Alyftrek Delays Will Reduce Receipts But Repurchases Will Offer Upside

Key Takeaways

• Potential delays in Royalty Receipts due to the Alyftrek arbitration process may adversely affect revenue projections.
  
• Overreliance on blockbuster drugs could lead to lower revenues due to price negotiations and IRA Part D redesign impacts.
  
• Strategic acquisitions, disciplined capital allocation, and share repurchases are poised to enhance shareholder value and strengthen Royalty Pharma's revenue and net margins.

Catalysts

Operates as a buyer of biopharmaceutical royalties and a funder of innovation in the biopharmaceutical industry in the United States.

• The integration of Royalty Pharma's external manager into the company may not result in the anticipated cost savings, leading to ongoing expenses that could compress net margins rather than enhance them.
  
• The competitive landscape for synthetic royalties may intensify, causing potential compression in the high returns that Royalty Pharma currently enjoys, potentially impacting overall earnings.
  
• The uncertainty surrounding the resolution of the Alyftrek arbitration process could delay anticipated Royalty Receipts, adversely affecting revenue projections.
  
• There might be overreliance on blockbuster drugs that are potentially vulnerable to price negotiation initiatives or IRA Part D redesign impact, which could lead to lower than expected revenues from these critical assets.
  
• The anticipated benefits from the capital deployment and share repurchase strategy could fall short due to market factors leading to less effective use of the capital, resulting in a weaker impact on EPS growth.

Royalty Pharma Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Royalty Pharma compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Royalty Pharma's revenue will grow by 5.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 37.9% today to 34.7% in 3 years time.
• The bearish analysts expect earnings to reach $922.0 million (and earnings per share of $2.6) by about April 2028, up from $859.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 23.0x on those 2028 earnings, up from 16.4x today. This future PE is greater than the current PE for the US Pharmaceuticals industry at 16.1x.
• Analysts expect the number of shares outstanding to decline by 3.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Royalty Pharma Future Earnings Per Share Growth

Risks

• Royalty Pharma's financial performance exceeded expectations in 2024, delivering Portfolio Receipts of $2.8 billion, which was at the high end of their guidance range, suggesting strong revenue growth.
  
• The planned acquisition of its external manager to form an integrated company is expected to yield multiple strategic and financial benefits, including cash savings exceeding $100 million annually starting in 2026, which could positively impact net margins.
  
• Through disciplined capital allocation, including $2.8 billion deployed in royalty transactions and a $230 million share repurchase, Royalty Pharma aims to enhance shareholder value, which could lead to an increase in earnings per share.
  
• The introduction of a new $3 billion share repurchase plan indicates that management believes the shares are undervalued, and a successful buyback could improve earnings per share by reducing the share count.
  
• With robust growth expected from new therapy royalties that are launching, such as Voranigo and Cobenfy, the potential for significant sales across its diversified portfolio could further strengthen revenue stream prospects.

Valuation

• The assumed bearish price target for Royalty Pharma is $34.67, which represents one standard deviation below the consensus price target of $40.03. This valuation is based on what can be assumed as the expectations of Royalty Pharma's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $47.0, and the most bearish reporting a price target of just $30.14.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $922.0 million, and it would be trading on a PE ratio of 23.0x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $32.6, the bearish analyst price target of $34.67 is 6.0% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.