Exagen Diagnostics of Albuquerque, NM, reflects the latest evolution of Capital Royalty’s strategy. The firm will lend as much as $25 million to Exagen, which plans to expand the sales force for its test for systemic lupus erythematosus.
On Nov. 18, Capital Royalty announced it had also invested $40 million in Solta Medical, a Hayward, CA-based aesthetic medicine device company that sells devices for skin resurfacing, acne reduction, body contouring, and skin tightening, as well as tools and accessories for liposuction.
Capital Royalty has made most of the investments from its current fund in the form of structured debt, as it did with the Exagen and Solta deals. A structured debt transaction reduces the firm’s investment risk while offering advantages to companies seeking capital.
In this form of transaction, growing companies gain a long-term commitment of capital, but may draw on the money only as needed. This can reduce the amount they end up paying in interest. In some structured debt deals, the loans can be partially repaid with royalty interests or equity stakes in the borrower company, according to a Capital Royalty white paper.
Tate and Duster say Capital Royalty invested in Exagen because of its well-regarded management team and the value of its lead test, Avise SLE+ Connective Tissue. The test is designed to confirm a lupus diagnosis and rule out the possibility that a patient’s symptoms are due to other common diseases of the connective tissue. The test could spare wrongly diagnosed patients a round of treatment costing as much as $30,000, he says.
Exagen’s announcement on the debt deal doesn’t specify an interest rate, and Capital Royalty declined to give details about its returns on investment. The firm’s white paper on structured debt says interest rates typically range from the high single digits to the mid-teens.
Capital Royalty says its structured debt financing is meant to allow borrowers to retain more of the potential value of their companies by avoiding the need to sell shares to raise money while also reducing risk for investors.
“Capital Royalty is the bridge between investors seeking attractive risk-adjusted returns and innovative, life science companies seeking a source of growth capital that is less dilutive than traditional equity or equity-linked alternatives,” Tate says.
