ROYALTY PHARMA PLC
Fitch Ratings has affirmed
The Rating Outlook is Stable.
The rating reflects RPRX's solid portfolio of high-quality royalty streams and cash flows. These strengths are somewhat offset by the sales risks of biopharmaceutical products on which it receives royalties, the uncertainties related to the acquisition of interests in development-stage biopharmaceutical products and its revenue concentration in a few medicines.
Key Rating Drivers
Product Portfolio Supports Royalty Stream: RPRX has built a solid portfolio of high-quality royalty streams. The portfolio comprised 35 approved and 10 development-stage products as of
Favorable Outlook for Biopharmaceuticals: RPRX benefits from the significant tailwinds underpinning the growth of the biopharmaceutical industry including population growth, increased life expectancy and growth of the middle classes in emerging markets. In addition, a dramatic acceleration of medical research in recent years has led to a better understanding of the molecular origins of disease and identification of potential targets for therapeutic intervention. This has accelerated R&D opportunities for new drugs.
Solid Cash Flows: Fitch believes RPRX's portfolio cash flows cover its outstanding debt by a comfortable margin. It is expected to generate strong adjusted EBITDA margins (adjusted to reflect royalty receipts and expenses on a cash basis) due to minimal operating costs and substantial FCF after distributions to shareholders. Fitch expects the company to manage distributions to shareholders prudently to remain within covenant thresholds and to maintain financial flexibility.
Prudent Use of Leverage: Fitch expects gross EBITDA leverage measured by debt/adjusted EBITDA (after payments to non-controlling interests) to remain in the range of 3.0x-4.0x and FCF/Debt to remain solidly above 10% over the forecast period. RPRX may use incremental levels of debt for royalty investments, but adjusted EBITDA is expected to grow as a result of higher levels of royalty receipts offset by upfront R&D payments and the loss of terminating royalties; there may be periods in which leverage exceeds the aforementioned sensitivities. In the event gross EBITDA leverage rises above 4.0x and FCF/Debt decreases below 10%, Fitch will evaluate RPRX's plans to reduce such leverage within the succeeding 12-18 months.
Portfolio Credit Risk: The portfolio is reasonably balanced by royalty receipts and therapeutic category but is more concentrated by marketers. Six individual marketers comprise approximately 75% of RPRX's royalty receipts for the year ended
Development Stage Investments: RPRX focuses on the acquisition of royalties of both approved products or development-stage product candidates that have generated strong proof of concept data. To date, aggregate impairments associated with development stage investments have been immaterial to RPRX's credit profile (approximately
Price Risk, Product Safety and Liability Issues: Drug pricing continues to be a contentious issue and is expected to remain a focus among payors, legislators and regulators. The enactment of the Inflation Reduction Act (IRA) underscores this focus. Whether the price negotiation powers granted to the Secretary of Health and Human Resources under the IRA results in materially lower new drug innovation or lower drug prices is too early to assess.
Pharmaceutical manufacturers increasingly need to demonstrate the value of therapies to payers, patients and providers, with strong clinical outcomes driven by increased safety and efficacy. This dynamic may heighten the valuation risk for RPRX as it seeks new products for its portfolio. Product safety or liability issues could ultimately affect the utilization of specific products and the royalty streams of RPRX.
Competitive Environment: There are a limited number of suitable and attractive opportunities to acquire high-quality royalties available in the market, leading to intense competition. In addition, the length of a product's commercial life cannot be predicted with certainty. There can be no assurance that the estimates of a royalty's duration will be substantially shortened because of a variety of factors, such as commercial developments, clinical trials, or regulatory approvals.
Derivation Summary
RPRX's 'BBB-' Long-Term IDR reflects its good base of contractual royalty streams generated from the sale of patent protected pharmaceutical products and its ample FCF relative to debt. Many of its royalty interests relate to products that lead their respective therapeutic classes. These strengths are somewhat offset by the sales risks of biopharmaceutical products from which it receives royalties, the uncertainties related to the acquisition of interests in development-stage biopharmaceutical products, and its revenue concentration in a few medicines.
In addition, the potential for leverage to increase over the near to medium term as RPRX seeks to grow may heighten all of these risks. RPRX is expected to continue to generate solid FCF relative to debt through 2026. RPRX's returns have come from a blend of relatively low-cost financing compared to the returns on its royalty portfolio as well as increases in the price of royalty generating drugs. Despite the recent rise in the cost of debt financing, 60% of total debt matures after
Direct peers are limited; RPRX competes against other potential royalty buyers, including the companies that market the products on which royalties are paid, financial institutions and investment funds. However, Fitch believes the intensity of competition has grown in recent years driven by the limited number of attractive acquisition candidates available in the market and the potential for biopharmaceutical companies to pursue alternative forms of financing. In addition, the introduction of expensive biopharmaceuticals will continue to place pressure on the price of the products that provide the basis for royalties.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer Include:
Continued strong adjusted EBITDA, with margins around 85% with operating expenses at approximately 8%-9% of adjusted cash receipts; patent challenges and write-offs of development stage investments are assumed to be minimal;
Dividends to unitholders increase at 4%-5% per annum and the introduction of share purchases;
Leverage to remain between 3.0x and 4.0x and FCF/Debt above solidly above 10%;
Leverage metrics will be affected principally by the timing of incremental borrowings for acquisition activity, upfront R&D payments and revenue growth;
Acquisitions of approximately
All debt maturities are assumed to be refinanced; 2023 maturities are assumed to be refinanced at 5.5%; no debt prepayments are assumed.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Fitch does not anticipate positive rating actions over the near to medium term for RPRX. However, factors that could lead to an upgrade include:
Successful replenishment of terminating royalties with new investments;
Improvement in revenue diversity such that the top three drugs represent less than 40% of revenue;
Total gross EBITDA leverage sustained below 3.0x; or FCF/debt sustained above 20%.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Significant disruption in royalty receipts on any core products;
A shift in the acquisition strategy towards development-stage products or reduction in revenue diversity;
Total gross EBITDA leverage sustained above 4.0x or FCF/debt sustained below 10%.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Good Liquidity: RPRX's primary source of liquidity is cash flow from operations (CFO). It generates solid earnings from royalty streams using a modest amount of expenses. Robust CFO is expected to comfortably cover interest expense over the forecast and provide for potential additional debt reduction; however, Fitch expects RPRX to maintain current levels of debt over the forecast. FCF is strong, particularly for the 'BBB-' rating category. Dividend growth is expected to moderate to approximately 4%-5% over the forecast period with the deployment of limited amounts of capital to share purchases. Fitch estimates that the company will maintain ample levels of cash and marketable securities to support its investment and operating needs.
Debt Maturities Manageable: The debt maturity schedule is flexible with FCF more than adequate to meet maturities; approximately 60% of total debt matures after
Issuer Profile
RPRX is the largest buyer of biopharmaceutical royalties and a leading funder of innovation across the biopharmaceutical industry. The company reported approximately
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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