The $3.3 billion paid by Royalty Pharma to the Cystic Fibrosis Foundation to acquire royalty rights to Vertex Pharmaceuticals' ( VRTX) cystic fibrosis drugs suggests investors are under-estimating peak sales.
I asked an analyst (compliance rules prevent him from being named) to calculate an estimate of peak sales for Vertex's cystic fibrosis drug franchise which would justify Royalty's decision to invest $3.3 billion to acquire the royalty stream. Here's what he sent back:
Using our model and doing some rough math, I can get to royalty stream worth approximately $3.3 billion after tax (don't know Royalty Pharma's tax rate but understand that it's likely low so just assume 15%) with peak risk adjusted cystic fibrosis sales of approximately $6 billion. This includes Kalydeco sales, risk-adjusted Kalydeco label expansion indications and combination drug sales, including risk-adjusted heterozygous F508del. I calculated the present value of cash flows from royalties through 2030 and ignored any terminal value which isn't unreasonable given loss of exclusivities and declining sales. I used 8% as discount rate.Let me translate for those who haven't passed the CFA exam yet: Based on this math, admittedly imprecise, in order to spend $3.3 billion for royalties today, Royalty Pharma is betting Vertex can generate $6 billion annually in cystic fibrosis drug sales at peak.
Currently, the buyside consensus for Vertex peak cystic fibrosis sales (2019) is around $4.7 billion.
If other investors are doing similar math, it helps explain why Vertex shares are up 4% today to $115.