Royalty Pharma(RPRX) - 2022 Q4 - Annual Report

Part I Item 1. Business Royalty Pharma is the largest buyer of biopharmaceutical royalties, funding innovation through a diversified, capital-efficient portfolio - Royalty Pharma is the largest buyer of biopharmaceutical royalties, having assembled a portfolio with royalties on over 35 commercial products and 12 development-stage candidates[18] - The company's business model is capital-efficient, reducing exposure to common industry risks like early-stage development, high R&D costs, and fixed manufacturing/marketing costs[19] - Since 2012, the company has executed transactions valued at over $24 billion, representing an estimated 60% market share of all announced royalty transactions by value[20][42] 2022 Financial Highlights | Metric | Value (in billions) | | :--- | :--- | | Net cash from operating activities | $2.1 | | Adjusted Cash Receipts | $2.8 | | Adjusted EBITDA | $2.6 | | Adjusted Cash Flow | $2.2 | | Cash deployed for acquisitions | $2.5 | Portfolio Overview The portfolio is diversified across numerous products, with key revenue drivers ensuring a long weighted average royalty duration Top 5 Royalties by 2022 Receipts | Royalties | 2022 Royalty Receipts (in millions) | 2022 End Market Sales (in millions) | | :--- | :--- | :--- | | Cystic fibrosis franchise | $811 | $8,931 | | Nurtec ODT/Biohaven payment | $560 | $764 | | Tysabri | $370 | $2,028 | | Imbruvica | $313 | $5,820 | | Xtandi | $187 | $4,817 | - The portfolio is highly diversified; in 2022, no individual therapy, therapeutic area, or marketer accounted for more than 21%, 29%, and 25% of royalty receipts, respectively[32] - The estimated weighted average royalty duration of the portfolio is approximately 13 years, with key growth driver Trikafta expected to have exclusivity through 2037[33] Our Strategy The company's strategy focuses on acquiring royalties on clinically validated therapies through diverse transaction structures - The company's strategy involves four main transaction structures: acquiring Third-party Royalties, creating Synthetic Royalties, providing Launch and Development Capital, and engaging in M&A-related royalty acquisitions[45] - From 2012 through 2022, the company deployed $8.3 billion in development-stage product candidates, with a 77% success rate for assets that have reached an approval decision[46][47] Competition The company faces intense competition for royalty acquisitions and from alternative financing and therapeutic products - Competition for acquiring suitable royalty assets is intense and comes from other potential royalty buyers, financial institutions, and the marketers of the products themselves[117] - The underlying biopharmaceutical products face significant competition, which can render them obsolete or non-competitive due to new products, generics, or changes in healthcare policy[118][119] Corporate Responsibility and Human Capital The company's ESG strategy focuses on value creation, while all operations are handled by an external Manager - The company is externally managed and has no employees, relying on the Manager for all operations; as of December 31, 2022, the Manager had 75 employees[125][126][128] - The company's ESG efforts include providing capital to non-profits like the Cystic Fibrosis Foundation to further scientific research and supporting patient advocacy groups[124] Governmental Regulation and U.S. Investment Company Act Status The company operates to avoid regulation as an investment company under the U.S. Investment Company Act of 1940 - The company operates to avoid being regulated as an investment company under the U.S. Investment Company Act, relying on Section 3(c)(5)(A) and a 2010 SEC staff no-action letter[131][132][133] - If the SEC were to adopt a contrary interpretation, the company could be required to register as an investment company, which would materially and adversely affect the business[136] Item 1A. Risk Factors The company faces diverse risks related to product sales, royalty acquisitions, its organizational structure, and financial market factors Risks Relating to Our Business Key business risks include reliance on product sales, development uncertainties, external marketers, and regulatory changes like the IRA - Product sales may be lower than expected due to pricing pressures, competition, or clinical trial failures, which would reduce or cease royalty payments[145] - Acquiring royalties on development-stage products is uncertain; products may fail to gain regulatory approval or achieve commercial success, as exemplified by the $273.6 million impairment charge on gantenerumab in 2022[147] - The company is dependent on external marketers for product development, regulatory approval, and commercialization, and these marketers' interests may not align with Royalty Pharma's[185][188] - The U.S. Inflation Reduction Act (IRA) of 2022 introduces significant drug pricing provisions, which could adversely affect product pricing and the company's royalties[197] Risks Relating to Our Organization and Structure As a holding company, its ability to pay dividends depends on receiving funds from its operating subsidiaries - As a holding company, Royalty Pharma is dependent on dividends and other payments from its subsidiaries to meet its financial obligations and pay dividends to its shareholders[251] Risks Relating to Our Ordinary Shares Share-related risks include market price volatility and differences in shareholder rights under English law versus U.S. law - The market price of Class A ordinary shares has been and may continue to be volatile; during 2022, the share price fluctuated between a low of $37.46 and a high of $44.65[254] - As an English public limited company, shareholder rights differ from those of a U.S. corporation, and it may be difficult for U.S. investors to enforce civil liabilities[258][259] Risks Relating to Taxation The company's tax structure faces risks from changes in law and its classification as a Passive Foreign Investment Company (PFIC) - The company's subsidiaries rely on benefits from the U.S.-Ireland income tax treaty; a failure to qualify could subject U.S.-source royalties to a 30% withholding tax[278][279] - The company expects to be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which could result in adverse tax consequences for U.S. shareholders[291][292] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A shares trade on Nasdaq, with regular dividends paid and performance tracked against major indices - The company's Class A ordinary shares are traded on the Nasdaq under the symbol "RPRX"[305] - In 2022, the company paid four quarterly cash dividends of $0.19 per Class A ordinary share, totaling $333.3 million for the year[308] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations GAAP operating income declined due to impairments, while non-GAAP metrics showed strong growth driven by a key asset redemption Results of Operations Operating and net income fell sharply due to significant provisions and non-cash impairment charges, despite a slight revenue dip Consolidated Results of Operations (2022 vs 2021) | Metric (in millions) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total income and other revenues | $2,237.2 | $2,289.5 | (2.3)% | | Total operating expenses, net | $1,930.2 | $858.7 | 124.8% | | Operating income | $307.1 | $1,430.7 | (78.5)% | | Net income attributable to Royalty Pharma plc | $42.8 | $619.7 | (93.1)% | - The provision for changes in expected cash flows increased to $904.2 million in 2022, primarily due to declines in sales forecasts for Imbruvica, Tysabri, and Tazverik[369] - The company recognized $615.8 million in non-cash impairment charges in 2022 related to gantenerumab ($273.6M), otilimab ($160.1M), and Gavreto ($182.1M)[374] Key Developments and Upcoming Events Relating to Our Portfolio The portfolio saw mixed results, with positive approvals for Trodelvy offset by significant development setbacks for gantenerumab and otilimab - Pfizer acquired Biohaven in October 2022, taking over the commercialization of Nurtec ODT and development of zavegepant[392] - Gilead's Trodelvy received full FDA approval for metastatic triple-negative breast cancer and later for pre-treated HR+/HER2- metastatic breast cancer in February 2023[392][400] - Significant setbacks occurred for development-stage assets, including Roche discontinuing gantenerumab trials and GSK deciding not to pursue regulatory submission for otilimab[419][425] Non-GAAP Financial Results Non-GAAP metrics showed strong growth, primarily driven by an accelerated redemption payment and new asset contributions Non-GAAP Financial Results (2022 vs 2021) | Metric (in millions) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total royalty receipts | $3,231.3 | $2,608.5 | 23.9% | | Adjusted Cash Receipts | $2,789.3 | $2,128.9 | 31.0% | | Adjusted EBITDA | $2,566.3 | $1,944.4 | 32.0% | | Adjusted Cash Flow | $2,235.2 | $1,573.4 | 42.1% | - The significant increase in Adjusted Cash Receipts was primarily driven by the accelerated redemption of all outstanding Biohaven Preferred Shares, contributing $479.5 million[437][434] Investments Overview The company deployed $2.5 billion in cash for new royalty acquisitions, including significant investments in Trelegy and olpasiran Capital Deployed (2020-2022) | (in millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Approved/marketed royalties | $1,955.0 | $1,819.9 | $1,404.2 | | Development-stage royalties | $562.2 | $830.7 | $894.5 | | Total capital deployed | $2,517.2 | $2,650.6 | $2,298.7 | - Major 2022 investments included acquiring royalties on Trelegy ($1.31B upfront), olpasiran ($250M upfront), and Gavreto ($175M upfront)[465] Liquidity and Capital Resources The company maintains a strong liquidity position with substantial cash from operations, reserves, and an undrawn credit facility - Net cash provided by operating activities was $2.1 billion in 2022; as of year-end, cash and cash equivalents were $1.7 billion[467][476] Debt Summary as of Dec 31, 2022 | Instrument | Principal Amount (in billions) | Undrawn Capacity (in billions) | | :--- | :--- | :--- | | Senior Unsecured Notes | $7.3 | N/A | | Revolving Credit Facility | $0.0 | $1.5 | - Primary uses of capital are acquisitions, dividends (paid $333.3 million in 2022), debt service, and other funding arrangements[481][483][484] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency, interest rate, and counterparty credit risks, though most debt is fixed-rate - The company is exposed to foreign currency risk as some royalties are paid in currencies like the Euro, British pound, and Japanese yen[508] - Interest rate risk is primarily related to its $1.5 billion variable-rate Revolving Credit Facility, which was undrawn; all $7.3 billion in notes have fixed interest rates[512] - The company faces counterparty credit risk, with the largest concentration from Vertex, which accounted for 31% of the current portion of Financial royalty assets[515] Item 8. Financial Statements and Supplementary Data This section contains the audited financial statements and the auditor's report, which identifies royalty asset valuation as a critical audit matter - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[521][522] - The critical audit matter identified was the valuation of financial royalty assets and related interest income, highlighting the subjective nature of management's forecasts[525][527] Consolidated Financial Statements The financial statements show total assets of $16.8 billion and a significant decrease in consolidated net income for 2022 Key Balance Sheet Items (as of Dec 31) | (in billions) | 2022 | 2021 | | :--- | :--- | :--- | | Total Assets | $16.8 | $17.5 | | Financial royalty assets, net | $14.2 | $14.3 | | Total Liabilities | $7.3 | $7.3 | | Total Shareholders' Equity | $9.5 | $10.2 | Key Income Statement Items (Year Ended Dec 31) | (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Total income and other revenues | $2,237.2 | $2,289.5 | | Consolidated net income | $230.1 | $1,241.2 | | Net income attributable to Royalty Pharma plc | $42.8 | $619.7 | | Diluted EPS | $0.10 | $1.49 | Notes to the Consolidated Financial Statements The notes detail critical accounting policies, the composition of financial assets, significant impairments, and the company's debt structure - The company's accounting for financial royalty assets uses the prospective effective interest method, which relies heavily on management's forecasts of future cash flows[589][591] - In 2022, the company recorded non-cash impairment charges totaling $615.8 million on its financial royalty assets for otilimab, gantenerumab, and Gavreto[689] - As of December 31, 2022, the company had $7.3 billion in senior unsecured notes outstanding and an undrawn $1.5 billion senior unsecured revolving credit facility[713][721] Item 9A. Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal controls were effective - Management concluded that the company's disclosure controls and procedures, as well as its internal control over financial reporting, were effective as of December 31, 2022[773][774] Part III Items 10-14 Information regarding governance, compensation, and related party transactions is incorporated by reference from the 2023 Proxy Statement - The information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2023 Proxy Statement[780][781][782][783][784] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits filed as part of the Form 10-K, with many incorporated by reference - This section contains the list of all financial statements and exhibits filed with the Form 10-K[787]