Royalty Pharma: A High-Conviction Buy in the Evolving Biopharma Royalty Market

The biopharma royalty market is undergoing a seismic shift, and Royalty Pharma is not just riding the wave—it's leading the charge. With a portfolio of blockbuster drugs, a strategic internalization of operations, and a capital-efficient model that's hard to replicate, this company is positioning itself as a must-own asset for investors seeking long-term value. Let's break down why Royalty Pharma is a high-conviction buy in an industry where structural growth and disciplined capital allocation are king.

Structural Growth: A Portfolio Built for the Long Haul

Royalty Pharma's second-quarter 2025 results were a masterclass in compounding. Portfolio Receipts surged 20% year-over-year to $727 million, driven by stellar performance from its crown jewels: Voranigo (a top-tier oncology drug), Trelegy (a respiratory blockbuster), Evrysdi (a rare disease leader), and Tremfya (a dermatology standout). These aren't just one-off successes—they're proof of a diversified, high-margin engine.

The company's recent $1.25 billion synthetic royalty deal with Revolution Medicines is a game-changer. By securing a stake in daraxonrasib, a Phase 3 drug candidate for RAS-addicted cancers, Royalty Pharma is betting on the next generation of therapeutics while maintaining downside protection via a $750 million secured loan. This dual-structure approach—leveraging upside potential without sacrificing capital—exemplifies the kind of risk-aware innovation that separates winners from the pack.

Capital Efficiency: Every Dollar Works Overtime

Royalty Pharma's financials scream operational discipline. Adjusted EBITDA hit $633 million in Q2, up 13% year-over-year, while Portfolio Cash Flow grew 12% to $641 million. Even with a 45% drop in net cash from operations (a one-time milestone payment skewing the numbers), the company's liquidity remains robust.

The recent internalization of its management structure is a stroke of genius. By acquiring its external manager, RP Management, LLC, for $1.1 billion, Royalty Pharma eliminated a 1.5% management fee and slashed operating costs. This move alone is expected to save $100–150 million annually, which will flow directly to the bottom line. For a company that's already a cash-generating machine, these savings are pure profit.

And let's not forget the share repurchase program. With $1 billion spent in the first half of 2025 and a $3 billion authorization in place, Royalty Pharma is buying back its own stock at a discount to intrinsic value. At current multiples, this is a classic “buy what you love” play.

Strategic Internalization: Full Control, Full Potential

The internalization of operations isn't just a cost-cutting exercise—it's a strategic masterstroke. By bringing management in-house, Royalty Pharma gains full control over decision-making, accelerating deal execution and portfolio optimization. This is critical in a sector where speed and agility determine success.

Compare this to peers like HealthCor or Royalty Pharma's former management structure, and the difference is stark. Internalization reduces friction, aligns incentives, and creates a flywheel effect: better decisions lead to better deals, which generate more cash, which fund more deals. It's a self-reinforcing cycle that's hard to disrupt.

Navigating Risks: Challenges That Don't Deter the Bull Case

No investment is without risks. The Vertex cystic fibrosis royalty dispute and Camber Pharmaceuticals' generic entry for Promacta are legitimate headwinds. But here's the rub: these are short-term hiccups in a business with a 20-year runway. The Vertex issue, while frustrating, is a minor dent in a $3.1 billion annual revenue stream. And generic competition? That's the cost of doing business in pharma—Royalty Pharma's diversified portfolio ensures no single asset can derail its trajectory.

The Bottom Line: Buy, Hold, and Watch the Compounding

Royalty Pharma is a rare beast: a company with structural growth, capital-efficient operations, and a management team that's fully aligned with shareholders. At a forward P/E of 12x and a yield of 3.5%, it's trading at a discount to its intrinsic value. The recent guidance raise (now $3.05–3.15 billion in Portfolio Receipts for 2025) and the $3 billion buyback program are clear signals that the board sees its stock as undervalued.

For investors with a 5–10 year horizon, this is a no-brainer. The biopharma royalty market is expanding, and Royalty Pharma is the only player with the scale, expertise, and balance sheet to dominate it. Buy now, and watch the compounding magic unfold.