Royalty Pharma plc — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparison is with Q1 2021. Royalty Pharma acquires biopharmaceutical royalties and funds development in exchange for royalties or other payments.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / prior period | Change |
|---|---|---|---|
| Total income and other revenues | $562.0 million | $573.0 million | Down 1.9% |
| Operating income | $219.7 million | $229.3 million | Down 4.2% |
| Consolidated net income | $128.1 million | $159.0 million | Down 19.4% |
| Net income attributable to Royalty Pharma | $51.8 million | $69.1 million | Down 25.1% |
| Basic and diluted EPS | $0.12 | $0.18 | Down |
| Royalty receipts | $711.0 million | $649.5 million | Up 9.5% |
| Adjusted Cash Receipts (non-GAAP) | $604.6 million | $523.8 million | Up 15.4% |
| Adjusted EBITDA (non-GAAP) | $555.7 million | $481.6 million | Up 15.4% |
| Adjusted Cash Flow (non-GAAP) | $367.1 million | $409.3 million | Down 10.3% |
| Net cash from operating activities | $460.3 million | $526.1 million | Down $65.8 million |
Cash and cash equivalents were $1.792 billion at March 31, 2022, and marketable securities were $484.2 million. Current assets totaled $2.982 billion against current liabilities of $135.9 million. Long-term debt had a carrying value of $7.101 billion ($7.3 billion principal); the $1.5 billion revolving facility was undrawn. Debt had fixed rates, and the company reported covenant compliance. The Class A dividend paid was $0.19 per share, versus $0.17 a year earlier.
Royalty receipts increased mainly from the cystic fibrosis franchise, Tysabri and newly acquired royalties, including Tremfya and Cabometyx/Cometriq. Growth was partly offset by declines in matured royalties, particularly the HIV franchise. GAAP income and cash receipts are not directly comparable: income from financial royalty assets uses forecast cash flows and the effective-interest method, while provisions for forecast revisions can cause material non-cash earnings volatility.
Material changes and unusual items
- Provision expense for changes in expected royalty cash flows was $184.6 million, down from $292.3 million. Q1 2022 included forecast-related expenses for Imbruvica and Tazverik, partly offset by provision income for the cystic fibrosis franchise. Credit-loss provision activity was income of $49.6 million, primarily reflecting a reduced allowance for Tazverik.
- R&D funding expense rose to $100.5 million from $2.6 million, primarily due to $100 million of upfront and milestone funding to Cytokinetics for a development-stage royalty. This contributed to lower operating cash flow and Adjusted Cash Flow.
- Interest expense increased 25.8% to $47.1 million, primarily reflecting the $1.3 billion of notes issued in 2021 and their first interest payment in the period.
- Other expense was $45.0 million, including $36.2 million of equity-security losses and $16.6 million of unrealized losses on available-for-sale debt securities, partly offset by interest income.
- Royalty revenue from intangible assets fell to $33.6 million; Januvia and Janumet royalties expired during Q1, and the company does not expect material future revenue from its DPP-IV intangible assets.
Outlook, risks and contingencies
The filing provides no formal numerical earnings or cash-flow guidance. Management said existing cash, operating cash flow and the undrawn revolver should support operating needs, planned strategic acquisitions and debt service for the foreseeable future. It expects to fund operations principally from cash flow and acquisitions from cash flow and potential debt or equity issuance; acquisition spending varies with opportunities.
Management reported no material COVID-19 effect on results or liquidity to date and did not believe a material future effect was reasonably likely. Key risks include changes in underlying drug sales, clinical and regulatory outcomes, product competition and patent life, and the uncertainty of long-term cash-flow forecasts used to value royalty assets. Vertex was the largest individual royalty marketer and payor; it accounted for 35% of total income and revenues and 32% of the current portion of financial royalty assets.
Funding commitments include up to $250 million remaining under Cytokinetics commercial-launch funding, up to $350 million under MorphoSys development funding bonds (no draw as of quarter-end), and $115 million remaining for Biohaven Series B preferred shares. Additional development and Avillion commitments were disclosed; the filing reports approximately $36.7 million of current-stage committed capital requirements across certain arrangements. Legal proceedings were described as ordinary-course matters, with no material adverse outcome expected by management. After quarter-end, BioCryst paused enrollment in BCX9930 trials while investigating elevated serum creatinine levels in some patients.
Management identifies significant judgment in royalty cash-flow forecasts and Level 3 fair-value estimates. It also notes counterparty and concentration exposure, foreign-currency risk, and interest-rate exposure on cash and securities. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether royalty receipts and product sales sustain growth, particularly for the cystic fibrosis franchise, and how mature royalties offset new-product contributions.
- Changes in forecast assumptions and cumulative allowances, especially for Imbruvica, Tazverik and the cystic fibrosis franchise, and their effect on non-cash GAAP earnings.
- Actual funding draws and milestone outcomes for Cytokinetics, MorphoSys and Biohaven, including the clinical and regulatory progress of relevant products.
- Debt-service capacity and refinancing needs, including the $1 billion note maturity in 2023, covenant headroom and continued availability of the revolver.
- How non-GAAP Adjusted Cash Receipts, Adjusted EBITDA and Adjusted Cash Flow reconcile to GAAP operating cash flow and whether those measures remain comparable over time.