Royalty Pharma plc — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; comparisons are to the corresponding 2020 periods. Amounts below are in U.S. dollars. Royalty Pharma acquires biopharmaceutical royalties and funds product development. Its consolidated results include substantial non-controlling interests.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total income and other revenues | $585.8 million | $538.4 million | $1,713.8 million | $1,550.2 million |
| Operating income | $303.1 million | $510.6 million | $1,277.3 million | $1,281.3 million |
| Consolidated net income | $221.8 million | $624.3 million | $1,187.5 million | $1,335.3 million |
| Net income attributable to controlling interest | $101.9 million | $290.6 million | $611.8 million | $803.9 million |
| Basic and diluted EPS | $0.24 | $0.79 | $1.49 | $0.88 |
Revenue growth reflected higher financial royalty income, intangible royalty revenue and other royalty income. Operating income fell 40.6% in Q3, while nine-month operating income was nearly unchanged. Net income attributable to controlling interest declined 64.9% in Q3 and 23.9% year to date. The Q3 comparison was affected by a $137.8 million provision expense for changes in expected royalty cash flows, versus $33.8 million of provision income in Q3 2020, and by prior-year gains on equity securities. Q3 2021 also included $90.5 million of R&D funding expense, primarily a MorphoSys upfront payment.
The filing reports no income tax expense for the periods presented. It does not provide a conventional operating-margin measure; reported earnings are influenced by non-cash changes in estimated royalty cash flows and investment fair values.
Cash flow, liquidity and debt
- Operating cash flow: $1.528 billion for the first nine months of 2021, compared with $1.469 billion in 2020.
- Royalty receipts: $1.949 billion for the first nine months, up 13.5%; Q3 receipts were $712.2 million. Management’s non-GAAP Adjusted Cash Receipts were $1.586 billion, up 20.5%; Adjusted EBITDA was $1.450 billion, up 22.2%; and Adjusted Cash Flow was $1.279 billion, up 20.7%.
- Cash and securities: At September 30, 2021, cash and cash equivalents were $1.801 billion and marketable securities were $245.7 million, versus $1.009 billion and $983.3 million, respectively, at year-end 2020.
- Debt: Long-term debt carrying value was $7.091 billion, up from $5.817 billion at year-end. The company issued $1.3 billion of fixed-rate notes in July 2021; $7.3 billion principal was outstanding. The $1.5 billion revolving facility was undrawn and extended to September 2026. The company reported compliance with applicable debt covenants.
- Cash deployment: Investing activities used $1.319 billion, including $2.020 billion of financial royalty asset acquisitions, partly offset by marketable-security sales and maturities. Financing activities provided $583.2 million. Class A dividends paid in the first nine months totaled $211.6 million, or $0.51 per share.
Material changes and portfolio developments
- Nine-month royalty receipts rose primarily from growth in the cystic fibrosis franchise, including the residual royalty interest acquired in October 2020, and receipts from newer assets. HIV franchise receipts declined $138.5 million as those royalties matured.
- The cystic fibrosis franchise was the largest source of receipts: $505.7 million for the first nine months, up 28.9%. Other notable growth included Imbruvica, Promacta and Tysabri.
- Royalty Pharma reported $2.2 billion invested in royalties and related assets across four transactions during the first nine months, including interests in Oxlumo, Cabometyx/Cometriq and seltorexant, and a MorphoSys funding partnership.
- The MorphoSys agreement provides for up to $2.025 billion of funding. The $1.425 billion upfront payment closed in July; the agreement also includes up to $150 million of milestones and up to $350 million of Development Funding Bonds. MorphoSys had not drawn the bonds by September 30, and must draw at least $150 million.
- Intangible royalty revenue increased, partly due to an expected recovery of approximately $21.7 million in underpaid Tradjenta royalties following a legal judgment.
Outlook, risks and unusual items
- The filing gives no numerical earnings, cash flow or acquisition guidance. Management said available cash, operating cash flow and the undrawn revolver were expected to fund operations, debt service, planned acquisitions and R&D commitments for the foreseeable future.
- Management cautions that royalty income and related provisions can be volatile because they depend on estimates of future product sales, royalty duration and other assumptions. These non-cash accounting measures may not track royalty receipts or near-term operating performance.
- Key exposures include sales and market-share changes in underlying drugs, product competition and patent or regulatory developments; concentration in the cystic fibrosis franchise and Vertex; development and commercialization risk; counterparty credit risk; and interest-rate and foreign-currency movements. Vertex accounted for 33% of total income and other revenues in the first nine months.
- The company had a remaining $147.2 million commitment for Biohaven Series B preferred shares, an accrued $110 million Tazverik purchase obligation that was funded on November 4, 2021, and other development and affiliate commitments. MorphoSys had not drawn its bonds as of quarter-end.
- Royalty asset valuations use forecasts and significant management judgment. In Q3, provision expense was driven mainly by lower forecasts for Tazverik and Xtandi; the filing also cites lower forecasts for Imbruvica and Emgality year to date. The Q3 loss on derivative instruments included a $15.1 million fair-value loss on treasury rate locks settled in connection with the July debt issuance.
- Management reported that COVID-19 had not materially affected financial performance to date and was not believed reasonably likely to do so, while noting effects may appear in future periods. Management stated that it did not expect existing legal proceedings to adversely affect the business materially; no material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- Whether product-level royalty receipts, particularly from the cystic fibrosis franchise and maturing HIV royalties, support continued cash-flow growth.
- How much reported earnings reflect cash performance versus non-cash royalty forecast provisions, fair-value movements and one-time items.
- The assumptions and sensitivity behind Level 3 royalty and Biohaven/MorphoSys valuations, and the timing and collectability of related payments.
- Debt-service capacity after the July 2021 issuance, including covenant headroom and the use of the undrawn revolver.
- The effect of non-controlling interests and exchangeable Class B shares on earnings attributable to Class A shareholders; the 2020 nine-month EPS comparison covers only the period after the June 2020 IPO.