Royalty Pharma: A Potentially Long-Term Dividend Investment
Summary
- Royalty Pharma is a new type of healthcare company.
- They buy up royalties from other biopharma and have many blockbusters in their portfolio.
- They pay a small dividend, which, if it increases over the years, maybe a good thing.
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Royalty Pharma Plc (NASDAQ:RPRX) is a different kind of biopharma company. Instead of doing biopharma the normal, risky way - discovering a molecule, running it through the lab, conducting an expensive clinical trial, producing vague data and then abandoning the product - Royalty Pharma does things differently. It researches novel molecules being developed by other biopharma, assesses their potential and chances of success, and then acquires rights to them. In this manner, it avoids a big part of the risk of doing biopharma - avoiding common industry challenges like "early stage development risk, therapeutic area constraints, high research and development costs, and high fixed manufacturing and marketing costs." True, this also reduces the reward part of the equation, but if you want a steady introduction to biopharma investing, maybe this is how to do it. On top of that, Royalty Pharma also pays a small dividend.
Royalty Pharma is quite unique in the world of biopharma. I don't know of any other publicly traded company that does exactly this. It is more like a bio-focused fund than anything else. Its competitors are other funds - usually privately held - so RPRX is probably the only stock of a biopharma fund one could invest in.
About the company
Royalty Pharma has been in existence since 1996. It IPO-ed in H2 2020, raising $1.9bn. It has been a pioneer and global leader in acquisition of royalties. The company collaborates with "academic institutions, research hospitals and not-for-profits through small and mid-cap biotechnology companies to leading global pharmaceutical companies." Their royalties are based directly on the top-line sales of their products, which royalties on more than 45 commercial products, including AbbVie and J&J's Imbruvica, Astellas and Pfizer's Xtandi, Biogen's Tysabri, Gilead's HIV franchise, Merck's Januvia, Novartis' Promacta, Vertex's Kalydeco, Orkambi, Symdeko and Trikafta. These are some of the top blockbusters of the pharma industry. Royalty Pharma funds biopharma innovations directly through partnering with companies to co-fund late stage clinical trials and new product launches, and indirectly through acquiring existing royalties from original owners.
The leadership position of the company is demonstrated by the fact that since 1996, they have spent over $20bn in acquiring royalties, and this figure represents ~50% of all royalty transactions in the industry.
The portfolio
Royalty Pharma goes wherever the money is, and stays agnostic to therapeutic areas and modalities. Its portfolio is this:
And its collaborators:
The collaborators come from four segments - (1) academic institutions, which in the US at least are vanguards of biopharma innovation, (2) charitable foundations, non-profits, which often own innovative products that have struck gold, (3) small/midcaps where, if you are lucky, you can get the multi-bagger products, (4) and big pharma, where costs are high but success rate is also high.
It is also indicative of Royalty's assessment capability that a number of products - some of them blockbusters - have been approved since they acquired rights to them. These include bosulif, evrysdi, imbruvica, nurtec, tazverik, trifecta, trodelvy and tecfidera.
Another major achievement of the company was with Immunomedics. In January 2018, Royalty Pharma did extensive due diligence and funded $250 mn to the development program for Trodelvy in metastatic TNBC and other indications. In April 2020, Trodelvy was approved for adults in mTNBC. In September, Gilead acquired Immunomedics for $21bn.
Royalty Pharma does a lot of due diligence for its acquisitions. For example, in 2020 it 265 initial reviews of target products, out of which it signed ~70 CDAs; out of these, there were 50 in-depth reviews, 38 proposals were submitted, and finally the company made 8 acquisitions worth $2.4 bn.
Financials
RPRX has a market cap of $17.29bn, a cash reserve of $2.06bn, and the stock is almost exclusively fund-owned. Insiders have not been buying lately; in fact, there's a lot of selling.
In February RPRX announced earnings. They announced total income and other revenues of $572 million in the fourth quarter; $2,122 million for the full year. This was driven primarily by the cystic fibrosis franchise, Imbruvica and Promacta, despite royalty expirations for mature products. In the fourth quarter of 2020, Adjusted EBITDA was $434 million, a 5% increase compared to Adjusted EBITDA of $413 million in the same period of 2019 on a pro forma basis.
The company pays a dividend of a little less than 2%. In April, RPRX declared $0.17/share quarterly dividend. In January, they declared $0.17/share quarterly dividend, 13.0% increase from prior dividend of $0.15. This quarter it has stayed the same, but if things go well, this company could become a solid dividend paying company in 4-5 years. Right now, at ~2% yield, it may not be attractive; but if they are able to keep their stock price straight and climbing and also offer a 5-6% dividend, it will be one very attractive company.
Bottom line
I like RPRX. This is a new type of company, and it is never going to be a multi-bagger sort of bio company. However, its business model averages it out into a steady grower, and I can see nothing but slow increase in the dividend offered over the years. If that happens, then this will be a very attractive stock.
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This article was written by
Avisol Capital Partners is made up of a team of medical experts, finance professionals and techies, all of whom invest their own money in the picks they share. They aim to help readers find the middle ground between value and growth investing, as they demystify the biopharma industry.
They lead the investing group Total Pharma Tracker where they offer a monthly updated catalyst database, an investability scoring system for quick reference ideas, and direct access in chat for dialogue and questions. Learn more.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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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