Royalty Pharma's $3.3 Billion Transaction is Bullish for Vertex Pharma

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. 

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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