Royalty Pharma’s IPO

(Barkha Babbar & Ali Soufraki)

Introduction

RoyaltyPharma is a biopharmaceutical company. It purchases the royalty rights in drugs from research and life science organisations. It not only develops these drugs but also invests in clinical trials for new treatments.

RoyaltyPharma has been integral in drug innovation. 

  • Since 1996, it has invested $18 billion buying shares in medical products. Examples include Vertex Pharmaceutical drugs for cystic fibrosis, Kalydeco and Trikafta. This generated $425 million for the firm in royalties last year.
  • It also acquired royalty rights for the Biogen drug for multiple sclerosis Tysabri, worth $333 million.  

These investments are likely to continue. Pablo Leggorreta, the CEO, has previously stated that his “biopharma financing firm is an integral part of America’s world-leading drug innovation ecosystem” and that “RoyaltyPharma’s IPO will give it more money to pump into this system”. 

Market Composition

The vast majority of Royalty Pharma’s competition consists of investment groups that seek to source the necessary liquidity for biotech innovation. The only publicly listed company in direct competition with Royalty Pharma is Compass Diversified: an investment and holding company that acquires and manages small/mid-market businesses across an array of different industry verticals. Despite their similar focus and modus operandi, Royalty Pharma distinguishes itself through its far superior market capitalisation ($26.81 Billion compared to Compass Diversified’s $1.10 Billion) as well as the fact that Royalty Pharma was started long before its competitor’s conception and benefits from a more established brand name.

Looking at Royalty Pharma’s privately owned competition however, the space gets far more crowded. Herein lies several robust private equity funds such as HealthCare Royalty Partners, ArchiMed Group, Capital Royalty etc. For many of these private equity firms though, it’s important to note how they rarely entertain the acquiring of the actual royalty rights and financing the clinical research: a significant distinction of Royalty Pharma from the rest of its competition.

Company Management Analysis

Spearheaded by billionaire founder and CEO Pablo Legorreta, Royalty Pharma boasts a plethora of top investment professionals in their senior leadership team. A former investment banker himself, Mr Legorreta founded Royalty Pharma back in 1996 under a private equity model before revamping it now to become a renowned publicly-listed investment operation. In order to transition the company’s business model and pioneer the very notion of investing in royalty rights, Mr Legorreta has fused financial experts with experienced scientific researchers in Royalty Pharma’s management team. Like this, the company has managed to source attractive investment returns whilst adhering to understand and develop the biotech products at play.

The Initial Public Offering (IPO)

On the 8th of June, RoyaltyPharma announced it was looking to raise around $1.96 billion in an IPO by offering 70 million Class A ordinary shares at a price of $25-$28 each. Pablo Legoretta has stated the money raised will be used to make bigger investments in drug research. With 13 banks underwriting this deal (led by J.P. Morgan), this would be the largest IPO in 2020, ahead of the Warner Music group $1.9 billion deal.

On the 15th of June, the company went public on the Nasdaq stock market, under the stock ticker RPRX. At $28 each, they sold 77.7 million shares, raising $2.2 billion and thus valuing RoyaltyPharma at $16.7 billion.

RPRX Stock Price

Since RoyaltyPharma has gone public, the RPRX stock has increased. On Tuesday June 16th the stock price was $44, a 58% increase from its first trade day ($28), valuing RoyaltyPharma at $26.5 billion.

On Wednesday June 17th, the stock price increased by a further 9%, pricing each share at $48.61. By Thursday 18th of June, the stock price increased by a further 12% to $54 , closing at $50.90 at the end of that trading day. Since its first trading day, RoyaltyPharma has experienced a 45% increase in their stock price.

Given the current Covid-19 pandemic, there is growing interest in pharmaceutical firms and innovative drug research. This is likely to continue to positively catalyse and increase the RPRX stock price.

Source: Capital.com

Investment Rationale and Impact of COVID-19

Widely respected in the industry for the sheer scale of its operations, Royalty Pharma’s decision to go public will undoubtedly provide more liquidity for the company to capitalise on the current global health crisis. When the IPO materialised, the group immediately confirmed that the lion’s share of the capital raised from its issuance of stocks would go towards the acquiring of more royalty rights. With a historic track record of profitability and strong cash flow generation, Royalty Pharma will now be placed in an even stronger market position post-IPO as they seek to reap the benefits of greater purchasing power in their negotiations for further royalty rights.

On an industry level too, there appears to be much room for investor optimism. Fundamentally, the current pandemic has exposed systemic problems in the healthcare and pharmaceutical industries- issues that must be addressed with significant amounts of capital to meet these most pressing of medical needs. Accordingly, this unsaturated market requires diligent and innovative research funding, a market condition that will undoubtedly favour Royalty Pharma’s operations. Exuding such confidence, aforementioned CEO Pablo Legorreta proudly shares this sentiment when he described the world as being in “the golden age of biotech and academic research.”

On a political level too, one ought to remember how the private healthcare ecosystem has benefitted after Joe Biden defeated Bernie Sanders to become the presumptive Democratic Party nominee for the US Presidential Elections this year. With Biden’s candidacy now established, it is reasonable to conclude that the prospects for any tangible reform to the US’s healthcare system have been severely hindered. Despite the implications this may have for those across America, Royalty Pharma and other players in the pharmaceutical space will undoubtedly reap the economic benefits from the US’s lacking public healthcare and unrestricted drug pricing.

To demonstrate the current industry sentiment quantitatively, it’s worth considering how significantly healthcare stocks have outperformed the broader market in 2020; the sector is down only 1.7% for the year, compared to the 3.1% drop for the S&P 500 benchmark. As Royalty Pharma’s own stocks have surged dramatically (see previous section), it appears the company will be well placed to continue this strong growth.

Definitions:

Initial Public Offering: Public Offering in which shares of a company are listed on the stock market and sold to institutional and retail investors.

Nasdaq: American Stock Exchange

Class A Ordinary Shares:  Class A shares are common stocks (entitles purchasers to a portion of the profits earned). They usually have more voting rights than owners of other classes of stocks.

Private Equity: Investment funds that buy and restructure companies that are not publicly traded.

Market Capitalisation: The market value of a publicly traded company’s outstanding shares

References:

Investopedia. 2020. The Difference Between Class A Shares And Class B Shares. [online] Available at: https://www.investopedia.com/ask/answers/062215/what-difference-between-class-shares-and-other-common-shares-companys-stock.asp [Accessed 1 August 2020].

Capital.com. 2020. Royalty Pharma IPO: Is The Stock Worth The Hype?. [online] Available at: https://capital.com/royalty-pharma-ipo [Accessed 1 August 2020].

Alpert, B., 2020. Royalty Pharma Jumps 58% From Its IPO. That’S More Money For Drug Research.. [online] Barrons.com. Available at: https://www.barrons.com/articles/royalty-pharma-ipo-drug-research-trials-discoveries-biotech-51592334780 [Accessed 1 August 2020].

Linnane, C., 2020. Royalty Pharma Raises $2.2 Billion In Biggest IPO Of The Year So Far. [online] MarketWatch. Available at: https://www.marketwatch.com/story/royalty-pharma-raises-22-billion-in-biggest-ipo-of-the-year-so-far-2020-06-16 [Accessed 1 August 2020].

Ft.com. 2020. Royalty Pharma: King For A Day. [online] Available at: https://www.ft.com/content/4b06c524-df1f-411c-9dd0-1adae2e312c3 [Accessed 1 August 2020].

Featured Image: Pixabay


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