Royalty Pharma Owns a Piece of 16 Blockbuster Drugs -- Is the Stock a Buy?

Whether it's biotech stocks or regular pharmaceutical stocks, when investors buy a particular name in healthcare, they are making a wager on a single company's pipeline. However, there is one unique name within this space that enables investors to gain more diversified exposure to current and potential future blockbuster drugs: Royalty Pharma (NASDAQ: RPRX).

Operating like both a biopharma company and a venture capital firm, Royalty provides capital to both for-profit drugmakers and nonprofit researchers, such as universities, in exchange for percentage ownership in their developed or underdeveloped drug candidates.

With the stock trading at a relatively low valuation, despite owning royalty interests in 16 blockbuster drugs, not to mention a slew of promising drug candidates, much suggests this is a gem among healthcare stocks that's still getting discovered by the market.

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Three reasons why Royalty Pharma is a drug stock standout

I know what you are thinking: Why buy Royalty Pharma when investors can simply buy multiple drug stocks?

For one, while you could go ahead and attempt to build a diversified portfolio of drug candidate stocks, why not let Royalty Pharma's management team do the heavy lifting for you? Operating with a lean overhead that accounts for only 5.5%-6.5% of portfolio receipts, Royalty Pharma offers a team of experienced pharmaceutical executives and capital allocators dedicated to investing in royalty deals that generate solid returns on invested capital.

This brings us to Royalty Pharma's second key strength: the advantageous way that it structures its royalty deals. A prime example of this is one of the company's latest unsuccessful investments. In September, Novartis and its biotech partner Ionis Pharmaceuticals unveiled disappointing clinical trial data for its experimental heart drug pelacarsen.

Royalty Pharma, through a prior funding agreement with Ionis, held a royalty interest in pelacarsen, but just because this candidate failed doesn't mean Royalty is out of its investment. As disclosed in a Sept. 4 press release, the funding deal coupled exposure to pelacarsen with ownership in "stable and predictable" royalties from another drug, Spinraza. In short, while pelacarsen's failure limits upside potential, the company still expects to generate a positive return from this investment.

Third, thanks to the favorable way Royalty Pharma structures deals and manages risk, it has built a long track record of double-digit annualized returns on invested capital. As noted in its latest quarterly earnings release, Royalty Pharma's average return on invested capital and equity was 14.9% and 21.5%, respectively, between 2019 and 2025. For Q2 2026, these figures stood at 14.2% and 20.1%, respectively. During the quarter, management also reported 14% growth in royalty receipts.

An overlooked gem still entering prime time

Since the start of the year, Royalty Pharma shares have surged over 50%. Price discovery is clearly taking shape as investors catch on to this company's unique strengths and impressive track record.

However, don't assume price discovery has completed just yet. Based on analyst estimates calling for adjusted earnings per share (EPS) of $5.34 during 2026 and $5.73 during 2027, Royalty Pharma seems like it's at the lower end of the valuation range among biopharma stocks. Yes, critics can counter this by pointing out that these strong adjusted earnings are relatively recent. For 2023, 2024, and 2025, Royalty Pharma reported EPS of $2.54, $1.93, and $1.80 per share, respectively.

However, with the company now scaled up and generating steady royalties and portfolio receipts from its blockbuster drugs, shares could be in for some serious multiple expansion if it meets or beats the aforementioned analyst forecasts. Established, profitable biotechs such as Amgen and Regeneron Pharmaceuticals trade at price-to-earnings (P/E) multiples in the high teens and low 20s.

Sure, contrary to this bull case, there are numerous long-term risks with Royalty Pharma. The company regularly issues new shares to finance expansion. In time, this dilution could weigh on long-term returns. Growing competition in the pharma royalty investment space could affect future returns.

Nevertheless, until Royalty Pharma's fiscal results and guidance more strongly reflect these risks, err on the side of optimism and consider this a long-term buy for investors seeking exposure to pharmaceutical stocks.

Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amgen, Ionis Pharmaceuticals, and Regeneron Pharmaceuticals. The Motley Fool has a disclosure policy.