Royalty Pharma plc (NASDAQ:RPRX) Q3 2022 Earnings Call Transcript

Royalty Pharma plc (NASDAQ:RPRX) Q3 2022 Earnings Call Transcript November 8, 2022

Royalty Pharma plc reports earnings inline with expectations. Reported EPS is $0.72 EPS, expectations were $0.72.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Royalty Pharma Third Quarter Earnings 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.

Photo by Glsun Mall on Unsplash

George Grofik: Good morning and good afternoon to everyone on the call. Thank you for joining us to review Royalty Pharma’s third quarter 2022 results. You can find the press release with our earnings results and slides for this call on the Investors page of our website at royaltypharma.com. Moving to slide 3. 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 4. Our speakers on the call today are Pablo Legorreta, Founder and Chief Executive Officer; Marshall Urist, EVP, Head of Research & Investments; and Terry Coyne, EVP, Chief Financial Officer. Pablo will discuss the key highlights after which Marshall will provide a portfolio update and Terry will review the financials. Following concluding remarks from Pablo, we will hold a Q&A session. Chris Hite, our Vice Chairman, will also join the Q&A session. And with that, I’d like to turn the call over to Pablo.

Pablo Legorreta: Thank you, George. And welcome to everyone on the call. I am delighted to report another quarter of strong execution on our strategy as a leading funder of innovation in life sciences. Slide 6 summarizes our financial and portfolio achievements in the third quarter, which again underscore our strong momentum and the power of our business model. First, we delivered solid financial performance despite significant headwinds from foreign exchange and a one-time benefit from a Soliqua milestone in the third quarter of last year. Adjusted cash received, our top line, grew by 2%; adjusted EBITDA by 3%; and adjusted cash flow, our bottom line, by 26%. Second, we have announced transactions of $3 billion year-to-date, including our innovative R&D funding collaboration with Merck.

This is an exciting model for future potential partnerships with large biopharma and Marshall will expand on this later. More broadly, our overall rate of capital deployment reflects the strong demand for innovative royalty-based funding solutions. Third, we saw positive progress across our portfolio. Pfizer closed its acquisition of Biohaven, which has resulted in accelerated value creation to Royalty Pharma. We have a deep development stage portfolio with certain new molecular entities and approximately 40 projects in late stage development €“ impressive figures, which rival many large biotech companies. Lastly, we’re raising our full-year guidance for adjusted cash receipts. Terry will take you through the details later, but we now expect growth of 29% to 32% compared with 7% to 10% at the time of our Q2 results.

This increase largely reflects the acceleration of our commercial launch capital payments, resulting from Pfizer’s acquisition of Biohaven, which has been one of our most successful partnerships since our IPO. In addition, our overall portfolio of royalties continued to perform exceptionally well. I would also remind you that our guidance excludes the potential benefit of any investments that we may make over the remainder of the year. On slide 7, you can see our financials in a little more detail. In the third quarter, we delivered 2% growth in our top line. We estimate that foreign exchange had an approximately 4% negative impact on the quarter. Furthermore, we had a headwind of $37 million relating to one-time milestones on Soliqua in the prior period.

Without the impact of these two factors, we would have delivered another quarter of strong double-digit top line operational growth. Consistent with our top line, we grew our adjusted EBITDA by 3%. Adjusted EBITDA is an important non-GAAP measure for us, which is arrived at by deducting operating and professional expenses from our top line. Lastly, our adjusted cash flow, our bottom line, grew by 26%. This significant increase primarily reflected differences in the size of the orphan development stage payments in the third quarter compared to last year’s third quarter. Slide 8 shows our track record of strong top line growth since our IPO in June of 2020. We delivered an impressive 9% growth of adjusted cash receipts year-to-date, despite headwinds which particularly impacted the third quarter, including two of our top royalties ending, HIV and DPP-IV.

This speaks to the power of our business model and our ability to continually replenish our portfolio with market-leading therapies through value-enhancing deals. Few of our peers in biopharma could lose two of their top products and still demonstrate such impressive growth. As I mentioned earlier, Pfizer’s acquisition of Biohaven, which closed in October, accelerated value creation to Royalty Pharma shareholders. On slide 9, from a bigger picture perspective, I wanted to expand on our Biohaven experience and talk more broadly about how we have become a critical funding partner for successful biotechs. When we look across Immunomedics, Biohaven, Cytokinetics, and BioCryst, in all these cases, our partnerships have resulted in Royalty Pharma providing a critical portion of their funding needs, alongside more traditional equity and debt funding.

In these instances, our approach was highly customized to each partner’s needs. And we used a variety of funding tools, such as royalties, commercial launch capital, and equity purchases. For Royalty Pharma, our investments will generally be validated by the successful development and commercialization of the therapies on which we have royalties. And in certain cases, such as Immunomedics and Biohaven, by the accelerated returns we achieved for our shareholders, resulting from their acquisitions by larger biopharma companies. This biotech funding model, using a variety of sources of capital, includes royalties, has proven to be successful for our partners and we believe should represent the new funding model that the most successful biotechs use in the future.

With that, I will hand over to Marshall to update you on our portfolio.

Marshall Urist: Thanks, Pablo. Let’s move to slide 11. We’re delighted to announce our recent R&D funding collaboration with Merck. Revitalizing R&D funding partnerships has been an important initiative at Royalty Pharma, and we think this collaboration structure will serve as a model for future transactions between Royalty Pharma and large biopharma companies. We see plenty of opportunity here. The projected scale of large biopharma R&D spend, $1 trillion cumulatively over the next five years, should create opportunities for Royalty Pharma to fund exciting late stage programs across the industry. The advantages we can offer to large biopharma are clear. We’re a true partner for biopharma, able to participate in clinical development, as well as the full trajectory of commercialization around the world.

In addition to risk sharing, we can provide capital at scale, allowing the partner to optimize their R&D spend across the broadest opportunity set. In addition, our rigorous diligence process provides independent validation of the opportunity. And as we have consistently demonstrated, we can be flexible and creative in our structure. Lastly, we’re long term partners and have built enduring relationships that reflect our unique role in the life sciences funding ecosystem. Slide 12 provides the details of our collaboration with Merck. In summary, Royalty Pharma has agreed to provide up to $425 million to co-fund the clinical development of MK-8189, an oral PDE10A inhibitor in Phase 2b development for schizophrenia. Our excitement about this pipeline therapy comes from our view that MK-8189 has the potential to demonstrate efficacy similar to the standard of care with a differentiated safety profile.

The structure of this deal highlights our uniquely flexible approach to alignment with our partners. Our investment can be scaled following program de-risking and Royalty Pharma will make an independent decision to co-fund the Phase 3 program. We agreed to pay $50 million upfront to support the ongoing Phase 2b program. Pending the results of this large randomized controlled study, we have an option to provide $375 million in additional funding if Merck decides to proceed to Phase 3 development. In return for our co-funding, Royalty Pharma will be entitled to a royalty on annual worldwide sales of MK-8189, as well as milestone payment. With US branded schizophrenia sales of around $5.6 billion, this could represent an important royalty stream as we look towards the back half of this decade and beyond.

On slide 13, I want to expand on the breadth and depth of our portfolio. We now have the potential to receive royalties on approximately 40 projects in late stage development. The size and diversity of our development stage pipeline, we think, compares well with many of the largest biotech companies. As you can see on our slide, we have considerable therapeutic area diversity in our pipeline, although oncology currently accounts for around half of these projects. We anticipate our pipeline will continue to grow as we invest in both approved and development stage medicines in the years to come. Moving now to slide 14 and the expected clinical and regulatory events for our portfolio over the next year. We have a significant clinical news expected over the remainder of 2022.

The recent Phase 3 results for otilimab were disappointing. However, we anticipate Phase 3 readouts for several potentially transformative therapies over the remainder of the year, including results from Cabometyx in combination with immunotherapy and, of course, gantenerumab in Alzheimer’s. In 2023, we anticipate readouts from up to seven important Phase 3 programs, including seltorexant for major depressive disorder, Xtandi in non-metastatic prostate cancer, aficamten in obstructive hypertrophic cardiomyopathy, and zavegepant in migraine prevention. On the regulatory front, we expect an FDA decision on PT027 in asthma in the coming months. And in 2023, we anticipate FDA approval decisions on Trodelvy in third line hormone receptor positive HER2 negative breast cancer, on intranasal zavegepant in migraine, and on Omecamtiv in heart failure.

Many of these milestones present the opportunity to deliver on our mission of accelerating innovation in life science to transform patient lives. With that, I’ll hand it over to Terry.

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Terry Coyne: Thanks, Marshall. Let’s move to slide 16. Total royalty receipts were broadly stable in the third quarter versus the year-ago period. Growth drivers in the quarter included the cystic fibrosis franchise, Xtandi, Tremfya, and the Trelegy royalty which we acquired in July. We also saw growth contributions from Cabometyx, Promacta, our Biohaven partnership, and though not shown on this slide, from Evrysdi, Trodelvy and Orladeyo. These positive factors were partially offset by the end of the royalty term for the DPP-IV inhibitors, the Soliqua milestone receipt in the prior period, Imbruvica weakness and the unfavorable 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 arrived at after deducting distributions to non-controlling interest. This amounted to $597 million in the quarter, growth of 2%, compared with last year’s third quarter. Without the impact of the Soliqua milestone payment, growth would have been 9%, while growth would have been low-double digits if we adjust for the estimated foreign exchange impact. As we moved down the column, operating professional costs were approximately 8% of adjusted cash receipts. On a year-over-year basis, operating professional costs declined by 9%. As a consequence, we reported 3% growth in adjusted EBITDA in the quarter, consistent with the growth in our top line. As Pablo noted, 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.

When we think of the cash generated by the business to then be redeployed into new value enhancing royalties, we look to adjusted EBITDA less net interest paid. Net interest paid in the quarter of $75 million reflected the semi-annual timing of the payments on our $7.3 billion of unsecured notes, which occurs in the first and third quarters, and offset by the interest received on our cash, which has been approximately $11 million year-to-date. After the $25 million upfront payment for development stage funding of ampreloxetine and other items, we generated adjusted cash flow, our bottom line, of $441 million or $0.73 per share for the third quarter. This resulted in an adjusted cash flow margin of 74% which once again highlights the efficiency of our business model.

Let’s now move to slide 18 and our financial position. We continue to maintain significant financial firepower for future royalty acquisitions. Year-to-date, we generated adjusted EBITDA less net interest paid of $1.42 billion. Again, this is the cash the business generates to reinvest or return to shareholders. We have deployed $2.1 billion of capital on royalty acquisitions as well as $362 million on dividends and distribution, bringing our cash and marketable securities to $1.1 billion at the end of September. Shortly after the quarter-end, we received $508 million in net cash related to Pfizer’s acquisition of Biohaven, which would bring our pro forma cash and marketable securities to $1.64 billion. Excluding this pro forma balance sheet adjustment, our leverage stands at 2.8 times net debt to EBITDA and 3.4 times total debt to EBITDA.

As a reminder, the fixed rate average coupon on our debt is slightly above 2%, which compares with our target returns on royalty acquisition in the high-single digit to teens percentage range. I would also note that around 60% of our debt matures in 2030 or beyond. Given our financial strength and efficient business model, we feel we’re well positioned to execute on our business plan and create value for shareholders. On slide 19, we are raising our full-year 2022 financial guidance. We now expect adjusted cash receipts to be in the range of $2.75 billion to $2.8 billion, an increase of between 29% and 32% over the $2.1 billion we delivered in 2021. This substantial raise in guidance largely reflects the accelerated Biohaven payment of $458 million we received in October.

The other payments underlying our top line guidance are essentially unchanged from those we described at the end of our Q2 earnings. 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 expect payments for operating and professional costs to be approximately 8% to 8.5% of adjusted cash receipts in 2022, which is lower versus our guidance from August. Our operating cost guidance reflects both the higher expected adjusted cash receipts and our relatively low fixed cost base. The degree of margin protection provided by our unique business model is, we think, especially impressive in today’s inflationary environment.

Finally, interest paid for full-year 2022 is still expected to be around $170 million, unchanged from our prior expectation. On slide 20, I want to drill down further on our adjusted cash receipts guidance. The graphic is illustrative and provides the various pushes and pulls behind our raise top line outlook for 2022. Starting with the left hand side, we continue to expect strong performance from our diversified royalty portfolio and the addition of Trelegy royalties in the second half further enhances this growth. The end of our HIV and DPP-IV royalty streams and Imbruvica performance are expected to partially offset the strong growth in our portfolio. As I have noted, the continued strength of the US dollar against key currencies is expected to adversely impact growth by around 3% to 4%, or around $65 million to $85 million for full-year 2022 compared to full-year 2021.

As a reminder, we estimate that approximately 40% of our adjusted cash receipts are exposed to regions outside the United States, with the euro representing the most significant portion of our ex-US exposure. If you exclude the Biohaven payments, we are tightening the range relative to our previous guidance, maintaining the higher end and increasing the low end. To deliver high-single digit to low-double digit top line growth is, we think, a tremendous achievement with the loss of two of our prior top royalty streams, as well as significant FX headwinds. We believe this speaks to the strength of our unique business model and our diversified royalty portfolio. And on the right hand side, we can see after layering in the accelerated Biohaven payments, we’re guiding to full-year top line growth of between 29% and 32%.

To close, I want to highlight a few factors on 2023 to help with your modeling. First, foreign exchange is expected to adversely impact growth by approximately 3% to 4% for full-year 2023 compared to 2022, assuming today’s rates remain constant next year. And second, while we are optimistic heading into Pfizer’s PFUFA for intranasal zavegepant in the first quarter of 2023, which would result in an accelerated $475 million payment to Royalty Pharma if approved, we do not plan to include that milestone in our 2023 guidance before approval. We plan to provide full-year 2023 guidance when we report fourth quarter 2022 earnings early next year. Consistent with our standard practice, this guidance will exclude contributions from any future investments.

With that, I would like to hand the call back to Pablo for his closing comments.

Pablo Legorreta: Thanks, Terry. So another strong quarter of strong business momentum, and we’re on track to deliver excellent results in 2022. My final slide shows that we’re executing well against the updated capital deployment plan we set out in May. So far this year, we have brought many important new medicines into our portfolio, ranging from development stage therapies to unapproved category leading blockbuster with significant remaining growth potential and including some of the highest caliber marketers in the industry. The $3 billion announced value of these transactions puts us well on track to achieving our five-year capital deployment target of $10 billion to $12 billion, and to deliver the attractive compounding growth profile that we described in detail at our Investor Day.

Lastly, while our development stage pipeline has grown very nicely over the past couple of years, around two-thirds of the capital we deployed this year has been for approved therapies, given the size of the Trelegy deal. With that, we’ll be happy to take your questions.

George Grofik: We’ll now open up the call to your questions. Operator, please take the first question.

Q&A Session

Operator: . Our first question comes from Geoff Meacham with Bank of America.

Geoff Meacham: Just had a couple of quick ones. On gantenerumab, I know it’s not in your guidance, but if successful, the royalties, it could be pretty impactful over time. So how do you think about this from a cash or a planning context? The second question is, from a policy perspective, how does the IRA inform if at all how Royalty is investing when you look at small molecule and biologics? And same question for longer term, the potential risk of heavy discounting.

Pablo Legorreta: Terry’s going to answer the first question and then Marshall will answer the question on the IRA.

Terry Coyne: We’re all very eager to see the gantenerumab data later this month. But as you know, we’ve taken a pretty conservative approach. We did not include gantenerumab in any of our long term guidance figures, recognizing that it is higher risk. But if it were to work, I think there’s a lot of reasons to be pretty optimistic that it could be a pretty nice selling drug. And so, I think at that point, we would we would look to €“ obviously, we want to see the data. But I think if it looks like it could be a big selling drugs, then I think that that’s something that we would look to incorporate into our guidance over time.

Marshall Urist: For your question on the IRA, so three points I’d make there on how we’re thinking about it. The first is, as we’ve highlighted previously, that I think that our ability to respond to this immediately and begin to pivot and think about IRA and our new investments immediately kind of highlights the flexible nature of our business model. So, we feel really good about our ability to continue to execute even in the era of the IRA. Second is that there’s probably still chapters to be told in terms of exactly how this law will evolve, how it will exactly be implemented. So we’re watching and learning with our consultants and alongside everyone else too as that plays out. And then finally, all that being said, we certainly have already started to implement IRA scenario planning in our new investments and thinking through the implications as you said for things that are small molecules versus large molecules and how that impacts our thesis and looking at different scenarios.

That being said, I think our focus on really wanting to add high quality innovation to our portfolio remains the driver of our strategy.

Operator: Our next question comes from Chris Shibutani with Goldman Sachs.

Chris Shibutani: I’m interested to get your thoughts on the Merck partnership in particular. Are there certain therapeutic categories that you sense that the large cap pharmas might be more willing to engage, noting that this one is in the CNS space? And then secondly, it does seem as if that it is a little bit earlier in terms of stage of development, Phase 2b, that this partnership has its initial point of intersection? Can you comment about that?

Pablo Legorreta: Marshall and Chris will actually answer your question.

Marshall Urist: I’ll answer the second part of your question and then maybe Chris can comment on your first about therapeutic areas and/or not that people are interested in. I think in terms of the fact that MK-8189 is a little earlier in development, I think is a good question. And I think highlights one of the great things about the structure, which is that it is early on in development, but the way that we have structured this is that we have made a small contribution to the Phase 2b development. And then once we see the data, completely understand the product profile, its efficacy, its safety, and the development landscape at the time, we can then make an investment at that point, which would be at a stage where we typically made the development stage investments in the past.