Jun 1, 2020 · 1h 2m · capital-allocators
Clarke Futch – Healthcare Royalty Partners (First Meeting, EP.20)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, host Ted Seides interviews Clarke Futch, co-founder and managing partner of Healthcare Royalty Partners, about the evolution, underwriting mechanics, and portfolio construction strategies of biopharmaceutical royalty investing. Futch explains how HCR structures non-correlated, non-dilutive financing for life sciences companies while delivering resilient yield and capital preservation to institutional allocators.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 17% of the talking time here. How this is scored →
Ted as informed peer 2.2 Guest teaching 3.9 Guest disagreement 0.0 Ted pushing back 0.1
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 26:45 Direct rejection of non-pharma asset classes
Futch firmly explains why they refuse to invest in medical devices or healthcare IT, contrasting weak device patents with unassailable chemical entity IP.
Hardest push from Ted ▶ 41:40 Probing asset protection on reverse milestonesTed presses Futch on how the firm can realistically recover funds or claw back payments from a cash-burning biotech that needs money for R&D.
Biggest teaching moment ▶ 11:40 Inversion of pharma R&D modelFutch educates the host on the multi-decade structural shift where 70% of commercial drugs now originate from small biotechs rather than pharma majors.
Ted holds their own ▶ 49:00 Drilling into historical portfolio loss base ratesTed drills down on the attractive pitch by pressing for exact historical default and loss base rates across the firm's 70 historical transactions.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| AlphaSense Platform Overview and Retrieval Capabilities Sponsorship Message | 0 | 0 | 0 | 0 | Sponsor message and platform announcements for AlphaSense and Intap DealCloud delivered as a monologue by the host. | |
| Admired Leadership and Alex AI Executive Coaching Message | 0 | 0 | 0 | 0 | Promotional read for Admired Leadership followed by Ted Seides's overview of the episode and introductory remarks. | |
| Clarke Futch’s Career Background and Entry into Royalties | 1 | 3 | 0 | 0 | Clark Futch details his educational background in law and finance and his career progression from Raymond James and Thomas Weisel to Paul Capital. | |
| Founding Healthcare Royalty Partners and Early Capital Raising | 3 | 6 | 0 | 0 | Futch gives an in-depth explanation of pharmaceutical R&D outsourcing trends and illustrates how royalty financing works using the Shingrix vaccine case study. | |
| Royalty Financing Market Scale and Regional Sourcing Architecture | 3 | 5 | 0 | 0 | Futch contextualizes the nine billion dollar market size against broader equity financing and explains the insourcing of internal scientific and IP diligence capabilities. | |
| Thematic Research White Papers and Systematic Pipeline Tracking | 2 | 4 | 0 | 0 | Futch describes their top-down thematic research white papers alongside a bottom-up systematic tracking of regional top-100 target lists. | |
| Target Investment Characteristics and Advantages of Orphan Drugs | 3 | 5 | 0 | 0 | Futch clarifies why the firm stays exclusively in pharmaceuticals over medical devices due to patent strengths and details why they target medically necessary and orphan therapies. | |
| Managing Regulatory Approval Risk in Late-Stage Pharmaceutical Assets | 3 | 5 | 0 | 0 | Futch discusses how the firm selectively takes pre-approval risk on Phase 3 assets by conducting in-depth FDA regulatory analysis and structuring tranche-based milestones. | |
| Ridgeline Front-to-Back AI Investment Management Platform Message | 3 | 6 | 0 | 0 | Following a sponsor message, Futch explains how diligence shifted from assuming regular price hikes to surveying insurers and highlights orphan drug regulatory exclusivity. | |
| Deal Structuring, Milestone Symmetry, and Capital Downside Protections | 4 | 5 | 0 | 1 | Ted probes how collateral works on reverse milestone clawbacks, prompting Futch to explain how they secure downside protection with corporate liens. | |
| Active Portfolio Monitoring Versus Traditional Private Equity Governance | 2 | 4 | 0 | 0 | Futch describes active portfolio management without governance seats, contrasting their underwriting focus with private equity operational involvement, and explains diversification limits. | |
| Historical Base Rates, Portfolio Loss Experience, and Commercial Risks | 3 | 4 | 0 | 0 | Ted asks for specific loss base rates across 70 historical deals, and Futch transparently details that only one or two small realized core investments lost capital. | |
| Competitive Dynamics and Proprietary Sourcing in Royalty Markets | 2 | 4 | 0 | 0 | Futch reviews market competition, the exit of macro hedge funds after 2008, proprietary deal flow generation, and their disciplined singles-and-doubles philosophy. | |
| Biopharma Capital Dynamics and Opportunities Amid Pandemic Disruptions | 2 | 3 | 0 | 0 | Futch discusses how pandemic disruptions led biotech management teams to seek balance sheet certainty and opportunistically raise capital to play offense. |
Statements from this episode (17)
Futch: Royalty monetization transaction volume grew from $150M to $9B
“The first year I was there, I think the total amount of transaction volume of all deals added up together for the whole year was like one hundred fifty million dollars. So really, really small. It's subsequently grown last year's about nine billion dollars of …”
Futch: 70% of drugs sold by big pharma originated at small companies
“What's happened over the last almost three decades now is that ratio has inverted such that today, the last estimate I saw was 70% of the products sold by the large companies have been invented at small companies.”
Futch: 90% of Healthcare Royalty Partners' investments are FDA-approved products
“And that's the key for us, 90% of what we do are products that have been approved by the FDA”
Futch: Biopharma equity raises two to five times more than royalty markets
“If you look at primarily equity raised, either venture capital raised or IPOs or following equity, it's a small fraction. There's two, three, four, five times as much money raised in the equity markets each year, but the equity markets can be volatile, right?”
Futch: Healthcare royalty diligence eliminates binary risks to focus on commercial risk
“Those three risks, the patents, manufacturing, and regulatory, are really what we view as potential binary risk. So if the product For safety reasons, gets pulled from the market because it's, have some significant side effect. That's a problem for us because …”
Futch: No new migraine treatment developments occurred for two decades
“Hasn't been any new development in migraines for two decades.”
Futch says medical device patents can be circumvented, unlike chemical entities
“And device, typically, you can engineer around the patent, you can do it a different way. If you have a patent on the chemical entity, there's really no way to get around that.”
Futch argues dominant commercial marketing can make mediocre pharmaceutical products successful
“And you can also have a product that's maybe okay, maybe not great, maybe it's not high science, but if you have a marketing company that dominates a certain area, they can do very well with those products. We've seen that in the dermatology area, for example.”
Futch: HCR structures pre-approval deals in one-third and two-thirds tranches
“So we may put a portion, maybe a third of the capital in Six months before approval, three months before approval, and then have it set up that when it's approved, the second tranche, the post-approval tranche with two-thirds of the capital goes in.”
Futch: US commercial insurers must reimburse ACA-recommended vaccines like shingles
“Commercial plans in the U.S. Under the Affordable Care Act have to reimburse these vaccines if they're approved by the Commission on Vaccines, which that one is.”
Futch: US Orphan Drug legislation grants seven years of market exclusivity
“In order to make it economically attractive, the government put in legislation that said if you do it, and you have to go through an FDA regulatory review, We will give you seven years of exclusivity where we will not approve another drug that does the same th…”
Futch: Orphan drugs preserve pricing power because rare disease costs are negligible to insurers
“The drugs are very expensive, but it's a very small line item on any insurance plan as opposed to cholesterol or diabetes or things that affect millions and millions of patients. So your pricing power there is better and therefore makes it more attractive and …”
Futch: Shingles vaccine generated nearly $1B in year one and $2B in year two
“That product done phenomenally well, did a billion dollars almost in the first year, two billion in the second year.”
Futch: HCR avoids board seats and management changes
“We don't sit on boards. Typically we don't change out management. On a very rare occasion, we've had to step in and be involved, but not very often. It's not what we're set up to do. We're not a loan to own type of investor.”
Futch says US drug pricing headwinds spare only oncology and orphan diseases
“Pricing headwinds in the U.S. That really applies to almost all therapeutic categories other than Orphan and oncology.”
Futch says 80% to 90% of royalty capital sits with top managers
“80, 90% of the capital that's available is probably in the hands of the top. Five, six, seven people, so it's still relatively concentrated.”
Futch: Biopharma Companies Now Value Deal Certainty Over Lowest Capital Cost
“What seems to be very clear already is that companies are valuing cash, access to capital, certainty of close, and it's not just about lowest cost of capital. If you went back a year or two years for sure, and the more credit oriented type deals in our market,…”