It’s an extraordinary time in medicine. New technology has transformed the research and development process for pharmaceuticals, and advanced treatments for debilitating and deadly diseases are in the pipeline or on the market. Quality of life has improved for patients living with conditions that once spelled unrelenting discomfort, if not outright death.
The companies producing these drugs have tremendous profit potential, and many investors are anxious to add related stocks to their portfolios. The trouble is choosing the best pharmaceutical stock, given the unique challenges and risks associated with this industry.
Industry analysts know exactly how to evaluate pharmaceutical stocks, and one of the most convincing factors they consider is insider trading. Not the illegal conduct that occurs when investors trade on material nonpublic information. Instead, it is simply a review and evaluation of the trades high-level company leaders are making. Their activity is reported to the SEC and available for anyone to access free of charge on the SEC website.
CEO Pablo Legorreta recently bought $10 million worth of stock in his company, Royalty Pharma (NASDAQ:RPRX), which suggests that he expects to see substantial growth. What does Royalty Pharma do, and more importantly, is Royalty Pharma stock a buy for the rest of the investing world?
What Does Royalty Pharma Do?
Buying pharma stock has the inherent risk that comes along with any investment, as well as a handful of other risks that only apply to the pharmaceutical industry. Two of those risks are of particular concern because they can make or break a company’s profits for an extended period of time.
The first is the possibility of drugs failing to produce the desired results in clinical trials. Either they don’t work as intended, or the side effects outweigh the benefits. This happens frequently.
More than 30 percent of drugs that reach Phase II trials don’t move on to Phase III, and the frequency of failure in Phase III trials is greater than 58 percent. When drugs fail in clinical testing, the companies developing those therapies lose most of their R&D investment.
The second major risk pharmaceutical companies face occurs at the opposite end of the timeline. After 20 years, drugmakers lose their exclusive patents, and generic versions of their medications can be produced by competitors. Abbvie is facing that issue right now, as the patent for its blockbuster drug Humira has expired. At least eight biosimilars are scheduled for release in 2023 and 2024.
Royalty Pharma has taken an alternative approach to this industry in an effort to mitigate the risks associated with pharmaceutical stocks. Royalty doesn’t develop and produce its own products. Instead, it invests in promising research in exchange for royalties.
Royalty Pharma is the biggest buyer of biopharmaceutical royalties in the industry, and it is one of the top funders of companies in the drug research and development space. It was founded in 1996, and over its nearly 30-year history, it has collaborated with non-profits, academic institutions, and for-profit companies of every size to promote innovation in the biopharma field.
For example, in 2000, the Cystic Fibrosis Foundation (CFF) partnered with Aurora Bioscience (now part of Vertex Pharmaceuticals) to develop new therapies for cystic fibrosis patients. CFF contributed approximately $100 million to the project, as well as deep expertise and access to its treatment center patients for clinical trials.
Aurora Bioscience worked on the actual research and development, and by 2012, the partnership had its first drug approved by the U.S. Food and Drug Administration (FDA). The new product, Kalydeco, is effective in a certain category of cystic fibrosis patients, and it was the first treatment intended to address the root cause of cystic fibrosis rather than just managing the symptoms.
A second drug, Orkambi, received FDA approval in 2015. This one is effective in a wider population of cystic fibrosis patients.
CFF was entitled to royalties from the drugs developed by Aurora Bioscience because of its contributions to the process – financial and otherwise. The estimated value of the royalties totaled more than $3 billion, but it wasn’t cash in hand. CFF believed it could better achieve its mission of advancing cystic fibrosis treatments and improving patient care if it had the royalties up front.
The organization sold its royalty rights to Royalty Pharma for $3.3 billion, which was a win for both sides. CFF had the lump sum to invest in other projects, and Royalty Pharma is entitled to CFFs portion of royalties for as long as the drug is on the market.
What Is The Target For Royalty Pharma Stock?
For the most part, Royalty Pharma stock has flown under the radar for quite some time, but a recent flurry of transactions by its CEO has investors intrigued. From May to June of 2023, CEO Pablo Legorreta made five separate trades – all buys – totaling more than $10 million.
At first glance, this is a bit puzzling. After all, the stock price is trading close to its all-time low. Such poor performance typically means it is best to stay away. However, Royalty Pharma has a number of positive characteristics that make it worthy of a second look.
For example, Royalty Pharma enjoys gross margins of more than 82 percent, and its revenue growth was 21 percent according to the most recent earnings report. Even if that figure doesn’t go higher in the next several quarters, the company appears poised to sustain the growth rate.
It’s true that Royalty Pharma’s debt is relatively high at $6.1 billion, but so is the company’s cash reserve of nearly $2 billion. When all of those factors are taken into consideration, they paint a compelling picture of a stock that is going to go up. If it does, today’s low prices look like a bargain.
Overall, analysts have concluded that the 12-month target price for Royalty Pharma stock is around $51 per share – over 60 percent higher than its current price. While there are no guarantees, it does appear that Royalty Pharma stock is a buy.
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