Summary
- We maintain a buy rating on Royalty Pharma.
- Royalty Pharma recently reported positive FY 2022 earnings.
- Adjusted cash receipts, adjusted EBITDA, and adjusted cash flow surged by 10%, 10%, and 15%, respectively, before an accelerated Biohaven redemption payment.
- We like Royalty Pharma's focus on Lpa class, which we see multi-billion dollar potential.
Q4 2022 earnings key takeaways
Royalty Pharma (RPRX) reported a solid financial performance for Q4 2022 and the full year. Adjusted cash receipts, adjusted EBITDA, and adjusted cash flow surged by 10%, 10%, and 15% , respectively, before an accelerated Biohaven redemption payment. Royalty Pharma's royalty portfolio expanded with the addition of six new therapies, including the blockbuster Trelegy, and various development-stage pipeline expansions through acquisitions. The company's R&D funding collaboration with Merck (MRK) could potentially pave the way for additional deals with large biopharma.
Since its IPO in 2020, Royalty Pharma has shown a robust track record of strong top-line growth, having announced about $10 billion in transactions across almost 20 deals, replenishing a significant portion of its business over a five-year period while maintaining double-digit growth. According to the management, looking ahead, Royalty Pharma's transaction pipeline continues to be robust, boosted by encouraging trends in the royalty market as royalties become a more established financing method to fund innovation.
Royalty Pharma maintained its leading share of the royalty market, with the number of royalty funding transactions increasing over sixfold to 27 deals between 2015 and 2022. With a selective approach to royalty funding opportunities, Royalty Pharma executed nine transactions across six new therapies, accounting for only 3% of its initial reviews, indicating an exceptionally high bar for royalty funding opportunities. Additionally, the company saw a 75% increase in initial reviews and in-depth reviews, with a 58% increase in the value of transactions executed between 2019 and 2022. With its raised 5-year capital deployment target, Royalty Pharma appears well-positioned for continued growth and sustained success in the life sciences industry.
Royalty Pharma's big bet on Lpa
RPRX has positioned itself to benefit from the development of two of the most promising agents targeting Lpa, a well-known risk factor for cardiovascular disease. We remind readers that the company holds the royalty rights on both a) Ionis' pelacarsen , an anti-Lpa ASO developed by Novartis, and b) Arrowhead Pharmaceuticals' olpasiran , a siRNA in development by Amgen.
These agents are undergoing Phase III cardiovascular outcomes trials or planned to start shortly, with pelacarsen's HORIZON trial expected to read out in 2024 and olpasiran's OCEAN trial expected to read out in 2026.
RPRX's bullish stance on this class of agents is supported by their belief in the significant commercial potential of Lpa-lowering drugs, which they view as an "under-innovated large market." The potential for multi-blockbuster sales of these agents makes RPRX's exposure to this area particularly compelling, especially given the high unmet medical need in patients with Lpa-associated cardiovascular risk.
Lpa is an important target in cardiovascular diseases
Lpa is a well-known risk factor for cardiovascular disease, and reducing Lpa levels has long been considered an attractive therapeutic target. Lpa is a lipoprotein particle similar in structure to LDL (low-density lipoprotein), or "bad" cholesterol. However, Lpa has an additional protein called apolipoprotein (apoa) that is linked to an increased risk of cardiovascular disease. Elevated Lpa levels are associated with an increased risk of coronary artery disease, aortic stenosis, and stroke, among other conditions.
Recent research has shed light on the mechanisms by which Lpa contributes to cardiovascular disease. Studies have shown that Lpa can promote inflammation and contribute to the formation of atherosclerotic plaques in blood vessels, leading to a higher risk of heart attacks and strokes.
Additionally, Lpa has been shown to inhibit the activity of an enzyme called plasminogen, which is involved in breaking down blood clots. This inhibition can lead to an increased risk of thrombosis, or blood clotting, which is a common cause of heart attacks and strokes.
Here's a possible table comparing and contrasting apoB, Lpa, and LDL-c:
ApoB | Lpa | LDL-c | |
---|---|---|---|
Structure | Protein | Lipoprotein | Lipoprotein |
Function | Binds to LDL receptors to facilitate LDL uptake by cells | Unknown, but may contribute to atherosclerosis and thrombosis | Transports cholesterol to cells, which can contribute to atherosclerosis |
Association with cardiovascular risk | Strongly associated with cardiovascular disease risk | Strongly associated with cardiovascular disease risk | Strongly associated with cardiovascular disease risk |
Relationship with HDL-c | Inversely correlated with HDL-c levels | No significant correlation with HDL-c levels | Inversely correlated with HDL-c levels |
Relationship with triglycerides | Directly correlated with triglyceride levels | No significant correlation with triglyceride levels | Directly correlated with triglyceride levels |
Therapeutic targets | PCSK9 inhibitors, MTP inhibitors, niacin, and omega-3 fatty acids can lower apoB levels | Lpa-lowering agents, such as antisense oligonucleotides, small interfering RNAs, and monoclonal antibodies, are in development | Statins, PCSK9 inhibitors, and ezetimibe can lower LDL-c levels |
ApoA Structure (ApoA Structure)
apoB, Lpa, and LDL-c are all critical factors in the development of cardiovascular disease:
- ApoB is a protein that is part of the LDL particle and plays a key role in the uptake of LDL by cells. Elevated apoB levels are strongly associated with an increased risk of cardiovascular disease. ApoB levels are inversely correlated with HDL-c levels and directly correlated with triglyceride levels. There are several therapeutic targets for lowering apoB levels, including PCSK9 inhibitors, MTP inhibitors, niacin, and omega-3 fatty acids.
- Lpa is a lipoprotein particle similar in structure to LDL but with an additional protein called apoa. Elevated Lpa levels are also strongly associated with an increased risk of cardiovascular disease, and Lpa may contribute to atherosclerosis and thrombosis. Lpa levels do not have a significant correlation with HDL-c or triglyceride levels. There are currently several Lpa-lowering agents in development, including antisense oligonucleotides, small interfering RNAs, and monoclonal antibodies.
- LDL-c is a lipoprotein particle that transports cholesterol to cells and is a key contributor to atherosclerosis. Elevated LDL-c levels are strongly associated with an increased risk of cardiovascular disease. LDL-c levels are inversely correlated with HDL-c levels and directly correlated with triglyceride levels. There are several therapeutic targets for lowering LDL-c levels, including statins, PCSK9 inhibitors, and ezetimibe.
Given the high risk associated with elevated Lpa levels, drug developers and investors are increasingly targeting this pathway for therapeutic intervention.
There are currently several Lpa-lowering agents in development, including:
- Antisense oligonucleotides (ASOs)
- Small interfering RNAs (siRNAs)
- Monoclonal antibodies.
Many of these agents are in late-stage clinical trials, and some have shown promising results in terms of reducing Lpa levels and improving cardiovascular outcomes.
Examples of drug development in this target:
- Ionis Pharmaceuticals' ( IONS ) antisense oligonucleotide pelacarsen , which is being developed in collaboration with Novartis (NVS), has shown significant Lpa-lowering effects in clinical trials and is currently in Phase III cardiovascular outcomes trials.
- Amgen's (AMGN) small interfering RNA olpasiran has demonstrated impressive Lpa-lowering effects and is also in Phase III trials.
- Other companies, such as Akcea Therapeutics, Esperion Therapeutics, and The Medicines Company, are also developing Lpa-lowering agents, among others. However, we believe pelacarsen and Olpasiran would be the first to enter the market between 2025-2029, and we expect them to dominate the market.
The potential market for Lpa-lowering drugs is substantial. According to some estimates, up to 20% of the population may have elevated Lpa levels, putting them at increased risk for cardiovascular disease. Furthermore, there are currently no approved drugs specifically targeting Lpa, making this an underserved and under-innovated market.
In summary, Lpa is an important therapeutic target for drug developers and investors due to its association with increased risk for cardiovascular disease. The development of Lpa-lowering agents has shown promising results in clinical trials and has the potential to address an unmet medical need for patients with elevated Lpa levels. The significant market potential for Lpa-lowering drugs makes this an attractive area for Royalty Pharma.
Lots of exciting catalysts are expected in 2023
Besides the non-correlated royalty cash flow growth, we expect several clinical catalysts that can move the Royalty Pharma's stock meaningfully, including a) Zavegepant (intranasal) approval in acute migraine, b) seltorexant Phase III data in depression, c) aficamten Phase III data in oHCM, and d) Tremfya Phase III data in UC and Crohn's.
Risks
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Therapeutic risk: Royalty Pharma's revenue is heavily dependent on the success of the drugs it invests in. The company is exposed to the risk of clinical trial failures, regulatory delays, or competition from new drugs.
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Concentration risk: Royalty Pharma's revenue is concentrated among a few therapies, which could be impacted by patent expirations or other events that could reduce cash flow. This could result in significant revenue declines and could negatively impact shareholder value.
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Regulatory risk: As a biopharmaceutical investment company, Royalty Pharma is subject to regulatory risks, including changes in regulations, policies, or laws, which could impact the company's operations and financial results.
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Currency risk: Royalty Pharma has a global portfolio and is exposed to foreign currency risk, which could negatively impact revenue and earnings. This risk is particularly significant given the volatility of foreign exchange rates in recent years.
Conclusion
Given Royalty Pharma's impressive financial performance, solid track record of growth, and promising transaction pipeline, the company appears to be a compelling investment opportunity in 2023. Furthermore, we like Royalty Pharma's focus on a Lpa, which we believe can be a multi-blockbuster opportunity, similar to Statins.
For further details see:
Royalty Pharma: Strong Q4 Results, Reiterating A Buy Rating