Royalty Pharma plc — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Royalty Pharma acquires biopharmaceutical royalties and funds selected development and launch activities. Comparisons below are with the corresponding 2022 periods.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total income and other revenues | $538.2m | $536.0m | $1,222.2m | $1,098.0m |
| Operating income | $248.8m | $377.8m | $727.8m | $597.5m |
| Operating margin | 46.2% | 70.5% | 59.5% | 54.4% |
| Consolidated net income | $351.3m | $491.6m | $860.4m | $619.7m |
| Net income attributable to Royalty Pharma plc | $227.6m | $304.5m | $568.4m | $356.3m |
| Diluted earnings per Class A share | $0.50 | $0.70 | $1.27 | $0.82 |
| Net cash provided by operating activities | $607.8m | $575.0m | $1,641.7m | $1,035.2m |
| Adjusted Cash Receipts (non-GAAP) | $544.6m | $524.0m | $1,675.6m | $1,128.7m |
| Adjusted EBITDA (non-GAAP) | $497.6m | $479.9m | $1,541.8m | $1,035.7m |
| Adjusted Cash Flow (non-GAAP) | $512.5m | $481.5m | $1,485.8m | $848.6m |
Operating margins are calculated as operating income divided by total income and other revenues. The company cautions that royalty-asset accounting can make GAAP income volatile and that its non-GAAP liquidity measures are supplemental, not substitutes for GAAP results.
- Liquidity and debt: Cash and cash equivalents were $2.17bn at June 30, 2023; no marketable securities were held. Principal borrowings totaled $7.30bn ($7.13bn carrying value), including $1.00bn of notes due September 2023. The $1.50bn revolving credit facility was undrawn. The company reported covenant compliance.
- Balance sheet: Total assets were $17.12bn and shareholders’ equity was $9.81bn. Current assets were $2.95bn and current liabilities $1.17bn.
- Cash uses: In the first six months, investing activities used $622.0m, including $662.2m for financial royalty asset acquisitions; financing activities used $557.4m, including $179.2m of dividends and $134.4m of share repurchases.
Material changes versus the prior period
- Q2 total income and other revenues were nearly flat year over year, while operating income fell 34.1% and attributable net income fell 25.2%. The main operating expense change was a 128.2% increase in the non-cash provision for changes in expected royalty cash flows, to $241.2m.
- For the first six months, total income and other revenues rose 11.3%, operating income 21.8%, and attributable net income 59.5%. Higher royalty-asset income included $153.6m of first-quarter interest income associated with Zavzpret approval; comparisons also reflect the prior-year $100m upfront Cytokinetics R&D expense.
- Six-month operating cash flow increased $606.4m, primarily on higher royalty collections, including the $475m Zavzpret approval milestone. Total royalty receipts were $1.86bn, up 38.4%; Adjusted Cash Receipts rose 48.5%.
- Portfolio receipts showed mixed trends: six-month cystic fibrosis franchise receipts increased 10.1%, while Imbruvica fell 21.4% and Tysabri fell 10.7%. Trelegy contributed $84.9m of receipts after its 2022 acquisition.
Outlook, commentary, risks and unusual items
- No specific quantitative earnings or revenue guidance is provided in the filing. Management says available cash, operating cash flows and the undrawn revolver are expected to support operations, planned acquisitions and R&D funding, and debt service for the foreseeable future.
- Management invested $682.1m in royalties, milestones and related assets in the first half of 2023. Acquisitions included interests in Spinraza and pelacarsen, KarXT, and an incremental Erleada royalty. The company expects to continue evaluating acquisitions but does not set a minimum annual investment target.
- In March 2023 the FDA approved Zavzpret, triggering a $475m milestone payment. The company also received $34.8m as its share of AstraZeneca’s fee for exercising its U.S. commercialization option for Airsupra.
- Q2 included $82.9m of gains on available-for-sale debt securities, primarily reflecting fair-value changes in MorphoSys development funding bonds, and $41.3m of equity-security gains. These fair-value gains are not equivalent to recurring royalty cash receipts.
- Royalty income depends on underlying drug sales, pricing, competition, regulatory and clinical outcomes, patents, and marketer decisions. The top five product franchises represented 65% of first-half royalty receipts, excluding the Zavzpret milestone. Vertex accounted for 31% of the current portion of financial royalty assets.
- Management highlights substantial estimation sensitivity: forecasts of product sales and royalty duration affect both effective-interest income and non-cash provisions. First-half provision expense was $360.0m, principally reflecting forecast declines for Imbruvica, Tremfya and Trelegy.
- Other exposures include development-stage asset failure, acquisition availability and competition, leverage and refinancing, interest-rate and foreign-exchange movements, healthcare pricing regulation, reliance on the external Manager, related-party conflicts, and complex tax positions. The filing reports ongoing legal proceedings but says their outcomes are not expected to materially adversely affect the company; no clear aggregate exposure is provided.
Most important facts for investors to verify
- How the September 2023 $1.00bn note maturity was refinanced or repaid after the filing date.
- Whether royalty receipt trends persist, particularly for the cystic fibrosis franchise, Imbruvica, Tysabri, Trelegy and other concentrated assets.
- How non-cash royalty provisions and forecast revisions affect reported income and carrying values relative to actual cash collections.
- Commercial and regulatory progress for development-stage holdings, and any contingent milestone funding obligations.
- Cash deployment, remaining share-repurchase authorization, dividend decisions, debt covenant headroom and availability of the revolving facility.
- Potential effects of U.S. drug-pricing changes, tax or treaty challenges, and the company’s significant reliance on its Manager.