Royalty Pharma(US:RPRX)2021-08-10 16:00PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements for Royalty Pharma plc as of June 30, 2021, and for the three and six months ended June 30, 2021 and 2020. It includes the balance sheets, statements of comprehensive income, statements of shareholders' equity, and statements of cash flows, along with detailed notes explaining the basis of preparation and significant accounting policies Condensed Consolidated Balance Sheet Highlights (Unaudited) | Metric | June 30, 2021 (in thousands) | December 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Assets | $16,514,913 | $16,020,286 | | Cash and cash equivalents | $1,142,281 | $1,008,680 | | Financial royalty assets, net | $12,932,077 | $12,368,084 | | Total Liabilities | $6,109,548 | $6,124,471 | | Long-term debt | $5,825,559 | $5,816,584 | | Total Shareholders' Equity | $10,405,365 | $9,895,815 | Condensed Consolidated Statements of Comprehensive Income Highlights (Unaudited) | Metric | Six Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | | :--- | :--- | :--- | | Total income and other revenues | $1,127,990 | $1,011,811 | | Operating income | $974,247 | $770,776 | | Consolidated net income | $965,734 | $711,072 | | Net income attributable to controlling interest | $509,895 | $513,314 | | Basic EPS (Class A) | $1.28 | $0.09 | | Diluted EPS (Class A) | $1.25 | $0.09 | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | Metric | Six Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,057,820 | $960,108 | | Net cash used in investing activities | ($473,134) | ($1,006,720) | | Net cash (used in)/provided by financing activities | ($451,085) | $2,121,956 | | Net change in cash and cash equivalents | $133,601 | $2,075,344 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of the company's significant accounting policies, IPO-related reorganization, and key financial asset and debt components - The company completed its IPO in June 2020, involving significant Reorganization Transactions, including an exchange offer for legacy investors and the creation of a new corporate structure. Old RPI is considered the predecessor for financial reporting purposes323842 - The company adopted ASU 2016-13 (Credit Losses) on January 1, 2020, resulting in a cumulative adjustment to Retained Earnings of $192.7 million to recognize an allowance for expected credit losses on financial royalty assets61125 Key Financial Assets as of June 30, 2021 (in thousands) | Asset Type | Net Carrying Value | | :--- | :--- | | Financial royalty assets, net | $13,528,928 | | Available for sale debt securities | $271,200 | | Investments in non-consolidated affiliates | $465,620 | Total Debt as of June 30, 2021 (in thousands) | Debt Component | Carrying Value | | :--- | :--- | | Senior Unsecured Notes (Par Value $6.0B) | $5,825,559 | | Senior Unsecured Revolving Credit Facility | $0 (undrawn) | | Total long-term debt | $5,825,559 | - Subsequent to the quarter end, on July 15, 2021, the company made an upfront payment of $1.425 billion to MorphoSys and purchased $100 million of its shares. On July 26, 2021, the company issued an additional $1.3 billion of senior unsecured notes217218 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's business model as the largest buyer of biopharmaceutical royalties, its portfolio of over 45 commercial products, and its financial reporting methodology. The MD&A highlights the use of non-GAAP metrics like Adjusted Cash Receipts due to the volatility of GAAP income recognition for financial royalty assets. The analysis covers results of operations, key portfolio developments, liquidity, capital resources, and recent investment activities - The company's business model focuses on acquiring biopharmaceutical royalties, which provides exposure to top-line sales of leading therapies with reduced R&D and commercialization risks222223 - Due to the effective interest method of accounting for financial royalty assets, GAAP income can be volatile and unpredictable. Management therefore uses non-GAAP metrics, primarily Adjusted Cash Receipts, Adjusted EBITDA, and Adjusted Cash Flow, as key measures of operating performance and liquidity229231233 Non-GAAP Financial Highlights (Six Months Ended June 30) | Metric (non-GAAP) | 2021 (in millions) | 2020 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Adjusted Cash Receipts | $999.0 | $844.1 | 18.3% | | Adjusted EBITDA | $917.2 | $774.1 | 18.5% | | Adjusted Cash Flow | $838.0 | $666.5 | 25.7% | - For the six months ended June 30, 2021, the company invested $706.9 million in royalties and related assets. Key recent transactions include a strategic funding partnership with MorphoSys and royalty acquisitions for Oxlumo and Cabometyx363365 Results of Operations This section analyzes the company's financial performance, focusing on changes in income from financial royalty assets and the provision for expected cash flows Comparison of Results (Six Months Ended June 30) | Metric (in thousands) | 2021 | 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total income and other revenues | $1,127,990 | $1,011,811 | 11.5% | | Income from financial royalty assets | $1,033,039 | $937,021 | 10.2% | | Provision for changes in expected cash flows | $48,499 | $135,290 | (64.2)% | | Operating income | $974,247 | $770,776 | 26.4% | | Consolidated net income | $965,734 | $711,072 | 35.8% | - The increase in income from financial royalty assets for the six months ended June 30, 2021 was primarily driven by strong performance from the cystic fibrosis franchise and income from newly acquired assets like Evrysdi and Cabometyx/Cometriq, partially offset by declines from the HIV franchise due to loss of exclusivity for certain products275 - The provision for changes in expected cash flows was an expense of $48.5 million in the first six months of 2021, compared to an expense of $135.3 million in the same period of 2020. The 2021 expense was driven by declines in forecasts for Imbruvica and Tazverik, partially offset by provision income from increased forecasts for Tysabri and Xtandi283284 Non-GAAP Financial Results This section presents key non-GAAP financial metrics, including Adjusted Cash Receipts and Adjusted Cash Flow, to provide a clearer view of operational performance - Adjusted Cash Receipts increased 18.3% to $999.0 million for the first six months of 2021, driven by higher royalty receipts from the cystic fibrosis franchise, new assets, and fixed payments from Biohaven, partially offset by declines from the HIV franchise337338 - Adjusted Cash Flow increased 25.7% to $838.0 million for the first six months of 2021, benefiting from higher Adjusted Cash Receipts, lower net interest paid due to debt refinancing, and lower R&D funding payments337346 Top Royalty Receipts (Six Months Ended June 30, 2021) | Product | Royalty Receipts (in millions) | | :--- | :--- | | Cystic fibrosis franchise | $322.8 | | Tysabri | $179.0 | | Imbruvica | $176.4 | | Xtandi | $76.8 | | Promacta | $76.5 | Liquidity and Capital Resources This section details the company's sources of liquidity, cash position, marketable securities, and outstanding debt, including recent financing activities - The primary source of liquidity is cash from operations, which amounted to $1.1 billion for the six months ended June 30, 2021368 - As of June 30, 2021, the company had $1.1 billion in cash and cash equivalents and $842.7 million in marketable securities. It also has an undrawn $1.5 billion revolving credit facility369376 - Total long-term debt outstanding was $5.8 billion as of June 30, 2021, consisting entirely of senior unsecured notes issued in September 2020. An additional $1.3 billion in notes were issued in July 2021371383 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposures are to interest rate sensitivity and foreign currency exchange risk. Interest rate risk affects investments in marketable securities and variable-rate debt, while foreign currency risk arises from royalties paid in non-USD currencies. The company uses derivative instruments to manage these risks but not for speculative purposes - The company is exposed to foreign currency risk as some royalties are paid in currencies other than the U.S. dollar, primarily the Euro, Canadian Dollar, Swiss Franc, and Japanese Yen406 - Following the September 2020 Notes issuance, 100% of the company's outstanding debt is at a fixed rate, mitigating interest rate risk on existing debt. However, the undrawn $1.5 billion revolving credit facility is variable-rate410 - Credit and counterparty risk is concentrated with a few large pharmaceutical companies. As of June 30, 2021, Vertex was the largest payor, accounting for 29% of the current portion of Financial royalty assets412 Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2021. There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls - The CEO and CFO concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective to a reasonable assurance level414 - No changes occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting415 PART II. OTHER INFORMATION This section covers legal proceedings, updates on risk factors, and other miscellaneous information required for the quarterly report Item 1. Legal Proceedings The company may be involved in various legal matters in the ordinary course of business. Management does not believe that the ultimate liability from these proceedings will have a material adverse effect on the company's business, financial condition, or results of operations - The company is not currently involved in any legal proceedings that are expected to have a material adverse impact on its financial condition or operations418 Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes to the risk factors disclosed in the Annual Report on Form 10-K have been reported419 Other Items (Items 2, 3, 4, 5, 6) This section confirms that there were no unregistered sales of equity securities, no defaults upon senior securities, and no other material information to report for the period. It also lists the exhibits filed with the quarterly report - Item 2: There were no unregistered sales of equity securities during the period420 - Items 3, 4, and 5 were not applicable421422423 - Item 6 lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL data files424