Royalty Pharma plc — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited. Royalty Pharma acquires and funds biopharmaceutical royalties. Its June 2020 IPO and related reorganization changed ownership and non-controlling interests, making some comparisons with 2019 less directly comparable.
Financial performance
| Metric | Q3 2020 | Nine months 2020 | Comparable change |
|---|---|---|---|
| Total income and other revenues | $538.4 million | $1,550.2 million | Up 16.0% and 14.3%, respectively |
| Operating income | $510.6 million | $1,281.3 million | Down 4.1% and 0.8%, respectively |
| Consolidated net income | $624.3 million | $1,335.3 million | Up 41.9% and 31.6%, respectively |
| Net income attributable to controlling interest | $290.6 million | $803.9 million | Down 28.9% and 13.4%, respectively |
| Class A earnings per share | $0.79 basic and diluted | $0.88 basic and diluted | Reported only for the post-IPO period; not comparable with 2019 |
| Operating cash flow | $508.8 million | $1,469.0 million | Nine-month amount was $1,188.8 million in 2019 |
Q3 and nine-month consolidated net income included substantial income allocated to non-controlling interests: $333.6 million and $531.4 million, respectively. Management cautions that royalty income and provisions under its effective-interest accounting model can be volatile and do not directly track royalty cash receipts.
Cash flow, liquidity and debt
- At September 30, cash and cash equivalents were $1.553 billion and marketable securities were $579.5 million. Total assets were $15.991 billion.
- Nine-month investing cash outflow was $1.927 billion, including $1.377 billion of financial royalty asset acquisitions. Financing cash inflow was $1.765 billion, including IPO proceeds and debt issuance.
- Management’s non-GAAP Adjusted Cash Receipts were $1.316 billion for the nine months, down 16.8%; Adjusted EBITDA was $1.187 billion, down 21.5%; and Adjusted Cash Flow was $1.060 billion, down 11.6%.
- The company reported $6.0 billion principal amount of senior unsecured notes, with a $5.812 billion carrying value after discounts and issuance costs. Notes mature in 2023, 2025, 2027, 2030, 2040 and 2050; the weighted-average coupon is 2.125%. All outstanding debt was fixed-rate at quarter-end.
- A new $1.5 billion, five-year revolving credit facility was undrawn at quarter-end. The company reported compliance with applicable debt covenants.
- Nine-month dividends to Class A shareholders were $54.9 million. Total current liabilities were $270.0 million; there was no current portion of long-term debt.
Material changes and drivers
- Financial royalty asset income rose 15.9% in Q3 and 16.8% for the nine months, led by the cystic fibrosis franchise and Imbruvica, with contributions from newer assets. Cystic fibrosis franchise royalty receipts rose 27.3% for the nine months, while Imbruvica receipts rose 21.7%.
- Mature-product royalty receipts declined 85.6% for the nine months, mainly reflecting the end of Tecfidera milestone receipts and lower Lyrica and Letairis receipts. Growth-product receipts rose 24.7%.
- Adjusted Cash Receipts fell despite growth-product receipts because distributions to non-controlling interests increased following the reorganization, and mature-product receipts declined.
- G&A expense rose 98.1% in Q3 and 63.7% for the nine months, reflecting the new management agreement, IPO-related insurance and professional costs, and share-based compensation. Management payments under the new agreement are tied partly to cash receipts and security investment values.
- Interest expense declined 54.3% in Q3 and 41.9% for the nine months, following debt refinancing. September’s $6 billion note issuance repaid the February senior secured facilities; the refinancing generated a $25.1 million debt-extinguishment loss.
Outlook, risks and unusual items
- No quantified company-wide earnings or revenue guidance is provided. Management expects operating and working-capital needs, planned acquisitions, R&D funding and debt service to be supported by operating cash flow, available cash and the revolving facility, while noting that future performance and access to financing depend on operating results and market conditions.
- Management says COVID-19 could materially affect results, financial condition and cash flows, but the impact could not be reasonably estimated at the filing date.
- Q3 included a $160.2 million unrealized gain on equity securities, primarily from Immunomedics shares after Gilead announced its proposed acquisition. Nine-month unrealized equity gains were $201.0 million. These are market-value movements, not royalty cash receipts.
- The nine-month provision for changes in expected cash flows was a $101.5 million expense, including $138.7 million of net credit-loss provision expense under the new expected-credit-loss accounting standard. Management emphasizes that royalty forecasts and related provisions rely on estimates and analyst consensus forecasts.
- Vertex represented 27% of Q3 total income and other revenues and 28% of the current portion of financial royalty assets at quarter-end, creating product and payor concentration to monitor.
- Commitments include $200 million of Biohaven commercial-launch preferred equity payments scheduled for 2021–2024, alongside a broader Biohaven funding agreement of up to $450 million. Tazverik obligations included a $110 million payment due in November 2020 and a further $110 million due in November 2021.
- After quarter-end, the company acquired the Cystic Fibrosis Foundation’s residual royalty interest for $575 million upfront plus a potential $75 million milestone. A secondary offering by existing investors in October generated no proceeds for the company. The company also disclosed a disputed royalty claim with Boehringer Ingelheim; no related amount was accrued.
Important facts for investors to verify
- How royalty receipts and portfolio forecasts evolve, especially for the cystic fibrosis franchise, Imbruvica, Tysabri and the maturing products.
- Whether Adjusted Cash Receipts, Adjusted EBITDA and Adjusted Cash Flow reconcile as defined, and how non-controlling-interest distributions affect cash available to Class A shareholders.
- The assumptions behind expected-credit-loss allowances and changes in expected royalty cash flows, which can materially affect reported earnings.
- Debt service, covenant headroom and funding requirements for the Biohaven, Tazverik and post-quarter Vertex transactions.
- The continuing effects of COVID-19, product/payor concentration, and the outcome and potential exposure of the Boehringer Ingelheim dispute.