It may have taken decades of drug discovery, but universities and other research institutions are finally waking up and smelling the money.

This year alone, Children's Hospital Foundation, the parent company of the Children's Hospital of Philadelphia, sold its royalty interest in sales of the oral gastroenteritis vaccine RotaTeq to Royalty Pharma of New York for $182 million in cash. And earlier this year, in the biggest college royalty deal to date, Northwestern University sold a portion of its worldwide royalty stake in the blockbuster pain drug Lyrica to Royalty Pharma for $700 million in cash, earmarking the proceeds for the scientists responsible for the chemical compound, the university's endowment, financial aid, research and construction of new buildings and laboratories.

"The real biotech boom of the late '80s and early '90s has now come to fruition," says Todd Davis, managing director of buyout shop Cowen Healthcare Royalty Partners, a new buyer of royalties and part of investment bank Cowen Group Inc. in New York.

Since 2004, money spent on royalty deals with research institutions has skyrocketed almost eightfold, says Jim Webster, an early investor in healthcare royalties and managing partner and co-founder of Capital Royalty LP in Houston. In 2004, these institutions monetized royalty interests totaling about $260 million. That jumped to $750 million in 2005 and to $1.9 billion in 2007. "There are not many royalty monetizations less than $50 million," he says.

Only the year 2006 was down, with $40 million spent on institution-based royalty transactions. Webster isn't sure why. "Research institutions act to their own drummer and are not running to boost a stock price," he says.

There are several reasons why universities choose to monetize a royalty: They receive needed capital; they share the risk of the drug with another party; they diversify their own portfolio; and they receive recognition for successful research. Cash made from sales in royalty stakes is usually funneled back to the universities to use for further drug development and other things. "Typically, a portion of the proceeds ends up back in the lab or in a new building devoted to R&D," Webster says.

More deals are likely as universities realize their potential to make money on drugs they helped create and as investors look to educational institutions as the pharma pipeline slowly dries up. Research institutions typically hold less than a 10% stake in a drug, and most of the royalties up for grabs are for drugs already on the market, meaning they provide annual revenue streams but also attract hungry buyers.

John Leone, a partner at Paul Capital Healthcare, a New York buyer of healthcare royalties and part of Paul Capital Advisors LLC, says the university deals "may be putting pressure on technology- transfer directors to look more carefully to what they have in-house."

Research institutions have licensed their inventions ever since the passage of the Bayh-Dole Act in 1980, which allowed schools to take royalty interests in their creations that benefited from federal funding. But these institutions have more aggressively sought to sell all or parts of their royalty interests.

"What happened is greater recognition among universities that they are sitting on an asset that has value and they have seen what has happened when other universities have monetized their royalty stream," Leone says.

Cowen's Davis says buyers and sellers find each other through three main avenues: the Association of University Technology Managers, the Licensing Executives Society and plain old business development. "A lot of universities come to us," he says. "They know who the players are."

Cowen typically pays $30 million to $70 million for royalty stakes, though the firm has the capacity to pay more than $100 million.

Durham, N.C.-based Duke University and the University of North Carolina at Chapel Hill recently established drug discovery centers and have recruited academics and executives from GlaxoSmithKline plc to lead them. Allen Roses, the scientist who started the Duke center after spending 10 years at the pharmaceuticals giant, says he seeks to enable collaboration between universities and drug companies.

"The marriage of these two entities needs to be brokered, and that's what I'm doing," he says. "They haven't figured out how to work together." Roses says over five to 10 years, he wants to show universities that the return on investment is higher if it can start a successful integration with the pharmaceuticals industry. "There are brilliant projects buried in research laboratories at major universities that are never systematically sought or supported," he says.

Buyers are also seeking deals. Jon Soderstrom, president of the Association of University Technology Managers' board of directors and a managing director at Yale University's Office of Cooperative Research in New Haven, Conn., says he receives inquiries frequently from potential buyers, since the group has a drug pipeline published on its Web site. "The royalty shops are out there marketing," he says. "If you go back to the 2000-2001 time frame, there wasn't anyone buying things, so there wasn't any market."

Competition for royalty stakes is intensifying as hedge funds and other investors also monitor the industry. Though not a university deal, in April New York private equity firm TPG-Axon Capital Management LP agreed to pay CV Therapeutics Inc. up to $185 million for the rights to 50% of its royalty on North American sales of Lexiscan injection, an option for cardiac patients unable to undergo exercise stress tests.

"I don't see the pie getting smaller," Leone says. "As more universities look to monetize their royalty streams, it would be hard to imagine a world where you wouldn't have more people consider [this market]."

With its 15 employees scouring for deals, Paul Capital has bought royalties from a handful of research houses, including Aston University and Imperial College. In January, the firm purchased a royalty interest in Rotarix from Cincinnati Children's Hospital Medical Center, for undisclosed terms. Rotarix is an oral vaccine developed to prevent rotavirus infection, a contagious viral disease that causes diarrhea and dehydration in infants and young children. U.K.-based GlaxoSmithKline markets the product, which has been approved in more than 100 countries.

The firm closed its first fund in April 2000 with about $300 million in equity capital commitments and three years later closed its second fund with about $650 million in capital. Paul Capital buys royalties not only from universities and other institutions but also from companies. It looks at the quality, remaining patent life and safety profile of the product and how it has performed in the marketplace, Leone says.

Capital Royalty in Houston got its start in 2003 after Webster and Harry Loveys left Toronto-based Drug Royalty Corp. (now DRI Capital Inc.) to help start the firm. The firm has established a $325 million fund for doing deals.

"We spent a lot of time -- not only ourselves but Paul Capital and Royalty Pharma -- in the 1990s going to the universities and getting them interested," Webster says. "We had a lot of doors shut in our face." Webster says his fund is 70% invested and the company hopes to launch a second fund soon. His 13-member firm has completed royalty deals in several therapeutic areas, including infectious diseases and oncology. "We have not disclosed returns, but [they are] generally lower than what venture funds seek but higher than bank returns," he says.

Cowen, the newest royalty shop, formed its practice in January 2007, and the firm employs seven professionals, a chief financial officer and two support staffers. It began raising its first fund in November 2007 and in nine months closed on more than $500 million in capital commitments. The fund was oversubscribed by $150 million. The firm has done five royalty deals so far -- all with companies -- and committed more than $260 million in capital, though its founders, previously employed at Paul Capital Healthcare, have done deals with nonprofits and universities.

By far the largest and most high-profile deals have been done by Royalty Pharma, a firm that has grown through the acquisition of revenue-generating intellectual property, mainly royalty interests in marketed and late-stage development biopharmaceutical products. Royalty Pharma did not return requests for comment but in press releases claims it owns about $5 billion in assets and has a 10-year history of doing such deals. In 2005, it teamed up with biotech firm Gilead Sciences Inc. of Foster City, Calif., to pay $540 million for Emory University's royalty stake in Emtriva, a drug used in the treatment of HIV infection, and it acquired 80% of Memorial Sloan-Kettering's U.S. and international royalty interests in the anti-­infection drugs Neupogen and Neulasta for more than $400 million.

Then in May last year, it paid $650 million, plus additional possible payments if sales exceed certain milestones, to buy the royalties in rheumatoid arthritis drug Remicade from New York University. And this year, it paid $700 million for the Lyrica stake.

Abram Goldfinger, executive director in NYU's technology transfer office, says Remicade came to market in 1998 as part of a collaboration between the university and Centocor Inc., a Horsham, Pa., subsidiary of Johnson & Johnson of New Brunswick, N.J. Shortly thereafter, the school started receiving inquiries from potential buyers. But NYU decided to retain the royalty stake "because the valuation wasn't there," Goldfinger says. As sales rose and the risks lessened, the royalty buyers came calling again several years later, and NYU decided to hold an auction to evaluate its options.

NYU, like most research institutions, worked on the initial development of the Remicade compound because the research is consistent with the school's overall mission of helping future patients and training the next generation of doctors, Goldfinger says.

More deals are likely to come, with buyers and sellers eager to negotiate and universities realizing the potential to cash in as their inventions come to market. Observers expect more of these deals will be large, which could challenge investors.

Webster says deal size for research institutions selling royalty stakes has risen so substantially in the past few years that it's difficult for smaller royalty shops such as his to compete with Royalty Pharma, DRI and other large buyers even for partial royalty sales. One option is for smaller shops to work with hedge funds to do deals, he adds.

Todd Sherer, director of the Office of Technology Transfer at Atlanta-based Emory, says interest in Emtriva heated up after the drug's approval. About 20 potential buyers approached the university, according to published reports, and it began an auction process that lasted eight weeks. Hedge funds and private equity firms were also vying for the royalty stake, but Royalty Pharma, along with Gilead, which was already licensing the drug, won out.

Sherer says the overwhelming interest in Emory's royalty stake "forced the university to start to take a more serious look at this asset ourselves and start doing our own valuation of what we thought it might be worth." The school weighed whether to receive royalty payments annually or monetize the asset and get one lump sum, eventually choosing a sale.

In the end, the Emory deal made other university scientists and administrators stand up and take notice, partly because it was the first time a university used an investment bank to help negotiate a deal -- and the deal was large. Emory hired Citigroup Inc. and law firm Covington & Burling LLP to handle the transaction.

Covington & Burling, along with Morgan Stanley, also advised Northwestern in its sale of Lyrica, which Pfizer Inc. marketed. Royalty Pharma made the acquisition after a two-pronged auction process that attracted up to 40 initial bidders and about 10 serious suitors. "We had a lot of interest in the auction at the end of the day," says John Gourary, a partner at Covington's New York office.

"Universities are looking at their portfolio with this in mind," he says.

"It's a seller's market right now."