the royalty purchase agreement. These may prohibit the seller from:

• incurring additional financial indebtedness;
• amending or terminating the license agreement; and
• granting third-party rights over the IP or royalty stream.

In addition, the agreement should require the seller to enter into an intercreditor agreement with any existing or future lenders to ensure that the investor’s rights to their portion of the royalty payments rank senior to the claims of other unsecured creditors.

Another approach would be to secure the royalty interest by creating security over the underlying intellectual property. However, this strategy carries a major drawback: it may undermine the true sale characterization in cases where the investor is from a common law jurisdiction. If the transaction is recharacterized as a secured loan, the investor loses the benefits typically afforded to a true sale, particularly in cross-border scenarios.

Conclusion

Royalty finance offers biotech companies a flexible and non-dilutive path to funding, particularly for assets with strong commercial prospects.

Because Swiss insolvency law does not uphold the true sale concept in the same way as common law jurisdictions, investors may find themselves exposed to insolvency risks despite careful structuring. This risk can be partially mitigated through prudent transaction planning — but not entirely eliminated.

Authors: Nicolas Mosimann, Kevin MacCabe, Lukas Bopp