Royalty Pharma plc — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial-statement figures are converted from thousands to millions unless stated otherwise.
Business context
Royalty Pharma acquires biopharmaceutical royalties and funds development and commercialization in exchange for royalties, milestones, or scheduled payments. Its portfolio included royalties on more than 35 marketed therapies and 13 development-stage candidates. Management emphasizes royalty receipts and cash-based measures because GAAP income from royalty assets can be volatile as sales forecasts change.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total income and other revenues | $573.5 million | $585.8 million | $1,671.5 million | $1,713.8 million |
| Operating income | $192.2 million | $303.1 million | $789.7 million | $1,277.3 million |
| Consolidated net income | $220.4 million | $221.8 million | $840.1 million | $1,187.5 million |
| Net income attributable to Royalty Pharma plc | $142.7 million | $101.9 million | $498.9 million | $611.8 million |
| Class A EPS, basic and diluted | $0.32 | $0.24 | $1.14 | $1.49 |
| Net cash provided by operating activities | $538.8 million | $469.8 million | $1,574.0 million | $1,527.6 million |
Q3 operating margin was approximately 33.5%, versus 51.7% a year earlier; the nine-month operating margin was approximately 47.2%, versus 74.5%. Operating expenses included provision expense for changes in expected royalty cash flows of $305.1 million in Q3 and $595.4 million year to date. Management cautions that this provision is substantially forecast-driven and non-cash, and GAAP royalty income is not a direct measure of royalty collections.
- Cash receipts: Nine-month royalty receipts were $2.048 billion, up 5.1%. Non-GAAP Adjusted Cash Receipts were $1.725 billion, up 8.8%; Adjusted EBITDA was $1.584 billion, up 9.2%; and Adjusted Cash Flow was $1.289 billion, up 8.4%.
- Cash flows: Nine-month investing activities used $1.444 billion, including $1.491 billion of financial royalty asset acquisitions. Financing activities used $679.3 million, including $249.1 million of shareholder dividends and distributions to non-controlling interests.
- Liquidity: At September 30, cash and cash equivalents were $991.6 million and marketable securities were $139.9 million, compared with $1.541 billion and $581.9 million, respectively, at year-end 2021. The company also reported $749.1 million of available-for-sale debt securities, current and non-current.
- Debt: Total note principal was $7.3 billion; carrying value was $7.111 billion, including $996.6 million classified as current. The $1.5 billion revolving credit facility was undrawn. The company reported covenant compliance. Principal payments include $1.0 billion due in 2023 and $1.0 billion in 2025.
Changes versus prior comparable periods
- Q3 revenue declined 2.1%; nine-month revenue declined 2.5%. Intangible royalty revenue fell sharply as Januvia and Janumet royalties expired and prior-year revenue included underpaid Tradjenta royalties.
- Operating income fell 36.6% in Q3 and 38.2% year to date, primarily reflecting higher royalty-cash-flow provision expense. Nine-month provision expense rose to $595.4 million from $186.3 million.
- Q3 attributable net income rose 40.0%, despite lower consolidated net income, reflecting lower income attributable to non-controlling interests and other-period comparisons. Year-to-date attributable net income fell 18.5%.
- Growth in royalty receipts from the cystic fibrosis franchise, newly acquired royalties, and products including Xtandi and Tremfya was partly offset by declines in Imbruvica and maturing DPP-IV and HIV royalties. Imbruvica receipts fell 8.5% year to date; DPP-IV receipts fell 36.0%.
- Cash from operations increased $46.5 million year to date. Higher royalty collections were partly offset by lower intangible-asset collections and increased interest paid.
Outlook, commentary, risks and unusual items
- No specific full-year financial guidance is provided in the filing. Management said existing capital resources, operating cash flow, and the undrawn revolver should support operating needs, planned acquisitions and R&D funding, and debt service for the foreseeable future.
- Management reported $2.1 billion invested in royalties and related assets during the first nine months. Subsequent to quarter-end, it funded $50 million under a Merck development agreement, with an option to fund up to an additional $375 million if Merck proceeds to Phase 3.
- After quarter-end, Pfizer completed its acquisition of Biohaven on October 3, 2022. The change of control accelerated redemption of Biohaven preferred shares and removed the remaining $85.8 million Series B purchase commitment. Q3 and year-to-date results included fair-value gains related to the anticipated transaction, including $97.6 million on a milestone-acceleration derivative for the nine months.
- After quarter-end, GSK discontinued development of otilimab following Phase 3 results; Royalty Pharma wrote off the royalty asset, which had a September 30 carrying value of $160.1 million.
- Key risks include changes in product sales and royalty forecasts, clinical and regulatory outcomes, product competition and patent duration, acquisition execution, and fair-value estimates based on significant unobservable inputs. Vertex represented 31% of the current portion of financial royalty assets at September 30, 2022.
- The company reported no material change in risk factors from its 2021 Form 10-K, no material change in market-risk exposures, and no legal proceeding that management believed would adversely affect the business. Disclosure controls were deemed effective at a reasonable-assurance level.
Important facts for investors to verify
- How much of the increased royalty receipts and non-GAAP cash measures is sustainable as acquired royalties ramp and older royalties mature.
- The product-level assumptions underlying the $595.4 million year-to-date provision expense, especially forecasts for Imbruvica, Tazverik, and Tysabri; distinguish these non-cash adjustments from collected cash.
- The impact of the $160.1 million otilimab write-off and the completed Biohaven transaction on subsequent-period results, cash flows, and reported fair values.
- Near-term liquidity and refinancing plans for the $1.0 billion note maturity in September 2023, alongside acquisition commitments and the remaining available credit facility.
- The degree of concentration in major royalty payors and products, and the sensitivity of Level 3 asset valuations to sales forecasts, discount rates, and clinical or regulatory developments.