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The Underlying Value of Biotech IPOs

While Covid-19 has brought hospitality and other service sectors to a standstill, the biopharmaceutical IPO market is booming. Royalty Pharma, a company focused on buying biopharmaceutical royalties from drug developers, went public on June 16, 2020 at a value of $2.18 billion. Royalty Pharma’s IPO is the second-largest biopharmaceutical IPO ever and the biggest IPO of 2020 so far. A royalty is a payment made to an individual for the ongoing use of their originally-created assets. Based on compiled research from LES and Royalty Stat, we concluded the average royalty rate for biopharmaceutical companies was approximately 5% and increasing to 13.3% after establishing proof on concept. Therefore, it is not unexpected that Royalty Pharma generated $1.8 billion in revenue from royalty receipts in 2019.

Founded in 1996, Royalty Pharma has acquired a portfolio of 36 royalty interests from prominent biopharmaceutical firms such as Pfizer, Gilead, and AstraZeneca. While there are infinite ways to structure a royalty deal, typically, Royalty Pharma purchases a majority stake in a biopharmaceutical royalty by providing a substantial upfront payment to a major drug developer. Assuming the drug developer retains a portion of the royalties, it continues to experience the benefit of consistent cash flows from the drug therapy, as well as a large, one-time capital inflow from Royalty Pharma. The drug developer then uses this substantial capital inflow to “support immediate infrastructure, research, and patient care initiatives” while simultaneously diversifying risk (assuming the majority of their revenues are derived from a single therapy).

This transaction not only encourages drug developers to increase funding for current/innovative therapies, but it also provides Royalty Pharma the funding to support other drug developers in need of cash. This unique business model is likely to drive biopharmaceutical innovation by providing capital to a sector that is heavily reliant on government and private sector funding.