TWST: Give us a brief overview of Drug Royalty, Corporation your history, your products, your activities, your customers, those kinds of things?

Mr. Lennox: Drug Royalty is building an international royalty portfolio of pharmaceutical assets. This means we visualize having our asset base comprise between seven and 12 pharmaceutical assets which, in fact, drive our top line from the top line of biotech and pharmaceutical companies around the globe. The company was listed on the Toronto Stock Exchange in April 1993. We have raised monies principally from European and Canadian investors. Since 1993, the management team has expanded from a couple of people to the group of 10 that we have now. I joined the company in March of 1997.

TWST: What's in it for the drug companies who give you royalties?

Mr. Lennox: That is a good question. We have four target markets or categories of company with which we want to do business. The first group is inventors. U.S. inventors today receive annually almost half a billion dollars of pharmaceutical royalties because of the structuring of their work at universities. Many could set up foundations to fund further research. We can help them monetize their income generating assets in order to achieve this. Research universities are another target market. They generate considerable royalty income from pharmaceutical and biotech firms to whom they license their patented knowledge. Many of those institutions have capital requirements. They can satisfy these requirements by monetizing their royalties. By monetizing royalties they also reduce their exposure to the risk created by fluctuations in the sales of the products that generate the royalties. A third group is in emerging biotech and pharma companies. In 1993, we helped Ethical Holdings, a drug delivery company in Europe. W were instrumental in the early-stage financing of Dura Pharmaceuticals of San Diego. These transactions involve the creation of new royalty agreements. They are completed at an early and very critical stage of a company's life when it does not want to dilute earnings with increased equity, yet does not have access to other financing options such as debt. This category of transaction comprises 15 percent of Drug Royalty's royalty portfolio today. The fourth market is large pharmaceutical manufacturers. There is a huge and growing need for large amounts of capital to take products through the Phase III development stage to market. Drug Royalty plans, by investing a much larger capital fund than it has today, to play an important role in this market.

TWST: Does Drug Royalty also get involved in the marketing?

Mr. Lennox:No. We allow companies to do what they are good at.

TWST: How about the competition? What are your competitive advantages? What sets Drug Royalty apart?

Mr. Lennox:Drug Royalty is unique in that it is the only publicly traded company in the world doing what it does. If you lived in Toronto you would be very familiar with two other royalty companies that have had huge success. They got started in 1983. Franco-Nevada and Euro-Nevada have created huge shareholder value by doing in the mining business what we are doing in the bio/pharma business. Over the last decade they have been among the fastest-growing, highest-return equities in the Canadian market. The strength of the model derives from the leverage that you can exert, and from the fact that you are taking top line revenues with very, very little expense between revenue and pre-tax income. As the shareholder, what you're not subjecting yourself to is the expense and risk of a management and administrative structure in the middle. Your principal risk exposure is to the failure of the& D effort.

TWST: Can you briefly describe your future growth strategy for the company?

Mr. Lennox:One of my first steps after arriving at Drug Royalty was to oversee the development of a three-year strategic business plan that we presented and sold to the Board late in 1997. It calls for us to invest approximately $185 million over the three year period ending in mid 2000 so that we are generating at least $20 million is sustainable annual royalty revenues by then. It also calls for us to keep our expenses associated with the management and operations of the business below $3 million. You can do the arithmetic. By doing this we create a cash flow that enables us to reinvest and sustain the business. In the past year, since we put the plan together and communicated it to the marketplace, we have invested something in excess of $50 million of the planned $185 million. With this investment, our sustainable royalty revenues will exceed $10 million in 1999, up from $3 million in 1998. So we're halfway to our revenue target on a base of only a third of our investment target. We are right on target to generating the $20 million we are committed to for the year 2000.

TWST: How are your earnings? Are you making money?

Mr. Lennox:Yes. This company has been cash flow positive for the last five years. This is the third year that we have produced net income. In two of those years we benefited from sales of royalty agreements. In both those years, we generated in excess of 20 percent return on equity. Last year our earnings were $9.2 million on revenues of $20 million.

TWST: How do you expect the market or industry to change over the next two to three years?

Mr. Lennox: We're going to see continued growth in the high-single to low-double-digit range in the pharmaceutical industry around the world. In 1997, the industry generated about $300 billion in sales. So we're going to see an additional $25 to $40 billion a year added to that total. We will also see emerging over the next two-to-four years, a clear separation between the have's from the have not's in the global industry. The have's will be the ones with the rich, full product pipelines. The have not's won't have the flow of new products. They will be very vulnerable to 'genericization' and under constant pressure to contain costs. The have's will have the capital because the markets will support them. This will enable them to continue producing relatively high multiples compared to the S & P 500 and other market indices. The pharmaceutical industry is a very high margin business for those with products in the pipeline. One of their challenges will be to raise capital and launch products without diluting shareholders' interests or impeding earnings growth. We see ourselves playing a role in that. The have not's will either fade away or be acquired. We can expect to see an increase in restructuring and acquisition activity in late 1999, 2000 and 2001. We can also look forward to a very promising development on the biotech side of the industry, where, over the next three or four years, a handful of what, today, are small-cap companies will emerge to become the Amgens and Genzymes of the day. This will be positive for the sector overall. Most importantly, for people like you and I, there are going to be remedies and cures for many of the diseases that we thought once incurable. We are going to actually live much healthier lives than our parents.

TWST: You have already hit some, but what are the potential home runs over the next two to three years for the company?

Mr. Lennox: We completed two large deals in 1998, the most recent of which we announced December 18th. Through it we acquired a significant piece of the Taxol which is distributed by Bristol-Myers Squibb. The drug was originally approved for use in the treatment of ovarian and breast cancer, and is now approved as a treatment of non-small-cell lung cancer and as a second-line treatment of AIDS-related Kaposi's sarcoma. Lung cancer is the leading cause of cancer death in the world, by the way. The deal has already generated a return ahead of expectation. Taxol is showing enormous sales growth potential because it is showing promise as a treatment for head and neck cancer and early-stage cancers. This asset makes up almost 40 percent of our portfolio, and we expect to see very healthy growth in revenue and profits from it over the next several years. We also have an agreement with Phytogen Life Sciences, a Vancouver-based company that produces the generic versions of paclitaxel, the core molecular ingredient of Taxol. We expect these generic versions to appear on the US market in the year 2000. This will expand the market for the drug considerably. We expect to benefit significantly from the anticipated strong sales of the generic versions without having to invest or spend more. Phytogen has an agreement with Mylan Laboratories to distribute the generic versions in the U.S. Mylan is the largest distributor of generics in North America. If they manage to capture even their traditional market share, the upside for us will be very good indeed. Last week, UltraVision, a California-based company in the contact lens and specialty contact lens business made a significant acquisition. We have a royalty agreement with them on top- line sales. The acquisition will allow them to expand manufacturing and sales in 1999 and 2000. It's a good example of the additional value that can arise from a royalty deal. We will also complete some late- stage transactions in 1999 in very high growth products which are either in market or about to be in.

TWST: What are the limitations on growth for Drug Royalty? Are there any bottlenecks or road blocks ahead?

Mr. Lennox:Absolutely. Every business has its share of challenges. One of ours is to determine the smartest, most effective way to form the capital we need to take advantage of the opportunities we face today. Interestingly, we face the same kind of problems that some of the companies we invest in face. During the year, we plan to find a couple of co-investment partners and raise capital in a shareholder-friendly way. So capital formation is a critical issue. We believe the current market and the market we face over the next two-to-three years will present opportunities for capital investments that far exceed the $185 million called for in our plan. The opportunities are much larger than we expected them to be, so we will have to amass the capital we need to take them on. I think the second issue is probably just managing the growth.

TWST: How do you go about choosing drugs you'll be investing in?

Mr. Lennox:We have spent almost 18 months taking a very careful look at all the licenses and royalty agreements for all of the products marketed around the globe today, particularly in the U.S. We have also assembled a library and built a knowledge base of the licenses and royalty agreements of the products that are either going into, or are already in, the FDA and MCA processes in the U.S. and Europe respectively. We have also completed an assessment of all of the Phase III product licensing agreements that are established. Out of that compendium of information of about some 1300-1400 products, we've selected about a dozen products that we would like in our portfolio. Our challenge, right now, is to go out proactively to put together the deals that will acquire these interests.

TWST: You mentioned your management team. Is your team now equipped to handle your ambitious growth strategy? Are there any areas you feel are really outstanding or that might need some shoring up at this juncture?

Mr. Lennox: There are 10 people at Drug Royalty, six of whom are in senior capacities in the areas of science, financial structuring, building relationships, due diligence, etc. We're staffed adequately to invest the $185 million we plan to invest. We're in pretty good shape.

TWST: Which areas of the business do you focus on personally, as opposed to delegating?

Mr. Lennox: We work closely as a management team which operates to identify, assess and negotiate deals. The process begins when we proactively recommend to the Board the list of assets we want to acquire. My priority is to oversee implementation of the strategic plan that we have developed for the company. This is my most critical role. My second most important role is to make sure that we have the people, teamwork, and motivation necessary to succeed. My third and fourth most important responsibilities lie in the areas of capital formation and investor relations. I probably spend 10 to 20 percent of my time getting out and telling our story to the investment community. I may have to improve on that, with time.

TWST: This is a great story right now. It's a great way of getting the word out.

Mr. Lennox: I'm a strong believer in the phrase 'track me, don't trust me'. So in 1999 you'll see more of me because I think we will produce the results called for in our strategic plan.

TWST: Do you have a CFO now?

Mr. Lennox:I do. Jim Webster is the Executive Vice-President and CFO.

TWST: What do you rely on Jim to do? What are his strengths?

Mr. Lennox:I rely on him heavily for overseeing our operations, due diligence and financial matters. I also rely heavily on the support that he and the team provide through the financial analysis and modeling process that we've put together. It is comprehensive, and he uses a lot of outside resources to carry it out. It involves assessing all the scientific and competitive factors impinging on a particular transaction, as well as the considerations with respect to intellectual property. Jim is responsible for pulling all of that together at a high enough level to enable us to sit down and determine the risks and potential returns associated with any transaction we are considering. He and his team are critical to the successful operation of the company.

TWST: How are your management incentives aligned with the interest of your shareholders?

Mr. Lennox:When we put together our strategic plan we also structured an incentive program which dovetails totally with the goals articulated in the plan. Those goals are to grow sustainable annual revenues to a level of $20 million or more by the year 2000. We also have very specific cash flow per share targets for 1998, 1999, and 2000. Our stock options are not traditional stock options. They are performance options. They vest only if we hit the key revenue growth targets, and the key shareholder value targets that have been stated in terms of cash flow per share. If we do not make those milestones, our performance options do not vest regardless of what the share price is. Secondarily, we increased the annual bonus program from 15 percent to between 50 and 60 percent of base salaries. About fifty percent of our annual bonuses are banked. These banked bonuses can increase if we consistently meet cash flow per share and stock price targets.

TWST: Do you offer options to everybody in the company?

Mr. Lennox: Yes. Everyone owns shares in the company. Every Board Member has shares and options.

TWST: What are your basic business principles or management philosophies? What are the underlying themes you rely on to set the goals and course of conduct for Drug Royalty?

Mr. Lennox:At the highest level, it is always integrity. We're in the financing business. Confidentiality is absolutely crucial both to us and to the partners or potential partners we deal with. We have had dealings in the past 15 months with probably 15 of the top pharmaceutical companies in the world, and we have spoken to literally every single biotech company in North America. So confidentiality is absolutely crucial. We are straightforward and open in responding to partners. We attempt to respond in a timely fashion explaining clearly how we believe a transaction can be completed or why we think it can't be. Wherever possible we try to put the other party in touch with people who we think would be better suited than ourselves to complete a transaction with them. This is very, very important. I guess the last principle is shareholder value. As a relatively significant shareholder, I want to be assured that the company is being managed the same way I would manage my own personal finances.

TWST: Looking at your financial reports, what are a couple of items or statistics that would give a long-term investor greater insight into Drug Royalty?

Mr. Lennox:I think you should focus very, very carefully on the size of the market opportunity we're going after. This is a relatively small company, small-cap even by Canadian standards. Yet it is attacking a marketplace which is estimated to be, in 1997, about $10 billion. This means huge growth potential. You should watch our top line revenue and you should be looking for a routine tripling or quadrupling of royalty revenues each quarter. You should also be watching our bottom line to make sure that it is tracking the types of profit growth one would expect from this type of highly leveraged operation. You should be looking for announcements of probably two to three transactions per year. The size of transactions we complete should get bigger, while the number drops slightly.

TWST: What should an investor know about your margin dynamics? What are the key factors affecting your margins?

Mr. Lennox:The ultimate royalty revenue company has royalty revenue equal to pre-tax income. We will have some expenses, but effectively what you should watch for, as we get our revenues up to and beyond $20 million, is an explosion of margin because our costs are fixed. For example, in 1997, our sustainable royalty revenues were $3 million, and the cost to do business was $3 million. We had very marginal profitability. In 1998, our revenues, with one-time transaction, rocketed to $20 million and we generated $9 million in net income. Investors should look for this type of profit growth as our revenues move up.

TWST: How do you feel about your current stock price?

Mr. Lennox:Most CEOs feel their stocks are priced too low. I'm no different. We are getting only about an 8 to 9 times multiple of our cash flow per share. We still have to convince the market that we can grow the business. I understand the hesitancy. Drug Royalty is still a young company. There aren't any other companies to compare us with. We are unique. I think we're going to have to earn the respect of the marketplace to get the multiple I feel we should be getting in relation to industry opportunity we're going after. I believe we will be successful.

TWST: Do you think there might be direct competition coming along down the road?

Mr. Lennox:We have seen a little bit of activity in the past 12 to 18 months in managed private money. Clearly individuals are doing something similar to us in private vehicles. To our knowledge there are no publicly traded companies doing what we do.

TWST: Is there anything we've overlooked or missed that you would like to bring up?

Mr. Lennox:Just to recap. Drug Royalty is a very interesting small-cap opportunity. It is facing a huge global market that is heavily skewed to the U.S. and Western Europe where economic conditions are secure. We have a proven track record in terms of what we've done over the last five years. We are unique in that we are the only public company participating in the pharmaceutical business in this way. We've positioned ourselves quite nicely for explosive growth in 1999 and beyond.

TWST: Thank you.

R. IAN LENNOX President & CEO Drug Royalty Corp., Inc. Suite 202, 8 King Street East Toronto, Canada M5C IB5 (416) 863-1865 (416) 863-5161 - FAX

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