Moderna (MRNA -2.52%) set the record for the biggest initial public offering (IPO) in biotech history on Dec. 6, 2018. The biotech raised over $600 million. But while Moderna's IPO was the biggest ever for a biotech, it wasn't the biggest one in the biopharmaceutical industry. That honor belongs to animal health company Zoetis, which conducted an IPO raising $2.2 billion on Jan. 31, 2013 after being spun off from Pfizer

And now there's another biopharmaceutical IPO that's even bigger than Moderna's. Royalty Pharma (NASDAQ: RPRX) went public on June 16, 2020. The $2.18 billion IPO became the second-largest biopharmaceutical IPO ever and the biggest IPO of 2020 so far. Here's why investors flocked to the drugmaker that made an even bigger initial splash than widely followed Moderna.

Man's finger pointing to IPO with a stock chart going up in the background

Image source: Getty Images.

A long history in a niche market

Royalty Pharma's public shares might be new, but the company isn't. It was founded in 1996 by a group that included CEO Pablo Legorreta. Prior to starting Royalty Pharma, Legorreta worked in the investment banking industry. He also co-founded Pharmakon Advisors in 2009 to provide debt capital to the biopharmaceutical industry. 

From the beginning, Royalty Pharma has focused on buying royalties from drug developers ranging from academic institutions to small biotechs to big pharma companies. Although Royalty Pharma hasn't been the only company focused on this niche market, it has been a pioneer in the area and now ranks as the largest buyer of drug royalties.

The company takes a couple of different approaches with its royalty deals. Sometimes it partners with drugmakers to help fund late-stage clinical studies and launches of new products, receiving rights to future royalties of the products in exchange for its upfront capital. In other cases, Royalty Pharma buys royalties for drugs that are already on the market.

Royalty's royalties

You might be surprised at how many well-known drugs for which Royalty Pharma owns royalties. In 1999, the company bought a royalty for Novartis' cystic fibrosis (CF) drug Tobi. Fifteen years later, Royalty Pharma upped its game in the CF market, acquiring the Cystic Fibrosis Foundation's royalties on sales of CF drugs marketed by Vertex Pharmaceuticals, including Kalydeco, Orkambi, and Trikafta. 

In 2005, Royalty Pharma bought royalties from Emory University for what eventually became blockbuster HIV drugs marketed by Gilead Sciences. Those HIV drugs include Atripla, Complera, Descovy, Genvoya, Truvada, and Biktarvy, which is on track to become the biggest-selling HIV drug so far.

Speaking of biggest-selling drugs, Royalty Pharma acquired royalties in 2006 from AstraZeneca for Humira. It became the world's No. 1 top-seller for AbbVie. And that wasn't Royalty Pharma's only royalties for a blockbuster immunology drug. In 2007, the company bought royalties from New York University for Remicade, which is marketed by Johnson & Johnson and Merck.

And we've only scratched the surface of Royalty Pharma's impressive lineup. It owns royalties to a long list of other successful products, including Biogen's multiple sclerosis drugs Tecfidera and Tysabri, Merck's diabetes drugs Januvia and Janumet, Pfizer's cancer drugs Ibrance and Xtandi, and Imbruvica, the blockbuster cancer drug marketed by AbbVie and J&J.

An IPO worth chasing?

It's too late for investors to get in Royalty Pharma's big IPO. But is buying the pharma stock a smart move now?

It's important to know that Royalty Pharma's revenue has increased by a compound annual growth rate (CAGR) of only 2.4% over the last four years. However, the company's earnings have soared by a CAGR of 41.8% during the same period -- thanks in large part to provisions related to increased cash flow from Vertex's Trikafta.

But Royalty Pharma faces some challenges in the near future. The company's royalties on Gilead's HIV lineup expire in 2021. Royalties on Januvia and Janumet expire in 2022. 

My view is that Royalty Pharma is a stock for investors to keep on their radars but not buy just yet. I'd like to see how some of the drugs linked to some of the company's newer royalty deals, such as Amgen's heart failure therapy omecamtiv mecarbil, fare.

Royalty Pharma might not have a single game-changer like Moderna could have with its COVID-19 vaccine candidate, but it has a lot of diversification across its royalty portfolio. The company deserved its enormously successful IPO.