Unpacking Royalty Pharma
The serial acquirer of royalty interests is coming into its own, but the secret to its success lies in cystic fibrosis.
A dire market has seen numerous biotechs feeling the pinch, and because Royalty Pharma can offer such companies instant cash its business has flourished. Poor market conditions surely lie behind an uptick in royalty financings, such as Royalty’s recent deals for Gavreto and Trelegy Ellipta, and Omers Capital Markets picking up Ultragenyx’s Crysvita last week.
Royalty thus timed its 2020 IPO to perfection; while others crashed its stock has put on 8% in the past 12 months. But is Royalty’s $30bn valuation warranted? Cut through the complex web of transactions and it becomes clear that, like any other investor betting on multiple assets, Royalty only needed to get lucky a few times to justify its entire business.
Royalty had struck multiple deals since being founded in 1996, but its single biggest masterstroke was to secure rights from the Cystic Fibrosis Foundation to Vertex’s CF drugs. Not only did this cover at least four separate assets, including combinations, it continues in perpetuity and is not tied to a patent term, as is typical for royalty financing.
How good was this deal? Royalty had paid $3.9bn to secure it, across two separate transactions, and it has already collected nearly $2bn of royalties from the Foundation, between 2016 and 2021, SEC filings show.
Not only that, but the royalty that Royalty stands to receive in future, calculated as a percentage of Evaluate Pharma’s sellside consensus revenue forecasts discounted for cost of capital, stands at $9.5bn, Vantage calculates. Thus, with the CF franchise generating sales well into the future, Royalty looks like it could triple its money.
|Royalty Pharma's selected revenue generators|
|Product(s)||Interest acquired from||Deal date||Up-front paid ($m)*||Royalties 2015-21 ($m)||Assumed blended rate||NPV of future in-market sales**||NPV of future royalties**|
|Kalydeco, Orkambi, Symdeko & Trikafta||Cystic Fibrosis Foundation||Nov 2014 & Nov 2020||3,875^||1,952||9%||105,387||9,485|
|Imbruvica||Quest Diagnostics||Jul 2013||485^^||1,472||5%||44,368||2,218|
|Trelegy Ellipta||Theravance & Innoviva||Jul 2022||1,382||0||9%||17,586||1,495|
|Evrysdi||PTC Therapeutics||Jul 2020||650||16||5%||10,512||526|
|Notes: right to Tysabri, Imbruvica and Evrysdi were acquired at the pre-revenue stage; *excludes milestones; **assumes WACC at 6%; ^2 separate transactions of $3.3bn & $575m; ^^Royalty later sold 20% of this royalty to Aisling Capital and Clarus Ventures for undisclosed amount. Source: SEC filings & Evaluate Pharma sellside consensus.|
The CF masterstroke notwithstanding, Royalty is about more than just this one deal. A host of smaller transactions are generating revenues that amounted to $2.1bn last year.
The table above shows selected deals, with the amounts Royalty paid to secure rights compared against the amounts received in 2015-21 and the sums it still stands to book in future. It is clear that Tysabri – another perpetual licence – and especially Imbruvica are proving hugely profitable for the company.
Meanwhile, Promacta and Evrysdi might just about wash their faces, our calculations suggest. Also in this category is last Wednesday’s deal for a royalty GSK pays on Trelegy Ellipta, which as Evaluate Vantage argued will generate a strong return only if the sellside’s forecasts for the inhaled therapy prove too conservative.
What else is Royalty banking on in future? Among the deals it has signed covering pre-revenue projects is last year’s complex transaction with Morphosys, effectively securing the latter’s acquisition of Constellation Pharmaceuticals. There are many caveats to the calculations below, but Royalty will also be hoping that the projects involved here outperform; this is no easy task given that one is gantenerumab.
|Interest secured by Royalty Pharma on selected projects yet to generate sales|
|Development-stage project||Interest acquired from||Marketer||Deal date||Up-front paid ($m)*||Assumed blended rate||NPV of future in-market sales ($m)**||NPV of future royalties ($m)|
|Omecamtiv mecarbil||Cytokinetics||Cytokinetics||Feb 2017||100||5%||NA^||NA^|
|Notes: *excludes milestones; **assumes WACC at 6%; ^asset written off by Royalty in Dec 2020. Source: company statements & Evaluate Pharma.|
And it must be remembered that not all of Royalty’s deals have succeeded. The company wrote off Cytokinetics’ omecamtiv in 2020 – only to sign a second deal with Cytokinetics, covering aficamten, whose proceeds the source company ironically vowed to plough into pressing on with omecamtiv.
However, as numerous successful deals that have already expired suggest below, Royalty can well afford a few duds. Since being founded the company has deployed some $20bn buying up royalty streams, and last year generated $600m of net profit on the $2bn or so of revenue it generated.
What really underpins its valuation is the future royalties already secured, not to mention the group’s ability to strike further deals. Royalty has an impressive track record, and there appears to be no shortage of willing sellers.
|Selected expired deals that built Royalty Pharma's track record|
|Product(s)||Interest acquired from||Marketer||Deal date||Up-front paid ($m)*||Royalties 2015-21 ($m)|
|Emtricitabine part of HIV combos||Emory University||Gilead||Jul 2005||525||1,429|
|Tecfidera||Fumapharm||Biogen||May 2012 & Jan 2014||1,271**||2,525|
|Januvia, Janumet & other DPP-IVs||Prosidion (Astellas)||Merck & Co etc||Jun 2011||609||1,124|
|Notes: *excludes milestones; **2 separate transactions of $761m & $510m. Source: SEC filings.|