Royalty Pharma: An alternative way to invest in pharma.

Royalty Pharma is a unique company in the healthcare industry that earns money from the sales of medicines without developing them itself. Instead of spending billions on research and development, the company provides funding to biotech and pharmaceutical companies in exchange for a share of future drug sales. This gives Royalty Pharma exposure to a wide range of successful and innovative treatments while avoiding many of the risks that traditional pharma companies face. With royalties from blockbuster drugs, a growing pipeline of new therapies, and strong cash flow, the company combines stability with long-term growth potential. As more companies look for alternative ways to fund drug development and innovation continues to accelerate, Royalty Pharma is well positioned to benefit. The question remains: Does this unique business model deserve a spot in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Royalty Pharma at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Royalty Pharma, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Royalty Pharma was founded in 1996 and has grown into the world’s largest acquirer of biopharmaceutical royalties, operating at the intersection of finance and life sciences. The company has built a unique business model centered on acquiring royalty rights to existing or future drug sales from academic institutions, biotech companies, and pharmaceutical firms. Instead of developing and commercializing drugs itself, Royalty Pharma provides upfront capital in exchange for a percentage of top-line sales from specific therapies. This approach allows the company to gain exposure to some of the most successful and innovative medicines in the world without taking on the costs and risks associated with research, development, manufacturing, or marketing. As a result, Royalty Pharma captures many of the attractive characteristics of the pharmaceutical industry, such as long product life cycles and high margins, while avoiding much of the operational complexity and binary risk tied to early-stage drug development. The company primarily focuses on royalties linked to approved products or late-stage development assets with strong proof-of-concept data, which significantly reduces risk while still providing meaningful upside if therapies achieve blockbuster status. Royalty Pharma’s revenues are tied directly to the top-line sales of the underlying drugs rather than their profitability, creating a highly cash-generative and capital-efficient model. These recurring cash flows are reinvested into new royalty acquisitions, enabling a compounding effect over time. The company’s portfolio is highly diversified across more than 35 therapies spanning areas such as oncology, rare diseases, neuroscience, and immunology, and includes exposure to a number of blockbuster drugs generating billions in annual sales. This diversification reduces reliance on any single product while providing broad exposure to global pharmaceutical innovation. Royalty Pharma operates with a flexible investment approach, participating in traditional third-party royalties, synthetic royalties, and other funding structures such as debt or equity components, which allows it to tailor solutions to the needs of its partners. This flexibility has become increasingly important as the cost and complexity of drug development continue to rise, driving demand for non-dilutive financing solutions across the life sciences ecosystem. As more companies seek alternative funding sources, the royalty market has expanded significantly, providing Royalty Pharma with a growing pipeline of opportunities. The company reviews hundreds of potential deals each year, leveraging its experienced investment team, deep scientific expertise, and rigorous due diligence process to identify the most attractive opportunities. Over time, this has enabled Royalty Pharma to build a strong track record of generating consistent growth. Royalty Pharma’s competitive moat is built on its scale, reputation, expertise, and structural advantages as the leading and most established player in the biopharma royalty market. As the pioneer and clear market leader, the company benefits from significant scale, which allows it to pursue large and complex transactions that smaller competitors cannot access. This scale advantage is reinforced by a lower cost of capital and a permanent capital base supported by recurring cash flows, which contrasts with many competitors that rely on closed-end funds with limited lifespans and higher funding costs. These structural differences enable Royalty Pharma to offer more attractive and flexible deal terms while still achieving strong returns. The company’s long investment horizon further strengthens its position, as it allows management to optimize value over the full lifecycle of a drug, including potential label expansions and long-term sales growth, while aligning closely with partners and fostering repeat business. Over nearly three decades, Royalty Pharma has built deep relationships across the life sciences ecosystem, including universities, research institutions, biotech companies, and large pharmaceutical firms. These relationships provide access to proprietary deal flow and reinforce the company’s reputation as a trusted and reliable partner. The firm’s investment platform represents another important competitive advantage, combining extensive life sciences expertise, a highly experienced team, and proprietary data and analytics capabilities. By reviewing a large volume of opportunities each year, Royalty Pharma continuously expands its institutional knowledge and improves its ability to assess risk and identify high-quality assets. Its industrialized investment process allows it to act quickly and confidently when attractive opportunities arise. The company’s ability to structure transactions in flexible ways, including milestone payments, tiered royalties, and multi-year funding arrangements, enables it to align incentives with partners while managing risk and enhancing returns. Diversification across products, therapeutic areas, and counterparties further strengthens the resilience of its cash flows, which are tied directly to drug sales rather than profits. In addition, Royalty Pharma benefits from strong structural tailwinds, as increasing R&D costs and the growing complexity of drug development are driving greater adoption of royalty-based financing solutions. As the undisputed leader in this expanding market, the company is well positioned to capture a significant share of future growth. The combination of scale, relationships, expertise, flexible structuring capabilities, and a capital-efficient model creates a durable competitive moat that is difficult for new entrants to replicate and supports Royalty Pharma’s ability to generate consistent, compounding returns over time.

Management

Pablo Legorreta is the Founder, CEO, and Chairman of Royalty Pharma, the company he established in 1996 with the goal of creating a more efficient way to fund innovation in the pharmaceutical industry. Since founding the business, Pablo Legorreta has helped transform Royalty Pharma from a niche investor in drug royalties into a central player in life sciences. Under his leadership, the company has built a diversified portfolio spanning more than 35 marketed therapies and has established itself as the leading platform in biopharmaceutical royalty funding, a market that it helped pioneer. Before founding Royalty Pharma, Pablo Legorreta spent about a decade at Lazard Frères in Paris and New York, where he worked as an investment banker advising healthcare clients and developing expertise in structuring complex financial transactions. That background in both finance and healthcare laid the foundation for Royalty Pharma’s business model, which applies financial discipline and deal structuring to the life sciences industry. By recognizing early that royalty streams from successful medicines could become a distinct institutional investment strategy, Pablo Legorreta helped create what is now a well established and growing segment of healthcare finance. He is also a co founder of Pharmakon Advisors, a healthcare focused credit platform and a leading provider of debt capital to the biopharmaceutical industry. Pablo Legorreta holds a degree in Industrial Engineering from Universidad Iberoamericana in Mexico City. Beyond Royalty Pharma, he has also been involved in a number of scientific, healthcare, and corporate organizations. He serves on the board of the New York Academy of Sciences and currently serves as a director of ProKidney Corp, while previously serving on the board of Epizyme. In addition, Pablo Legorreta founded Alianza Médica para la Salud, a nonprofit organization focused on improving medical education and access to healthcare in Latin America. These activities reflect a broader commitment not only to capital allocation, but also to healthcare innovation and access. One of the most notable examples of Pablo Legorreta’s long term investment mindset was Royalty Pharma’s acquisition of royalty rights to Humira from AstraZeneca in 2006 for $700 million. That transaction became one of the most successful royalty investments in the company’s history, with the Humira royalty generating $499 million in cash receipts in 2018 alone. The deal illustrates Pablo Legorreta’s ability to identify valuable long duration assets and structure transactions that can produce strong returns over time. More broadly, Royalty Pharma has consistently emphasized disciplined underwriting, patience, and lifecycle optimization under his leadership, which has helped the company build a reputation for attractive returns and thoughtful capital deployment. Pablo Legorreta has generally maintained a relatively low public profile, but within the biopharma and investment communities he is widely respected for his discipline, long term orientation, and deep understanding of both science and finance. That combination has been critical to Royalty Pharma’s success, as the company’s business requires not only access to capital, but also the ability to evaluate clinical data, competitive positioning, commercial potential, and deal structure with a high degree of precision. In recent years, Pablo Legorreta has continued to emphasize consistent growth, disciplined capital allocation, and long term value creation, which remain central to the company’s strategy. Given his founder’s mindset, long record of value creation, and central role in building Royalty Pharma into the leading platform in its niche, Pablo Legorreta appears well suited to continue guiding the company through its next phase of growth.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Royalty Pharma made its IPO in 2020, which means the available track record is relatively short, and based on the reported figures, ROIC has generally been below that 10% threshold. At first glance, this may suggest that the company does not generate particularly high returns on capital, especially compared to what management communicates when highlighting mid-teens returns. However, it is important to understand that Royalty Pharma’s business model is quite different from most operating companies, and this has a significant impact on how returns should be interpreted. Royalty Pharma’s reported ROIC is affected by both accounting and timing, which can make returns look lower than they actually are. The company pays large upfront amounts to acquire royalty streams, and these are then spread out as expenses over many years, even though the cash has already been spent. At the same time, new investments often take time before they generate meaningful cash flow. This means that the capital base can grow faster than earnings in the short term, which depresses ROIC. As the underlying drugs mature and sales increase, the cash flows improve, which should support higher returns over time. In simple terms, Royalty Pharma operates more like a portfolio of long-term investments, where the real value comes from steady cash flows over time rather than short-term accounting profits. Even though reported ROIC looks modest, the underlying economics of the business appear stronger. Management has stated that most investments are made with the expectation of mid-teens returns, which suggests that the actual returns on capital are higher than what traditional ROIC calculations indicate. Looking ahead, reported ROIC may continue to look lower than management’s targets when using standard calculations, but it could improve as more of the portfolio matures and generates higher cash flows. The key drivers of returns remain in place, including a growing number of royalty opportunities, the ability to structure attractive deals, and strong demand for non-dilutive funding in the biopharmaceutical industry.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Royalty Pharma’s equity has fluctuated over time, with some years showing increases and others showing declines. These movements are primarily driven by the company’s investment activity and the nature of its business model rather than instability in the underlying business. Royalty Pharma regularly deploys large amounts of capital to acquire new royalty streams. These upfront investments reduce equity initially, while the cash flows from those assets are realized over many years. This means that in periods with high investment activity, equity can decrease or grow more slowly, even though those investments are expected to create value over time. As the underlying drugs mature and generate stronger cash flows, this value becomes more visible in the financials. Fluctuations in earnings also play a role. Years with strong profitability tend to increase equity, while periods with lower earnings or higher investment activity can lead to declines. In addition, because Royalty Pharma’s assets are tied to financial agreements and long-term royalty streams, accounting adjustments and valuation changes can also create movements in reported equity from year to year. Importantly, declining equity does not necessarily indicate a weaker business in Royalty Pharma’s case. The company generates strong cash flows and focuses on deploying capital into new investments rather than accumulating it on the balance sheet. This means equity may fluctuate depending on how capital is allocated in a given year. Looking ahead, equity is likely to continue showing some volatility rather than steady growth. Royalty Pharma’s business model involves continuously investing in new royalty opportunities, and this can create short-term fluctuations in equity. What matters more is whether these investments generate strong cash flows and attractive returns over time, as this ultimately drives long-term value creation for shareholders.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Royalty Pharma has generated very strong free cash flow since its IPO, although it has declined somewhat in the past two years. This development is mainly driven by timing and investment activity rather than a deterioration in the underlying business. The company has been very active in deploying capital into new royalty agreements, and these upfront investments reduce free cash flow in the short term. At the same time, some of the newly acquired assets have not yet reached full cash generation, which can temporarily lower overall free cash flow. In simple terms, when Royalty Pharma invests heavily, it gives up cash today in exchange for higher cash flows in the future. The reason Royalty Pharma can achieve such high free cash flow margins lies in its business model. Unlike traditional pharmaceutical companies, Royalty Pharma does not spend heavily on research, development, manufacturing, or large sales organizations. Instead, it receives royalty payments based on drug sales, while its operating costs remain relatively low. Management has highlighted that operating and professional costs represent a small percentage of portfolio receipts, which means that a large portion of revenue flows directly through to cash. This creates a highly efficient model with very strong cash conversion. These high margins are likely to continue. The structure of the business does not require significant incremental costs as revenue grows, which means that additional royalty income largely turns into cash. As long as Royalty Pharma continues to invest in high-quality assets and maintain discipline in its cost structure, the underlying cash generation should remain strong. Royalty Pharma uses its free cash flow in a very disciplined and flexible way. A large portion is reinvested into new royalty deals, which management sees as the primary driver of long-term growth. In addition, the company returns capital to shareholders through share repurchases and dividends. In 2025, for example, Royalty Pharma deployed $2,6 billion into new investments while returning $1,7 billion to shareholders, including $1,2 billion in buybacks and more than $500 million in dividends. The company follows a dynamic capital allocation framework, where it balances investing in new opportunities with returning capital depending on where it sees the highest value. Looking ahead, free cash flow is likely to grow over time, although it may fluctuate from year to year depending on investment activity. Periods of high deal activity may temporarily reduce free cash flow, while periods where existing assets mature and generate higher royalty income should support stronger cash generation. Free cash flow yield suggests that the shares are trading at a very attractive valuation. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. We do this by dividing the total long-term debt by earnings. Based on my calculations, Royalty Pharma has 11,3 years of earnings in debt, which is significantly above the three-year threshold. At first glance, this may appear concerning, but it is important to understand why the company carries this level of debt. Royalty Pharma uses debt as a key tool to fund large, upfront royalty acquisitions. These investments are long-term in nature and are expected to generate cash flows over many years, which makes debt a natural funding source. By using debt instead of issuing new shares, the company avoids diluting existing shareholders while still being able to grow its portfolio. Another important point is that Royalty Pharma’s debt structure is relatively conservative. The company maintains an investment-grade credit rating and has spread out its debt over many years, with an average duration of more than a decade. This reduces refinancing risk and gives the company flexibility. In addition, the business generates strong and predictable cash flows from its royalty portfolio, which supports its ability to service debt. Management has also indicated that the company has access to additional liquidity through cash on the balance sheet and available credit facilities, which provides further financial flexibility. While the debt level is high compared to my preferred threshold, it is more understandable given the nature of the business. Royalty Pharma does not have the same operational risks as traditional pharmaceutical companies, as it does not need to fund large research programs or operate manufacturing facilities. Instead, it receives cash flows from a diversified portfolio of drugs, which makes earnings more predictable. As a result, the company can support a higher level of leverage than many other businesses. Overall, the debt level is something to monitor, but it does not currently appear to be a major concern. The combination of long-duration debt, strong cash flow generation, and a disciplined approach to capital allocation suggests that Royalty Pharma is in a position to manage its leverage while continuing to invest in new opportunities.

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Risks

Using debt as part of its capital deployment strategy is a risk for Royalty Pharma because the company relies on borrowing to fund large, upfront royalty acquisitions. While this allows Royalty Pharma to grow its portfolio without issuing new shares, it also means that the business depends on future cash flows from these investments to cover its obligations. If the underlying drugs do not perform as expected, or if sales growth is weaker than anticipated, the cash generated may not be sufficient to comfortably cover interest expenses. This could reduce the capital available for dividends, share buybacks, or new investments. Another important part of this risk is reduced financial flexibility. When Royalty Pharma borrows money, it agrees to certain conditions with its lenders. These conditions are there to protect the lenders and ensure that the company does not take on too much risk. In simple terms, this means the company cannot freely increase its debt or spend large amounts of capital without staying within certain limits. If Royalty Pharma is close to these limits, it may not be able to borrow more money to fund new royalty deals, even if attractive opportunities arise. This can slow down growth and make it harder for the company to act quickly when good deals are available. Interest rates also play an important role. If borrowing becomes more expensive, Royalty Pharma will have to pay more in interest, which reduces the overall returns from its investments. This means the company needs to find better deals just to maintain the same level of profitability, which can be challenging in a competitive market. Leverage also increases both upside and downside. When investments perform well, debt can enhance returns for shareholders. However, if investments underperform, the impact is greater because the company still has to repay its debt. This is particularly important for Royalty Pharma, as it depends on the long-term success of the drugs it invests in. While the company focuses on lower-risk assets, there is still uncertainty around future sales and competition.

Reliance on forecasting is a risk for Royalty Pharma because the company’s entire business model depends on predicting future cash flows from royalty agreements. When Royalty Pharma invests in a royalty, it is essentially making a long-term bet on how a specific drug will perform over many years. This requires assumptions about future sales, pricing, competition, patent protection, and how widely the drug will be adopted. If any of these assumptions turn out to be wrong, the actual returns from the investment can be lower than expected. This risk is particularly important for development-stage therapies. Even if early data looks promising, there is no guarantee that a drug will be approved, launched on time, or achieve strong market adoption. Delays in approval, safety concerns, or weaker-than-expected demand can all reduce the value of a royalty. Even for approved drugs, there are still uncertainties. Competition from other therapies, pricing pressure, or changes in reimbursement can affect sales and therefore reduce the royalty income Royalty Pharma receives. Another important part of this risk is estimating how long a royalty will last. In some cases, the duration is not fixed and depends on factors such as patent protection, regulatory exclusivity, and the timing of generic competition. These factors can change over time. For example, if patents are challenged or expire earlier than expected, or if competitors enter the market sooner, the royalty period can be shorter than anticipated. This would reduce the total cash flow generated from the investment and could lead to lower returns. Small changes in assumptions can have a large impact on value. Because Royalty Pharma pays large upfront amounts for these royalties, its returns depend heavily on long-term projections. If expected cash flows are reduced or delayed, the company may need to adjust the value of its assets, and future income could be lower than originally forecast.

Competition is a risk for Royalty Pharma because the company operates in two highly competitive areas at the same time. First, it competes to acquire high-quality royalty assets, and second, the drugs underlying those royalties compete in the biopharmaceutical market. Both forms of competition can impact the company’s ability to grow and generate returns. The first layer of competition comes from acquiring royalties. There is a limited number of attractive royalty opportunities available, and many different players are trying to access them. Royalty Pharma competes with pharmaceutical companies, private equity firms, institutional investors, and other pools of capital. Some of these competitors may have access to cheaper funding, may be willing to accept lower returns, or may have relationships that give them access to deals before Royalty Pharma. This can make it harder for the company to win attractive transactions or force it to pay higher prices for assets, which reduces future returns. In addition, companies seeking funding have other options, such as issuing equity or taking on traditional debt, which means Royalty Pharma is not always the preferred partner. The second layer of competition comes from the drugs themselves. Royalty Pharma’s cash flow depends on the success of the therapies it invests in, and those therapies operate in a highly competitive and rapidly evolving industry. New drugs, improved treatments, or alternative therapies can reduce demand for existing products. Even well-established drugs can lose market share if a better or cheaper option becomes available. Factors such as safety, effectiveness, pricing, and reimbursement policies all influence which treatments are used, and small differences in these areas can have a large impact on sales. Generic and biosimilar competition is another important risk. When patents expire or exclusivity periods end, lower-cost alternatives often enter the market. These alternatives can quickly take market share and significantly reduce sales of the original drug, which directly lowers the royalty income Royalty Pharma receives. In some cases, competition can also emerge earlier than expected due to patent challenges or regulatory changes, which can shorten the period during which royalties are collected. There is also a risk that companies developing the underlying drugs may actively try to reduce or avoid royalty payments. For example, they may develop improved versions of a product or shift focus to new therapies where no royalty is owed. This can reduce the long-term value of existing royalty agreements.

Reasons to invest

The current portfolio of royalties is a reason to invest in Royalty Pharma because it provides a strong, diversified, and growing base of cash flows with additional upside from both existing products and a large development pipeline. The company’s portfolio includes royalties on more than 35 marketed therapies across multiple therapeutic areas, which reduces reliance on any single product and creates a more stable and predictable revenue stream. This diversification is important because even if one product underperforms or loses exclusivity, the impact on the overall portfolio is limited. Management expects royalty receipts to grow by around 3% to 8% in 2026 based solely on the current portfolio, which highlights the strength of the underlying business without relying on new acquisitions. Another key strength of the portfolio is the quality of the underlying products. Royalty Pharma has exposure to several blockbuster therapies with strong market positions and continued growth potential. Products such as Trelegy, Tremfya, and Evrysdi continue to perform well, while newer additions like Voranigo and Imdelltra are contributing to growth. In many cases, these therapies address significant unmet medical needs and are supported by strong commercial partners, which increases the likelihood of sustained sales over time. The company also benefits from long-duration assets, often supported by patents or exclusivity periods that can extend for many years, providing visibility into future cash flows. In addition to the existing portfolio, there is meaningful upside from the development-stage pipeline. Royalty Pharma currently has around 20 development-stage therapies, many of which have already shown promising clinical results or are approaching key milestones. Management has highlighted that these assets could generate significant additional royalty income if successful, with multiple important data readouts expected over the next few years. Importantly, the company is not dependent on any single outcome, as the pipeline is diversified across different diseases and technologies. This creates multiple opportunities for value creation while reducing the risk associated with any individual project.

The opportunity to expand the portfolio is a reason to invest in Royalty Pharma because it provides a long runway for future growth driven by strong structural tailwinds in the biopharmaceutical industry. The demand for capital in life sciences continues to increase as drug development becomes more complex, time-consuming, and expensive. Developing a new drug can cost billions and take many years, which creates a constant need for funding across the industry. At the same time, many companies prefer to use royalties as a source of capital because it allows them to raise funds without issuing new shares or giving up control of their products. This trend is becoming more widely accepted, which expands the pool of potential opportunities for Royalty Pharma. Another important factor is the rapid pace of scientific innovation. The number of new therapies being developed continues to grow, driven by advances in areas such as biotechnology, genetics, and new treatment modalities. This leads to more licensing agreements and collaborations across the industry, which in turn creates more royalty streams. As innovation becomes more fragmented, with many smaller biotech companies contributing to new discoveries, the number of potential royalty opportunities increases. This creates a larger and more diverse opportunity set for Royalty Pharma to invest in. The growth of the royalty market itself is also an important driver. The total value of royalty transactions has increased significantly over time and continues to reach new highs, reflecting both higher demand for capital and greater awareness of royalty-based financing. This suggests that the market is still developing and far from saturated, giving Royalty Pharma the opportunity to continue expanding its portfolio for many years. Geographic expansion further strengthens this opportunity. New markets, particularly China, are becoming increasingly important sources of innovation. As more Chinese biotech companies partner with global pharmaceutical companies, new royalty streams are being created. Royalty Pharma is actively building relationships and expanding its presence in these regions, which could open up an additional pipeline of future investments. Importantly, Royalty Pharma has shown that it is able to access and evaluate a large number of opportunities. The company reviews hundreds of potential transactions each year, but only invests in a small percentage of them. This indicates that the opportunity set is broad and growing, while the company remains disciplined in selecting only the most attractive investments.

Synthetic royalties are a reason to invest in Royalty Pharma because they represent a fast-growing and increasingly important part of the company’s future growth opportunity. Unlike traditional royalties, which are typically acquired after a drug is already approved or close to commercialization, synthetic royalties are created through direct partnerships with biopharmaceutical companies. In these agreements, Royalty Pharma provides upfront funding in exchange for a share of future sales if the therapy is successfully developed and commercialized. This allows the company to access high-quality assets earlier in their life cycle, often at more attractive terms. This earlier entry point is important because it often allows Royalty Pharma to negotiate better economics. By providing capital at a stage where uncertainty is still present, the company can secure a larger share of future sales compared to buying royalties on fully established products. At the same time, these deals are usually structured in a way that manages risk, for example by linking payments to milestones or phasing investments over time. This balance between risk and return makes synthetic royalties an attractive complement to traditional royalty acquisitions. Another key advantage is flexibility. Synthetic royalties can be tailored to each situation, allowing Royalty Pharma to design agreements that align incentives with its partners and optimize the long-term value of the investment. This includes adjusting royalty rates, timing of payments, and conditions tied to development or commercial success. This level of customization is harder to achieve in traditional royalty deals and gives Royalty Pharma an edge in structuring attractive transactions. Synthetic royalties are also becoming a more meaningful part of Royalty Pharma’s business. Management has highlighted that activity in this area has increased significantly, with 2025 being a record year and synthetic transactions representing a larger share of capital deployment than traditional royalties. This indicates that the company is successfully expanding into this segment and that the opportunity set is growing.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 1,78, which is from the year 2025. I have selected a projected future EPS growth rate of 10% as management expects to grow the topline by a 10% compounded growth over the next decade. Additionally, I have selected a projected future P/E ratio of 20, which is double the growth rate. This decision is based on Royalty Pharma's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $22,82. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Royalty Pharma at a price of $11,41 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 2.490, and capital expenditures were 0. The tax provision was 0. We have 42,2 outstanding shares. Hence, the calculation will be as follows: 2.490 / 427,2 x 10 = $58,29 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Royalty Pharma's free cash flow per share at $5,83 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is $73,34.

Conclusion

I find Royalty Pharma to be a very intriguing company with strong management. It has built a moat through its scale, reputation, expertise, and structural advantages as the leading and most established player in the biopharma royalty market. ROIC looks underwhelming, but this is primarily because the company pays large upfront amounts to acquire royalty streams, which are then expensed over many years even though the cash has already been spent. At the same time, new investments take time before they generate meaningful cash flow, meaning the capital base can grow faster than earnings in the short term and depress ROIC. Free cash flow has decreased in the past two years, but this appears to be more of a timing issue, and Royalty Pharma continues to achieve a very high free cash flow margin, which is expected to persist. Using debt as part of its capital deployment strategy is a risk because the company depends on future cash flows from its investments to cover interest and repayments, which may fall short if underlying drugs underperform, and debt can reduce financial flexibility, especially in a higher interest rate environment. Reliance on forecasting is also a risk, as returns depend on long-term assumptions about drug sales, competition, and patent duration, which may prove inaccurate and lead to lower or shorter cash flows than expected. Competition is another risk because Royalty Pharma must compete both to acquire attractive royalty assets and against other drugs that can reduce the value of its existing royalties, which can lead to higher acquisition prices, lower returns, and declining cash flows if therapies lose market share or face generic competition. At the same time, the current portfolio of royalties is a reason to invest because it provides a diversified and growing base of cash flows supported by high-quality therapies, reducing reliance on any single product while offering additional upside through a broad development pipeline. The opportunity to expand the portfolio is another reason to invest, as strong demand for capital, rapid innovation, and increasing adoption of royalty financing are creating a growing pipeline of investment opportunities and a long runway for compounding. Synthetic royalties further strengthen the case, as they allow Royalty Pharma to access high-quality assets earlier and structure deals with more attractive economics, and as this segment grows it could become an increasingly important driver of returns. Overall, I believe Royalty Pharma is a great company, and buying shares below the Ten Cap price of $58 can be a good long-term investment.

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