Royalty Pharma plc (RPRX) Earnings Call Transcript & Summary

Great. So good morning, everybody, and thank you for joining our next session with Royalty Pharma. My name is Dave Risinger, and I'm responsible for diversified biopharmaceuticals at SVB. And it's very much my pleasure to welcome the company's CFO, Terry Coyne. And I've asked Terry to run through slides for about 15 or 20 minutes, and then we're going to go into some questions. So with that, let me turn it over to you, Terry.

Great. And thanks, Dave, and to everyone at SVB Securities for hosting us today. If we flip to Slide 3, these are our forward-looking statements. Let's move on to Slide 4. This lays out our vision and our mission. So Royalty Pharma's vision is to be the leading partner of funding innovation in life sciences, and our mission is to accelerate innovation in life sciences and transform patient lives globally. We like to remind ourselves that this is our -- this is why we come to work every day, and we think that this business is playing a very important role in the broader life sciences ecosystem. Moving to Slide 5. This is an overview of Royalty Pharma. The company has been public for a little over 2 years -- actually coming on 3 years now. We were private actually for 25 years prior to going public. So the company was founded in 1996. We have 75 employees. It's a very efficient business as you can see. Our portfolio consists of over 45 approved and development-stage therapies and 15 of those are blockbusters with sales of $1 billion or more. We think blockbusters is a very important sort of type of product to invest in because these tend to be the products that marketers put the biggest resources behind in terms of clinical development and also commercially maximizing the opportunity. From a financial perspective, our business had -- we just reported our 2022 year-end results yesterday. We had $2.8 billion of adjusted cash receipts. That's our top line. We had $2.6 billion of adjusted EBITDA, so 92% EBITDA margins really speaks to the efficiency of the business and $2.2 billion of adjusted cash flow, which is what we view as our bottom line and that represents a net margin of 80%. Looking to the right on this slide, you can see that our business is diversified across products in therapeutic areas. Rare diseases make up 33% of our portfolio, the biggest component within the rare disease segment is our royalties on Vertex's cystic fibrosis franchise. Then cancer is 22%. Neurology is 17%. Immunology is 6% and growing with the strong performance of both Tremfya and Entyvio. And then hematology 7%, respiratory is 4%, and that's another area where we expect a fair amount of growth given that Trelegy -- the Trelegy transaction that we completed in 2022. It was our largest transaction last year. It's a very exciting product with a lot of growth ahead of it. So we're very pleased with the overall financial health of Royalty Pharma. If we move on to Slide 6, let me review the accomplishments of the business over the past year. So from a financial perspective, we grew our adjusted cash receipts by 10% prior to the accelerated payments that we received as a result of Pfizer's acquisition of Biohaven. That would -- that added $458 million to our top line last year. If we include those, we had -- we reported growth of 31% -- we actually reported growth of 31%. Our adjusted EBITDA similarly grew 10% and 32%, including Biohaven. And then adjusted cash flow grew 15% and 42% if we included Biohaven. From a portfolio perspective, we had a great year in terms of adding new therapies. We added 6 new therapies to the portfolio, including the blockbuster Trelegy that I mentioned, that was the deal. That was a $1.3 billion deal and our largest deal of the year last year. I touched on this briefly, but Pfizer acquired Biohaven. And that was a very important financial development for Royalty Pharma. It accelerated our payments related to -- we had commercial launch funding, which is a type of capital that we offer to companies where Biohaven was going to pay us fixed payments over many quarters and Pfizer's acquisition accelerated those payments and ultimately resulted in an increase of $458 million last year, as I mentioned. Similarly, this year, if intranasal zavegepant is approved, it has a PDUFA date later this quarter, that would bring forward another $475 million of milestone payments this year. That's not included actually in our financial guidance, but we're very optimistic that, that will ultimately be approved. And then just sort of summarizing what the impact of that is on our Biohaven transaction. It would result in -- we deployed over 4 different transactions, about $800 million. And with the acceleration of these payments, we also made an equity investment in Biohaven, that generated a very nice return. We will receive a 1.8x by the middle of this year, assuming that intranasal zavegepant is approved, we would receive a 1.8x on our $800 million investment and then have 15 years of royalties plus -- 15 years plus of future royalties on Nurtec and zavegepant, which we think is very, very attractive and will be one of our better investments that we've ever made. From a capital deployment perspective, last year, we announced up to $3.5 billion of transactions, $2 billion of that was upfront, the rest was in the milestones across 9 deals. We also, at our Investor Day, in May, we increased our capital deployment target over the next 5 years when we went public, we said that we think we can invest over $7 billion over 5 years. We have -- and I'll touch on this later in the presentation, but we've significantly exceeded that already. And we increased our guidance in May of 2022 to deploy $10 million to $12 billion over the next 5 years. So it's about a 50% increase there. We've also maintained a leading share of the biopharma royalty funding market, which we think is very important. Let's move to the next slide. This lays out the opportunity for Royalty Pharma to fund innovation, which we think is immense. We start at the top on the left. Over the next 10 years, academics and not-for-profits are expected to spend over $1 trillion. This is usually -- this is typically in basic research. But this is going to lead to many, many future royalty opportunities because as we all know, a lot of the innovation is happening in academia. If you move down, pharma companies -- profitable biopharma companies are expected to spend over $1 trillion in R&D over the next decade and unprofitable biotech companies are expected to spend over -- sorry, pharmas are expected to spend over $2 trillion and unprofitable biopharmas are expected to spend over $1 trillion. And so these are areas where we can actually work directly with those companies. In the case of pharma, we can fund trials in exchange for royalties. In the case of small and mid-cap biotech companies, we can fund trials in exchange for royalties and also fund launches in exchange for royalties. So we see a very big opportunity there. On the right-hand side of the slide, you can see that the global pharma market, by early next decade, is supposed to -- is expected to have over $2 trillion of annual sales, which speaks to the scale of the opportunity. And we just want to capture a little piece of that. If you -- moving on to Slide 8. We've seen significant growth in the royalty market over the past couple of years. So if you look back from 2015 to today, the number of transactions has increased sixfold. And then the dollar value of transactions over that time has increased over tenfold. So this really speaks to the strong momentum that we are seeing in the royalty market. And our role over that period has actually stayed pretty constant, which we think is also really important. So our share over that period has represented over 50%. That's where our share was in 2022. And over 1/4 of the -- sorry, over 50% of the transaction value so those are dollars spent and over 1/4 of the transaction volume. And so what that tells you is that we tend to have a bigger share of the bigger deals. If you move on to the next slide, George, Slide 9. One area where we see a big growth opportunity is in the area of synthetic royalties. So a synthetic royalty is basically the creation of a royalty that does not already exist. So we go to a pharma company or a biotech company and tell them we will give you X $100 million of capital now or over the next couple of years to fund development in exchange for a future royalty. And there's a lot of attractive elements of this to our partners. From a cost of capital perspective, we think it competes well with other alternative sources of capital. We can provide capital at scale and we take out the market risk. And we're truly partners alongside of them. If the product works, then we succeed and they succeed. If the product fails, then our capital is completely at risk. Over the past 5 years, synthetic royalties have only represented around 2% of the total biopharma industry funding. So it's a very small slice. And then if you move to the right, we expect that over the next 5 years, the cumulative capital need of biopharma is going to be over $450 million (sic) [ $450 billion ]. And if you sort of put that in context, in terms of our -- the share and just to contextualize the opportunity. If we -- if royalty -- synthetic royalties represent 4% share, then that would mean an $18 billion market opportunity. That's a doubling, but it's still a pretty small piece of the overall market. And then if synthetic royalties represent 8%, it would be a $36 billion opportunity. So the scale is pretty significant, and we think we can play a very important role in that market over time. If you go to Slide 10. This is what we think could ultimately be a model for many successful biotech companies over time, where Royalty Pharma -- where royalties become a very important component of their overall capital structure. So if you look at some of the companies like Immunomedics, Biohaven, Cytokinetics and BioCryst. These companies have needed to raise significant capital over their lifetimes. And royalties represented around 25% of the total capital that they raised. And we think that this really could be the future of the industry, and we expect to play a very important role. One of the things that we've noticed over the past 5 years is that royalties are a part of the conversation at every emerging biotech company in terms of how they're going to fund themselves in the future. We're doing a lot to drive that. And we think that there is a really big opportunity going forward. Let's move to Slide 11. This -- and we dig a little bit deeper into our funnel, which is always an area of investor interest. So in 2022, we announced transactions of $3.5 billion. We looked at 350 million -- 350 initial reviews. We signed 106 CDAs. We did 70 in-depth reviews. We ultimately submitted proposals on 38 of those reviews, and we executed on 9 transactions, which represents around a 3% sort of hit rate versus the top of the funnel. That's actually been something that's been pretty consistent over the years. We tend to transact on low single-digit percentage of the deals that we initially look at. And it really speaks to the high bar and the selectivity and the really deep due diligence process that the team has. We find that if we want to win a transaction, we should be able to win because we have the lowest cost of capital. And so there is that drop off from proposals to submit it versus executed transactions. And there's a lot of reasons why things drop off there. But typically, if we have conviction, then we're very confident that we can win these deals. Let's move to the next slide and dig a little deeper on the trends. So if you look at the initial reviews from 2019 to 2022, these are up 75% from 200 initial reviews to 350. The in-depth reviews are up also up 75%, so 40 goes to 70. And then the announced transaction value is up almost 60%. So we feel like the momentum is there. There's a lot of tailwinds in the industry. Certainly, the challenging capital markets over the last year, 1.5 years, have been helpful, although if anything, we feel like this is just helping to accelerate a trend that was already there as more and more companies think about royalties as a way that they can fund ourselves going forward. If we move to Slide 13, capital deployment is a key metric that we look at as a business. And over the past 10-plus years, we've deployed $24 billion -- sorry, we've announced transactions of $24 billion, and that's split across both approved products and development-stage therapies. So over this period, we -- around 55% of the deals that we've announced have been in approved products and around 45% have been in development-stage products. Many of these development stage -- most of these development-stage products ultimately went on to be approved and they've led to some of the most important products in our portfolio like Tremfya -- sorry, like Trikafta and Imbruvica and Trodelvy and Nurtec and the list goes on. In the middle panel, shows where we guided. I mentioned this before, but it shows where we guided in terms of capital deployment at the time of our IPO, we guided to $7 billion over 5 years. And then you can see that from 2020 through 2023, we actually announced transactions of $10 billion. So we blew through this number. We knew it was conservative but we wanted to make sure that we delivered as a new public company. And looking ahead, now we increased that guidance, as I mentioned, to $10 billion to $12 billion. So around $2 billion to $2.5 billion per year over the next 5 years. And since January 2022, we've announced transactions of $4.5 billion. So we're well on our way to this new target. What we said at our Investor Day in May is that over the long term, we see an opportunity to double our annual spending target again. So $2 billion to $2.5 billion, double that to $4 billion to $5 billion. We haven't given a time line on that because we don't -- deploying capital for the sake of deploying capital is not our business. We want to make sure we're investing in great assets that are going to drive long-term value for the business and generate attractive returns, but we do really see that -- a line of sight to getting to that type of scale for the business, which we think would be pretty powerful. Moving to Slide 14. This is an area where we think is unique about our business and underestimated by investors. Sometimes it's our ability to replenish the portfolio. So if you look on the left-hand side, you can see some of the transactions that we've done over the past 3 years. We added products like Entyvio, Nurtec, Cabometyx, ORLADEYO, Tremfya. Just this past year, we added Trelegy. And then just recently, in the beginning of this year, we added Spinraza. These are some of the most exciting products in the industry that have great growth ahead of them. We've also invested in a number of development-stage therapies. One of them on the left side, Evrysdi ultimately was approved, and we have a number of readouts coming up as well. If you move to the right side, you can see the power of the investments that we've made over this period. We expect that the deals that we did on the left side are going to generate royalties on the right side of $1 billion by 2025. And that will represent around 1/3 of our royalties in 2025 based on our internal estimates, that does not include any future transactions. So the business's ability to constantly reinvent itself find great new assets to add to the portfolio, to grow through patent expirations, which we think is a very unique element of our business. And we've shown our ability to do that. In 2022, we lost -- well it was really in early 2021 that we lost our royalties on Gilead's HIV franchise. It was our fourth largest franchise at the time, and we grew 18% that year. And this past year, we lost our royalties on Januvia and Janumet. That was also a top franchise for us. And we grew, excluding Biohaven, by 10% and including the Biohaven acquisition by 31%. So we think that our ability to grow through these expirations is very unique when it compares to other large biopharma -- large diversified biopharma companies. Slide 15. We've been transparent about what our return hurdles are when we're making new investments. So when we invest in approved products. We're targeting unlevered IRRs of high single digits to low double digits. And when we invest in development-stage products, we're targeting teens IRRs. And what this plans to is a low-teens average IRR over time. And at our Investor Day in May, we showed the historical data that showed that we have actually been able to pretty consistently generate those sort of low-teens to even mid-teens IRRs over an extended period of time. And we have not seen those types of return that -- those returns contract. I will touch on competition in a second, but that is always an area of investor focus is that competition is going to cause returns to contract. We simply haven't seen it. And we're very confident in our ability to continue to target and deliver on these types of returns. Moving to the right is an area that we think is often overlooked is the power of our capital structure and our ability to use conservative leverage to enhance returns. So on -- so if you start with a low teens blended return and then you add-in leverage, and even at today's rates, which are obviously much higher than where -- we previously borrowed at. But if you add-in conservative leverage, and we've historically funded around 1/3 of our transactions with low-cost debt, that drives our returns from the low teens to the high teens to low 20s. And like the unlevered returns, those returns tend to be very consistent as well. Moving on to the next slide. We are often asked about competition. We think our business is -- has a strong moat and it's driven by a few things. The first is the business model. We obviously -- we're a publicly traded company. We invest in very long royalty durations. We have a low cost of capital, where we're borrowing at 2.25%. 60% of our debt matures in 2030 and beyond. And we have a mid-single-digit overall cost of capital. When you compare us to other royalty buyers, they often have a serial fund structure. They have -- they focus on shorter-duration royalties, and they have a much higher cost of capital. Our scale is unique. We have over 45 approved and development-stage products in our portfolio. We are able to transact on the largest deals in 2022. We did a $1.3 billion deal in 2021. We did a nearly $2 billion transaction. We had deep access to the capital markets. Now we have obviously access to the deepest equity markets. But as a public company, we also have access to the deepest investment-grade bond markets. And we also have the ability to lever our entire portfolio, which drives that lower cost of capital. And then the last thing is the platform. We have a long tenured team. We have a singular focus on biopharma. That's all we sort of live and breathe that every day. We have a long history in this industry. We are viewed as good partners. We have great industry relationships. And we think we are positioned as the partner of choice amongst the different biopharma royalty competitors out there. The last slide, 17, is a summary of why we think that Royalty Pharma is a unique way to invest in biopharma. We give investors exposure to transformative therapies. We have revenue and profit diversification. We have a therapeutic area of breadth. We're diversified across revenue -- product area, therapeutic area, marketers. These are all very unique. We have a long-duration portfolio, weighted average life north of a dozen years. So many of our royalties go into the late 2030s. We've been able to deliver consistent and sustainable growth. So in the past -- the last decade 2010 to 2020, we delivered consistent 13% top line growth throughout this decade. At our Investor Day, we guided to be able to deliver 10% or more growth throughout from 2020 to 2030, which we think is very attractive. The management team is -- has been around -- been at this company for a long time -- been doing this for a long time. We have significant equity investments in the business. Management owns 23% of Royalty Pharma. When we went public, we agreed that we would lock up 80% of what we owned for 5 years, which really speaks to our commitment to the business and our conviction in the long-term opportunity. And the final thing is the opportunity that we have, we view the entire R&D ecosystem as our pipeline. If there is a product out there, we oftentimes can figure out how to get a royalty in that product. And then in terms of the things that we don't do, we don't take early-stage development risk. We have a very low R&D cost base. We don't have therapeutic area biases. And we're very -- highly competitive -- sorry, oftentimes when you look at pharma M&A, the -- or BD, it's highly competitive, and we don't feel that ours has that same level of competition for some of the reasons that I discussed. And then the last thing is that we rarely -- or we don't have that sort of late-stage clinical binary risk, where the stock is going to go up 100%, but maybe down 100%. So that's -- these are all the reasons why we think that Royalty Pharma is a very unique business model. With that, Dave, I'm happy to take your questions.

Great. Well, thanks so much, Terry, for the comprehensive overview. So just 2, because we are going to be running out of time, could you just touch on the Merck transaction and explain that one, on the Merck asset? And then just remind us about management's targets for future deals and how you think about the potential split between approved drugs and development-stage assets going forward?

Sure. So yes, we were really excited to announce that -- the Merck transaction in 2022. Just as a reminder for people who don't know, we announced that we would invest up to $470 million -- sorry, $425 million to help Merck fund Phase IIb and Phase III development of MK-8189, which is a product that's in development for schizophrenia that we think has a very unique profile. The way that, that deal was structured is that we are investing $50 million upfront to help them fund the Phase IIb trial. It's a big Phase IIb trial, well-designed, placebo-controlled. So we will have a lot of data to sink our teeth into after that trial reads out. And at that time, we would decide whether we want to fund a Phase III trial. And it's a -- if Merck decides to move ahead, then we have the option to provide an additional $375 million of funding. So we think it's a unique structure of derisking, in that, we'll have that Phase IIb data and also Merck's commitment before we move forward. And we're excited about this as a product. We think that this could be very differentiated, particularly on the side effect profile.

What royalty -- sorry to interrupt, what royalty would you realize if it's successfully launched?

We haven't said -- but I think at the appropriate time, we would probably provide more information if this product is ultimately approved. But we think that it would generate -- we would expect that it would generate a very attractive return to us. We also think that this is exciting because it's also a model for other larger biopharma companies. So there was a little bit of a lull in terms of biopharma deals getting done. And we think that this transaction provides a little bit of a road map for how these deals can work going forward. And we're very excited about the opportunity to partner with other biopharma companies to fund their most exciting clinical development programs. You asked about the mix of approved versus development stage. I think to be honest, Dave, we don't know. We really are opportunistic. There could be years where it tilts more one way or the other. But over time, it actually -- when you look at it over a 5-, 10-year periods, it does end up being fairly consistent in that -- 40% to 45% of the deals we do are development stage. And they are in different stages of development stage. There are some that already have their Phase III trials that read out, and we're helping them to build the commercial infrastructure. That's a different risk profile, obviously, than one where they don't have the Phase III data. So it's a mix. But I would suspect over time, it will continue to be in that range. But any given year, it could tilt more approved or development stage. That's the unique thing about our business model is that we really try to focus on the asset, the unmet need, the benefit that it would bring to patients and look at all of those dynamics to then select what we think will be the most important long-term products that ends up being a mix of approved and development stage.

It makes a lot of sense. That's great. Well, that's a good spot to wrap up that. And once again, thank you very much for joining us. Thanks for the comprehensive rundown and congrats on all the great momentum.

Great. Thanks, Dave. Thanks for having us.

All righty. Have a nice rest of the conference.

You too.

Thanks.