Royalty Pharma plc — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Royalty Pharma acquires and funds biopharmaceutical royalties; its portfolio included royalties on more than 45 marketed therapies and nine development-stage candidates. Figures are in U.S. dollars.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total income and other revenues | $555.0 million | $510.9 million | $1,128.0 million | $1,011.8 million |
| Operating income | $744.9 million | $409.3 million | $974.2 million | $770.8 million |
| Consolidated net income | $806.8 million | $602.0 million | $965.7 million | $711.1 million |
| Net income attributable to controlling interest | $440.8 million | $442.1 million | $509.9 million | $513.3 million |
| Net cash provided by operating activities | $531.7 million | $489.0 million | $1,057.8 million | $960.1 million |
- Q2 total income and revenues rose 8.6%; six-month results rose 11.5%. GAAP operating income and consolidated net income were substantially affected by a non-cash provision for expected royalty cash flows: Q2 included $243.8 million of provision income, versus $47.3 million of provision expense in Q2 2020. For the first half, provision expense was $48.5 million, down from $135.3 million.
- Controlling-interest net income was nearly flat in Q2 and slightly lower for the first half despite higher consolidated net income, reflecting a greater share of income attributable to non-controlling interests.
- Royalty receipts were $587.7 million in Q2 versus $585.0 million; first-half receipts were $1,237.2 million, up 9.6%. First-half non-GAAP Adjusted Cash Receipts were $999.0 million, up 18.3%; Adjusted EBITDA was $917.2 million, up 18.5%; and Adjusted Cash Flow was $838.0 million, up 25.7%. These are management-defined non-GAAP measures, not substitutes for GAAP cash flow.
- First-half diluted EPS was $1.25 and basic EPS was $1.28. The reported 2020 EPS comparison is not directly comparable: 2020 Class A EPS reflects only the period after the June 2020 IPO.
Balance sheet, debt and liquidity
- At June 30, 2021, cash and cash equivalents were $1.142 billion and marketable securities were $842.7 million. Current assets totaled $2.707 billion and current liabilities $284.0 million.
- Long-term debt had a carrying value of $5.826 billion, representing $6.0 billion principal of fixed-rate senior notes, with maturities from 2023 to 2050. The $1.5 billion revolving credit facility was undrawn; the company reported compliance with applicable debt covenants.
- Operating cash flow increased by $97.7 million year over year for the first half, primarily on higher royalty collections and lower interest paid. Investing activities used $473.1 million; financing activities used $451.1 million, including $325.2 million of distributions to non-controlling interests and $138.6 million of dividends.
Changes, outlook and risks
- Growth drivers included the cystic fibrosis franchise, new royalty assets and Biohaven fixed payments. First-half cystic fibrosis royalty receipts increased $87.3 million. HIV-franchise receipts fell $73.5 million, mainly following U.S. loss of exclusivity for Truvada and Atripla.
- Royalty-income accounting uses estimated future cash flows and analyst consensus forecasts; revisions can create significant non-cash provision volatility. Management cautions against using royalty income and the related provision as measures of near-term operating performance, emphasizing receipts and supplemental non-GAAP cash measures instead.
- No numerical full-year guidance was provided in the supplied filing text. Management said existing resources, operating cash flows and available credit should support operations, planned acquisitions and debt service for the foreseeable future. It reported that COVID-19 had not materially affected performance to date and did not believe a material future impact was reasonably likely, while noting effects may emerge in later periods.
- Post-quarter transactions: Following MorphoSys’s July 15 acquisition of Constellation, Royalty Pharma paid $1.425 billion and bought $100 million of MorphoSys shares; it also committed to up to $150 million of milestone payments and up to $350 million of development funding bonds, with at least $150 million required. On July 26 it issued $1.3 billion of additional senior notes. These transactions were not reflected in the June 30 balance sheet.
- Risks include dependence on underlying drug sales and product forecasts, royalty concentration (Vertex represented 33% of first-half total income and revenues), product and patent-life changes, credit and counterparty exposure, and the ability to source attractive acquisitions. The filing reported no material changes to previously disclosed risk factors and no legal proceedings expected to materially affect results.
Investor verification points
- Assess the sustainability of royalty growth, particularly cystic fibrosis growth versus continued HIV-franchise declines.
- Review the assumptions behind the large Q2 provision credit and the sensitivity of royalty-asset valuations to forecast changes.
- Evaluate post-quarter MorphoSys funding and the new $1.3 billion notes against liquidity, leverage and future acquisition capacity.
- Distinguish GAAP earnings and operating cash flow from management’s non-GAAP Adjusted Cash Receipts, Adjusted EBITDA and Adjusted Cash Flow.
- Consider concentration in major royalty payors and products, including Vertex, and the timing and commercial risks for development-stage assets.