Royalty Pharma (RPRX)

Healthcare royalties company Royalty Pharma (NASDAQ:RPRX) met Wall Street’s revenue expectations in Q1 CY2025, but sales were flat year on year at $568 million. Its GAAP profit of $0.75 per share increased from $0.01 in the same quarter last year.

Company Overview

Pioneering a unique business model in the pharmaceutical industry since 1996, Royalty Pharma (NASDAQ:RPRX) acquires rights to receive portions of sales from successful biopharmaceutical products, providing funding to drug developers without conducting research itself.

The branded pharmaceutical industry relies on a high-cost, high-reward business model, driven by substantial investments in research and development to create innovative, patent-protected drugs. Successful products can generate significant revenue streams over their patent life, and the larger a roster of drugs, the stronger a moat a company enjoys. However, the business model is inherently risky, with high failure rates during clinical trials, lengthy regulatory approval processes, and intense competition from generic and biosimilar manufacturers once patents expire. These challenges, combined with scrutiny over drug pricing, create a complex operating environment. Looking ahead, the industry is positioned for tailwinds from advancements in precision medicine, increasing adoption of AI to enhance drug development efficiency, and growing global demand for treatments addressing chronic and rare diseases. However, headwinds include heightened regulatory scrutiny, pricing pressures from governments and insurers, and the looming patent cliffs for key blockbuster drugs. Patent cliffs bring about competition from generics, forcing branded pharmaceutical companies back to the drawing board to find the next big thing.

Royalty Pharma's competitors include other healthcare royalty investors such as HealthCare Royalty Partners, Oberland Capital, and OrbiMed Advisors, as well as specialized investment firms like Drug Royalty Corporation and Ligand Pharmaceuticals (NASDAQ:LGND).

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With just $2.26 billion in revenue over the past 12 months, Royalty Pharma lacks scale in an industry where it matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Royalty Pharma’s 3.8% annualized revenue growth over the last five years was tepid. This was below our standard for the healthcare sector and is a poor baseline for our analysis.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Royalty Pharma’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 2% annually.

We can dig further into the company’s revenue dynamics by analyzing its most important segment, Portfolio Receipts. Over the last two years, Royalty Pharma’s Portfolio Receipts revenue averaged 11.2% year-on-year growth. This segment has outperformed its total sales during the same period, lifting the company’s performance.

This quarter, Royalty Pharma’s $568 million of revenue was flat year on year and in line with Wall Street’s estimates.

We also like to judge companies based on their projected revenue growth, but not enough Wall Street analysts cover the company for it to have reliable consensus estimates.

Royalty Pharma has been a well-oiled machine over the last five years. It demonstrated elite profitability for a healthcare business, boasting an average operating margin of 55.5%.

Looking at the trend in its profitability, Royalty Pharma’s operating margin rose by 17.3 percentage points over the last five years, as its sales growth gave it operating leverage. This performance was mostly driven by its recent improvements as the company’s margin has increased by 60 percentage points on a two-year basis.

This quarter, Royalty Pharma generated an operating profit margin of 94%, up 107 percentage points year on year. This increase was a welcome development and shows it was more efficient.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Royalty Pharma, its EPS declined by 10.5% annually over the last five years while its revenue grew by 3.8%. However, its operating margin actually expanded during this time, telling us that non-fundamental factors such as interest expenses and taxes affected its ultimate earnings.

Diving into the nuances of Royalty Pharma’s earnings can give us a better understanding of its performance. Royalty Pharma recently raised equity capital, and in the process, grew its share count by 63.3% over the last five years. This has resulted in muted earnings per share growth but doesn’t tell us as much about its future. We prefer to look at operating and free cash flow margins in these situations.

In Q1, Royalty Pharma reported EPS at $0.75, up from $0.01 in the same quarter last year. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Royalty Pharma has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 11.5% over the last five years, better than the broader healthcare sector.

Taking a step back, we can see that Royalty Pharma’s margin expanded by 30.9 percentage points during that time. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

Royalty Pharma’s free cash flow clocked in at $596 million in Q1, equivalent to a 105% margin. This result was good as its margin was 3 percentage points higher than in the same quarter last year, building on its favorable historical trend.

Revenue was in line but EBITDA beat on better profitability. Overall, the quarter was solid. The stock traded up 1.4% to $33.25 immediately following the results.

Updated: June 8, 2025 at 11:55 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Royalty Pharma.

In our opinion, Royalty Pharma is a good company. Although its revenue growth was uninspiring over the last five years, its growth over the next 12 months is expected to be higher. And while Royalty Pharma’s subscale operations give it fewer distribution channels than its larger rivals, its impressive operating margins show it has a highly efficient business model. On top of that, its rising cash profitability gives it more optionality.

Royalty Pharma’s P/E ratio based on the next 12 months is 7x. Looking at the healthcare space right now, Royalty Pharma trades at a compelling valuation. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $41.52 on the company (compared to the current share price of $33.78), implying they see 22.9% upside in buying Royalty Pharma in the short term.