Royalty Pharma: Business Model May Be Oversold, But Shares Are Undervalued And Could Trade >$80

Summary

• Royalty Pharma invests in biopharmaceutical royalty streams and has deployed $18bn of capital into the space since 1996 - ~50% of all deployed capital.
• Its portfolio of assets includes royalties from AbbVie's Imbruvica, Vertex' Cystic Fibrosis franchise and Biogen's Tysabri - all of which make multi-blockbuster sales.
• In June, the company IPO'd, raising $1.9bn, and has issued $6bn of debt, giving it a substantial war chest to make further acquisitions.
• Royalty management say their business model has all the benefits of sharing in the profits of successful new drug launches, with fewer risks - but I see Royalty's exposure to risk as quite high.
• Nevertheless, based on its current portfolio of assets and recent investments I would argue the company's shares are undervalued and would set a price target ~$80 - despite falling volumes of Receipts.
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Investment Thesis

Royalty Pharma (NASDAQ:RPRX) IPO'd in June, selling ~72m shares at a price of $28 per share, earning the company ~$1.9bn after underwriters discounts and fees were deducted.

This is a substantial raise for a biotech focused company - in fact it is more than three times the size of the largest ever pure biotech IPO - Moderna's - which raised ~$604.3m back in December 2018. But in actual fact Royalty acts more like a fund manager than a biopharmaceutical in terms of how it is set up and how it operates.

The company makes strategic acquisitions of royalty streams related to the drug development process. Typically, a biotech developing a new drug may partner with a large Pharma company, who will assume responsibility for the development, commercialisation and marketing of a promising drug candidate, investing much larger sums than the smaller biotech can, but also making milestone payments to the biotech as it hits development and commercialisation targets, and agreeing to give the biotech a portion - usually in the mid-teen percentages - of all future global sales, known as a royalty.

It is these royalty streams that Royalty - as its name suggests - then buys form the biotechs, in exchange for an up-front payment.

Extract from Royalty Pharma IPO prospectus describing how royalties work.

After being in existence since 1996, Royalty has taken the decision to go public, presumably to raise substantially more funds and increase its purchasing power. Besides its IPO funding, the company has issued ~$6bn of debt at a coupon of just 2.125% - substantially lower than the 3.19% average for the BioPharma sector - with a 12.3 year maturity (BioPharma median is 11.5 years).

Royalty is headquartered in the United Kingdom and has a highly complex ownership structure. Based on detail from SEC

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in RPRX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.