Investing.com -- Moody’s Ratings has uplifted the rating of Royalty Pharma plc’s senior unsecured notes from Baa3 to Baa2. The outlook for the company has also been revised, shifting from positive to stable on April 30, 2025.

This upgrade reflects Moody’s belief that Royalty Pharma will sustain its strong earnings growth, supported by its royalty portfolio, which has been recently enhanced by additions such as Voranigo and Cobenfy. The company’s revenue diversity is expected to improve steadily due to growth from these new royalty streams. The internalization of the manager, announced in January 2025, ensures the continuity of key royalty investment managers.

While Royalty Pharma is expected to continue utilizing debt financing to fund ongoing acquisitions and expand its royalty portfolio, Moody’s anticipates the company will maintain moderate financial policies over time. This is due to the strong free cash flow and high profit margins that provide the company with good financial flexibility.

The Baa2 rating of Royalty Pharma mirrors the robust product portfolio that underlies the company’s royalty streams. It also highlights the company’s successful history of acquiring royalty interests on blockbuster drugs. Royalties from products like Trikafta, Tremfya, Evrysdi, Cobenfy, and Voranigo are expected to show strong growth prospects and provide long-term revenue streams. The strong cash flow of the company allows it to continue investing in new royalties.

However, it is important to note that the company’s revenues will remain concentrated in several key products, with the three largest royalty streams accounting for approximately 50% of the total. The pharmaceutical royalty investing strategy of the company involves risks related to commercial execution and pipeline execution. The company’s investment strategy also includes funding smaller biotech firms seeking alternative sources of capital. The US Inflation Reduction Act may lead to drug price reductions, which could impact prices on some products later this decade.

The stable outlook signifies Moody’s expectation for continued earnings growth for Royalty Pharma, supplemented by ongoing royalty acquisitions under moderate financial policies.

Certain factors could lead to an upgrade or downgrade in the ratings. These include successful replenishment of terminating royalties with new investments, improving revenue diversity from growth in newer royalty streams, and debt/EBITDA sustained below 3.0 times, which could support an upgrade. On the other hand, factors such as unexpected erosion in revenues from key royalty streams, large debt-financed acquisitions and/or share repurchases, or a significant reduction in portfolio duration, could lead to a downgrade. Specifically, if debt/EBITDA is sustained above 3.75 times, it could trigger a downgrade.

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