Pablo Legorreta says his biopharma financing firm is an integral part of America’s world-leading drug innovation ecosystem. Investors seemed to agree Tuesday, as they lifted the stock of his
more than 50% above its initial public offering price of $28, in the year’s biggest IPO to date.
The offering raised $2.2 billion for Royalty Pharma’s business of acquiring royalty rights in drugs from the research institutions that developed them, as well as investing in the clinical trials for new treatments. The first trade in the stock (ticker: RPRX) on Tuesday was at $44, and the shares maintained that 58% gain through midday.
The firm’s royalty deals have allowed research institutions such as Memorial Sloan Kettering to redeploy the rewards from discoveries, including the cancer drugs Neupogen and Neulasta, according to Legorreta. Royalty Pharma financed the turnaround of the long-struggling biotech company
(IMMU), which allowed it to finish developing its recently approved treatment Trodelvy for hard-to-treat breast cancers.
“Royalty Pharma has carved for itself a role in the middle of this ecosystem where we work with all of the innovators,” Legorreta said in an interview.
Since 1996, Royalty Pharma has invested $18 billion in deals in which it buys rights to a percentage of the top-line sales of products such as the Vertex Pharmaceutical (VRTX) drugs for cystic fibrosis Kalydeco and Trikafta, which brought the firm $425 million in royalties last year. It acquired the rights to those royalties from the Cystic Fibrosis Foundation.
(BIIB) drug for multiple sclerosis Tysabri, Royalty Pharma received $333 million. The company believes its deals have accounted for more than half of all drug industry royalty transactions since its founding.
Because Royalty Pharma collects a piece of a drug’s sales without having to cover the associated expenses, it enjoys operating cash flow margins of better than 90%. “We don’t do the sales and marketing or manufacturing, so our operating expenses are incredibly light,” Legorreta said.
Since 2012, the firm’s cash receipts have grown at an annual rate of 11%. Net income rose from $580 million in 2015 to $2.35 billion in 2019. Royalty Pharma’s investors have received annual dividends of about 25% of the business’s free cash flow. After a reorganization for the IPO, the quarterly dividend now equals 15 cents a share. That amounts to a 1.3% dividend yield, at Tuesday’s $44 stock price.
Legorreta oversees a team of a dozen analysts who pick the firm’s royalty deals. The current portfolio is a diverse bet on 45 marketed products, with 22 of them generating more than $1 billion in 2019 end-market sales apiece. That doesn’t mean that Royalty Pharma’s bets always pay off. The firm funded a recent clinical trial of the
(PFE) breast cancer drug Ibrance that was halted in May when data indicated that long-term use of the drug didn’t seem to prevent a recurrence of the disease.
About three-quarters of the drugs approved in the U.S. or Europe in the past decade have come from America’s academic and biotech research complex, Legorreta said. Royalty Pharma’s IPO will give it more money to pump into this system.
“The U.S. has this extraordinary ecosystem in life sciences that is very difficult to replicate,” he said. “Countries have tried—China is making a huge effort—but the U.S. has a lead that’s probably more than a decade.”
Write to Bill Alpert at firstname.lastname@example.org