Royalty Pharma was initially published as one of our 7investing Community's New Ideas in November 2024

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Background

The following comes directly from our initial Community recommendation. 7investing's opinions may differ from the person(s) who submitted this community research.

Royalty Pharma is a $22 billion biopharma royalty business generating $2.7 billion in sales w/ 90% margins.

With their efficient cfs & 2.5% fixed, investment grade debt, they are well capitalized to self fund deals, averaging $3 billion in deals per year, plus buybacks and dividends for a +4% Shareholder Yield.

The company has a 30 yr track record of selecting best in class drugs incl royalties in 15 blockbuster drugs today. Still founder run.

Since the 2020 IPO, RPRX has exceeded sales, earnings, capital deployed expectations each yr while stock valuation has trended down near all time low, at <7x Non Gaap PE. Founder/CEO has given unofficial 2030 guidance of $5B in Sales or +$7 non gaap eps, which would imply a 12% cagr since 2020 IPO. Stock is currently trading at 7x PE paying +3% yield. Clear path to +20% 2030 cagr conservatively, if multiple just rerates to 10.5x. This business is uncorrelated to macro inflation or geopolitics with very predictable cfs. Royalty businesses in O&G, Mining trade at premiums whereas this Royalty business cheaper than the drug makers it owns royalties with and well below S&P multiple. I believe it deserves a premium multiple rather than discount. However, one con is there is no comparable business of its kind in public markets. It also has no long term history as a public company and its business model is not well understood. It’s in a royalty dispute overhang w Vertex Pharma over Deuterated Vanzicaftor molecule on Cystic Fibrosis Franchise (30% of portfolio) which could lower Royal’s royalty from 9% to 4.5%. That’s a potential $200M hit to sales in a couple yrs. Precedent has been set however on similar case w Sun & Concert Pharma and believe RPRX should win. Even if they don’t, $5B 2030 sales guidance assumes worst case scenario of $200M impact to sales. The stock has sold off way in excess of the NPV of this drug -stock is most likely considered PFIC, which complicates tax/institutional ownership. GAAP accounting is terrible & misleading for this business which obscures real value/ROE.