Royalty Pharma tops its record-setting $3.3B deal with CF Foundation, betting $575M more on Vertex's drugs
Royalty Pharma’s $3.3 billion deal with the Cystic Fibrosis Foundation to purchase royalties on Vertex’s CF franchise was its largest royalty deal ever. But that didn’t buy it all: Per the arrangement, if Vertex’s annual worldwide net sales go above $5.8 billion, 50% of the royalties go back to the CF Foundation.
Just as Vertex seems poised to reach that mark, Royalty Pharma CEO Pablo Legorreta is putting down $575 million in cash to eliminate that obligation and channel 100% of the cash stream into his shop.
“Our initial landmark funding transaction in 2014 enabled the Foundation to expand its efforts to develop new lifesaving therapies and improve care for patients, and exemplified our leadership role as an innovator in funding the biopharma ecosystem,” Legorreta said in a statement. “We are similarly optimistic that today’s transaction will further support the CF Foundation’s work to fund research and drug development and advance high-quality, specialized CF care.”
Long revered for its visionary investment pact with Vertex — whose portfolio of four drugs now cover as much as 90% of the CF patient population — the CF Foundation has since generated new drug candidates, launched a $500 million fund focused on gene-based therapies, and committed $20 million to team up with Longwood on a CF incubator.
But Evercore ISI analyst Umer Raffat called the new deal a headscratcher. With consensus peak sales estimate of $8.8 billion, the net present value for the CF Foundation would be $1.2 billion to $1.3 billion. So why sell for half of that?
Raffat offered three explanations: Either the group didn’t get good bids, or it lacked the skillset to get the fair value for their royalties, or it was actually less optimistic than the Street on peak sales — implying the CF Foundation estimated peak sales for Vertex’s drugs at $7.5 billion to $7.8 billion.
Royalty Pharma noted that the Vertex CF franchise generated net revenues totaling over $4 billion in 2019. Left unsaid is the financial guidance the biotech has recently updated: Total CF product revenue is now expected to go above $6 billion, based on “strong year-to-date performance driven by the Trikafta launch in the US.”
Previously Vertex had pegged revenue between $5.7 billion and $5.9 billion for the year.
Contrast that with six years ago, when Kalydeco was the only approved CF product in its portfolio and brought in $464 million for all of 2014.
But Royalty Pharma’s work with CF dated back to 1999, the company recounted in an IPO filing earlier this year, and it approached the CF Foundation when Vertex reported promising Phase II data for Kalydeco in 2008. Those talks went nowhere; discussions began in earnest again once a second CF therapy, Orkambi, cleared the Phase III bar.
Our deep understanding of the CF market and of the development-stage product candidates in Vertex’s portfolio allowed us to gain high conviction about executing a transaction of this unprecedented scale, for an asset with no cash flow and significant clinical, regulatory and commercial risk remaining, all within a short execution window.
The Nasdaq listing ended up reaping $2.2 billion for Royalty Pharma. The royalties under its new agreement with the CF Foundation, the company added, are perpetual and not tied to patent expirations.
In addition to the upfront, there’s a singular potential milestone payment of $75 million — although it was not specified.
“Ultimately, from Royalty Pharma perspective, the single biggest strength of this deal structure is that they now have a completely open-ended economics on Vertex CF drugs (<<this was a key thing missing in most of their recent deals – which were capped),” Raffat wrote in his note.
November 3, 2020
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