Royalty Pharma(RPRX) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements This section presents Royalty Pharma plc's unaudited condensed consolidated financial statements for Q3 and 9M 2023, encompassing balance sheets, statements of operations, and cash flows Condensed Consolidated Balance Sheets Total assets decreased to $15.86 billion as of September 30, 2023, driven by reduced cash and debt repayment, significantly lowering current liabilities Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | As of Sep 30, 2023 | As of Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $936,448 | $1,710,751 | | Financial royalty assets, net | $13,230,474 | $13,493,106 | | Total assets | $15,855,524 | $16,813,466 | | Liabilities & Equity | | | | Current portion of long-term debt | $0 | $997,512 | | Total current liabilities | $127,933 | $1,166,783 | | Long-term debt | $6,131,194 | $6,118,810 | | Total liabilities | $6,270,427 | $7,288,093 | | Total shareholders' equity | $9,585,097 | $9,525,373 | Condensed Consolidated Statements of Operations For the nine months ended September 30, 2023, total income increased to $1.76 billion, with diluted EPS rising to $1.43, though Q3 net income decreased to $72.1 million Condensed Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :--- | :--- | :--- | :--- | :--- | | Total income and other revenues | $536,313 | $573,463 | $1,758,486 | $1,671,467 | | Operating income | $151,442 | $192,210 | $879,254 | $789,720 | | Consolidated net income | $122,077 | $220,414 | $982,502 | $840,094 | | Net income attributable to Royalty Pharma plc | $72,114 | $142,651 | $640,494 | $498,916 | | Diluted EPS | $0.16 | $0.32 | $1.43 | $1.14 | Condensed Consolidated Statements of Cash Flows Net cash from operations significantly increased to $2.22 billion for the nine months ended September 30, 2023, despite a $774.3 million net decrease in cash due to debt repayment and share repurchases Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | For the Nine Months Ended Sep 30, 2023 | For the Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,215,174 | $1,574,049 | | Net cash used in investing activities | ($1,072,617) | ($1,444,163) | | Net cash used in financing activities | ($1,916,860) | ($679,306) | | Net change in cash and cash equivalents | ($774,303) | ($549,420) | | Cash and cash equivalents, end of period | $936,448 | $991,628 | Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, financial royalty assets, debt, shareholder equity, and related party transactions, clarifying the company's biopharmaceutical royalty business - The company is the largest buyer of biopharmaceutical royalties and a leading funder of innovation in the biopharmaceutical industry, acquiring royalties on both approved products and development-stage candidates[35] - The company's largest individual marketer and payor of royalties is Vertex, accounting for 31% of the current portion of financial royalty assets as of September 30, 2023[46] Top Financial Royalty Assets by Net Carrying Value (in thousands) | Asset | Net Carrying Value (as of Sep 30, 2023) | | :--- | :--- | | Cystic fibrosis franchise | $5,304,675 | | Tysabri | $1,200,887 | | Trelegy | $1,171,799 | | Tremfya | $775,902 | | Evrysdi | $772,667 | - In September 2023, the company repaid $1.0 billion of its 0.75% senior unsecured notes upon maturity[100] - In March 2023, the board authorized a share repurchase program of up to $1.0 billion. Through the first nine months of 2023, the company repurchased 8.9 million shares for approximately $278.6 million[108] - Subsequent to the quarter end, in October 2023, the company acquired additional royalties on Roche's Evrysdi from PTC Therapeutics for an upfront payment of $1.0 billion[134] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition and operations, covering business model, portfolio performance, investment activities, liquidity, and non-GAAP financial measures Business and Portfolio Overview Royalty Pharma, the largest biopharmaceutical royalty buyer, holds a portfolio of over 35 products, with $2.6 billion in royalty receipts for 9M 2023, driven by the Cystic Fibrosis franchise and Zavzpret milestone - The company's business model is capital-efficient, providing exposure to the biopharmaceutical industry's long product life cycles and high barriers to entry while substantially reducing exposure to common industry risks like early-stage development and high R&D costs[139] Royalty Receipts by Top Products (in thousands) | Royalties | 9M 2023 | 9M 2022 | | :--- | :--- | :--- | | Cystic fibrosis franchise | $660,673 | $591,733 | | Zavzpret milestone | $475,000 | $0 | | Tysabri | $256,932 | $281,819 | | Imbruvica | $193,895 | $241,943 | | Trelegy | $143,111 | $42,720 | | Total royalty receipts | $2,597,444 | $2,048,103 | Results of Operations For 9M 2023, total income rose 5.2% to $1.76 billion, driven by the Zavzpret milestone, while provision for changes in expected cash flows increased to $637.2 million and G&A expenses rose 23.7% - Income from financial royalty assets for the first nine months of 2023 increased by 6.1% to $1.67 billion, primarily driven by $153.6 million of interest income recognized from the $475.0 million Zavzpret milestone payment[180][183] - Provision expense for changes in expected cash flows was $637.2 million for the first nine months of 2023, primarily due to declines in sell-side analysts' consensus sales forecasts for Imbruvica, Tremfya, and Tysabri[188][192] - R&D funding expense decreased by 59.3% to $51.5 million in the first nine months of 2023, compared to $126.6 million in the same period of 2022. The 2023 expense was mainly a $50.0 million milestone payment to Cytokinetics[179][195] - General and administrative expenses increased by 23.7% in the first nine months of 2023, driven by higher Operating and Personnel Payments which are calculated based on cash receipts, including the large Zavzpret milestone[197] Investments Overview The company invested $1.2 billion in royalties during 9M 2023, including a subsequent $1.0 billion Evrysdi acquisition and other notable investments in Skytrofa, Adstiladrin, KarXT, and Spinraza/pelacarsen - In the first nine months of 2023, the company invested $1.2 billion in royalties, milestones, and related assets[214] - Key acquisitions in 2023 include[215][216] - Evrysdi: $1.0 billion upfront for additional royalties (Oct 2023) - Skytrofa: $150 million upfront - Adstiladrin: $300 million upfront - KarXT: $100 million upfront - Spinraza/pelacarsen: $500 million upfront Liquidity and Capital Resources Primary liquidity from operations was $2.2 billion for 9M 2023, with $936.4 million cash, $6.3 billion total debt, and non-GAAP Adjusted Cash Flow increasing 52% to $2.0 billion - As of September 30, 2023, cash and cash equivalents totaled $936.4 million. The company repaid $1.0 billion of senior unsecured notes in September 2023, reducing total outstanding debt to a par value of $6.3 billion[219][220] Non-GAAP Financial Measures (in thousands) | Metric | 9M 2023 | 9M 2022 | % Change | | :--- | :--- | :--- | :--- | | Total royalty receipts | $2,597,444 | $2,048,103 | 26.8% | | Adjusted Cash Receipts | $2,312,807 | $1,725,377 | 34.0% | | Adjusted EBITDA | $2,123,968 | $1,583,724 | 34.1% | | Adjusted Cash Flow | $1,959,667 | $1,289,273 | 52.0% | - The significant increase in Adjusted Cash Receipts and Adjusted Cash Flow was primarily driven by the $475.0 million Zavzpret milestone payment, strong performance of the cystic fibrosis franchise, and contributions from newly acquired royalties like Trelegy[246][248] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk exposures have occurred since the Annual Report on Form 10-K for the year ended December 31, 2022 - There have been no material changes in market risk exposures since the last annual report[271] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting identified - The CEO and CFO concluded that as of the end of the period, the company's disclosure controls and procedures were effective to a reasonable assurance level[272] - No changes in internal controls over financial reporting occurred during the third quarter of 2023 that materially affected, or are reasonably likely to materially affect, internal control[273] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings, not expecting a material adverse effect on its business or financial condition - The company is involved in ordinary course legal proceedings but does not expect them to have a material adverse impact[123][275] Item 1A. Risk Factors This section outlines significant business risks, including dependency on biopharmaceutical product sales, competition, reliance on third-party marketers, holding company status, and tax complexities - The company's business is subject to significant risks, including sales risks of the underlying biopharmaceutical products, reliance on the Manager, uncertainties in acquiring new assets, and potential conflicts of interest[277][281] - A significant risk is the reliance on a limited number of products, with the top five product franchises accounting for 66% of royalty receipts in the first nine months of 2023 (excluding the Zavzpret milestone)[312] - The company is entirely dependent on its external Manager for all required services, and its success depends on the Manager's key personnel, particularly CEO Pablo Legorreta[294][295] - 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[411] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2023, the company repurchased 4.86 million shares for $144.1 million, with $721.4 million remaining under the authorized repurchase program Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Shares Purchased (thousands) | Average Price Paid Per Share | Total Cost (thousands) | | :--- | :--- | :--- | :--- | | July 2023 | 1,296 | $31.03 | $40,218 | | August 2023 | 1,252 | $30.50 | $38,186 | | September 2023 | 2,314 | $28.42 | $65,764 | | Total Q3 2023 | 4,862 | $29.65 | $144,168 | - As of September 30, 2023, approximately $721.4 million remained available for future repurchases under the company's $1.0 billion share repurchase program, which expires on June 23, 2027[420] Item 5. Other Information This section discloses the adoption and termination of Rule 10b5-1 trading plans by executive officers and directors during Q3 2023 - During Q3 2023, CFO Terrance Coyne terminated a Rule 10b5-1 trading plan, while EVP Marshall Urist and Director Rory Riggs each adopted new plans for the sale of company shares[423][424] Item 6. Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications and XBRL data files - Exhibits filed with the report include CEO and CFO certifications and XBRL interactive data files[427]