Royalty Pharma plc — FY2021 Form 10-K Summary
Business context and reporting period
Royalty Pharma acquires and funds royalties on biopharmaceutical products, receiving payments generally linked to product sales. This annual report covers the fiscal year ended December 31, 2021; it is not a standalone Q4 report. At year-end, the portfolio included royalties on more than 35 marketed products and ten development-stage candidates. The company deployed approximately $2.7 billion for royalties and related assets during 2021.
Financial and operating performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Total income and other revenues | $2.289 billion | $2.122 billion | +7.9% |
| Operating income | $1.431 billion | $1.595 billion | -10.3% |
| Consolidated net income | $1.241 billion | $1.702 billion | -27.1% |
| Net income attributable to controlling interest | $619.7 million | $975.0 million | -36.4% |
| Net cash provided by operating activities | $2.018 billion | $2.035 billion | -0.8% |
| Royalty receipts | $2.609 billion | $2.344 billion | +11.3% |
| Adjusted Cash Receipts (non-GAAP) | $2.129 billion | $1.800 billion | +18.2% |
| Adjusted EBITDA (non-GAAP) | $1.944 billion | $1.621 billion | +20.0% |
| Adjusted Cash Flow (non-GAAP) | $1.767 billion | $1.483 billion | +19.1% |
Cash measures improved despite nearly flat operating cash flow. Royalty receipts rose mainly on growth in Vertex’s cystic fibrosis franchise, Biohaven fixed payments and newly acquired assets; these gains partly offset the maturation of HIV royalties. The HIV franchise receipts fell $215.8 million to $78.0 million. The cystic fibrosis franchise generated $702.1 million in royalty receipts, up 27.4%.
GAAP results were affected by higher non-cash provision expense for changes in expected royalty cash flows, which rose to $452.8 million from $230.8 million. R&D funding expense increased to $200.1 million from $26.3 million, largely due to upfront funding associated with BioCryst and MorphoSys development-stage assets. FY2020 also included $65.1 million of impairment expense related to omecamtiv mecarbil and substantial equity-security gains; FY2021 had net equity-security losses. The effective-interest accounting applied to many royalty assets can make reported income volatile and is not directly equivalent to cash receipts.
At December 31, 2021, total assets were $17.516 billion and total liabilities were $7.267 billion. Cash and cash equivalents were $1.541 billion, marketable securities were $581.9 million, and financial royalty assets, net, were $14.333 billion. Principal on senior unsecured notes totaled $7.3 billion, with a 2.24% weighted-average coupon and approximately 13-year weighted-average maturity. The $1.5 billion revolving credit facility was undrawn and available through September 2026; the company reported compliance with debt covenants. Long-term debt carrying value was $7.096 billion.
The company paid four quarterly dividends of $0.17 per Class A share, or $0.68 for the year and $285.2 million in aggregate. Future dividends remain subject to board declaration. Diluted EPS was $1.49 for 2021; the reported 2020 EPS of $1.32 covers only the period after the June 2020 IPO, so it is not a full-year comparable.
Material changes versus the prior comparable period
- Royalty receipts and non-GAAP cash metrics increased, while operating cash flow was essentially unchanged.
- GAAP operating income and net income declined, reflecting higher provision expense and R&D funding expense, and the absence of 2020’s investment gains.
- HIV royalty receipts fell sharply as those royalties substantially matured in 2021. Growth in the cystic fibrosis franchise and newer assets partly offset the decline.
- Royalty acquisitions included Cabometyx/Cometriq, Oxlumo and Tremfya, alongside additional development-stage funding and royalty interests. The company also issued $1.3 billion of notes in July 2021.
Outlook, management commentary, risks and unusual items
Management said available cash, operating cash flow and the undrawn revolver should support operating needs, debt service, planned acquisitions and R&D funding for the foreseeable future. The filing provides no specific company-level revenue, earnings or cash-flow guidance. Its cited biopharmaceutical market growth projections are industry estimates, not company guidance.
- Portfolio and commercial risk: Royalty cash flows depend on product sales, marketer decisions, clinical and regulatory outcomes, pricing and reimbursement, competition, and patent or exclusivity duration. The top five product franchises accounted for 67% of 2021 royalty receipts. No single therapy exceeded 19% of receipts.
- Forecast and accounting sensitivity: Financial royalty asset valuations and income depend on projected sales and royalty duration. Management’s two-year-shorter-duration sensitivity showed substantial potential provision expense for major assets, including $261.3 million for the cystic fibrosis franchise, $173.1 million for Tysabri and $173.1 million for Imbruvica.
- Acquisition and development risk: Competition for suitable royalties may constrain deployment; development-stage assets may not receive approval or achieve commercial success. The 2021 MorphoSys and BioCryst commitments and funding arrangements increase exposure to counterparties and development outcomes.
- Debt and liquidity risk: Debt service, refinancing access, covenant compliance and the ability of operating subsidiaries to distribute funds are important to liquidity. Most operating assets and cash are held in subsidiaries; Royalty Pharma plc depends on them to meet obligations.
- Other risks: The filing highlights healthcare regulation and drug-pricing changes, foreign exchange and interest rates, reliance on the external Manager and key personnel, conflicts of interest, tax and treaty uncertainty, and investment-company-status risk. COVID-19 had not materially affected results or liquidity to date, but management noted continuing uncertainty.
- Unusual or contingent items: A one-time $45 million Soliqua milestone contributed to 2021 receipts. A legal judgment involving Boehringer Ingelheim supported recognition of an expected $16.5 million recovery for underpaid Tradjenta royalties. MorphoSys funding bonds remained undrawn at year-end; Biohaven Series B preferred-share purchases had a remaining $129.6 million commitment. The filing reports ordinary-course legal proceedings and says management did not expect them to materially affect the company.
The independent auditor issued an unqualified opinion on the financial statements and internal controls. Valuation of financial royalty assets and related interest income was identified as a critical audit matter because of judgment involved in forecasts and royalty-duration assumptions.
Important facts for investors to verify
- Whether product-level sales and royalty receipts support the assumptions behind the large royalty asset valuations, particularly for Vertex, Tysabri and Imbruvica.
- How the $452.8 million provision expense and the $1.6949 billion cumulative allowance affect future reported income and asset carrying values.
- The expected timing and cash impact of maturing royalties, especially HIV and DPP-IV royalties, versus growth from newer acquisitions.
- Debt-service requirements, covenant headroom, subsidiary cash-distribution capacity and the availability of the undrawn revolver.
- The terms, funding status and counterparty risks of Biohaven, MorphoSys, Cytokinetics and other development or fixed-payment arrangements, including subsequent events disclosed after year-end.
- That non-GAAP Adjusted Cash Receipts, Adjusted EBITDA and Adjusted Cash Flow are management-defined supplemental measures and should be assessed alongside GAAP results and operating cash flow.