Royalty Pharma plc — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. Royalty Pharma acquires royalty interests in biopharmaceutical products and development-stage candidates; its portfolio included royalties on more than 45 commercial products and five development-stage candidates. The June 2020 IPO and February 2020 reorganization changed the group structure and non-controlling interests, limiting direct comparability with prior years.
Key financial metrics
| Metric | FY2020 | Prior comparable period |
|---|---|---|
| Total income and other revenues | $2.122 billion | $1.814 billion in 2019; up 17.0% |
| Operating income | $1.595 billion | $2.623 billion in 2019; down 39.2% |
| Consolidated net income | $1.702 billion | $2.461 billion in 2019; down 30.9% |
| Net income attributable to controlling interest | $975.0 million | $2.349 billion in 2019; down 58.5% |
| Net cash provided by operating activities | $2.035 billion | $1.667 billion in 2019 |
| Adjusted Cash Receipts (non-GAAP) | $1.800 billion | $2.115 billion in 2019; down 14.9% |
| Adjusted EBITDA (non-GAAP) | $1.621 billion | $2.026 billion in 2019; down 20.0% |
| Adjusted Cash Flow (non-GAAP) | $1.483 billion | $1.636 billion in 2019; down 9.4% |
| Cash and cash equivalents; marketable securities | $1.009 billion; $983.3 million | $246.2 million; $94.5 million at year-end 2019 |
| Debt | $6.0 billion principal; $5.817 billion carrying value | $6.0 billion principal at year-end 2019 |
The filing does not present a conventional gross margin. Operating income fell despite revenue growth, primarily because 2019 included a $1.019 billion provision credit on expected royalty cash flows, while 2020 recorded $230.8 million of provision expense. Adjusted cash measures are non-GAAP and should be considered alongside GAAP operating cash flow. FY2020 basic and diluted EPS of $1.32 cover only June 16–December 31, 2020, after the IPO, not the full fiscal year.
Material changes and operating drivers
- Royalty receipts from Growth Products increased 23.0% to $2.277 billion, led by the cystic fibrosis franchise ($551.3 million), Tysabri ($345.8 million), Imbruvica ($322.1 million) and the HIV franchise ($293.8 million). Growth in cystic fibrosis royalties reflected Trikafta’s launch.
- Mature Product royalty receipts declined 84.0% to $67.0 million. Tecfidera milestone receipts ended after the final 2019 payment; Humira royalties expired in 2018, and Remicade, Letairis and Lyrica receipts also declined.
- Adjusted Cash Receipts declined despite stronger Growth Product receipts, principally because distributions to non-controlling interests rose to $544.0 million following the reorganization and because mature royalties declined.
- Royalty income from financial royalty assets increased 18.9% to $1.960 billion. GAAP results also reflected changing analyst forecasts, asset provisions and non-cash valuation items; these can make reported earnings diverge from royalty cash receipts.
- Invested $2.3 billion in royalties and related assets during 2020. Acquisitions included Evrysdi, Prevymis, IDHIFA, Entyvio, an additional cystic fibrosis royalty interest, and interests in Orladeyo and BCX9930.
Liquidity, debt and capital allocation
- Issued $6.0 billion of senior unsecured notes in September 2020, with a weighted-average coupon of 2.125% and maturities from 2023 to 2050; proceeds and cash on hand refinanced secured credit facilities. All outstanding debt was fixed-rate at year-end.
- Had an undrawn $1.5 billion, five-year revolving credit facility at year-end and reported compliance with applicable debt covenants. Cash, cash equivalents and marketable securities totaled approximately $1.992 billion.
- Management said existing capital resources, operating cash flow and the revolver should support operating needs, strategic acquisitions, committed funding and debt service for the foreseeable future. This is not quantified earnings or royalty guidance.
- Paid $112.5 million in post-IPO dividends, or $0.15 per Class A share for two quarterly payments. Future dividends remain subject to board approval and legal and contractual limits.
Outlook, risks and unusual items
- Portfolio and market risks: Royalty cash flows depend on product sales, pricing and reimbursement, competition, patent duration, regulatory outcomes and marketer decisions. The top five therapies accounted for 61% of 2020 royalty receipts. The HIV royalty stream was expected to substantially end in 2021; Januvia/Janumet royalties in 2022; and the cystic fibrosis franchise faces potential sales pressure around Trikafta’s expected 2037 patent expiration.
- Development risk: In 2020, Royalty Pharma recorded a $65.1 million impairment charge after writing off the omecamtiv mecarbil royalty asset following mixed Phase III results and the announced end of its collaboration. Pfizer’s PALLAS and PENELOPE-B trials for adjuvant Ibrance did not meet their primary objectives; the filing says no royalties or milestones are expected from that funding arrangement.
- Accounting and estimates: Adoption of the expected-credit-loss standard resulted in a $192.7 million opening retained-earnings adjustment. 2020 provision expense included $156.2 million for current expected credit losses. Forecasts of product sales and royalty duration are significant estimates; the auditor identified valuation of financial royalty assets as a critical audit matter. The auditor issued an unqualified opinion on the financial statements.
- Other unusual items: The Immunomedics investment generated approximately $385 million in gross cash proceeds upon Gilead’s acquisition and contributed to a $292.3 million gain. Operating and personnel payments to the external Manager were $112.5 million; the fee structure is linked in part to cash receipts and security investments.
- COVID-19 and legal matters: The company said COVID-19 had not materially affected financial performance to date and did not believe a material future impact was reasonably likely, while noting uncertainty and possible effects on partners, trials, supply and sales. Management did not expect existing legal proceedings to materially affect the business.
- Structural and tax risks: The company is externally managed and relies on its Manager. It also relies on interpretations supporting its Investment Company Act exemption and tax positions, including treaty benefits and expected PFIC classification for U.S. tax purposes.
Important facts for investors to verify
- Reconcile GAAP net income and operating cash flow with Adjusted Cash Receipts and Adjusted Cash Flow, including non-controlling-interest distributions and provision movements.
- Review sales trends, forecast assumptions and royalty durations for major assets, particularly the cystic fibrosis franchise, Tysabri, Imbruvica and the HIV franchise.
- Track commercialization and clinical outcomes for development-stage assets, and the timing and terms of committed Biohaven, Tazverik and other funding obligations.
- Assess debt service, revolver covenant headroom, future acquisition funding needs and the board’s discretion over dividends.
- Examine Manager fees, related-party arrangements, equity performance awards and the company’s ability to maintain its Investment Company Act and tax positions.