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spk09: Ladies and gentlemen, thank you for standing by. Welcome to the Royalty Farmer First Quarter 2021 Financial Results Conference Call. I would now like to turn the call over to George Grofik, SVP, Head of Investor Relations and Communications. Please go ahead, sir.
spk05: Good morning and good afternoon to everyone on the call. Thank you for joining us to review Royalty Farmer's First Quarter results. You can find the slides to this call on the investors' page of our website at royaltyfarmer.com. Moving to slide three, I would like to remind you that information presented in this call contains forward-looking statements that involve known and unknown risks. Uncertainties and other factors may cause actual results to differ materially. I refer you to our 10-K on file with the SEC for a description of these risks. With that, please advance to slide four. Our speakers on the call today are Pablo Legareta, Founder and Chief Executive Officer, Marshall Urist, EVP, Co-Head of Research and Investments, Jim Reddick, EVP, Co-Head of Research and Investments and Chief Scientific Officer, and Terry Coyne, EVP, Chief Financial Officer. Pablo will discuss the key highlights, after which Marshall and Jim will provide an update on our royalty acquisitions and portfolio. Terry will then review the financials, and after concluding remarks from Pablo, we will hold a Q&A session. Chris Height, our Vice Chairman, will also join the Q&A session. And with that, I'd like to turn the call over to Pablo.
spk08: Thank you, George. and welcome to everyone on the call. I am delighted to report a great start to the year for Royalty Pharma, building off our strong momentum in 2020. Our financial performance in the first quarter was excellent, with strong double-digit top-line and bottom-line growth. In addition, we continued to execute well against our strategy. We announced up to $787 million in new royalty transactions as well as an exciting new thematic index collaboration with MSCI. And looking ahead, our pipeline continues to be very active as the demand for royalty funding of life sciences innovation is exceptionally strong. Lastly, we're also raising our guidance for adjusted cash receipts for 2021. On slide seven, you can see our financials in a little more detail. In the first quarter, we delivered 37% growth in both adjusted cash receipts and adjusted cash flow, what we consider to be our top and bottom lines, respectively. This excellent momentum positions us well to deliver another year of strong performance, as Terry will speak to when he discusses our race guidance for this year. So overall, I'm extremely pleased with our start to 2021, and for reasons we will highlight during this presentation, We continue to believe our prospects look very promising. Before I hand it over to Marshall and Jim to update you on our royalty portfolio, I would like to elaborate a bit more on a recently announced collaboration with MSCI to develop and market thematic indexes in life sciences, biotechnology, and the pharmaceutical spaces. Thematic investing is a fast-growing category of assets under management globally. and we believe we can leverage our unique skill set based around our deep scientific and clinical knowledge and our data analytics capabilities to develop novel indexes in partnership with MSCI, an innovative index provider. We see this collaboration as having a number of benefits to Royalty Pharma. First, it is expected to create a recurring and growing license revenue stream on global life sciences under management linked to these indexes. Second, we believe it expands our commitment and recognition as a leading funder of innovation in the biopharmaceutical industry. And third, we expect that upfront costs required will be minimal as we already have the capabilities in place to contribute to this important new collaboration. In terms of the financial contribution, we expect this collaboration to start small and play out over a longer period of time. That said, thematic index investing is a rapidly growing area with more than $400 billion of assets under management, of which approximately $100 billion are invested in ETFs and $300 billion in mutual funds. With healthcare representing an important segment of the economy contributing to around 18% to US GDP. We think this collaboration could be an attractive source of recurring cash flow over time. With that, I will hand it over to you, Marshall.
spk06: Thank you, Pablo, and good morning and good afternoon to everyone. We're really excited about the royalty acquisitions we have announced so far in 2021, and I'd like to take a couple minutes to highlight two of our recent transactions, which expanded our portfolio of innovative high-growth therapies. Beginning on slide 10, in April, we announced the acquisition of GlaxoSmithKline's royalty interest in the Cabozantin products CaboMedix and Cometric. For an upfront payment of $342 million and potential milestones of $50 million based on approvals in lung and prostate cancer, we will receive a 3% royalty on worldwide net sales. CaboMedix is a leading TKI approved for renal cell carcinoma and hepatocellular carcinoma and is marketed by Exelixis in the U.S. and by Ipsen and Takeda outside the U.S. Most recently, CaboMedix received regulatory approvals in the U.S. and Europe for use in combination with the PD-1 inhibitor Opdivo and first-line renal cell carcinoma. CaboMedix is also in a number of ongoing combination studies in kidney, liver, lung, and prostate cancer. Overall, we see a tremendous opportunity for this therapy to improve treatment outcomes for a large and growing number of cancer patients. And as reported by Exelix this last week, the early launch in first-line kidney cancer in combination with Obdivo is off to a good start. In terms of the financials, the street expects Cabo Medix and Cometric sales to grow from just over $1 billion in 2020 to $3 billion by 2025. And we are excited to add this important therapy to our portfolio and expect it to deliver an attractive return for Royalty Pharma as well. Now, moving to slide 11, we're excited by the opportunity for Oxalumo, a transformative medicine that significantly improves the lives of patients suffering from the ultra-rare genetic disorder primary hyperoxaluria type 1, or PH1. Oxalumo is an RNA interference therapeutic which lowers levels of oxalate that are abnormally elevated in PH1, resulting in kidney stones and ultimately kidney failure. Oxlumo was approved in the U.S. and Europe in November 2020 and is marketed by Alnylam, a company that has pioneered RNA interference therapies and successfully launched other rare disease medicines. Last month, we acquired Dicerna's mid to high single-digit loyalty interest in Oxlumo for an upfront payment of $180 million and $60 million of potential sales-based milestones. Following its launch at the end of last year, The uptake has been encouraging, and we are optimistic that the number of patients that could benefit from Oxlumo should expand with increased awareness and diagnosis. Consensus estimates show sales of $333 million in 2025, and Alilam has described a potential market opportunity in excess of $500 million. Similar to Cabo Medix, we expect Oxlumo to generate an attractive return for Royalty Pharma. And with that, I will hand it over to Jim.
spk03: Thanks, Marshall, and good morning, everyone. As shown on slide 13, we have seen strong progress from our portfolio in the first quarter, and there are multiple upcoming clinical and regulatory events that could impact our portfolio throughout 2021. So far in 2021, we have seen an important development for our migraine portfolio with the start of the Phase 2-3 study on BioHaven's intranasal Zevegipant. As a reminder, we agreed in August 2020 to fund the development of this therapy by providing up to $250 million to Biohaven. Should this therapy be approved in migraine, we will receive 1.9 times the funded amount, or $475 million, which would be paid over a 10-year period, and also a royalty on sales. Additionally, in the first quarter, Biohaven filed for European approval of its oral migraine therapy, NERTEC-ODT. And lastly, the European regulators approved Roche's Evrizdi for SMA, as well as Biochrist or Liddeo for hereditary angioedema. In April, the FDA granted full approval for Trodelby in triple negative breast cancer and accelerated approval in urethelial cancer. In addition, we saw the European approval of a subcutaneous formulation of Tysabri. For the rest of the year, I will call out the upcoming clinical data on CABO medics in first-line hepatocellular carcinoma and in prostate cancer, the readouts for TRODELVI and hormone receptor positive breast cancer, as well as the phase three results of PTO27, the combination asthma therapy that we have funded through Avilion that would be marketed by AstraZeneca. So in short, you can see the multiple milestones over the coming quarters showing the continued development of our portfolio. With that, I'll turn it to Terry.
spk11: Thanks, Jim. Let's move to slide 15. We delivered a very strong first quarter with total royalty receipts of 19% year-over-year. As you can see, royalties from our largest franchise, Cystic Fibrosis, grew 68% this quarter. This substantial growth was driven by two factors. First, the continued strong performance of the franchise led by growth of Trifacta, Trikafta in the US, and Caftreo in the EU. The impact of which was enhanced by our acquisition of the residual royalty interest from the Cystic Fibrosis Foundation in November of last year. And second, a one-time adjustment related to Vertex's agreement with the French authorities around reimbursement for our CAMBI that reduced royalty receipts in the first quarter of 2020. Imbruvica, Xtandi, and Promacta also contributed double-digit growth in the quarter. We are also pleased with the contribution from several recently approved therapies, including Tridelvi, Evrizdi, and NeurTech ODT. NeurTech is becoming an increasingly important contributor to our business after we received a $16 million payment from Biohaven on the Series A Preferred Equity this quarter. This payment was triggered by the approval of the product last year and is the first of 16 consecutive quarterly payments we will receive. We also experienced a couple of headwinds this quarter. Specifically, the HIV franchise was down significantly, primarily as a result of the LOEs for Truvada and Atripla, as well as a lower percentage of combination sales attributable to emtricitabine in the United States. We expect similar dynamics to impact the HIV franchise in the second quarter, leading to year-over-year declines. Taken together, the portfolio drivers mentioned previously, as well as contributions from several recently approved products, more than offset the impact of declines in royalties for the HIV franchise, delivering strong growth in total royalty receipts. Slide 16 shows how our royalty receipts translated to strong adjusted cash flow in the quarter. As you're aware, adjusted cash receipts is a key non-GAAP metric for us, which we arrive at after deducting non-controlling interest. This amounted to $524 million in the quarter, growth of 37% compared to last year's first quarter. as Pablo noted earlier. We did recognize a high base of comparison in the first quarter of 2020 that increased our growth rate in the first quarter of 2021. Excluding this item, year-over-year adjusted cash receipt growth would have still been 22%. When we moved left to right, operating and professional costs of $42 million equated to 8% of adjusted cash receipts. This percentage is lower than in the past couple of quarters, which included certain IPO expenses, as well as expenses related to our bond offering. Net interest of $63 million reflected the first semiannual interest payment following our $6 billion unsecured note offering in 2020. As a reminder, the next semiannual interest payment is due in September, meaning our net interest expense will be de minimis in the second and fourth quarters. After other items of $7 million, we reported adjusted cash flow, our bottom line earnings, of $409 million, or 67 cents per share. This translates to an adjusted cash flow margin of 78.1%, again, highlighting the strong cash conversion in our business model. Turning to our balance sheet on slide 17, we ended the quarter with cash and marketable securities of $1.8 billion. The decrease of just over $200 million since the start of the year reflects the $521 million deployed on royalty acquisitions, which was largely offset by the strong adjusted cash flow I just described. We finished the quarter with $6 billion in investment-grade debt, which alongside our undrawn $1.5 billion revolving credit facility gives us a strong liquidity position. Taken together with leverage of 2.4 times EVITDA on a net basis and 3.4 times EVITDA on a gross basis, we remain well-positioned to continue to fund important innovation in biopharma. My final slide provides our 2021 full-year guidance. We now expect adjusted cash receipts to be in the range of $1.94 to $1.98 billion, an increase from our previous guidance. for new adjusted cash receipt guidance represents an increase of between eight to 10% over the $1.8 billion we delivered in 2020 and reflects a number of pushes and pulls. In particular, this raised guidance reflects the new royalty acquisitions Marshall spoke about, as well as the strength of our portfolio, offset by declines in HIV that were more substantial than we initially expected. We are quite encouraged to see that our despite headwinds within our HIV franchise, which we do not expect to be a contributor to our business beyond 2021, we are still able to increase guidance to year-over-year growth of 8% to 10%. Looking forward to the second quarter, we expect adjusted cash receipts, excluding new investments, to be at a similar level as the second quarter of last year. Turning to operating costs, we expect these to be approximately 9% to 10% for of adjusted cash receipts for the year, which is unchanged from our prior guidance. Consistent with our standard practice, this guidance is based on our portfolio as of today and does not take into account any future acquisitions. With that, I would like to hand the call back to Pablo for his closing comments.
spk08: Thanks, Terry. So, in conclusion, we're experiencing a really strong start to the year. We continue to be very excited about the growing role of royalty funding to advance health outcomes for patients globally, as well as the powerful dynamics in our business. With that, I would like to open the call to Q&A. Back to you, George.
spk05: Thanks, Pablo. We will now open the call to your questions. Operator, please take the first question.
spk09: Ladies and gentlemen, to ask a question, please press star, then 1. If your question has been answered and you'd like to remove yourself from the queue, you may press the pound key. Our first question comes from Christopher Schott with JPMorgan. Your line is open.
spk01: Christopher Schott Good morning. This is Chris Neron for Chris Schott. So, first question is a high-level one on inflation. How does the potential for higher inflation impact Royalty Pharma's business model going forward? And specifically, how do you view the balance between the cost of funding for future transactions and the potential for lower sector valuations? Second one's on synthetic royalty deals. Royalty Farm introduced synthetic royalty deals several years ago and has completed several transactions, but this remains a fairly small portion of the royalty market overall. How much of these transactions do you see as part of your business mix going forward, and how much traction have you received negotiating synthetic royalty deals with your potential partners? Thanks so much.
spk08: Terry, would you mind taking the first question and maybe Marshall can take the second one?
spk11: Yeah, and maybe before I answer the first one, could you just sort of clarify the question? I want to make sure I understand the question.
spk01: Yeah, so with the higher inflation, we're seeing the potential for kind of a negative impact on sector valuations. So I'm just trying to think through all the pushes and pulls on Royalty Farmer's business model and what impact inflation may have on your business going forward.
spk11: Okay, understood. So, yeah, others could weigh in as well, but I would say – Our view is, you know, if valuations across the sector are impacted by higher inflation, then that could actually increase our opportunity set as companies look for alternative ways to fund themselves beyond just the traditional equity capital markets. We think that that could actually enhance our business.
spk06: That makes sense. Thank you. Good morning. I'm the second half of your question on synthetic royalties. So, yeah, thanks for the question. As we've talked about in the past, we are really excited about the potential for synthetic royalties as a new and, you know, ultimately important way of funding drug development and innovation in our sector. You know, we are very active there and expect it to become an important, you know, and increasing part of our business over time. I think as you've seen in the past, we do have a very high bar when we look at new opportunities, and we're going to maintain that going forward. So I think it's exciting. We are seeing a lot of traction there, actually. And I would remind everyone, our last transaction there with Biochrist at the end of last year, You know, Orla Deo's launch there is off to a great start. So we think the Biochrist team is doing a great job with that launch. And I think you'll continue to see us do those deals in the future and continue to add to our portfolio through synthetic royalties over the coming years.
spk01: Thanks for taking the questions.
spk09: Our next question is, Our next question comes from Jeff Meacham with Bank of America. Your line is open.
spk04: Hey, guys. Good morning, and thanks for the question. I just have a few. The first one is, how much of a contributor can the MSCI collaboration ultimately be? I just want to know if you guys have any more detail about how it could generate cash for royalty. And the second question is, Terry, you mentioned that the HIV erosion was worse than you guys originally modeled. I know you typically look at consensus numbers for each product, but going forward, are there additional analyses that you could conduct? I'm just trying to think of all the inputs and outputs to what you guys provide as guidance and how that could be enhanced. Thank you.
spk08: So I'll take the first question, Jeff. Thank you for the question, and good to hear you. And I think just very briefly on HIV, I mean, this is the end of this investment, so it really is not going to drive much regarding the future. But Terry can give you more. information there. So regarding MSCI, if I step back a little bit, just from a big-picture perspective, let me just mention a few things. One is it's a business that I've followed for decades because I know well, have a relationship with a chairman and CEO of decades. And I recall in conversations with him many years ago where I said to him, I think your business is really, really interesting because if you think about it, the indexes, really what they produce is royalty on global assets under management. The way index creators and publishers, MSCI being, in my view, the most creative of the three big ones... the way they get compensated is that all of the asset managers that license their indexes pay them basis points, you know, three, five, six basis points on the assets managed by the specific fund. So if you have, you know, Capri, Fidelity, a Moody that is licensing those indexes, they would pay, MSCI basis points, as I said, on their assets under management. And if you think about it, over long periods of time, assets under management grow. They could fluctuate from one quarter to the other because of the volatility in the markets. But if you look over a 5, 10, 20-year period, there's obviously significant growth in assets under management. Why? Because economies grow, people save more. So it's a very interesting dynamic there. And I recall in a conversation with Henry, I said to him, I love your business. You really have this royalty on global assets under management. So the relationship continued. He's obviously on our board now. And about a year ago, we started to discuss about the opportunity in life sciences to because it's an incredibly important part of the world economy and maybe broader than life sciences, you know, all health care and growing and highly complex. If you just take, you know, biopharma, for example, we have the big pharma, there's an index there, and we have biotech also with an index and biotech. But it's probably, as far as it goes, there might be one or two other small indexes that are maybe not that common or investors don't pay too much attention to. But if you think of biotech... With more than 8,000 biotech companies and 3,000 that are public, highly complex. You have companies that focus on one product, and there might be an oncology or a multiple sclerosis, companies that have technology platforms, either gene therapies or you name it. It's highly complex, so it's very difficult for investors really to understand how to invest in biotech. Obviously, they do it by investing in mutual funds. But if you then look at indexes and life sciences, so if you look at indexes in general, you know, we all grew up with indexes that were sector indexes, like utilities, banks, insurance companies. And a very interesting new trend, recent trend, is indexes that are thematic where, you know, investors can invest based on a specific theme they like. And when we saw this in life sciences, we just thought that there was just an incredible opportunity to start to create indexes that would actually track better what's going on in specific themes within life sciences. So you could create an oncology index. You could create an early stage biotech index where investors could invest in early-stage biotech that offer huge upside potential, but are risky. And if you do it by investing in an ETF that gives exposure to early-stage biotech, it's much more interesting, safer than actually picking one or two stocks where it could be tough and you could lose money. And if you just think about it, we could create indexes that maybe track Chinese companies, indexes that are going to track other aspects. It could be a CRO index or a hospital index. And so from our perspective at Royal Pharma, what's so interesting for us is that we're going to apply our knowledge built over decades, the knowledge base and expertise we have, and just monetize it, create from that knowledge that we already have. We're going to create a revenue stream for us that is really a royalty on, you know, investment in life sciences, global assets under management, investment in life sciences linked to the syndexes. And it's going to be a sharing of the top line. We're going to get a percentage of the top line that is not quite, you know, sort of 50-50 because obviously we recognize that this is, You know, a very significant business for MSCI, and it's actually, you know, they have all of the infrastructure worldwide to distribute these indexes, but it's a decent-sized, you know, royalty, not far from, you know, an equal sharing. So it's very exciting to us. It will start low, but if we look, you know, into the future, maybe three, five years, ten years from now, I think it will be an important revenue contributor. And another really important thing is that it's actually, you know, the cost for us is very marginal because we're already – we have a lot of this knowledge we're actually investing – with the new group that we created, the strategy and analytics group trying to even enhance more our knowledge base. So, you know, for us to actually provide this and the service we need to provide in the collaboration with MSCI, you know, it's going to be half a million, million-dollar incremental investment, which is well worth it. And maybe just to finish, to give you a sense of why this is exciting, If we look at all of the disrupting technologies that are changing the world, and here I'm talking about technology in general, internet, all of the things that we always talk about, but also biotech, very important. It is estimated that the... Creation of value, if you look at the market cap created by all of this disruptive technologies, which is about $10 trillion in 2020, it's expected to get over $60 trillion in additional market cap created. All of the new companies that end up going public and then achieving nice growth, this is expected to get up to about $16 trillion by the mid-2030s. And if we look at thematic investing, it's already a $400 billion market where you have about $100 billion invested in ETFs and $300 billion invested in mutual funds. And that is growing very fast. It was about $150 billion in 2015, and it's $400 billion in 2020. So that gives you a sense of the growth opportunity. And I hope that answers your question, Jeff.
spk11: And then, Jeff, on HIV and how we think about consensus, we still do feel generally pretty comfortable with using consensus for sort of the guidance that we provide. HIV is a little unique in that there's sort of two factors. There's net sales of the Gilead's products, but then there's also the percent of those sales that is attributable to emtricitabine. And that's actually the part that actually came in, um, and much lower than, than we initially anticipated. But as Pablo mentioned, um, you know, HIV has been an amazing investment for us. Um, but it's not, it's not a part of our future. And we're really encouraged to see that the growth across the rest of the business and more than offset, uh, those substantial declines within HIV.
spk04: Okay, great. Thanks, guys, for all the detail.
spk09: Our next question comes from Terrence Flynn with Goldman Sachs. Your line is open.
spk07: Great. Thanks so much for taking the question. I had one on Tredelvi. There's been some discussion recently about the impact of prior CDK4-6 treatment that that could have on the efficacy of the drug in the ongoing HR-positive Phase III trial. If you look back at the Phase 1-2 data in HR-positive, there is a bigger benefit for the drug in people that were naive to CDK4-6 versus those that were previously exposed. So just wondering, Marshall, if you could comment and if you have any perspective on this trial, as I know it's a pretty important growth driver for the future opportunity here. Thank you.
spk06: Sure. Hey, Terrence, good morning. So on Tridelvy, thanks for the question. We've certainly been, you know, following all of the kind of debate out there, and, you know, it's certainly interesting. You know, I'd say bigger picture, first just bigger picture taking a step back. You know, we think Tridelvy is an exciting and going to be and is and will be an important therapy program. You know, and certainly HR positive is one aspect of that. But if you think taking a step back, you know, there's a lot more there in terms of, you know, growing within triple negative, you know, as well as ladder and then other indications. So, you know, this has been a, you know, a real kind of win-win for us in terms of adding this to our portfolio in terms of, you know, a great example of the power of a synthetic royalty transaction system. That being said, with respect specifically to the HR positive trial, we know what you guys know about this, so I think we're following this and look forward to the readout this year. Gilead obviously took a close look at this, I think, as they have talked about and has powered the trial adequately for what will hopefully be a positive readout later this year. So I think, you know, something that is interesting, but regardless, you know, we think there's a lot of growth and future for Tredelvi.
spk05: Thank you, Karen. Operator, we'll take the next question.
spk09: Our next question comes from Greg Gilbert with Truist Securities. Your line is open.
spk14: Good morning, team. A couple of strategy questions. You've made it clear that you would continue to consider development stage deals for products in pipelines, but what's your appetite to invest in earlier stage but maybe more platform-oriented technologies that could later spawn multiple products in multiple areas where you're not sure what those areas or products are yet And then back to the MSCI arrangement, really interesting announcement there. Are there other themes under consideration in the near term, or is the goal to sort of observe these two and see how they go? But maybe as an offshoot of that, is this effort potentially helpful to your core business in sourcing new deals unrelated to the MSCI collaboration? Thank you.
spk05: Pablo, are you on?
spk08: Oh, sorry, sorry. I was muted. So Jim can provide the answer to the question related to the early stage investments. And I'll answer your question about MSCI. So I think what this really shows is how Royalty Pharma's model is actually not constrained. We can be creative and look for ways to actually creating new sources of revenue like we have with this MSCI collaboration. I think there could be other things that over time develop like this that could create sources of revenue. For us, it's interesting because it will give us potentially an economic exposure to other parts of life sciences where we are not likely to invest in. So the focus, as you know, is therapeutics. We can and probably will over time invest in other things that are not therapeutics, like it could be diagnostics and devices. We're very careful there because we want to make sure that this assets have very long life cycles, which, you know, is an important thing, which therapeutics do have. But, you know, we will also potentially, you know, we're able to create indexes that are going to track those things, like devices and diagnostics, but also, you know, as I said, could be an index for CROs or other things. So that's obviously in the index category, but there could be other things. And maybe just one other thing that occurred to me, just to give people a sense, of the economics here so if you have a fund that has ten billion dollars of assets under management and MSCI is going to charge somewhere between three and six basis points it generates you know three to six million of revenue per year now if that fund doubles or triples over time you know the revenues will double or triple and I think what's also very interesting for us about this is that it's perpetual. You know, as you know, the royalties that we invest in have a life of 10, 12, 15 years, sometimes a little bit more, but they expire and we need to replace them. In the case of the indexes, this is perpetual. It will go on for many years, you know, forever. So with that, I'll turn it over, I'll turn it back to Jim to give you a little bit more perspective on our strategy regarding earlier stage investments.
spk03: Hey, Greg. Thanks for the question. Yes, it's a good question on, you know, going earlier stage and looking at, you know, whether there are opportunities to, you know, invest in platforms and, you know, potentially bring in multiple products at a time. I do think that, you know, over the years we've demonstrated that we're creative and, you know, really kind of push the envelope in the royalty, you know, industry for going earlier and and finding ways that are risk-aware to go into earlier stages of development. We kind of pushed the envelope into pre-approval. We've since then done products that are even pre-Phase 3 in a smart way and gotten returns on those. We actually made an investment just recently as part of the, uh, or Ladeo investment, we made an investment in by Chris, uh, factor D drug, uh, called 99 30, which was in phase one slash two right now. Um, so, you know, that's an example of us going early as a part of a larger deal. So there are a variety of creative structures that we're looking at right now that, um, you know, can give us some exposure to exciting new platforms and modalities and perhaps, um, groupings of products. I think that we'll just leave it at we're exploring those as a way to keep the opportunities coming, but we do think it's a good thing for us to be apprised of. Actually, part of the reason that we wanted to form the strategy and analytics team is to make sure that we're using data in the best way to make sure we know where all the promising opportunities are and to really kind of be mining opportunities earlier than we would before as a way of, you know, A, following them from an earlier stage, but B, seeing if there might be opportunities for us to invest earlier.
spk14: Thanks a lot.
spk09: Our next question comes from Kathy Miner with Cohen & Company. Your line is open.
spk10: Thank you very much for taking the questions. Just a couple questions. First, could you just clarify on the HIV that the royalty expires this year, or is it sometime during the year? And are there any other notable royalties that expire during 2021? Second question is on the adjusted cash receipts guidance that you gave. You said the increase was based both on the existing portfolio and on some of your recent additions. But is there also any change in your expectations for distributions? And the last question is a little more big picture. Do you expect drug pricing reform to increase or decrease the number, magnitude, and potential of royalties? Thank you.
spk08: Terry, can you take the questions, please?
spk11: Yes. So on your question on HIV, what we've said is that we expect it to substantially end in 2021, and we have not been more specific than that. Your question on... on distributions as it relates to adjusted cash receipts. I assume you're referring to the distributions to non-controlling interest. And in the back of our deck, we actually lay out, you know, what those different non-controlling interests are or were for the quarter. And so that's a pretty good guide for you for, you know, how to think about what they'll look like going forward. And then your last question was on drug pricing. And I think that Marshall's probably the best person to answer that one.
spk06: Sure. Thanks, Terry. Good morning. Thanks for the question on this. So, you know, specifically to your question of how we think, you know, what the outcome of, you know, what may happen on the drug pricing front could impact our opportunity set for royalties. And You know, regardless of what happens, I think we are very optimistic about the size of our market, the number of companies that are going to be looking for potential funding. I think certainly we're all watching what is going to happen in Washington and all of the stops and starts and puts and takes that we've seen, but, you know, I think we would we're focused on two things. You know, one is, I think in terms of our current portfolio, you know, we are, you know, we are, we have a portfolio that's highly diversified, you know, across products, therapeutic areas, marketers, geographies, payer types, all, you know, all different types of diversification. And we've really focused on important drugs that are, you know, that really impacts patients' lives. And so regardless of what happens, I think we feel good about where our portfolio stands now. I think looking forward, we really don't think that whatever happens will meaningfully impact the number of new opportunities for us. When you look at the rate of company formation over the last few years, we see that as a really encouraging leading indicator of the number of companies and the number of opportunities for us. The amount of innovation, how much is happening right now, you know, we think those are all kind of overwhelmingly positive in terms of how things may look going forward. So I think, you know, certainly, you know, for all of us who have been around the industry for a long time, you know, we are continuing to follow, you know, what's happening on the policy front. But, you know, but we think all the positives and tailwinds for our business are, you know, remain and will remain in years to come.
spk09: Our next question comes from David Risinger with Morgan Stanley. Your line is open.
spk02: Yes, thanks very much, and thank you for the comprehensive update. So I have two questions. First, regarding the MSCI indices global recurring revenue opportunity, I Could you just put that in a little bit more financial perspective? I mean, it makes a lot of strategic sense for you. I think you had mentioned, Pablo, three to six basis points on assets for MSCI. What could Royalty Pharma realize, and should we think about this as being a potentially $5 million revenue opportunity in a couple of years for Royalty Pharma, or a $20 million revenue opportunity, just so that we have some context. That would be appreciated. And then second, Vertex has been advocating at recent investor conferences that it's excited about novel cystic fibrosis candidate development, including potentially reducing royalties as part of that. Could you remind us about your position and next developments to watch? Thanks very much.
spk08: Thank you, David. So with respect to MSCI, I actually would like at this stage to just be very cautious about the revenue contribution, just because it's something totally new to us that we would like to understand better. We do believe that revenue contribution, this year probably we won't get anything. Why? Because the indexes have to be created, then they have to be sold to the team at MSCI and ourselves. You know, we'll start to talk to some of the major, you know, investors in life sciences to actually see if they want to license the indexes. But, you know, what you will start to see is maybe some of the bigger ones, a BlackRock or a Moondi or others, you know, they might create an ETF if we launch an oncology index, you know, you know, an early-stage biotech ETF, and then mutual funds. So it will take time, and I even think that the revenue next year is going to probably be very small because, again, it's all in the launch phase. But, you know, at some point this will gain momentum, and if you just look at the fact that today there's $400 billion invested in thematic indexes, already $100 billion in ETFs and $300 billion in mutual funds, And a lot of that is technology because life sciences is behind. It hasn't really happened. So could that $400 billion grow over the next 10 years to a trillion? I think it will probably. And what share of that is going to be life sciences? and then you have to sort of go through the economics that MSCI will get and then what we will get. So I think this is something that looking in sort of the second half of this decade could become important, but maybe as time evolves and we get a better sense of how this could grow, we could be a little bit more specific. At this stage, I am very excited because it's not only – It shows what we can do with the Royal Terma model in things that were totally unexpected. I mean, nobody thought of this, had it in their model, so it's potentially something new for us. And it also will benefit – I mean, there was a question before about whether this will benefit – our core business, and absolutely it will. Why? Because in that effort of us really looking into life sciences and trying to look in three, five years as to what are going to be the important therapeutic areas, and we'll also start to look at the companies that are starting to invest in that, many of which may have things in you know, preclinical. But if you start to look at those companies and track them, you know, through an index and you start to see how, you know, the value creation, you know, begins or how capital is shifting from, you know, into those areas, it will give us a feel for that. And, you know, just as an illustration, I think that, you know, Chinese biotech, for example, we looked at it last fall as we were starting to talk to MSCI about this, and I was blown away to realize myself and the team have been going to China in the past years to try to explore if there's anything for us to do in that market. And I was blown away last fall when I checked the market cap of Chinese biotech, And it was about $700 billion, and I think it went as high as maybe $1 trillion. And there's about 800 Chinese biotech companies that are public, 800 biotech companies, which is a very significant number. So it gives you a sense of what's going on in other markets, and it will help us, at Royal Pharma to, you know, make sure we're really understanding the space, you know, in a very deep way and we can, you know, understand the trends better. So, you know, that's additional perspective that I wanted to provide.
spk11: And then, Dave, on your question on the cystic fibrosis franchise, we've certainly, you know, heard comments from Vertex about, future potential combinations and potential lower royalty rates on those combos. Our position's unchanged, so as it relates to any combination that includes deuterated Kalydeco, our position is that deuterated Kalydeco is simply Kalydeco, and Kalydeco is a collaboration compound that's royalty-bearing. With regard to any other components of of combination products, I think there's, you know, there's a number of factors to consider. So, you know, which components are they and are they royalty bearing and at what level? And then, you know, as those combos move forward, it's, you know, time to enroll the clinical trials in a population that is, you know, at this point pretty well served. And then the success and timing of potential regulatory approvals and then ultimate uptake versus Trikafta, which is a pretty remarkable drug for CF patients. So our view is we expect CF to be a very important contributor to our business for many years to come. And in the meantime, we're going to keep focusing on executing our business plan and adding innovative new therapies to the portfolio.
spk01: Thank you.
spk09: Our next question comes from Umar Rahat with Evercore. Your line is open.
spk12: Hi, guys. This is Mike DeFiore in for Umar. Thanks so much for taking my question. Just two for me, just to piggyback on the previous question before on Vertex. They've, again, recently been very clear that what their next-gen triple combo may be and that Phase 3 is going to start this year. My question is, given that things are starting to be more definitive, has anything changed regarding Royalty Pharma's long-term outlook and potential or willingness to do earlier stage deals, just given the more certain step done in future royalties? And secondly, and separately, just the oral CGRP market outlook, especially with AbbVie's recent AtoJapan data and preventative migraine data, has your outlook changed regarding the implications for Biohaven's future royalty potential? Thank you.
spk08: Thanks for the question, Mike. Terry, can you take the CF question and marshal the migraine CGRP question?
spk11: Yeah, Mike, I think, to be honest, I think it's really premature to be talking about any changes to our long-term outlook. I think what I just said holds. We feel really confident in the long-term outlook performance of the CF franchise. You know, as other products come along, it's all going to be sort of case dependent, but they are going to have to compete against Trikafta, which again is a great drug and we're entitled to very attractive royalties on Trikafta. And then, you know, would it change our strategy? No, absolutely not. You know, I think we're going to keep doing what we've been doing and keep reinvesting in what we think are the most exciting wave of new products in this industry. And, you know, that's the plan. And, you know, that's what we're going to stick to.
spk06: Hey, Mike. Good morning. Thanks for the questions on the CGRP class. So I think there's multiple aspects to it of what you're raising. I think at a high level, you know, we are excited by what we're seeing on the oral CGRP market in terms of the market uptake and the success that, you know, Biohaven and AbbVie are having there. And I think, you know, we've heard AbbVie on, you know, on prior conference calls this quarter and prior ones, you know, really express their enthusiasm and excitement about the potential for a potential of this category. You know, and we are certainly excited to be a part of that with Biohaven. You know, I'd remind you that we have multiple avenues of exposure to this market. Certainly, NERTEC, ODT, and the acute market is part of it right now. Biohaven has the filing to have the first-ever dual label for acute and prevention, and the PDUFA for that is coming up. So we think that's interesting. And then it would remind you, too, that we did a – of our deal with Biohaven from last summer to support the Zvejapan development program, and they are also exploring oral Zvejapan products. in the prevention market as well so you know we think it's a you know it is an exciting category and we're excited to have kind of multiple um you know multiple ways that we can participate in that just lastly um I think it's a, you know, this also highlights an exciting aspect of the Royalty Pharma business model in that we can have, you know, multiple ways to, you know, to play or participate in an exciting class like the CGRP. So we also have a royalty on Willys and Gallaty. and then also on multiple of the oral CGRPs, which we think is a pretty unique aspect of our business model, that we see a class and a market that we like and has a lot of potential. And I think certainly the early launch of the oral CGRPs are bearing that out, that we have the strategic flexibility to be involved in that in multiple ways. So we're excited about the outlook for CGRPs and look forward to seeing that play out in the coming years. Got it. Thanks so much.
spk09: And our last question comes from Andrew Vaughn with Citi. Your line is open.
spk13: Thank you. Global system shocks such as the pandemic seem to be reshaping the relationship between governments and the industry in a number of dimensions. So you've already addressed drug pricing, but if you look at IP in light of the comments on vaccine waivers and also tax, you can see how there may be increased risk compared to what we might have envisaged previously. How do you think about those individual characters in terms of the risk for your operating model going forward? So that would be the first question. And then the second question is, there has been an increase in the number of competitors in your space, so Patient Square, so ex-KKR executives have moved into your space. They're not just doing WorldFuse, they're doing SPACs as well. How are you looking at the competitive environment and confidence that your mode of cash flows gives you in terms of continuing to secure the most attractive assets? Many thanks.
spk08: Yeah, so maybe Chris can take the first question. With regards to competition, in fact, you know, all of the facts that have been created, and there's many of them that are addressing sciences, I see those as actually, you know, additive to our, effort, because what's happening there is that there's a ton of capital that actually has been raised by the SPACs that are focused in life sciences, many billions of dollars, and again, that's going to fund private companies, give them the capital they need to continue to invest in research, to bring products forward, and eventually they could become partners of ours, companies that we could partner and collaborate to help them eventually bring products to market. So I think, you know, the more capital that is invested in life sciences, the better. And, you know, one other comment to make about, you know, this new index collaboration, you know, I was in a conversation I had with the MSCI team, the chairman and CEO, mentioned that, you know, in conversations they've had with, you know, world governments, you know, World Bank, how, you know, capitals flow around the globe in the, you know, investment community. And, you know, when markets open, and here markets not only geographically but also, you know, think about it from an industry perspective, you know, the fact that MSCI creates indexes, attract, you know, many billions of dollars of capital into that space. And I gave the example of, you know, maybe an early stage biotech index or an oncology index or you name it. It can be many others. And, you know, then what is likely to happen over time is that you know, as, you know, products are created like ETFs or mutual funds to focus on that specific theme or new market, you know, capital flows and then, you know, companies end up getting, you know, additional capital to fund their research. So it's a very interesting phenomenon, but one that, like, this whole development of thematic indexes and life sciences is going to make the whole life sciences more investment opportunity more understandable, more accessible to investors, and this will attract capital. So it's quite interesting from that perspective. And I think, you know, so I'll let Chris answer the other question about impact to life sciences from, you know, big trends.
spk15: Sure. Thanks, Pablo. And, Andrew, thanks for the question. I think as it relates specifically to the intellectual property waiver, you know, we don't see that as something that's going to impact our business long term. You know, I know the idea has been floated, you know, and obviously there's a global pandemic. And, you know, from a compassionate perspective, you want to get as many vaccine doses around the world as you possibly can, and there's probably more efficient ways. actually just transfer excess doses once the supply is there as opposed to trying to waive intellectual property. And with know-how, obviously these vaccines are very difficult to make and manufacture. So I think it's probably more efficient ways to get the vaccines around the world than just waiving intellectual property. We don't see, you know, the need for compassionate use right now as impacting intellectual property laws going forward. So we don't see that as impacting our business going forward.
spk09: There are no further questions. I'd like to turn the call back over to Pablo Legareta for concluding remarks.
spk08: Sure, Rob Baer. Thank you. Thank you to everyone on the call for your continuing interest in Royal Pharma. My team and I look forward to continuing to share our progress with you. If you have any follow-up questions, please feel free to reach out to George. And thank you for... joining the call, and I hope everyone has a good week. Thank you.
spk09: Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.
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