Royalty Pharma: Massive Opportunity Ahead

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Royalty Pharma's Q3 results met expectations, with a modest 2024 outlook increase, driven by strong portfolio performance and new royalty acquisitions.The CF franchise remains a key cash cow despite ...

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Solskin  This week, Royalty Pharma plc (NASDAQ:RPRX) announced Q3 results in line with expectations and modestly raised its 2024 outlook (the third time in a row). The outlook increase of $37.5 million at the midpoint reflects solid portfolio performance, and overall, our team walked away from the Q3 print with an unchanged view of the company's equity story. Our last update focuses on a downside: the Vertex (Cystic fibrosis franchise). There were no updates on the CF franchise, which increased royalty sales by 6% in the quarter. During the Q&A analyst call, an analyst from City asked about CF development and newer deals to offset this negative trend. RP managers replied that the CF franchise would be an excellent contributor to Royalty Pharma in the longer term. On the other hand, Vertex is progressing with its new Venza triple development, leaving both parties the option to go to a settlement. Our team anticipates a headwind for RP of almost $200/$300 million. Despite the ongoing challenges, Vertex's cystic fibrosis franchise will likely remain the company's cash cow over the following years. Q3 Results and New Deals The company's portfolio receipts increased by 15% to $735 million (Fig 1), with an operating cash flow activity of $704 million. Once again, Royalty Pharma's portfolio receipts this quarter went up by double-digits, benefiting from the continued momentum of solid turnover from the GSK's Trelegy, Roche's Evrysdi, and the cystic fibrosis franchise resilient performance. RP Adjusted EBITDA also increased by 17% to $679 million. As we already reported, the company's expenses are minimal, and there is no Depreciation & Amortization. During Q3, it is also crucial to report that Royalty Pharma repurchased another $95 million of stock, and now the Weighted average Class A ordinary shares outstanding stands at 593.46 million. RP Q3 results in a Snap Aside from the CF franchise challenges, the company recently acquired additional royalties, and our team is optimistic about Royalty Pharma executing new deals. Biopharma companies' increasing demand for new drug development funding would also expand the total market RP could address. This factor will support the company's top-line growth. Regarding capital allocation, Royalty Pharma acquires $2.6 billion worth of royalties on a year-to-date basis. In numbers, the company holds over 50% share of biopharmaceutical royalty acquisitions. This investment approach helps to mitigate risk when certain drugs underperform. Since our last report Q2 comment, RP announced three new additions:  Ascendis Pharma agreement for a total consideration of $150 million; Syndax Pharmaceuticals agreement for a total consideration of $350 million; Royalty Interest agreement in Geron's Rytelo for a total consideration of $125 million.  All three deals extend Royalty Pharma portfolio duration and increase the company's diversification, aiming to offset earnings from the CF franchise. Additionally, we understand that pharmaceutical companies highly accept using royalties to support late-stage clinical trials (Fig 2). The overall market is growing, and this might support RP's re-rating. Royalties market Earnings Changes and Upside Following the Q3 print, we updated our model accordingly. In our estimates, considering RP's higher estimates, we increased our EBITDA projection from $2.49 billion to $2.52 billion, and considering the ongoing buyback, we raised our 2024 EPS from $3.91 to $3.99. At the time of writing, RP trades at a P/E of 6.89x and an EV/EBITDA of 8x. The company once again increased its outlook and continues to benefit from a supportive pipeline thanks to its lower cost of capital and biotech funding environment. Additionally, as reported by the company, Royalty Pharma has almost $1 billion of available liquidity. Related to the valuation, we see RRP's investment as an idiosyncratic move. We're seeing a unique market opportunity, suggesting increasing or starting a new position. We decided to leave our P/E target unchanged, which is set at 10x (RP historical five-year average). Having increased our EPS estimates, we increased our target price to $39.9, confining our buy rating in the next twelve months. SA Valuation data Our upside:  The $1 billion buyback is value-accretive to current shareholders, given that the share price is trading below our fair value estimate. Despite the continued strong performance from RP's portfolio, year-to-date, the biotech index benchmark (IBB) has increased by 3.55%, while RP's shares are down by approximately 6%. We believe this gap will be closed, Looking at the capital deployment evolution, management exceeded its expectation of an investment target previously announced (Fig 4); Even if there is a capital reinvestment risk, the company secures more significant deals and maintains attractive returns; Additionally, as shown in Fig 5, the company has several pipeline assets in late-stage development. This could also support portfolio royalty receipts in the next few years.   RP Capital Deployment Fig 4 RP late stage drugs Fig 5 Risks Our detailed risks section includes:  The company's unique business model makes it the only US-listed public player. For this reason, it is hard to justify a valuation and a peer group analysis; The company has several assets in late-stage development. This includes: 1) Frexalimab for multiple sclerosis, 2) Pelacarsen and Olpasiran for cardiovascular disease, 3) Aficamten for hypertrophic cardiomyopathy, and 4) KarXT for schizophrenia; Vertex potential dispute; IRA price concessions; Xtandi royalty with a 1-year loss of exclusivity, Higher biosimilar competition.  Additionally, the company is very active in acquiring new royalties. This might lead to execution risks and value-disruptive deals. Conclusion  The company's valuation remains highly compelling, with stock reflecting no value from future investments and CF royalty risks fully priced. Looking at the fundamentals, RP trades with an FCF yield above 20% and a dividend yield of 3%. This is a screaming buy.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2482185774"}