Royalty Pharma plc — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Royalty Pharma acquires and funds biopharmaceutical royalties and related assets. Its portfolio included royalties on more than 35 marketed therapies and 11 development-stage candidates.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total income and other revenues | $684.0 million | $562.0 million | +21.7% |
| Operating income | $479.0 million | $219.7 million | +118.0% |
| Operating margin, calculated as operating income divided by total income and other revenues | 70.0% | 39.1% | Higher |
| Consolidated net income | $509.1 million | $128.1 million | +297.5% |
| Net income attributable to Royalty Pharma plc | $340.8 million | $51.8 million | +558.3% |
| Diluted earnings per Class A share | $0.76 | $0.12 | Higher |
| Net cash provided by operating activities | $1,033.8 million | $460.3 million | +$573.6 million |
| Adjusted Cash Receipts, non-GAAP | $1,131.0 million | $604.6 million | +87.1% |
| Adjusted EBITDA, non-GAAP | $1,044.2 million | $555.7 million | +87.9% |
| Adjusted Cash Flow, non-GAAP | $973.4 million | $367.1 million | +165.2% |
Cash and cash equivalents were $1.976 billion at March 31, 2023, versus $1.711 billion at year-end 2022. Total assets were $17.074 billion and shareholders’ equity was $9.822 billion. Debt had $7.3 billion principal outstanding, with a $7.121 billion carrying value; $1.0 billion of notes was due in September 2023. The $1.5 billion revolving facility was undrawn. The company reported compliance with applicable debt covenants. Interest expense was $47.0 million.
Changes versus the prior-year quarter
- The $475 million Zavzpret approval milestone was a major driver of higher receipts and earnings. It contributed to a $475 million increase in royalty receipts overall, which rose 72.0% to $1.223 billion.
- Operating cash flow also benefited from the milestone and lower development-stage funding payments. Q1 2022 included $100 million of upfront and milestone R&D funding expense/payments to Cytokinetics; Q1 2023 had none of those upfront or milestone payments.
- GAAP income from financial royalty assets rose 29.9% to $664.7 million, including $153.6 million of Zavzpret-related interest income. The company also cited Trelegy, Tremfya and cystic fibrosis franchise performance as contributors.
- These gains were partly offset by weaker Imbruvica and Tysabri forecasts and receipts, and by the near-completion of Januvia, Janumet and other DPP-IV royalties. Intangible royalty revenue fell 99.6% to $0.1 million.
- General and administrative expense rose 66.3% to $85.7 million, primarily because manager payments are partly linked to royalty cash receipts. Equity-method earnings increased to $34.6 million, mainly reflecting Avillion’s Airsupra-related gain.
Outlook, commentary and risks
- No numerical full-year earnings or cash-flow guidance is provided. Management said existing cash, operating cash generation and access to the undrawn facility should support operating needs, planned acquisitions and debt service for the foreseeable future. It expects to continue evaluating acquisitions, whose timing and size may vary.
- The company invested $618.2 million in royalties, milestones and related assets during the quarter, including $500 million for interests in Spinraza and pelacarsen and $100 million upfront for KarXT. Additional contingent payments may become due under these agreements.
- Royalty receipts are concentrated: Vertex represented 32% of the current portion of financial royalty assets at quarter-end, and the top five products represented 63% of Q1 receipts excluding the Zavzpret milestone. Product sales, pricing, competition, regulatory outcomes, patent duration and actions by third-party marketers can affect collections.
- GAAP results are sensitive to estimates of long-term royalty cash flows. The $118.8 million provision for changes in expected cash flows was a non-cash expense, and the filing emphasizes that this accounting can make reported income volatile and does not directly track royalty receipts.
- Portfolio developments included FDA approval of Trodelvy and Airsupra, and positive Xtandi Phase 3 topline results. Cabometyx’s CONTACT-03 trial did not meet its primary endpoint; BCX10013’s program was expected to be delayed after non-clinical observations. Development-stage assets remain subject to approval and commercialization risk.
- Other unusual items included $32.3 million of gains on available-for-sale debt securities, largely related to MorphoSys Development Funding Bonds, and $10.8 million of losses on equity securities. The company also authorized up to $1.0 billion of share repurchases through June 2027; none were made in Q1.
- Funding commitments included $250 million remaining under the Cytokinetics agreement and approximately $39.3 million of committed capital for current development stages and Avillion arrangements. Legal proceedings are described as ordinary-course matters; the company reported no accruals for those proceedings and does not expect their outcomes to materially harm it.
Important facts for investors to verify
- How much of subsequent cash generation and earnings is recurring royalty performance versus milestone receipts and fair-value movements.
- Repayment or refinancing plans for the $1.0 billion September 2023 note maturity, and continued covenant compliance.
- Updated sales forecasts and royalty performance for concentrated assets, particularly the cystic fibrosis franchise, Imbruvica and Tysabri.
- Clinical, regulatory and commercial progress for development-stage assets, including pelacarsen, KarXT, aficamten and BCX10013, and any contingent funding obligations.
- Whether the authorized buyback proceeds, and how acquisitions, dividends and capital deployment affect liquidity and leverage.
- Tax, manager-related and other risks detailed in the filing; the company reported no income tax expense for the quarter.