Key Points
Revolution Medicines' daraxonrasib has received FDA approval.
Royalty Pharma estimates that the drug could produce peak revenues of $11 billion.
Royalty Pharma estimates it will generate up to $340 million in peak royalties from daraxonrasib with zero effort.
Revolution Medicines (NASDAQ: RVMD) invested significant time, energy, and money to advance its pancreatic cancer drug daraxonrasib through the FDA approval process. The payoff could be huge, with Royalty Pharma (NASDAQ: RPRX) estimating that the drug could produce peak revenues of $11 billion, which easily falls into the "blockbuster" category. If that sounds interesting, you may want to sidestep Revolution Medicines and instead buy Royalty Pharma, which is set to get a windfall of its own if daraxonrasib is as successful as hoped. Here's why.
What does a drug company like Revolution Medicines do?
The pharmaceutical industry is research-driven and highly competitive, but its overall dynamics are pretty easy to understand. To sum it up, drug companies spend heavily to find and develop drugs. Successful drugs get a limited period of patent protection during which they generate large profits. When the patent protection ends, generic versions enter the market, and revenues fall.
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Revolution Medicines has worked through the first step with daraxonrasib, receiving FDA approval in August, 2026. And if Royalty Pharma is correct about the drug's outlook, Revolution Medicines could see years of significant profits ahead. That's great and helps explain why Revolution Medicines' stock is up 200% over the past year and more than 700% over the past three years.
It's hard to place a valuation on Revolution Medicines stock because the healthcare company has been losing money as it invests in drug development. However, daraxonrasib could easily be the drug that turns the company profitable, and investors are reacting accordingly.
Royalty Pharma helped Revolution Medicines get here
If you don't want to buy a pharma stock that has rocketed higher thanks to good news around one drug, you may want to look at Royalty Pharma. It doesn't actually make drugs at all; it provides financing to companies that do. In exchange for that upfront cash, Royalty Pharma gets royalties on the sales of the drugs it helps finance. It invested in Revolution Medicines' daraxonrasib and believes it could see peak revenue of up to $340 million from the drug.
The key, however, is that Royalty Pharma doesn't have to do anything at all to benefit from this drug's success. It just sits back and collects the royalties it is entitled to, making it something of a quiet winner. So, if you are excited about daraxonrasib, it could be time for a deep dive into Royalty Pharma.
What you'll find is that Royalty Pharma has a lot more going for it than just this one drug. At present, the company has investments in 35 approved drugs, 16 of which fall into the blockbuster category. It also has investments in another 16 drugs that are still in development. The average remaining royalty period is 13 years. Essentially, you are buying a drug business with more diversification than you'd get with Revolution Medicines (and just about any other drug maker).
Play the long game with Royalty Pharma
Revolution Medicines could be on the cusp of producing huge profits. But Wall Street is already pricing in a lot of good news now that the company's pancreatic cancer drug has been approved. The growth story isn't as attractive as it once was.
But you can still get in on the action with Royalty Pharma, while also gaining exposure to a broader portfolio of attractive drug royalties. Royalty Pharma won't be the name in the headlines, but that won't change the fact that it's collecting a piece of the action while doing none of the hard work. And for dividend lovers, the stock's 1.4% yield is an added enticement.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.