Royalty Pharma(RPRX) - 2021 Q4 - Annual Report

PART I Business Royalty Pharma is the largest buyer of biopharmaceutical royalties, acquiring streams on over 35 commercial products and 10 development-stage candidates - Royalty Pharma is the largest buyer of biopharmaceutical royalties and a leading funder of innovation, collaborating with academic institutions, biotech companies, and large pharmaceutical firms[18] 2021 Key Financial and Investment Metrics (USD) | Metric | Value (USD) | | :--- | :--- | | Cash from operating activities | $2.0 billion | | Adjusted Cash Receipts | $2.1 billion | | Adjusted Cash Flow | $1.8 billion | | Cash deployed for royalties and securities | $2.7 billion | - The company's portfolio includes royalties on more than 35 commercial products and ten development-stage product candidates, with key products like Imbruvica, Xtandi, Tysabri, and the Vertex cystic fibrosis franchise[18][22] - The business model is capital-efficient, providing exposure to the biopharmaceutical industry's attractive characteristics while mitigating common risks like early-stage development, R&D costs, and fixed manufacturing/marketing costs[19] - Since 1996, the company has deployed over $22 billion to acquire royalties, representing over 50% of all royalty transactions in that period, and from 2012 to 2021, it deployed over $17 billion, capturing approximately 60% of the market share[20] Portfolio Overview Top 5 Products by 2021 Royalty Receipts (in millions) | Product(s) | Marketer(s) | 2021 Royalty Receipts | 2021 End Market Sales | | :--- | :--- | :--- | :--- | | Cystic fibrosis franchise | Vertex | $702 | $7,573 | | Tysabri | Biogen | $369 | $2,063 | | Imbruvica | AbbVie, Johnson & Johnson | $353 | $6,943 | | Promacta | Novartis | $174 | $2,016 | | Xtandi | Pfizer, Astellas | $158 | $4,582 | - The portfolio includes ten development-stage product candidates in Phase 2 or Phase 3 trials, targeting conditions such as Alzheimer's disease, hypertrophic cardiomyopathy, and myelofibrosis[24] Our Business Model - The portfolio is highly diversified, with no single therapy accounting for more than 19% of royalty receipts, no therapeutic area for more than 29%, and no marketer for more than 27% in 2021[35] - The portfolio has a long duration, with an estimated weighted average royalty duration of approximately 13 years, and key royalty on Vertex's Trikafta is expected to have exclusivity through 2037[37] - The company holds a leadership position in the royalty market, executing 9 of the 11 largest transactions (over $500 million) since 2012, representing over 80% market share in this segment[44] - The company has a significant cost of capital advantage with $7.3 billion in senior unsecured notes at a weighted average coupon of 2.24% and a weighted-average maturity of approximately 13 years as of December 31, 2021[42] Our Strategic Plan to Grow the Portfolio - The growth strategy is built on three pillars: - Acquiring royalties on approved products with dependable cash flows - Acquiring royalties on attractive development-stage product candidates with strong clinical proof of concept - Acquiring royalties in connection with M&A transactions[49] - From 2012 through 2021, the company deployed $7.8 billion in cash for royalties on development-stage candidates, with an 81% success rate to date ($6.3 billion on products that have since been approved)[48] - The company takes a disciplined approach to acquisitions, focusing on therapies that are clinically validated, address high unmet needs, offer significant patient benefits, have a unique competitive position, and are marketed by strong partners[52][53] Our Portfolio Details Royalty Portfolio Summary (Selected Products) | Product | Therapeutic Area | Est. Expiration | Royalty Rate Details | | :--- | :--- | :--- | :--- | | Cystic fibrosis franchise | Rare disease | 2037 | Tiered single-digit to sub-teen percentages | | Tysabri | Neurology | Perpetual | 18% on sales up to $2.0B, 25% above | | Imbruvica | Cancer | 2027-2032 | Tiered mid-single digits | | Xtandi | Cancer | 2027-2028 | Slightly less than 4% | | Tremfya | Immunology | 2031-2032 | Mid-single digit, tiered | | Trodelvy | Cancer | Perpetual | 4.15% on sales up to $2B, tiered down to 1.75% | Fixed Payment Arrangements Summary | Funding Arrangement | Key Terms | | :--- | :--- | | Biohaven Series A Preferred Shares | 16 quarterly payments of $15.6M (total $250M) from Q1 2021 to Q4 2024 | | Biohaven Series B Preferred Shares | 24 quarterly payments of $14.8M (total $354.5M) from Q1 2025 to Q4 2030 | | Zavegepant Success-Based Milestones | Payments up to 2.95x the $250M funded amount, contingent on regulatory approvals | | MorphoSys Development Funding Bonds | Payments totaling ~2.2x the amount drawn (up to $350M available) | | Cytokinetics Commercial Launch Funding | Payments totaling 1.9x the amount drawn (up to $300M available) | Risk Factors The company faces significant risks related to its business, organizational structure, stock, and taxation, including sales performance, reliance on its Manager, and potential changes in tax laws - Business Risks: The company's revenue is subject to the sales performance of biopharmaceutical products, which can be affected by pricing pressures, competition, clinical trial failures, and loss of patent protection, and the company also relies heavily on its external Manager to identify and acquire suitable assets[147][160] - Financial & Accounting Risks: The use of leverage magnifies potential losses, and accounting for most royalty assets under the effective interest method can lead to volatile and unpredictable GAAP results due to sensitivity to long-term sales forecasts[158][193][194] - Regulatory & Legal Risks: The business could be adversely affected if the SEC changes its interpretation of the U.S. Investment Company Act, potentially requiring impractical registration as an investment company[224][228] - Tax Risks: The company's structure involves complex tax laws, with a key risk being the potential loss of benefits under the U.S.-Ireland income tax treaty, which could subject a substantial portion of its U.S.-source royalty revenue to a 30% withholding tax[273][276] - General Risks: The COVID-19 pandemic and future outbreaks could disrupt the global economy, affecting partners' clinical trials, manufacturing, and product sales, which could in turn impact the company's results[292][293] Properties The company's executive offices are located in New York, NY, provided by its external Manager, and are considered suitable and adequate for business operations - Executive offices are located in New York, NY and are provided by the Manager[298] Legal Proceedings The company may be a party to various legal matters in the ordinary course of business but does not expect any current proceedings to have a material adverse effect on its financial condition or operations - The company is not currently party to any legal proceedings that are expected to have a material adverse effect on its business or financial condition[298] PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Royalty Pharma's Class A ordinary shares trade on the Nasdaq Global Select Market under "RPRX", and in 2021, the company declared and paid four quarterly cash dividends totaling $0.68 per share - The company's Class A ordinary shares are traded on the Nasdaq Global Select Market under the symbol "RPRX"[301] - In the year ended December 31, 2021, the company declared and paid four quarterly cash dividends of $0.17 per Class A ordinary share, totaling $285.2 million[303] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, Royalty Pharma's total income grew 7.9% to $2.3 billion, but consolidated net income decreased 27.1% to $1.2 billion, mainly due to increased provisions and R&D funding expenses 2021 vs. 2020 Results of Operations (in thousands) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Total income and other revenues | $2,289,463 | $2,122,353 | 7.9% | | Total operating expense, net | $858,748 | $526,954 | 63.0% | | Operating income | $1,430,715 | $1,595,399 | (10.3)% | | Consolidated net income | $1,241,201 | $1,701,954 | (27.1)% | 2021 vs. 2020 Non-GAAP Financial Results (in thousands) | Non-GAAP Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Total royalty receipts | $2,608,542 | $2,344,399 | 11.3% | | Adjusted Cash Receipts | $2,128,938 | $1,800,447 | 18.2% | | Adjusted EBITDA | $1,944,427 | $1,620,738 | 20.0% | | Adjusted Cash Flow | $1,766,647 | $1,482,898 | 19.1% | - The increase in Adjusted Cash Receipts was driven by growth from the cystic fibrosis franchise, fixed payments from Biohaven, and newly acquired assets, partially offset by declines from maturing assets like the HIV franchise[421] - The company invested $2.7 billion in royalties and related assets in 2021 across five transactions, including a strategic funding partnership with MorphoSys and royalty acquisitions on Tremfya, Oxlumo, and Cabometyx[445][449] - As of December 31, 2021, the company had total long-term debt of $7.1 billion, consisting of senior unsecured notes, and an undrawn $1.5 billion revolving credit facility, indicating a strong liquidity position[453] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include foreign currency exchange rate volatility and interest rate sensitivity, with all outstanding debt having fixed interest rates as of December 31, 2021 - Primary market risks include foreign currency exchange risk (from royalties paid in currencies like the Euro, Swiss Franc, etc.) and interest rate risk (on cash equivalents and marketable securities)[500][501] - As of December 31, 2021, 100% of the company's outstanding debt has fixed interest rates, minimizing exposure to interest rate fluctuations on its liabilities, though the $1.5 billion revolving credit facility, if drawn, would have a variable rate[505] - The company is exposed to credit and counterparty risk, with the largest concentration being with Vertex, which accounted for 32% of the current portion of net financial royalty assets as of year-end 2021[507] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for Royalty Pharma plc for 2021, 2020, and 2019, including balance sheets, statements of operations, and cash flows, along with detailed notes Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,541,048 | $1,008,680 | | Financial royalty assets, net | $14,332,596 | $12,955,277 | | Total Assets | $17,515,865 | $16,020,286 | | Long-term debt | $7,096,070 | $5,816,584 | | Total Shareholders' Equity | $10,248,545 | $9,895,815 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total income and other revenues | $2,289,463 | $2,122,353 | $1,814,254 | | Operating income | $1,430,715 | $1,595,399 | $2,623,176 | | Consolidated net income | $1,241,201 | $1,701,954 | $2,461,419 | | Net income attributable to controlling interest | $619,728 | $975,040 | $2,348,535 | Consolidated Statement of Cash Flows Highlights (in thousands) | Account | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $2,017,536 | $2,034,629 | $1,667,239 | | Net cash used in investing activities | $(1,870,280) | $(2,759,320) | $(2,153,625) | | Net cash provided by/(used in) financing activities | $385,112 | $1,487,172 | $(1,191,626) | Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes identified - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[776] - Management's assessment concluded that internal control over financial reporting was effective as of December 31, 2021, and the independent registered public accounting firm issued an unqualified audit report on its effectiveness[777] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for the 2022 Annual General Meeting of Shareholders - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's Proxy Statement for the 2022 Annual General Meeting of Shareholders[782] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for the 2022 Annual General Meeting of Shareholders - Information regarding executive compensation is incorporated by reference from the company's Proxy Statement[783] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's definitive proxy statement for the 2022 Annual General Meeting of Shareholders - Information regarding security ownership of beneficial owners and management is incorporated by reference from the company's Proxy Statement[784] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive proxy statement for the 2022 Annual General Meeting of Shareholders - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's Proxy Statement[785] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for the 2022 Annual General Meeting of Shareholders - Information regarding principal accountant fees and services is incorporated by reference from the company's Proxy Statement[786] PART IV Exhibits and Financial Statement Schedules This section lists all exhibits filed as part of the Annual Report on Form 10-K, including corporate governance documents, material contracts, and required certifications - This section contains a list of all exhibits filed with the 10-K, including corporate governance documents, material contracts, and required certifications[789]