Germany: Securing Financing For Zealand Pharma's Operations Through US$50 Million Royalty Stream Securitization

The Opportunity

Zealand Pharma A/S ("Zealand") (Nasdaq Copenhagen: ZEAL) is a biotechnology company based in Copenhagen, Denmark. Zealand has leading expertise in the discovery, design and development of novel peptide medicines and possesses in-house competences in clinical trial design and management with a therapeutic focus on metabolic diseases and acute care indications.

Zealand's first invented medicine, lixisenatide, a once-daily prandial GLP-1 agonist for the treatment of Type 2 diabetes, is marketed globally (ex-US) as Lyxumia® and is in Phase III development as a single-injection combination with Lantus®, Sanofi's blockbuster long-acting insulin, together referred to as LixiLan, in both cases under a global license agreement with a German affiliate of Sanofi ("Sanofi").

Zealand is advancing a pipeline of novel wholly-owned medicines, including Zealand's wholly-owned danegaptide (prevention of Ischemic Reperfusion Injury) which is in Phase II, the stable glucagon analogue ZP4207 which is in two Phase I trials as a single-use rescue pen (severe hypoglycemia) and a multiple-dose version (mild to moderate hypoglycemia), as well as several preclinical peptide therapeutics.

Advancing a pipeline of novel peptide medicines involves extensive pre-clinical and clinical trials and lengthy regulatory approval processes. In 2014, Zealand decided to raise approximately $50 million to fund the development of its portfolio.

Although it could have sought these funds through an equity offering, Zealand management did not want to force its existing shareholders to accept the resulting dilution. Moreover, given market conditions at that time, Zealand management expected new equity to be overly aggressive in their demands. Traditional debt financing would have presented its own difficulties, with lenders likely wanting a security interest in the intellectual property underlying Zealand's entire portfolio of peptide medicines, and so Zealand was reluctant to risk losing control over its core assets.

Recognizing the complexity of its position, Zealand turned to Dechert for assistance with alternative financing structures.

The Solution

The solution settled upon was a securitization of certain of Zealand's royalty and milestone rights under its license agreement with Sanofi. Zealand used two newly-formed, bankruptcy remote Danish subsidiaries to establish a pool of assets that would be isolated from its potential bankruptcy estate where they could be pledged as security for an issuance of notes under Rule 144A/Regulation S of the US Securities Act of 1933, as amended.

The securitization required a two-step transfer of assets. Under Section 365(n) of the U.S. Bankruptcy Code, a licensee is protected against the rejection of a patent license in the bankruptcy of the licensor so long as the licensee continues to make royalty payments. As a result, there is generally no need in a U.S. royalty stream securitizations for the operating company to transfer its patents and license rights to a bankruptcy-remote entity. As Danish law does not contain provisions analogous to Section 365(n) of the U.S. Bankruptcy Code, it was necessary to isolate these assets of Zealand in order to protect the securitized royalty stream. Therefore, Zealand first assigned all of its rights under the Sanofi global license agreement (including its interests in milestones and all royalty payments thereunder), its related patents and other intellectual property rights, and certain other assets to its newly-formed subsidiary, ZP Holding SPV K/S. Second, ZP Holding, sold to ZP SPV1 K/S, its newly-formed subsidiary and the issuer of the notes, a percentage of its interest in certain royalty and milestone payments under the license agreement.

Zealand retained responsibility for exercising ZP Holding's rights and responsibilities under the Sanofi license agreement and the administration of the underlying intellectual property, and is also responsible for managing, on behalf of ZP SPV 1, the latter's interests in the assets acquired from ZP Holding. The notes issued by ZP SPV 1 were secured by a security interest in all of ZP SPV 1's assets as well as by a pledge by ZP Holding of its direct and indirect equity interests in ZP SPV 1.

Significantly, rights to the royalty stream expected from LixiLan remains entirely in Zealand's hands, ensuring that this key driver of future value will continue to support the company's market valuation.

The Result

The structure Dechert put in place allowed Zealand to strengthen its balance sheet with additional cash in advance of the US regulatory submission of Lyxumia®, which occurred in late September 2015, and anticipated US/EU regulatory submissions for LixiLan, expected in Q4 2015. The financing provided cash to support the company's ongoing development work and growth prior to these key new revenue triggers, and eliminated uncertainty that could otherwise be a drag on the company's stock market valuation. This was done on financial terms that preserve for Zealand shareholders the potential upside from both Lyxumia® and LixiLan.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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