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 Grothick, SVP, 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 2023 results. You can find the press release with our earnings results and slides to this call on the investors page of our website at royaltypharma.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 SEC 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. The GAAP to non-GAAP reconciliations are provided in the earnings press release available on our website. And with that, please advance to slide four. Our speakers on the call today are Pablo Legareta, Founder and Chief Executive Officer, Marshall Uris, EVP, Head of Research and Investments, and Terry Coyne, EVP, Chief Financial Officer. Pablo will discuss the key highlights. Mark will then provide a portfolio update, after which Terry will review the financials. Following the concluding remarks from Pablo, we will hold a Q&A session when we will be joined by Chris Height, EVP, Vice Chairman. With that, I'd like to turn the call over to Pablo.

Thank you, George, and welcome to everyone on the call. I am delighted to report a strong start to 2023 as we deliver on our strategy as a leading funder of innovation and life sciences. Slide 6 summarizes our financial and portfolio achievements in the first quarter, which again highlights our strong momentum and the power of our business model. First, we delivered strong performance. Adjusted cash receipts, our top line, grew by 11%. Adjusted EBITDA, also by 11%. And adjusted cash flow grew by 49%. All the strong metrics were prior to the Biohaven-related payments. which I will discuss on the next slide. Second, on capital allocation, we announced royalty positions of up to $1.6 billion, including $600 million in upfront payments and a multi-year share repurchase program of up to $1 billion. I also personally intend to acquire up to an additional $50 million of royalty farmer stock, given the compelling value I believe the share represents. We strengthened our royalty portfolio. We added three new therapies, including the SMA blockbuster SpinRasa and the exciting development stage therapies, Pella-Carson and CAR-XT, both of which are potential future blockbusters on consensus estimates. Additionally, three medicines in our portfolio were approved by the FDA, and Stanley had a positive phase three readout for a potential label expansion with the EnVIR study. we are reaffirming our increased full-year guidance for adjusted cash receipts. Our guidance reflects expected underlying growth from our portfolio of between four and nine percent prior to the Biohaven-related payments. Consistent with our standard practice, our guidance is based on our current portfolio and does not include the benefit of any future acquisitions this year. On slide seven, you can see our financials in more detail. We delivered 11% growth in our top line prior to the BioHaven-related payments and 87% growth if we include this payment. As a reminder, the major non-recurring items here are the $475 million milestone we received from Pfizer in March 2023, following the approval of SAP spread for migraine, as well as the $13 million fixed BioHaven-related payment we received in the same period a year ago. Foreign exchange continued to represent the headwind, impacting our top line by around minus 3 to minus 4% in the quarter. Consistent with our top line, we grew our adjusted EBITDA by 11% in the quarter prior to the biohabit-related payment, and 88% including this payment. Adjusted EBITDA is an important non-GAAP measure for us, which is arrived at by deducting payments for operating and professional costs from our top line. Lastly, our adjusted cash flow, our bottom line, grew by 49% in the quarter prior to the Biohaven-related payments, and 165%, including this payment. The substantial increase in the quarter also reflected the $100 million upfront and milestone development stage payments to cytokinetics in the prior year. Slide 8. shows our impressive track record of strong top-line growth since our IPO in June of 2020, including our double-digit growth in the first quarter. This reflects our ability to execute successfully and consistently against our strategy. Slide 9 provides a deeper dive into our top-line performance in the quarter to show the various moving parts. The strong performance of our base business and our acquisition of the trilogy royalties allowed us to deliver 11% top-line growth before taking into account the impact of the biohaven-related payment. Royalty expiration and foreign exchange together represented a combined headwind to growth in the 7% to 8% range. The strong underlying dynamics in the quarter once again underscore the unique power of our business model to replenish our portfolio and to drive compounding growth. With that, I will hand it over to Marshall to update you on our portfolio.

Thanks, Pablo. On my next few slides, I want to discuss our recent transactions in schizophrenia and also to provide a broader perspective on our approach to portfolio strategy. Last month, we were delighted to announce the acquisition of Pure Tax Royalty on Karuna's CAR XT. This is a novel oral muscarinic agonist with two positive Phase III trials in schizophrenia. CAR XT is also in development for the treatment of psychosis and Alzheimer's disease. In return for an upfront payment of $100 million and $400 million in potential regulatory and sales milestones, we will receive a 3% royalty on annual sales of CAR XT up to $2 billion and approximately 1% above this threshold. To provide some context for modeling the potential outflows for this transaction, the vast majority of the milestones require very strong commercial performance. Our excitement about this development stage medicine is driven by the results of the clinical program, including two phase three studies, emergent two and three, and the significant need for new novel therapies in schizophrenia. Not only did the trials demonstrate early and sustained reductions in the positive and negative symptoms of schizophrenia, but importantly, our ability profile was very encouraging, especially regarding some of those common adverse events typically associated with current medications, including weight gain, somnolence, and extrapyramidal symptoms. Based on these strong results, Karuna plans to submit a new drug application to the FDA in the third quarter of this year. The street has certainly recognized the exciting profile of this compound, with consensus sales projections rising to $5 billion by 2030. Slide 12 expands on the significant unmet need for new treatments in schizophrenia. On the left-hand side, you can see that close to a third of patients do not respond to current therapy, and only about half have a partial improvement or suffer unacceptable side effects. When taken together with the particular challenges of this disease, this results in approximately three-quarters of patients discontinuing treatment within 18 months, which underscores the need for new treatment approaches. This is why we are so excited to have invested in two novel mechanisms of action through CAR-XT and MK8189. Each potentially offers a differentiated clinical profile from current medications. most notably on tolerability. RXT, as I just highlighted, has already reported positive Phase III results and will be marketed by Karuna, subject to FDA approval, and MK8189 is a PDE10A inhibitor in Phase IIb, where our potential royalty arises from a unique collaboration between Royalty Pharma and Merck. Taken together, this is another illustration of our unique ability to invest in multiple therapies in the same category, where we see the potential for innovation to transform patient lives. Slide 13 returns to a concept that we showed at our Investor Day last year on selected investment themes of interest. Our investments in the schizophrenia category are consistent with two of these themes. The first is to explore the potential of under-innovated large markets, where there has arguably been less industry focus given the shift towards specialty markets with smaller patient populations and higher price points. Schizophrenia is a great example of a large, under-innovated market, and we believe that CARXT and MK8189 could bring important benefits to patients in this complex and difficult-to-treat population. In addition, we believe brain disease has tremendous scope for innovation with limited effective treatment options in many cases. Schizophrenia sits squarely in this heterogeneous category. Lastly, on slide 14, I want to provide a long-term perspective on our balanced royalty acquisition strategy. This data shows how we have deployed our capital since 2012 between approved and development stage opportunities. On the left hand side, you see that since we started investing in development stage therapies in 2012, of the approximately $21 billion in capital deployed, the majority of the investments have been in approved products. On the right hand side, you can see that the percentage deployed annually has exhibited significant variability on an annual basis. in part reflecting the opportunistic nature of our business, but in aggregate has also been skewed towards approved products on average at 59% of total capital. So while we do not have target levels of investment between approved and development stage, our therapeutic area agnostic approach to investing and position as the partner of choice in the royalty funding market has allowed us to fund innovation in a balanced way while maintaining strong returns and long-term growth. With that, I'll hand over to Sherry.

Thanks, Marshall. Let's move to slide 16. Total royalty receipts grew 72% in the first quarter versus the year-ago period. Excluding the BioHaven-related payments in each quarter, royalty receipts grew approximately 8%. The magnitude of growth reflects the $475 million ZAPPS PREP milestone payment, together with strong contributions from the Cystic Fibrosis franchise, Tramphya, and the Trilogy royalty, which we acquired last July. We also saw growing royalty contributions from Evrizdi and Kabamedics and from other medicines not shown on this slide, particularly Trodelvi and Orlodeo. Lastly, we received a $35 million payment related to AstraZeneca's Air Supra. These positive factors were partially offset by the loss of the DPP-4 royalties, by weakness in Imbruvica, and to a lesser extent, Tysabri, and by the adverse FX impact. Slide 17 shows how our efficient business model generates substantial cash flow to be redeployed. As you're aware, adjusted cash receipts is a key non-GAAP metric for us, which we arrive at after deducting distributions to non-controlling interests. This amounted to $1.1 billion in the quarter, or growth of 87% compared with last year's first quarter. As Pablo noted earlier, prior to the impact of Biohaven-related payments, growth would have been 11% in the quarter. As we move down the column, operating and professional costs were approximately 8% of adjusted cash receipts in the quarter. As a consequence, we reported 88% growth in adjusted EBITDA in the quarter, relatively consistent with our top-line growth. When we think of the cash generated by the business to be redeployed into new value-enhancing royalties, we look to adjusted EBITDA less net interest paid. Net interest paid in the quarter of $67 million reflected the semiannual timing of the payments on our $7.3 billion of unsecured NOCH, which occur in the first and third quarters. This figure included $16 million we received in interest given the strong cash position on our balance sheet, which benefited from higher interest rates. We did not have upfront and milestone payments for development stage funding in the quarter. whereas the prior year period included a $100 million payment related to cytokinetics. As a consequence, adjusted cash flow, our bottom line, grew significantly faster than adjusted cash receipts and adjusted EBITDA, and amounted to $973 million, or $1.60 per share for the quarter. This resulted in an adjusted cash flow margin of 86%, which once again highlights the efficiency of our business model. Let's move now to slide 18 and our financial position. We continue to maintain significant financial firepower for future royalty acquisitions. In the first quarter, we deployed a little over $600 million of capital on royalty acquisitions, as well as around $120 million on dividends. This was more than offset by our strong cash flow generation over the quarter, so that our cash and marketable securities increased to $2 billion at the end of March. Our leverage at the end of the quarter stood at a comfortable 2.3 times total debt to EBITDA and 1.7 times net debt to EBITDA. As I have previously highlighted, the fixed rate average coupon on our debt is slightly above 2%, which compares to our target returns on royalty acquisitions in the high single digit to teens percentage range. In addition, around 60% of our debt matures in 2030 or beyond. Taken together, we continue to believe that our cost of capital and debt maturity profile represent a durable competitive advantage for our business. Based on our financial strength and efficient business model, we remain confident in our ability to execute on our business plan and create value for shareholders. On slide 19, I want to remind you of our capital allocation strategy and how we expect this to drive shareholder value creation. At our investor day last May, we outlined that over a five-year period, through a combination of cash generation and our debt capacity, we expect to have access to around $20 billion of capital. As you can see on this slide, the majority of our capital will be deployed on value-enhancing royalty acquisitions, with a target of $10 to $12 billion invested over the period. In fact, as many of you are aware, we are running a bit ahead of this schedule. having announced transactions of up to $5 billion since 2022. Furthermore, given the tailwinds in our industry and our powerful market position, our transaction pipeline continues to remain robust and highly active. We aim to balance this primary focus on loyalty acquisitions with returning capital to shareholders through a combination of dividends and, when appropriate, share repurchases. Recently, the Board authorized a multi-year share buyback program of up to $1 billion, which is a reflection of the compelling value we see in our share price and our focus on efficient capital allocation to drive shareholder returns. By executing against this capital allocation strategy, we are confident we will continue to deliver on our mission of accelerating innovation in life sciences while generating strong returns and creating significant shareholder value. Slide 20 provides our full year 2023 financial guidance. We expect adjusted cash receipts to be in the range of $2.85 billion to $2.95 billion, consistent with the raised outlook we provided in March following receipt of the Zabzapret milestone payment. Importantly, and consistent with our standard practice, this guidance is based on our portfolio as of today and does not take into account the benefit of any future royalty acquisitions. Turning to our operating costs, we expect payments for operating and professional costs to be approximately 8% to 9% of adjusted cash receipts in 2023, in line with previous guidance. We continue to believe that the degree of margin protection provided by our unique business model is impressive in today's inflationary environment. Similarly, interest paid for full year 2023 is still expected to be around $170 million and to follow the established quarterly pattern with de minimis amounts payable in Q2 and Q4. This does not take into account interest received on our cash balance, which was $16 million in the first quarter. You should also note that we expect to make a $50 million milestone payment to Cytokinetics in the second half of 2023, based on the company's guidance of initiating their pivotal trial of Afikampton in nonobstructive hypertrophic cardiomyopathy. This $50 million expense will be recorded as a development stage funding payment and thus reduce adjusted cash flow this year. Lastly, as many of you are aware, the royalties we receive lag sales by one quarter, lag product sales by one quarter. Several of our largest royalties are tiered, which typically reset at the beginning of the year and have the potential to increase throughout the year. Therefore, there is some seasonality to our business and the second quarter tends to be lower than other quarters in the year and the first quarter tends to be higher. Accordingly, we would expect adjusted cash receipts in the second quarter to be slightly higher compared with the same quarter in 2022. My final slide drills down further on our adjusted cash receipts guidance. The graphic is illustrative, but sets out the various pushes and pulls behind our outlook for 2023. Starting with the left hand side, we have faced a high base of comparison due to the $509 million of Biohaven related payments, which we received in 2022. Adjusting for these payments brings the underlying base for 2022 adjusted cash receipts to $2.28 billion. On the right side, if we start from the adjusted cash receipt base prior to Biohaven, we expect underlying growth of 4% to 9% this year, which we anticipate to be driven by the CF franchise, Tramfaya, and a full year of Trilogy royalties, partially offset by the losses of exclusivity on the DPP-4s and Imbrivica weakness, which we believe we have conservatively reflected in our guidance. We also expect a modest contribution from three-quarters of Spinraza royalties. As mentioned earlier, this growth does not include the benefit of any future acquisitions. Using today's U.S. dollar exchange rates, FX is expected to represent a relatively modest headwind of minus 1% to minus 2%. Putting this all together, including the $475 million milestone payment on Zavzapret, we are reaffirming our increased top-line guidance of $2.85 billion to $2.95 billion. With that, I would like to hand the call back to Pablo for his closing comments.

Thanks, Terry. Let me close by saying how pleased I am with our excellent start to 2023. This sets us up well to deliver on our guidance for the full year and to continue to execute strongly against our strategies. To finish on slide 23, I would like to highlight why Royal Department's business model offers a unique way to invest in biopharma. Starting with growth, as we announced at our investor day, we expect to deliver a top-line CAGR of more than 10% or more over this decade, which compares with consensus expectations of 4% for large biopharma. Despite being a relatively small company in terms of headcount, We offer the benefits of scale with exposure to 15 broad foster medicines as compared with an average of nine for the large biopharma companies. We have a similar low cost of capital, but our development stage investments tend to be lower risk as we generally do not invest in therapies before clinical proof of concept, thereby avoiding the high failure rate of preclinical and early stage clinical compounds. We have consistently delivered an attractive low double-digit rate of return on our investments, and while we are unable to provide a precise comparison with large biopharma, as you know, the R&D productivity of the industry and returns on acquisitions are open for debate. We also offer a yield of around 2%. And last but not least, our management team is fully aligned with shareholder interest with high ownership of the company, which is significantly higher than the management ownership in large biopharma. The ownership for named executive officers of Royalty Pharma is 16%, which compares to less than 1% for our large-cap biopharma peers. However, when we consider all employees in the board, ownership of Royalty Pharma is even higher at around 32%. Taken together, I truly believe Royalty Pharma offers a unique, powerful business model with a very attractive growth and return profile when compared to the biopharma industry. With that, we would be happy to take your questions.

We'll now open up the call to your questions. Operator, please take the first question.

One moment for your first caller. The first question comes from the line of Chris Shibutani from Goldman Sachs. Chris, go ahead.

Thank you very much. Good morning. Appreciate the updates. You talk about a balance between the development stage and the commercial royalties. Do you feel that that balance is the correct one for you, roughly 59%, 60%? And is that reflected in terms of the funnel? Historically, you've talked about all the screening that you do across the different landscapes. And I asked that question in part, in particular, and I know that these were some of the selected investment themes, but you thought about sort of areas where there's underinvestment in terms of innovation for large TAMs, neurologic diseases, et cetera, which seem to skew more towards taking some development-type risk. And then relatedly, can you comment on what your team's thoughts are? We recently, in the Alzheimer's disease area, had some incremental news that continues to move forward, the beta amyloid hypothesis there. Do you see opportunity, neurodegeneration is mentioned, but in particular for Alzheimer's disease where we are, love to get your thoughts on sort of the outlook there and how you view that as a potential realm for opportunity. Thank you.

Thanks, Chris. This is a question for you, Marshall.

Okay, great. Hi, Chris. Good morning. I think there were three basic questions there. The first was how do we feel about the overall balance of approved versus development stage in our portfolio. And overall, as we've highlighted, we feel really confident in our overall strategy here and how our focus continues to be on finding the therapies that are important to patients, to physicians, to the medical system that make sense for our portfolio. And I think we're gonna continue to focus on those. And as you've seen, as you can see on slide 14, that has yielded a really comfortable balance of approved and development stage therapy. So I think overall we feel really comfortable with where we are and we'll continue to prosecute that strategy as we have been. The second question there was, do the overall themes that we highlighted suggest that there'll be more of a focus on development stage? Overall, I'd say no to that for a couple reasons. I think one is that, as I said in the prepared remarks, these investment themes are overall themes of interest, but they aren't necessarily driving day-to-day how we look at the opportunities in front of us. So these are themes that we think are really interesting. But they are just that, themes, and we're going to continue to stay really focused on the strategy that I talked about. And yes, there are some examples on here of development stage investments. But at the same time, I think there's other areas where we've made investments in approved therapies that would be consistent with these themes. you know, an under-innovated large market. You know, certainly we felt like when we made the Trilogy investment, this was another area where, you know, there'd been less investment by large pharma and this was a leading therapy and still a very large category. So just as an example. The third part of your question was about Alzheimer's disease. It's been great to see all the success there for patients and, you know, it looks like we're going to have multiple therapies in that category. We think that is an exciting area and continues to be something that we're monitoring and looking for potential opportunities there as they make sense for us. Great, thank you.

One moment for the next question. The next question comes from the line of Chris Schatt of JP Morgan. Chris, go ahead.

Great. Thanks so much for the questions. I just have another one on just the environment. I guess if you just elaborate a bit on the, I guess, the tone of the conversation you're having with potential partners. I guess specifically, have kind of the needs and objectives of some of these partners changed at all given the prolonged challenges in the biotech funding environment? And is that kind of changing the way you're thinking about the type of deals or structures of deals you're doing. And then the second piece of that is just about the competitive landscape. So I guess with, on one hand, higher interest rates, but maybe on the other hand, seemingly more involvement of the large-cap biopharma names looking to either partner or acquire assets in some of the verticals that you're targeting as well. Are you seeing kind of a different competitive arena than you might have thought about kind of two or three years ago, or is that largely kind of the same as what you've experienced? Thank you.

Thanks, Chris.

Thanks for your question, Chris. On the first one on the tone, we showed some pretty good slides at our last quarter, quarterly call, which talked about just the number, how the royalty market's growing and how our initial reviews have gone up, I think, 75% since 2019. So in the backdrop of The royalty market's growing sixfold since 2015 in the sense of number of deals, tenfold since 2015 in the number of dollar value transactions. With that as a backdrop, of course, the capital markets environment is challenging for biopharma right now. And I think that's in part what has led to a little bit of the increase in our number of opportunity sets. But keep in mind, you know, in 2020 and 2021, the capital markets were extraordinarily robust and we still announced, you know, lots of transactions. So, you know, the tone of the market is one in which we see a lot of opportunity, but we're going to continue to be very selective in the deals that we do. So I guess that's how I'd answer the first question. And then the second question, as it relates to competition, once again, you know, We see some deals are competitive, some deals are not. The nature of the competition hasn't really changed. On the backdrop of the overall environment growing, this is a growing marketplace in biopharma land. We continue to dominate that marketplace with greater than 50% share, especially on the larger transactions. We certainly see a growing environment. We welcome competition. It's certainly there, but we feel very confident with our competitive advantages, especially around our cost of capital and our access to capital.

I think our competitive advantages have even increased since we went public in many ways, but we can talk about that more later if desired. Great.

Thanks so much.

One moment for the next question. The next question comes from the line of Steve Scala from Cohen. Steve, please go ahead.

Thank you. I have two questions. GSK seems to be refocusing on respiratory overall after deemphasizing it a few years ago. Entering the chronic cough space is a recent example of that. I assume this could have impact on future royalties of Trilogy in a positive way. Is there any stipulations in the contract, either positive or negative, that could reflect GSK's commitment adjustments to respiratory in the future. Secondly, I think you've been asked this before, but given how quickly the market is developing, I thought it might be worth asking again. And that is that Royalty Pharma has no exposure to obesity. I can think of three reasons for this. Number one, you have not come across opportunities. Two, there are opportunities, but you don't like the molecules or terms. or three, you are not convinced on the size of the market. I'm wondering if you can tell us which of those three is the most prominent factor that you're not involved in obesity. Thank you.

Sure, Steve. Good questions. Marshall, why don't you take those?

Sure. Thanks, Steve. Good morning. So on GSK and Trilogy, thanks for highlighting that. You know, we are excited to see excited to see GSK focusing on something like chronic cough, which is an interesting market, and as you point out, is consistent with their focus on respiratory disease and the general medicine category. I don't think there's anything to answer your question. There's nothing specific in the contract with respect to that, although I would just highlight a couple of things. The first is As part of diligence on that, we did get a sense of and tried diligence, GSK's commitment and investment in Trilogy, and that was part of our evaluation process. But overall, taking a little step back, Trilogy is a good example of the types of products that we really get excited about. It's large, it's growing into a, as highlighted on a previous question, an under-innovated, unfocused on market, and is really attracting investment by GSK and is a really important product over there. And I think when our interests are aligned with a great company like GSK's in a category where they're a real leader, that's the kind of thing that we get really excited about. On obesity, thanks for bringing that up as well. Agree with you, such an exciting space with a lot going on. It is a category of interest there. And without kind of ranking your three factors there, I think we'll continue to apply our same approach there of looking for opportunities where we can find a win-win for us for our partner and we'll continue to apply the same strategy of looking for the right opportunities to get involved at the right time. But thanks for the questions. Thank you.

One moment for your next question.

The next question comes from the line of Terrence Flynn from Morgan Stanley. Terrence, please go ahead.

Hi, good morning. Thanks for taking the questions. Maybe for me on TRIMFIA, this is one of your larger potential royalty streams, and there have been, I'd say, a growing interest in new oral immunology drugs here. And so as you think about the implications of the entry of the TIK2 inhibitors or potentially an oral IL-23, Maybe, Marshall, how do you see this market evolving? And then just one follow-up on the kind of deal flow for the year. Maybe any more metrics you could cite, Chris, in terms of how that backlog is playing out over the course of this year versus last year. Thank you.

Sure. Maybe I can start on the first one, and Chris can comment on the second question. So on TrimpFaya, Again, a medicine that we are really, really excited to have as a part of the portfolio and having one of the best marketers in the world in Janssen behind it is some of the same themes that we just touched on with Trilogy as well as why we're really excited about this. I think the both the putting together the incredible efficacy of trim fire, the dose inconvenience, the strength of the market, their position. you know, both in terms of physicians' minds, their position commercially, label expansion into IBD. I think we're really excited about Tramfiya's future. We are following, you know, the entry of Orald. You know, as we've seen historically, this space has had a really interesting and underestimated capacity to to find roles for new products just given the need for patient choice and the unmet need here and that's that's our view overall i think we're still really we're excited about both categories um of trim fire and the injectables as well as some some of the really interesting things that are going on in the um on the oral space so um that that's our overall view there and chris can talk about um you know, our deal flow?

Sure. Yeah. So the, you know, as we stated in the past, deal flow in any given year is hard to predict and can be volatile, which is why we describe our capital deployment targets over a multi-year period. So I would just encourage you to keep that in the back of your head. But obviously, last year, we executed $3.5 billion of announced transaction value and $2 billion of which was up front. And already this year, we've announced $1.6 billion in transaction value, of which $600 million was up front. So we feel we're off to a great year. Last year, we looked at over 350 opportunities, and less than 3% of those opportunities resulted in transactions. So it's a very small percentage that we actually transact upon. The environment, as you might imagine, is extraordinarily robust. and we are extraordinarily excited about our opportunity set, and that's why we've raised our guidance and talked about the $10 to $12 billion in capital deployment over the next five years. We're very comfortable with that. So I think everything is really sort of ticking in the sense of the backdrop of the overall royalty market growing, as I mentioned, tenfold since 2015, and our opportunity set itself We're really excited about the pipeline.

One moment for your next question. The next question comes from the line of Jeff Meacham of Bank of America.

Jeff, please go ahead. Good morning. This is Susan on for Jeff. First, just a broader question. We've seen a lot of M&A deals this year, and the valuations have been relatively high. Have you guys seen an uptick in asset valuations with the M&A environment getting better? And then two, just a question on under-innovated markets. Can you tell us more about what's new and of interest within migraines beyond anti-CGRPs, which from our research have really just been the dominant assets in migraine so far?

Sure. Thanks for the question, Suzanne. Regarding M&A, I think it's important to note that there are sort of different markets, right? When companies are acquiring other companies, you know, the pricing of those deals is based on different metrics than the metrics we use when we're acquiring royalties. And, you know, very different. And, you know, there's obviously, in some respects, a strategic component when a company acquires other companies. And in our case, you know, when we are investing in royalties, it's more of a financial-driven analysis where we're looking always at very attractive, positive returns. And we've in the past covered what sort of returns we're seeking. But the other thing I would mention is that it's exciting to see all of this M&A activity happening because they do present opportunities for us to acquire royalties once a company has been acquired and the acquirer is more interested in potentially selling non-core strategic assets. And there's been many transactions in the past that fall in that category. We're also working with acquirers, you know, when they're looking at potential acquisitions, you know, for us to partner with them and deploy capital side by side with them to make their acquisitions more efficient. And then maybe I'll turn it over to Marshall for the migraine question.

Sure. Great question. And, you know, and a really interesting one. You know, overall, I think the things in in earlier things in migraine are programs that we continue to monitor. But I think the really important thing to keep in mind is, you know, the CGRP inhibitors in our mind are still in the early innings of their rollout and their ability to really impact how migraine is managed. So I think it'll be great to watch in the years to come, you know, how Pfizer and AbbVie are able to really broaden the prescriber base for CGRP for the CGRP inhibitors and, you know, continue to, you know, continue to penetrate into the still dominant tryptan class, and we're excited to see them do that, and also what happens globally as well. So, you know, I think that's the real focus in our mind right now, and we'll continue to follow what's happening in the earlier development stages.

Thank you. One moment for your next question. Your next question comes from the line of Umar Rafet of Evercore ISI. Umar, please go ahead.

Hi, guys. This is Mikey Fiore in for Umar. Thanks so much for taking my question. Two for me. With respect to the IRA, the CMS guidance documents specifically call out the terms active moiety versus active ingredient, as it respectively pertains to identifying qualifying single source small molecule and biologic drugs, whereby drug products, i.e., small molecule products with the same active moiety will be considered single source, and biologic products with the same active ingredient will be considered single source. All that said, what are your thoughts on this, and does this influence your willingness to invest in royalties linked to reformulated biologic drugs. And then similarly, but separately, your thoughts on how the CMS guidance documents bodes for fixed-dose combination products such as Trilogy, Ellipta, and Air Supra. Thank you.

Sure. Marcia, you should take this question.

Sure. Thank you. Yeah, thanks. Hey, Mike, good morning. So two questions there. I think first on the active ingredient versus active moiety question. That's something that we have talked with the external consultants and advisors that we use as we continue to all follow IRA. You guys have done some interesting work there as well in terms of defining that issue. So something we continue to follow, I think it highlights an important point, though, which is our overall – our overall strength of our business model in this IRA era, which is as we learn new things about how the IRA will be implemented, as we work through that, we can implement that in our investment process and are right now in terms of looking at, and it has become, I think, as for all of us, a really core part of how we look at every project, which is what is the potential exposure to IRA, what are the scenarios, and work through that and, you know, fits really well with our scenario-based approach that we've talked about before. On fixed-dose combinations, I think there the world seems a little bit more clear that those are considered, you know, that they are considered kind of individual products, which was kind of consistent with our expectation and will have their own kind of clock from an IRA perspective. So that's our view. Like I said, we're continuing to follow it and, you know, confer with all the outside advisors who we use, you know, to continue to process all the new learnings about IRAs.

Great. Thank you.

One moment for your last question. The next question comes from the line of Ash Verma of UBS.

Ash, please go ahead. Hi, good morning. Thanks for taking my question. So just a different angle on the M&A. So as you look at your deal-making environment for royalties with these biotech companies, do you think the M&A exit route for them directly competes with them trying to monetize the assets via the royalty route? And in your view, like, do the strategic acquirers kind of prefer targeting wholly owned assets with unencumbered economics, and so biotechs might be hesitant to get into royalty agreements before if they want to sell eventually? Thanks.

Thank you for your question, but on our side, we were all shaking our heads, not really being able to listen to the first part of your question clearly. So I don't know if maybe you can... closer to the microphone or something, but it was hard just to understand. Sorry.

Yeah, no worries. So here, like do you think when you're making these deals with the biotech companies, do you think that the M&A exit route for them kind of directly competes with them trying to monetize the asset-wide, the royalty route? What I'm trying to get a sense is like if the strategy acquirers, do they prefer assets with unencumbered royalty And that's why the biotech companies might be hesitant into getting a royalty arrangement with you if they eventually want to sell.

Chris, why don't you take that question?

Sure. Thanks, Ash, for the question. Generally speaking, the pharmaceutical universe, right, I mean, just the history, and I think we actually covered this in our analyst day last year with the slides showing just the number of partnerships and and royalties associated with products that are getting developed these days because it's such a fragmented R&D process that there's oftentimes royalties associated with every product or partnership profits or however you want to define that. And that's just the nature of the universe that pharmaceuticals, that's just the nature of the universe that we live in. When pharmaceutical companies are looking at acquiring a company, they are modeling whatever the economics of that product are. And most of the acquisitions come with an encumbered product. So that's just a very regular way for large pharma when they're looking at a target. And they're used to that, and so is, you know, the companies that we talked to. And obviously, we had deals with Biohaven and Immunomedics, where we had royalties and both ended up being acquired. But as a former person who did a lot of those transactions representing large pharma on the banking side, it's just part of the way they think about, it's just the universe that they live in. And so it's not really... something that prevents M&A, and it's not really something that prevents a company to do a transaction with us on the royalty side. So it doesn't prevent our business flow, and it's not a chill to the M&A environment either.

All right. Thank you.

At this time, I'd like to turn it back over to Pablo for further comments.

Sure. Thank you, operator. And thank you to everyone on the call for your continued interest in Royalty Pharma. If you have any follow-up questions, please feel free to reach out to George. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.