One stock that is likely to hold up better than average during the bear market is Royalty Pharma plc (NASDAQ:RPRX). The company is the largest buyer of biopharmaceutical royalties. Royalty Pharma also is a leading company that provides funds for innovation across the biopharmaceutical industry. The company’s strong growth and reasonable valuation can drive the stock to outperform over the next year and hold up well during the bear market.
Royalty Pharma is focused on acquiring biopharma products that are early in their lifecycles. Royalty works with innovators from non-profits, academic institutions and biotechnology and pharmaceutical companies of various sizes (small to large cap).
The company owns a portfolio of royalties that provides RPRX with payments for sales of many leading products. Some examples of drugs that Royalty receives payments from are: Biogen’s (BIIB) Tysabri, AbbVie (ABBV), and Johnson & Johnson’s (JNJ) Imbruvica, Astellas (OTCPK:ALPMY), and Pfizer’s (PFE) Xtandi, Gilead’s (GILD) Trodelvy, and Merck’s (MRK) Januvia.
Royalty Pharma’s recent Q3 2022 earnings call revealed success that the company can build on going forward. Net cash increased 15% to $539 million while adjusted cash flow increased 26% to $441 million. The increase in adjusted cash flow was attributed mostly to differences in the size of the orphan development stage payments in Q3 2022 over Q3 2021.
The company achieved $3 billion in transactions year-to-date. This includes an R&D funding collaboration with Merck. RPRX has 40 projects in late stages of development, which puts the company in a good position for future growth.
Royalty significantly increased its guidance for adjusted cash receipts for the full year. The company now expects adjusted cash receipts to increase 29% to 32% for the full year as compared to previous guidance of only 7% to 10%. This increased guidance should help catalyze the stock over the next few months as investors anticipate strong results for Q4.
RPRX expects two Phase 3 results by the end of the year for the following drugs: cabometyx in combination with immunotherapy and gantenerumab for Alzheimer’s. The company also expects Phase 3 results from up to 7 drugs in 2023: Some examples of these include: Xtandi for non-metastatic prostate cancer, seltorexant for major depressive disorder, zavegepant for migraine prevention, and aficamten for obstructive hypertrophic cardiomyopathy.
The following FDA decisions are expected in 2023: Trodelvy for third line hormone receptor positive HER2 negative breast cancer, Omecamtiv for heart failure, and intranasal zavegepant for migraine. PT027 just received FDA approval on November 9, 2022 for the treatment of asthma for people aged 18 years and older. The newly approved drug and the if the other pending approvals get the OK from the FDA, the company will have new sources of royalties.
Royalty achieves high margins which helps drive its earnings growth. RPRX has a gross margin of 61.6%, an EBITDA margin of 42.5%, and a net income margin of 22.6%. This is higher than the sector median GM of 54%, EBIDTA margin of 3%, and net income margin of -4.3%.
Royalty Pharma is expected to grow earnings at an average pace of about 11% per year over the next 3 to 5 years (consensus). This double-digit growth should help drive the stock higher over the long-term if it is successfully achieved.
RPRX is trading with a low forward PE of 12.5 and a PEG of 1.14. The forward PE is based on expected EPS of $3.49 for 2023, while the PEG is based on the average estimated annual EPS growth of 11% for the next 3 to 5 years.
Royalty’s valuation is lower than the Biotechnology industry’s forward PE of 30.1 and PEG of 1.3. Royalty Pharma is also trading lower than the S&P 500’s (SPY) forward PE of 17.4 and PEG of 1.5. So, I see RPRX as a bargain in the current market with room for PE expansion as the company continues to grow.
Royalty’s weekly chart above looks positive. The stock increased from support in the $30s. The RSI indicator increased above the 50 level, showing bullish price strength. The green MACD line is about to cross above the red signal line, indicating a possible change in trend back to positive. The positive price action is likely to continue since the company recently increased guidance for 2022 in the latest earnings call.
The Balance Sheet
Fitch gave RPRX a rating of BBB- with a stable outlook. Fitch noted that this reflects the company’s solid portfolio of high-quality royalty streams and cash flows. The rating note also pointed out that these strengths were partially offset by the sales risks involved with the biopharmaceutical products in the portfolio. It also pointed out that uncertainty exists for the development stage products that have yet to be FDA approved.
Royalty has $992 million in total cash & equivalents, total debt of $7.1 billion, and net debt of $5.6 billion. The balance sheet shows 2.4x more total assets than total liabilities for shareholders’ equity of $10.4 billion. These figures put the company in a good position to effectively handle short and long-term debt.
Royalty’s positive cash flow also enables the company to operate effectively with the flexibility to accomplish multiple things such as paying dividends and growing the business. RPRX had $2 billion in operating cash flow over the past 12 months.
Royalty Pharma’s Long-Term Outlook
RPRX has some stability to weather the bear market. The company is diversified with many royalty-producing drugs in its portfolio. As a result, the stock is likely to hold up better than average during market declines. This is evident in the stock’s low beta of 0.34 as compared to the S&P 500’s beta of one. Betas lower than one, indicate that the stock experienced less volatility than the broader market. That puts Royalty Pharma stock in a good position during the current market volatility.
The stock’s low valuation leaves room for more upside price appreciation. Royalty’s increased guidance for the full year provides a positive catalyst for the next few months. The company’s pipeline of potential FDA approvals has the potential to drive future growth through increased royalty payments.
Analysts have a one-year price target of $54 for the stock. This is 24% higher than the current price. The price target of $54 would take the PE to 15.5 based on 2023 expected EPS of $3.49. That looks reasonable to me.