Royalty Pharma plc — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement figures are unaudited. Royalty Pharma acquires biopharmaceutical royalties and funds product development. It reported royalties on more than 35 marketed therapies and 11 development-stage candidates.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total income and other revenues | $536.0 million | $555.0 million | $1,098.0 million | $1,128.0 million |
| Operating income | $377.8 million | $744.9 million | $597.5 million | $974.2 million |
| Consolidated net income | $491.6 million | $806.8 million | $619.7 million | $965.7 million |
| Net income attributable to Royalty Pharma plc | $304.5 million | $440.8 million | $356.3 million | $509.9 million |
| Diluted EPS | $0.70 | $1.08 | $0.82 | $1.25 |
| Net cash provided by operating activities | $575.0 million | $531.7 million | $1,035.2 million | $1,057.8 million |
- Royalty receipts: $633.2 million for Q2 and $1,344.2 million for the first half, up 7.7% and 8.7%, respectively. These are management-defined measures based on cash collections and other receipts, not GAAP revenue.
- First-half non-GAAP measures: Adjusted Cash Receipts were $1,128.7 million, up 13.0%; Adjusted EBITDA was $1,035.7 million, up 12.9%; Adjusted Cash Flow was $848.6 million, up 1.3%.
- Cash and liquidity: At June 30, cash and cash equivalents were $2,108.0 million and marketable securities were $290.4 million. The $1.5 billion revolving credit facility was undrawn and available through September 2026.
- Debt and equity: Long-term debt carrying value was $7,106.2 million, against $7,300.0 million principal outstanding. Total shareholders’ equity was $10,408.2 million. The company paid $165.3 million in Class A dividends in the first half.
- Margins: The filing does not present a defined operating-margin measure. Operating income was particularly affected by changes in the provision for expected royalty cash flows, so reported earnings do not track royalty cash collections directly.
Material changes versus the prior period
- First-half GAAP revenue declined 2.7%, while operating income fell 38.7% and net income attributable to Royalty Pharma fell 30.1%. A $290.3 million first-half provision expense for changes in expected royalty cash flows, versus $48.5 million in the prior-year period, was a major factor.
- Cash royalty receipts increased, led by the cystic fibrosis franchise, which rose $61.0 million in the first half, and newly acquired Tremfya receipts of $46.7 million. Imbruvica receipts declined $8.9 million, and receipts from other products fell $81.3 million, primarily reflecting maturing royalties.
- Intangible royalty revenue fell 52.6% in the first half as Januvia and Janumet royalties expired in Q1. The company said it does not expect material future DPP-IV revenue.
- Operating cash flow decreased $22.6 million to $1,035.2 million. Higher royalty cash collections were offset by $100.0 million in Cytokinetics development funding and increased interest paid.
- Interest expense rose 25.6% in the first half, primarily due to $1.3 billion of notes issued in July 2021. Cash distributions to non-controlling interests declined, supporting higher Adjusted Cash Receipts.
Outlook, commentary, risks and unusual items
- Management gave no specific full-year revenue or earnings guidance in the supplied filing text. It said existing cash, operating cash flow and available credit should support operating needs, planned strategic acquisitions and debt service for the foreseeable future.
- In July 2022, the company acquired the Trelegy royalty interest for $1.31 billion, with up to $300 million of additional sales-milestone payments. It also agreed to provide Theravance $25 million upfront and a potential $15 million regulatory milestone for ampreloxetine development.
- Other commitments include up to $250 million remaining under the Cytokinetics commercial-launch funding arrangement; the company expected $125 million of the optional $200 million tranche to remain available because certain milestones might not be met by year-end. MorphoSys notified the company in July of its intention to draw $300 million of Development Funding Bonds in September. A further $100.4 million remained committed for Biohaven Series B preferred shares.
- Results include significant fair-value and estimate-driven items. A $71.8 million Q2 gain on a Biohaven-related derivative and gains on available-for-sale debt securities contributed to other income; management’s valuation assumed a high probability of a Biohaven change of control within the next year. These items are not equivalent to recurring royalty cash receipts.
- Royalty forecasts and provisions depend on product-sales estimates and royalty durations. First-half provision expense included charges tied mainly to Imbruvica and Tazverik forecasts; the filing also reports provision income from reduced expected credit losses related to Tazverik following a significant decline in its asset value.
- Portfolio risks include product sales, competition, generic entry, clinical and regulatory outcomes, and reliance on external marketers. Vertex accounted for 32% of the current portion of financial royalty assets and 36% of first-half income and other revenues. The company said COVID-19 had not materially affected results or liquidity and was not expected to do so; it reported no material change to previously disclosed risk factors.
- The company reported it was in compliance with applicable debt covenants. It said existing legal proceedings were not expected to adversely affect the business, financial condition or results, while noting that some proceedings’ loss probabilities and damages could not be estimated.
Important facts for investors to verify
- Whether royalty receipts and cash generation remain resilient as mature royalties decline and product-level trends, particularly for Imbruvica and the cystic fibrosis franchise, evolve.
- How the $1.31 billion Trelegy acquisition and related contingent payments affect liquidity, leverage and future royalty receipts.
- Whether MorphoSys draws the planned $300 million and how Cytokinetics and other funding commitments progress against their clinical and regulatory conditions.
- How Biohaven-related transaction developments affect the value and timing of preferred-share redemptions and the derivative gain recorded in Q2.
- Whether changes in product forecasts, patent durations and credit assumptions result in further material royalty-asset provisions or valuation changes.