Royalty Pharma plc

Ladies and gentlemen, thank you for standing by. Welcome to the Royalty Pharma first quarter earnings conference call. I would now like to turn the call over to George Grafick, Senior Vice President, Head of Investor Relations and Communications. Please go ahead, sir.

Good morning and good afternoon to everyone on the call. Thank you for joining us to review Royalty Pharma's first quarter 2022 results. You can find the press release with our earnings results and slides to this call on the investor's 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 that may cause actual results to differ materially from these statements. I refer you to our 10-K on file with the FCC for a description of these risks. All forward-looking statements are based on information currently available to Royalty Pharma, and we assume no obligation to update any such forward-looking statements. Non-GAAP financial measures will be used to help you understand our financial performance, and the GAAP to non-GAAP reconciliations are provided in the earnings press release available on our website. With that, please advance to slide four. Terry Coyne, EVP, Chief Financial Officer, will cover key highlights and review the financials. Pablo's son is undergoing a medical procedure, so he will not be able to join today's call. We wish his family well, and he's looking forward to seeing everyone at our investor day on May 17th. After Terry's prepared remarks, we will hold a Q&A session. Marshall Uris, our head of research and investments, and Chris Height, our vice chairman, will also join the Q&A session. And with that, I'd like to turn the call over to Terry.

Thank you, George, and welcome to everyone on the call. I'm delighted to report a strong start to the year as we execute on our strategy as a leading funder of innovation in life sciences. On slide five, I will start by summarizing our accomplishments in the first quarter, which continue to reflect the excellent momentum in our business. First, we delivered strong top-line growth of 15%, continuing our impressive track record of double-digit growth. We maintained a robust and active deal pipeline, which reflects the strong growth in demand for innovative royalty-based funding solutions. We continue to be very excited by our opportunity set, which you will hear more about at our Investor Day on May 17th. When we look at our portfolio, we also saw very encouraging progress. Caftria received European approval for 6- to 11-year-olds with cystic fibrosis. while Vidura gained a first-ever European approval for both the treatment and prevention of migraine. Each of these approvals brings these transformative therapies to many new patients who could benefit. Lastly, we are reaffirming our full-year guidance for adjusted cash receipts based on the strong underlying performance of our existing portfolio. This is even more impressive in the context of a roughly 2% unfavorable impact from FX we are facing this year. which I will talk to you more about in a minute. I would also remind you our guidance excludes the impact of any investments that we may make over the remainder of 2022. On slide six, you can see our financials in a little more detail. In the first quarter, we delivered 15 percent growth in adjusted cash receipts, our top line. This impressive double-digit momentum puts us in a great position to deliver another year of strong top line performance in 2022. Below our top line, I am also pleased to report that we grew our adjusted EBITDA by 15%. This is an important non-GAAP measure for us, which is arrived at by deducting operating and professional expenses from our top line. Our adjusted cash flow, or our bottom line, was impacted by an update to our non-GAAP treatment of certain development stage payments, which amounted to $100 million in the quarter. This update conforms with changes being made across the biopharma industry beginning in the first quarter of 2022. As a consequence, our adjusted cash receipts declined 10% in the quarter. I will take you through the details of the update to our non-GAAP financial results presentation a little later. Slide 7 shows our track record, a strong top line growth since our IPO in June 2020. This track record is a testament to the underlying power of our business model. By consistently innovating funding solutions and replenishing our royalty portfolio, we can drive compounding growth and absorb losses of exclusivity in a way that is not possible for most other biopharma companies. Total royalty receipts grew 9% in the first quarter versus the year-ago period. Growth drivers in the quarter included Cystic Fibrosis franchise, Tysabri, and the new royalty on Tramphaia. We also saw significant growth contributions from Promacta, from the BioHaven payments, and also, though not specified here, from Calomedics and Evrizdi. As in the preceding two quarters, these positive factors more than offset the loss of contribution from our legacy HIV franchise. Slide 9 drills deeper into our first quarter top-line performance to illustrate this point. As you see here, our 15% top-line growth in the quarter was powered by strong performance of our base business. This was partially offset by losses of exclusivity, mainly on the HIV franchise, which had a negative impact of close to 700 basis points, but were easily absorbed by the strength of our base business. In short, our unique business model and capabilities allows us to consistently replenish and grow our top line, and you can expect to hear more about this at our investor day. Slide 10 shows how our royalty receipts translated to adjusted cash flow. Similar to many of our peers in the biopharma industry, we have also updated the treatment of certain development stage payments, which impacted our non-GAAP bottom line when compared with the historic presentation of our non-GAAP results. I will take you through the details of this update on the next slide, but I want to first highlight a few key points here. First, we delivered 15% growth in adjusted cash receipts in the quarter, continuing our double digit top line momentum. As you are aware, adjusted cash receipts is a key non-GAAP metric for us, which we arrive at after deducting non-controlling interest, and this is the central measure of our full-year and long-term guidance. In the quarter, adjusted cash receipts were $605 million, compared with $524 million in the year-ago quarter. Second, as we move down the column, operating and professional costs equated to approximately 8% of adjusted cash receipts. slightly below our guidance of approximately 9% for the full year. Third, as a consequence, we reported 15% growth in adjusted EBITDA in the quarter, which was consistent with our top line growth. Adjusted EBITDA is an important non-GAAP financial measure for us and one of the three key non-GAAP metrics by which we measure our business performance. Fourth, Net interest paid of $86 million reflected the first payment on the $1.3 billion of unsecured notes we issued in July 2021, as well as the timing of the semiannual interest payments associated with our original $6 billion unsecured note offering in 2020. Fifth, we now include the $100 million development stage payments related to our AFIC-Hampton investment in our non-GAAP results. Previously, and consistent with industry practice, these payments would have been excluded from our nine GAAP results. Lastly, after de minimis payments for ongoing development stage funding and other items, this resulted in an adjusted cash flow, our bottom line, of $367 million or 60 cents per share for the first quarter. The impact of the applicant in payments was equivalent to 16 cents per share. Of course, these accounting updates have no impact on the cash generation of our business. Slide 11 provides more detail on the update to our non-GAAP financials. If we acquire royalties on approved or development stage products, there is no change to how we reflect these in either our GAAP financial statements or our non-GAAP financial measures. These investments are capitalized on the balance sheet. Examples of recent royalty acquisitions in this category include Cabo Medics, Tramfaya, and Gantanerumab. If we acquire synthetic royalties on approved products, there is no change to our GAAP or non-GAAP presentation. These would also be capitalized on our balance sheet. Recent examples here include Orlodeo and the incremental royalty we acquired on NERTEC ODT in 2020. If, on the other hand, we acquire synthetic royalties on certain development stage products, we will now treat the upfront payment as an expense in our non-GAAP financial measures. The accounting treatment under the new guidance will be subject to the specifics of the transaction, including probability of success, among other factors, and it should be noted that there would be no change on a gap basis. Examples of this type of transaction include afacantin, as I already highlighted, along with BCX-9930 and two of the therapies from our morphosis deal, Palabrasiv and CPI-0209. On the right-hand side, you can see how this new treatment of certain development stage payments impacted our adjusted cash flow over each of the past two years. In 2020, the impact would have been very minor, less than half a percent, as a result of our initial BCX9930 transaction with Biochrist. In 2021, by contrast, the impact on our adjusted cash flow would have been approximately 11%, as a result of the expanded partnership with Biochrist on BCX9930 and the morphosis transaction. The creation of synthetic royalties on development stage therapies continues to be an important opportunity for royalty pharma. And while the timing, size, and structure of these deals are difficult to predict, we recognize that this new accounting treatment potentially introduces an element of volatility to our bottom line as we look forward. We will ensure that any development stage payments falling under this treatment are transparent in our quarterly and annual reporting for the purposes of your financial modeling. We have also included updated non-GAAP quarterly financials for the years 2020 and 2021 in tables five to seven in the back of our press release. Let's move now to slide 12 and our financial position. We continue to maintain significant financial firepower. We deployed $199 million of capital on royalty acquisitions during the first quarter, as well as $117 million on dividends and distributions. As a result of our strong cash flow generation, we had $2.3 billion of cash and marketable securities at the end of March, slightly above our position at the end of 2021. Our leverage stands at 2.5 times net debt to EBITDA and 3.6 times total debt to EBITDA. With a fixed rate average coupon on our debt of slightly above 2%, which is significantly below our target returns on royalty acquisitions in the high single digits to teens percentage range, we continue to feel confident about our ability to execute on our business plan and create value for shareholders. On slide 13, we are well positioned for the current financial environment. As I just noted, we have a very attractive coupon on our debt portfolio. and we also benefit from a weighted average maturity on our debt of around 13 years. We have limited near-term refinancing needs, and any debt refinancing through 2025 would be expected to have a less than 1 percent impact on our weighted average cost of debt. More broadly, with a commitment to our investment-grade credit rating, we expect to maintain attractive overall borrowing costs and deep access to fund our future capital deployment plans. The current equity market environment for biotech is also favorable to our business plan as royalties are becoming increasingly attractive as a source of funding given to pressed stock valuations and as new M&A opportunities are being created. Of course, the bar for investments remains as high as ever, though over time we are confident in our ability to capitalize on the opportunity ahead and create value for shareholders. We are confident in our ability to maintain returns in this environment. There is a natural hedge through asset pricing against a background of rising interest rates. Furthermore, we have demonstrated through previous economic cycles our ability to react quickly in a dynamic market and to maintain attractive returns. Our aim is to deliver attractive unlevered returns with enhancements on those returns through conservative leverage, even at higher interest rates. Now switching gears to upcoming milestones, Slide 14 highlights the expected clinical and regulatory events for our portfolio during 2022. In summary, the year has started well with positive clinical trial results from Tredelvi and Tramfaya and the European approval of Vidura, and the remainder of 2022 could have a number of potentially important milestones. We continue to anticipate Phase III readouts for a number of potentially transformative therapies, including from cabometics in combination with immunotherapy in a number of different settings, Johnson & Johnson's Seltzerexam in depression, Roche's Gantanarumab in Alzheimer's disease, Biohaven's oral migraine prevention therapies of edupan, and GSK's Otilimab in rheumatoid arthritis. On the regulatory front, we would highlight expected filings of PTO27 in asthma and intranasals of edupan in migraine this quarter. In addition to potentially advancing the standard of care for patients, Many of these milestones represent major commercial opportunities and could add significantly to our long-term growth outlook. Lastly, we discussed on last quarter's call the cytokinetics transaction in which we gained a royal to an avicamptin, potential new therapy for hypertrophic cardiomyopathy. I should note another event that is not on this slide is the recent FDA approval of Bristol's Mavicamptin, which brings a new treatment option to patients with hypertrophic cardiomyopathy and is also very supportive of our thesis for African. On slide 15, we are reaffirming our full year 2022 financial guidance, despite an unfavorable impact from foreign exchange. We continue to expect adjusted cash receipts to be in the range of $2.225 billion to $2.3 billion, an increase of between 5% to 8% over the $2.1 billion we delivered in 2021. This outlook reflects the expected strong underlying performance of a royalty portfolio, partially offset by the residual impact of the loss of royalties on the HIV franchise in the first two quarters of the year, as well as the end of the DPP-4 royalty term in March of this year, for which we will receive the last royalty receipts in the second quarter. At today's FX rates, we face a $30 to $40 million unfavorable impact to adjusted cash receipts compared to where rates were when we gave our initial guidance in February. Despite this, we have maintained our guidance for adjusted cash receipts, again, highlighting the strength of our diversified portfolio. And consistent with our standard practice, this guidance is based on our portfolio as of today and does not take into account any future royalty acquisitions. Turning to our operating costs, we continue to expect this to be approximately 9% of adjusted cash receipts in 2022. Finally, net interest paid for full year 2022 is still expected to be around $170 million, reflecting the net interest associated with the bond offering in July 2021. Moving to my final slide, let me close by saying how pleased I am with our strong start to 2022 and that we really look forward to seeing you at our upcoming Investor Day. You can expect to hear detailed discussions of the outlook for royalty funding, our updated capital deployment opportunities, and our long-term growth targets. And, of course, you will have the opportunity to interact with the team and ask plenty of questions. We are very excited to talk to you in more depth about Royalty Pharma's unique role at the heart of funding the golden age of life sciences innovation and why we are confident in our ability to deliver compounding, attractive growth over the coming years. With that, we would be happy to take your questions.