Royalty Pharma plc — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Royalty Pharma acquires biopharmaceutical royalties and funds selected development programs. Results include major reorganizations and the June 2020 IPO, so some year-over-year comparisons—particularly attributable income, cash receipts and ownership—are affected by changes in structure and non-controlling interests.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total income and other revenues | $510.9 million | $457.6 million | $1,011.8 million | $892.5 million |
| Operating income | $409.3 million | $327.9 million | $770.8 million | $758.8 million |
| Consolidated net income | $602.0 million | $178.8 million | $711.1 million | $574.9 million |
| Net income attributable to controlling interest | $442.1 million | $151.7 million | $513.3 million | $519.2 million |
| Net cash from operating activities | $489.0 million | $336.9 million | $960.1 million | $769.8 million |
- Revenue growth reflected higher income from financial royalty assets: up 13.7% in Q2 and 17.3% for the half year. The cystic fibrosis franchise and Imbruvica were key contributors. Intangible royalty revenue and other royalty income declined as certain royalties matured or expired.
- Operating margin was approximately 80.1% in Q2 and 76.2% for the first half, calculated as operating income divided by total income and other revenues.
- Six-month GAAP operating cash flow rose about 25% year over year. Royalty cash collections from financial assets were $1,003.5 million, versus $895.2 million.
- Management’s non-GAAP measures declined: six-month Adjusted Cash Receipts were $844.1 million (down 21.5%), Adjusted EBITDA $774.1 million (down 24.7%), and Adjusted Cash Flow $666.5 million (down 19.0%). Higher distributions to non-controlling interests and declining mature-product receipts drove much of the decrease. These measures are not GAAP and may not be comparable with similarly named measures at other companies.
- Q2 consolidated income included $193.9 million of unrealized gains on equity securities. For the six months, a $135.3 million provision for changes in expected royalty cash flows included $108.7 million of expected credit-loss provision. These items make reported earnings less indicative of cash collections.
Liquidity, debt and capital changes
- At June 30, cash and cash equivalents were $2.44 billion, marketable securities $343.7 million, and current assets $3.39 billion against current liabilities of $451.0 million.
- Long-term debt, including the current portion, had a carrying value of $5.91 billion; the balance-sheet current portion was $182.2 million. New secured term loans bear interest at LIBOR plus 1.50% and 1.75%, with maturities in 2025 and 2027. The company reported compliance with leverage and coverage covenants at quarter-end.
- The February refinancing replaced the prior facilities; the company terminated its interest-rate swaps, paid $35.4 million to terminate them and received back $45.3 million of collateral. The new debt is not hedged by swaps.
- The June IPO generated approximately $1.9 billion in net proceeds for the company, which were used to acquire RP Holdings Class A interests. The offering price was $28 per share. Continuing Investors’ Class B interests represented approximately 40% ownership in RP Holdings and are exchangeable into Class A shares. Reported basic and diluted EPS of $0.09 covers only June 16–30, after Class A shares began trading; the filing reports 607.1 million fully diluted shares at June 30.
Changes, outlook, risks and unusual items
- Growth-product royalty receipts increased 27.7% for the first half to $1.09 billion, while mature-product receipts fell 87.2% to $38.4 million. Tecfidera milestone receipts ended after the final 2019 payment; Lyrica and Letairis receipts also declined.
- The new management agreement ties operating and personnel payments partly to cash receipts and security investments. G&A rose 47.6% for the first half to $80.9 million, reflecting these payments, IPO/reorganization professional costs and share-based compensation.
- Adoption of the expected-credit-loss standard on January 1, 2020 reduced retained earnings by $192.7 million. Royalty asset income and provisions depend on forecast cash flows and can be volatile; management says royalty receipts are a more useful indicator of operating performance than royalty income alone.
- COVID-19’s potential financial effect could not be reasonably estimated at the filing date. Royalty performance depends on sales of underlying products, and cash flow forecasts rely substantially on analyst consensus estimates. The portfolio also has product and payor concentration; Vertex accounted for 27% of current financial royalty assets at June 30.
- Floating-rate debt exposes the company to interest-rate increases. Management also cited the planned LIBOR transition, which could require renegotiating facility terms and could increase borrowing costs. Credit-facility covenants restrict certain distributions, additional debt, investments and transactions.
- Commitments include $220 million of additional Tazverik purchase payments: the second $110 million tranche was due in November 2020 and the final $110 million tranche in November 2021. Remaining Sanofi R&D funding commitment was $21 million; Avillion unfunded commitments were $41.5 million.
- A dispute with Boehringer Ingelheim concerns alleged DPP-IV royalty overpayments and Royalty Pharma’s separate claim for €23.1 million of underpaid royalties. No material accrual was recorded; outcome and potential exposure were not estimable.
- Subsequent to quarter-end, Royalty Pharma acquired a risdiplam royalty for $650 million in July and announced an expanded Biohaven arrangement of up to $450 million in August, including $200 million of preferred-equity support payable during 2021–2024. The filing provides no quantified full-year earnings or cash-flow guidance.
Investor verification priorities
- Reconcile GAAP operating cash flow with Adjusted Cash Receipts and Adjusted Cash Flow, especially the treatment of non-controlling-interest distributions and refinancing-related cash items.
- Assess royalty-asset forecast assumptions, credit-loss allowances and concentration in major products and marketers, including Vertex.
- Review the IPO-era ownership structure, exchangeability of Class B interests, fully diluted share count and resulting attribution of earnings.
- Evaluate floating-rate debt, covenant headroom, scheduled repayments and the effects of the LIBOR transition.
- Confirm funding needs and expected returns from the Tazverik commitments, post-quarter acquisitions and Biohaven agreement, alongside COVID-19 and product-sales risks.