Royalty Pharma

Royalty Pharma increased its top-line portfolio receipts figure by 6% in the second quarter, partially skewed by a one-time distribution received last year. It lifted 2026 guidance by 2%. Shares traded flat on Aug. 5.

Why it matters: While portfolio receipts grew 6%, which might suggest slowing momentum, Royalty Pharma delivered 14% growth in royalty receipts, which is its more durable and less volatile measure of underlying revenue generation. Royalty Pharma's growth is increasingly powered by a new cohort of high-value royalties, led by Tremfya, Voranigo, Evrysdi, and Imdelltra, reducing reliance on legacy assets and improving the portfolio's long-term growth durability. The firm also continues deploying capital into late-stage pipeline candidates across the cardiovascular, oncology, immunology, and rare-disease markets. Despite generic and branded competition affecting Promacta and Imbruvica, Royalty Pharma's strong royalty receipt growth demonstrates that newer assets are helping offset these headwinds while creating additional long-term upside as pipeline investments mature.

The bottom line: We maintain our $61 fair value estimate for narrow-moat Royalty Pharma. Shares are trading in 3-star territory, which we think appropriately reflects the balance between the firm's strong competitive position and execution risks associated with a growing mix of development-stage opportunities. The benefits of Royalty Pharma's recent internalization of its management structure are becoming increasingly evident. Professional costs fell to just 5% of portfolio receipts from 13% a year ago, helping drive 16% adjusted EBITDA growth, underscoring strong operating leverage embedded in the business. While the firm invested roughly $1 billion as part of this internalization, we believe long-term cost savings will outweigh upfront costs by improving cash flow conversion. We forecast $80 million in operating cost efficiencies in 2026 alone.

We raise our fair value estimate to $61 for narrow-moat Royalty Pharma, up $10 from the previous estimate of $51, thanks to a more bullish view of the company’s near- and medium-term portfolio receipt generation. We have a positive outlook for the long-term potential of the firm's diversified portfolio, thanks to its repeated success with pipeline investments and commercial launches.

Despite the ongoing dispute with Vertex over Alyftrek royalties, we believe the cystic fibrosis franchise will remain the biggest source of Royalty Pharma’s future cash inflows over the next 10 years, with annual portfolio receipts north of $650 million in 2035. The cystic fibrosis franchise, represented by Trikafta, is a leading treatment in the field, and future regulatory approvals of Trikafta in international markets and pediatric treatments could eventually make the therapy available for about 90% of the world’s cystic fibrosis population.

We think royalty receipts from Johnson & Johnson’s Tremfya could surpass $500 million in 2030 as the therapy showed superiority to Novartis’ Cosentyx, making it one of the top performers in the psoriasis market. GSK’s next-generation respiratory triplet drug Trelegy has shown solid clinical data, and we expect royalty receipts to eclipse $350 million by 2029. Evrysdi is the first oral treatment of spinal muscular atrophy, or SMA, approved for infants. Royalty Pharma first invested in the drug in 2020, with additional royalty acquisitions in 2023. This therapy has been approved in over 100 countries and enjoys favorable pricing over other SMA treatments. We forecast that Evrysdi will exceed royalty receipts of $400 million in 2033.

By 2035, we believe Royalty Pharma’s portfolio receipts could surpass $6.6 billion. We model nearly $3 billion in capital deployment for new royalties in 2035.

We think Royalty Pharma earns a narrow moat rating thanks to its high-quality investment portfolio that consists of royalties on approved biopharma products across different therapeutic areas. Many of Royalty Pharma’s invested therapies have patent exclusivities extending beyond the next decade, and the weighted average royalty duration of all portfolio products is around 13 years as of 2025. Since royalty receipts are often a percentage of the underlying products’ annual sales, patent lifespans are critical to the return on each investment Royalty Pharma makes.

We find that the annualized return on investment for Royalty Pharma’s main royalty asset, Vertex’s cystic fibrosis franchise, would exceed the cost of capital well before the patent maturity date. Using the discounted cash flow method, our forecast shows that total royalty receipts from Vertex’s cystic fibrosis franchise through 2026 would earn Royalty Pharma an annualized return on investment higher than the company’s cost of capital of 7.7%, and the end-stage annualized return on this investment should be in the high-teens range when patent expires between 2037 and 2041. However, there are currently heightened risks surrounding the company’s ongoing royalty rate dispute with Vertex Pharmaceuticals over the new vanza triple drug. In December 2024, Vertex received FDA approval for Alyftrek, a once-daily next-in-class triple combination cystic fibrosis transmembrane conductance regulator modulator. Both parties are still in discussion to reach a settlement on the royalty payment schedule.

Besides Vertex’s cystic fibrosis franchise, Royalty Pharma’s recent investments in Pfizer’s Nurtec and Zavzpret have patent exclusivities through 2034-36. Following the US Food and Drug Administration's approval of Zavzpret in March 2023, Royalty Pharma received a milestone payment of $475 million from Pfizer, which is 1.9 times its initial investment of $250 million or a 29% annualized return over the 2.5-year investment horizon. Between 2024 and 2034, the company is entitled to receive royalties based on Zavzpret’s worldwide sales at no incremental cost, which adds up to more than $80 million based on our estimates.

We appreciate Royalty Pharma’s diverse investment approach, which helps to mitigate risk when certain therapies underperform in end-market sales due to development setbacks, competition, or regulatory reasons. Royalty Pharma acquired royalty rights on Vertex’s cystic fibrosis franchise in 2014. More than 10 years after the purchase, it remains Royalty Pharma’s biggest revenue-generating asset, accounting for nearly 30% of total royalty receipts in 2025. Royalty Pharma’s focus on clinically validated solutions that address high unmet needs has created a portfolio of patent-protected innovative drugs, which have valuable intangible assets that provide a competitive advantage.

Royalty Pharma’s capacity to execute large deals with complicated structures is unique across all royalty buyers. The five largest royalty transactions in history all have Royalty Pharma as the purchaser, with the biggest being Royalty Pharma’s acquisition of royalties on Vertex’s cystic fibrosis treatments owned by the Cystic Fibrosis Foundation, or CFF, in 2014. Back then, the $3.3 billion transaction price was about 4 times the size of Royalty Pharma’s largest prior royalty acquisition, and over 10 times the size of all the competitors’ biggest royalty acquisitions. Despite financing and structuring challenges, Royalty Pharma’s deep expertise in financial markets allowed the company to secure a $2.7 billion loan and reach an agreement on deal terms with CFF in under four weeks. For every royalty transaction, the size of upfront payments is directly linked to the scale and duration of future royalty cash flows. Many other royalty acquirers competing with Royalty Pharma are finite-life trust funds purely financed by equity, which means the financial resources they can leverage are at a much smaller scale. This leads to Royalty Pharma’s strong market position for royalty transactions sized over $500 million. We think the company’s high market share among large-size royalty transactions bolsters the quality of both current and future portfolios.

We appreciate Royalty Pharma’s effort to tailor transactions based on counterparty needs using M&A strategies and financial derivatives. For example, in October 2023, Royalty Pharma closed a deal with PTC Therapeutics to acquire a portion of royalties on Roche’s Evrysdi for $1 billion upfront. The transaction included a put option, but Royalty Pharma announced in December 2025 its acquisition of the final portion of PTC’s remaining royalty for $240 million and potentially $60 million more in sales-based milestones.

Royalty Pharma’s portfolio includes market-leading therapies for a wide range of diseases, enabling stable future royalty streams and high returns on investments over the next decade.

Demand for increased funding across the biopharma ecosystem for new product development expands Royalty Pharma's potential addressable market.

Royalty Pharma’s capacity to execute large deals and connections with royalty holders make the company a preferred choice for royalty transactions.

Underperformance of key portfolio products due to major regulatory changes could put pressure on Royalty Pharma’s cash flows.

Competition with other royalty buyers and alternative funding methods through debt or equity could drive down Royalty Pharma’s returns.

If the counterparty of a key royalty transaction were to default on future royalty payments, this would pose a risk to Royalty Pharma.