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Investment Thesis
Royalty Pharma plc (NASDAQ:RPRX) is an active biopharmaceutical royalty buyer and funder of technologies in the biopharmaceutical space. It is headquartered in New York, United States. In this thesis, I will discuss the strategic royalty acquisitions by RPRX and their impact on the company’s future performance. I assign a buy rating for RPRX on the basis of strong future growth prospects through strategic royalty acquisition.
Acquisition of Royalty Interest in Trelegy Ellipta
RPRX has made yet another acquisition as per its long-term growth strategy. It relies on acquisition to sustain long-term growth. The company recently has agreed to acquire royalty interest in Trelegy Ellipta, popularly known as Trelegy, from Innoviva, Inc. (INVA) and Theravance Biopharma, Inc. (TBPH). The deal is estimated to cost RPRX $1.3 billion in upfront cash payment and an additional $300 million in case the company achieves certain sales milestones in the future. Trelegy primarily treats respiratory problems like chronic obstructive pulmonary disease (COPD) and asthma for patients aged 18 years and above. As per this deal, RPRX will be entitled to 6.5%-10% royalty on the sales of Trelegy worldwide till June 30, 2029, after which RPRX will have to pay 85% of the royalty earned on the international sales of Trelegy to Theravance Biopharma and 85% royalty on the domestic (United States) sales after December 31, 2030. To put into perspective the opportunity that lies ahead of RPRX with respect to Trelegy sales, the annual sales of Trelegy in 2021 stood at $1.68 billion, up 57% from 2020. Trelegy is a treatment constantly growing its market share and sales. I believe it will diversify RPRX’s respiratory treatment portfolio and help diversify its risk. The company is expecting this deal to add a minimum of $200 million to the adjusted non-GAAP cash receipt of RPRX in 2025. As per my analysis, this deal will drive future growth for the company and help it maintain its growth trajectory.
Pablo Legorreta, Royalty Pharma’s founder and Chief Executive Officer, stated:
We are excited to acquire this royalty from Theravance and Innoviva. Trelegy is the leading triple combination therapy for COPD and asthma and adds another important, rapidly growing blockbuster therapy to our royalty portfolio. Additionally, providing capital at scale positions Theravance and Innoviva to pursue important strategic initiatives. The transaction involves multiple parties with different motivations and goals and once again highlights how Royalty Pharma can facilitate complex transactions to create win-win solutions for its partners.
Acquisition of Royalty Interest in Gavreto
RPRX has acquired a royalty in Gavreto; a therapy used to treat a form of lung cancer called NSCLC and other RET-altered cancers. RPRX acquired royalty interest from Blueprint Medicines for the ex-US sales of Gavreto. As per the conditions of this deal, RPRX will receive the royalty interest in the range of higher tens to mid-twenties from the sales of Gavreto outside the US, excluding China. This deal is estimated to cost RPRX a total of $340 million, out of this $175 million in upfront cash payments and $165 million in potential payments based on the sales milestone achievement. The royalty agreement for this is valid through 2036-2040 based on the agreed sales parameters. I believe this deal will help RPRX expand its royalty line in lung disease. Gavreto has also been submitted for marketing approval in Europe for the treatment of thyroid cancer; the approval is expected by the end of 2022. I believe this could multiply the potential revenues from Gavreto and help RPRX achieve long-term growth.
Pablo Legorreta, Royalty Pharma’s founder and Chief Executive Officer, stated:
We are pleased to partner with Blueprint and help advance their innovative precision therapy pipeline for the benefit of patients worldwide. Precision therapies continue to transform the treatment paradigm in oncology and acquiring a royalty on Gavreto aligns with our strategy of investing in differentiated therapies that address unmet medical needs. Gavreto has shown consistent outcomes with deep and durable responses across several RET-altered cancers, and we look forward to its clinical development in additional tumor types and earlier-stage patients.
Key Risk Factors
Interest Rate and Currency Exchange Rates: Any borrowings made via the revolving credit facility and any investments made in marketable securities and money market accounts, most of which carry fluctuating interest rates, expose RPRX to the risk of volatility in interest rates. The rise in interest rate generally increases borrowing costs, and using leverage will become more expensive, reducing net earnings.
The U.S. dollar serves as the operational and reporting currency; certain items that pay royalties in currencies besides U.S. dollars mainly affect the Euro, Canadian Dollar, Swiss Franc, and Japanese Yen. Additionally, the firm’s financial results are subject to foreign exchange risk due to transactional exposure brought on by volatility in exchange rates between the period in which royalty income is recognized and the period in which the payment settles or the period in which the firm collects the royalty payment. As the marketer translates payment amounts from domestic currencies to U.S. dollars using a quarterly mean exchange rate, there is an underlying sensitivity to foreign currency because the corporation is entitled to royalties on global sales for various products. As a result of currency changes, cash received may deviate from the expected receivable. As a result, the company’s financial results may be significantly impacted by major foreign exchange rate fluctuations.
Valuation
RPRX currently trades at $44.35 with a market capitalization of $26.68 billion. After comparing the current share price with last year’s earnings, the company is trading at a PE multiple of 15x. After considering the effect of the recent acquisition of royalty interest in Trelegy and Gavreto, I estimate the EPS to be $3.17, which gives the leading PE multiple of 14x. The company is trading 29.25% below the sector average of 20.46x, which shows that it is currently significantly undervalued. I believe the company might trade at a PE of 18.5x, which gives the target price of $58.645, representing a 32.23% upside from the current price levels.
Conclusion
RPRX has recently bought royalty interest in Trelegy and Gavreto, and I think it can significantly boost the company’s earnings. The company is trading 29.25% below the sector average of 20.46x, which tells us it is trading below its intrinsic value. After considering the 32.23% returns from share price, I assign a buy rating for the RPRX.
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