Royalty Pharma plc — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020. Royalty Pharma acquires biopharmaceutical royalties and funds selected development programs. Its portfolio included royalties on more than 45 marketed therapies and five development-stage candidates. The 2020 comparison includes periods around the company’s reorganization and June 2020 IPO, so some measures are not fully comparable.
Financial performance and liquidity
- Income and revenue: Total income and other revenues were $573.0 million, up 14.4%. Income from financial royalty assets was $529.6 million; intangible royalty revenue was $36.1 million; other royalty income was $7.3 million.
- Profit: Operating income was $229.3 million, down 36.6%, and operating margin was approximately 40%, versus 72% in Q1 2020. The decline primarily reflects a $292.3 million provision for changes in expected cash flows from financial royalty assets, compared with $88.0 million a year earlier. Consolidated net income increased 45.7% to $159.0 million, while net income attributable to controlling interest declined 3.0% to $69.1 million. Basic and diluted Class A EPS were both $0.18; comparative 2020 EPS was not presented.
- Cash generation: Net cash provided by operating activities was $526.1 million, up from $471.1 million. Management’s non-GAAP Adjusted Cash Receipts increased 37.0% to $523.8 million; Adjusted EBITDA rose 35.1% to $481.6 million; and Adjusted Cash Flow rose 37.4% to $409.3 million. Total royalty receipts were $649.5 million, up 19.5%.
- Cash and investments: At March 31, cash and cash equivalents were $708.8 million and marketable securities were $1.069 billion. Cash declined $299.9 million during the quarter. Investing activities used $599.3 million, including $503.1 million of financial royalty asset acquisitions; financing activities used $226.7 million, including $66.0 million of dividends and distributions to non-controlling interests.
- Debt and liquidity: Long-term debt carrying value was $5.821 billion, representing $6.0 billion principal of fixed-rate senior notes, with maturities from 2023 through 2050. The $1.5 billion revolving facility was undrawn. The company reported compliance with debt covenants. Cash, marketable securities and the revolver provide substantial stated liquidity.
Material changes versus Q1 2020
- Royalty receipts rose, led by the cystic fibrosis franchise, up $67.4 million, and Imbruvica, up $11.4 million. HIV franchise receipts fell $37.4 million, primarily following U.S. loss of exclusivity for Truvada and Atripla.
- The much larger expected-cash-flow provision reduced operating income despite higher royalty income. Management attributes provisions to revised product cash-flow forecasts and credit-loss estimates; these charges can be non-cash and volatile.
- Other expense was lower year over year, at $31.0 million versus $189.7 million, while interest expense fell 30.2% to $37.4 million following the 2020 refinancing. Q1 2021 included $54.2 million of losses on equity securities, partly offset by interest income and a fair-value gain on Biohaven-related securities.
- Acquisitions of financial royalty assets were $503.1 million in cash, versus $99.3 million in Q1 2020. The company also reported $514.4 million invested in royalties and related assets during the quarter.
Outlook, commentary and risks
- No specific full-year financial guidance was provided. Management said it expects to continue making acquisitions in the ordinary course and believes existing resources, operating cash flows and available credit will fund obligations, planned acquisitions and development funding for the foreseeable future.
- Key risks include sales and market performance of royalty-bearing products; changing analyst forecasts, product competition and patent or royalty duration; development and regulatory outcomes; and the company’s ability to source suitable acquisitions. Management noted COVID-19 had not materially affected performance to date and did not believe a material future impact was reasonably likely, while acknowledging effects may emerge in later periods.
- Significant commitments include $182.4 million remaining under Biohaven’s Commercial Launch Preferred Equity arrangement, a $110.0 million Tazverik purchase obligation recorded as current, and approximately $55.7 million of committed capital requirements for development and affiliate arrangements. The company also disclosed an April 2021 Oxlumo royalty acquisition for $180 million upfront plus up to $60 million in contingent milestones.
- Management’s results rely on estimates of future royalty cash flows and expected asset lives. These estimates can materially affect income and provisions. The filing reported no material change in risk factors from the 2020 Form 10-K, and management did not believe existing legal proceedings would adversely affect the company.
Important facts for investors to verify
- Whether cash-flow forecasts and the large royalty-asset provision—particularly for Imbruvica, cystic fibrosis, Tazverik, Xtandi and Emgality—change in subsequent quarters.
- Product-level royalty trends, especially continued cystic fibrosis growth and the ongoing decline in HIV franchise receipts.
- Biohaven payment obligations, the timing and collectability of preferred-share redemptions, and development progress for zavegepant.
- Acquisition spending, remaining commitments, cash balances, debt service and covenant headroom; also distinguish GAAP cash flow from management’s non-GAAP liquidity measures.
- Concentration and valuation risks: Vertex represented 28% of the current portion of financial royalty assets, and several investment fair values rely on significant management estimates.