Royalty Pharma (NASDAQ:RPRX) started trading on the NASDAQ June 16. It has been the largest initial public offering so far in 2020. Royalty Pharma offered 77.7 million shares, which was 7 million higher than initially planned. RPRX stock was priced at $28. The shares opened at $44 and on June 18, hit a high of 56.50. RPRX stock is currently shy of $49.
Therefore there has been considerable interest from retail and institutional investors alike. Today, I’ll take a look at the company to see if RPRX should belong in a long-term portfolio.
As the current COVID-19 pandemic has shown, Research & Development (R&D) is at the center of drug development. And developing a new prescription medicine is likely to cost well over $2 billion.
According to the Association of the British Pharmaceutical Industry (ABPI), “The global pharmaceutical industry invested over $1.36 trillion in R&D in the decade from 2007 to 2016 and forecasts predict an annual investment of $181 billion by 2022.”
The pharmaceutical industry faces monetary challenges as it develops new drugs. “Patent expiration, decreases in R&D productivity, and a general decline in profitability” also contribute to the long-term issues biopharma groups work to overcome. Therefore, many biopharma companies supplement their funding through royalty-based licenses.
The U.S. Food & Drug Administration (FDA) highlights that a drug patent lasts for 20 years. But about half of that time is, in general, spent to develop the drug. Put another way, drug development is a costly and lengthy process.
A Closer Look at RPRX Stock
Royalty Pharma partners directly “with companies to co-fund late-stage clinical trials and new product launches in exchange for future royalties.” And it also “acquires existing royalties from the original innovators.”
The company’s history goes back to 1996 when investment banker Pablo Legorreta founded the group and successfully initiated its business model.
According to a 2013 study by Andrew Lo and Sourya V. Naraharisetti of MIT:
“new alternative investment companies have emerged to bridge the biopharma funding gap by purchasing economic interests in drug royalty streams. Such purchases allow universities and biopharma companies to monetize their intellectual property, creating greater financial flexibility for them while giving investors an opportunity to participate in the life sciences industry at lower risk. Royalty Pharma is the largest of these drug royalty investment companies.”
The company currently holds a range of royalties which entitles Royalty Pharma to payments based directly on the top-line sales various therapies, including Imbruvica, Januvia, Kalydeco, Trikafta, Truvada, Tysabri and Xtandi. Some of the companies it partners with are AbbVie (NASDAQ:ABBV), Biogen (NASDAQ:BIIB), Johnson & Johnson (NYSE:JNJ), Merck (NYSE:MRK), and Vertex Pharmaceuticals (NASDAQ:VRTX).
According to a recent SEC filing, the company has a story of stable income and cash flow. In 2019, cash receipts were around $2 billion. It is likely that proceeds form the IPO will fund new royalty acquisitions for the group. And that would potentially mean shareholder value for investors in RPRX stock.
The Bottom Line on RPRX Stock
Over the past few decades, the pharmaceutical industry has been searching for alternative methods of financing for drug development. And that is where Royalty Pharma comes in.
Its recent IPO is regarded as one of the most interesting and potentially promising IPOs of recent months.
I’d continue to do due diligence on the group with the possibility of becoming an investor. Any upcoming weakness in the stock price may provide an opportunity for long-term investing in RPRX stock.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil holds covered calls on MRK (July 2 expiry).
