Royalty Pharma plc (RPRX) Earnings Call Transcript & Summary

Okay. Great. Thanks for joining us, everybody. I'm Terence Flynn, Morgan Stanley's U.S. biopharma analyst. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. I'm very pleased to be hosting this afternoon, Royalty Pharma. From -- presenting from the company, we have Pablo Legorreta, the company's CEO and Chairman. Thank you. And we have Marshall Urist, who is Head of Research and Investments. Thank you both so much for being here today to join us on the first day of our conference. Really looking forward to it. I thought maybe we'd start high level, Pablo. And then again, we'll go to some of the pipeline portfolio questions later on for Marshall. But again, as I look back, your 5-year deployment target that you set was $10 billion to $12 billion back in 2022 at your Investor Day, you hit that about a year ahead of schedule now. So how are you thinking about the next set of targets here and the deployment goal as you think about the business?

Well first of all, thank you for the invitation to participate in your conference and for the relationship with you and Morgan Stanley, which has been key to our growth over decades. And so yes, we have been able to invest the amount we guided when we went public, $10 billion to $12 billion quicker, a year quicker. And that's obviously because the deal flow has been really robust. It continues to be very active. There's a couple of things that have become real opportunities for us that I think we did not guide to when we went public in 2020. And the guidance just for everyone's -- so we are all on the same page was $2 billion to $2.5 billion per year and $10 billion to $12 billion over 5 years. But the 2 things -- and a lot of that guidance was based on deals that we have been doing for decades, buying royalties from universities, hospitals, foundations, biotechs, pharmas on approved products, but also funding late-stage trials and what we call synthetic royalties that had become a really important part of our business. The 2 things that are new that were not that important at the time were deals with big pharma in China. And those have materialized. And I'll briefly mention -- talk a little bit about both. So in the case of big pharma, you saw us last year do a deal with Biogen, funding a really exciting lupus drug that they referred to as the crown jewel of the company, a deal with Teva on an LAI, long-acting injectable for schizophrenia. And then this year, a deal with Teva on a drug for vitiligo, $0.5 billion deal. And then a deal with J&J, a really exciting deal where they're combining 2 antibodies. It's a market we know extremely well because we have been investing in this therapeutic area for decades with Humira, Remicade and Cimzia and the early-stage drugs and then Tremfya. And this one is a combination of Tremfya and Simponi essentially to try to treat patients that are progressing, $0.5 billion investment. And we have done deals in the past with Merck and other companies. But I think the fact that a company as important as J&J has decided to do this with one of their top programs really send a signal to the industry that this is something that is worth doing for big pharma. And that has resulted in so many discussions we're having daily with big pharmas globally, not only in the U.S. And so it's very active. I think we have a decent chance of this really becoming an important driver of growth for Royalty Pharma. And it's a whole new thing. We're very excited about it because it will require many billions of dollars per year. Obviously, we have to be very selective and see what we want to fund. And then the other opportunity is China that we actually have now really made steps to be present in that market, hiring one of the top bankers in Hong Kong focused on China. He's in the room, Ken Sunn, and he's going to help us build the business there. And we did a large deal last year with BeOne for $900 million plus upfront, buying a royalty on Amgen's Imdelltra in that product. And we can talk later if you want to more details as to why China and what we see exciting in China and also big pharma. But obviously, the capital deployment has been very strong, and we think it's going to maybe accelerate. So I think are we going to invest more than 2, 2.5 per year? We have been doing that. I think we will continue to do it. But we still want to be conservative in terms of the guidance. And I think how much capital we deploy is important. I think another metric that is important for us is the top line growth, and we've guided to double-digit top line growth through 2030. I think it will go on for much longer than that, given all of the growth drivers.

Okay. Great. We'll unpack a bunch of these over the next half hour or so here. I guess the R&D co-funding opportunity, I know we talked a lot about in the past on the synthetic opportunity. R&D co-funding, we haven't spent as much time on. But again, it sounds like you're seeing a real change here. So maybe just remind us like why does pharma want to do these deals? Like what are they trying to solve for? Again, you guys always like to be the go-to party for these kind of transactions, but what are they solving for?

So we started this in 2012 when we decided to actually -- in addition to investing in approved products where there was already a license in place. And we said we're going to fund late-stage clinical trials for biotech and pharma. And we proactively started that in 2012. Since then, we've deployed $28 billion, of which about $18 billion is in approved products and $10 billion, $11 billion is in products in development. So it's become an important part of our business. And we started to talk to big pharma back then. And I had a meeting one-on-one earlier today when someone was asking, is there a negative bias there with big pharma that they may want us to fund the less interesting products in their pipeline. And absolutely, there was a negative bias initially. We would go and talk to these big companies, and I'm going to give some numbers just to illustrate, but big company that might have 80, 90 programs in Phase I, Phase II and Phase III, and they might have in their P&L, it's not about cash because they have cash. They might have $30 billion of cash, $20 billion of cash. It's about the P&L. And they might have a P&L budget where they have R&D of $12 billion per year. And that $12 billion allows them to fund 60 programs, but they cannot fund programs 60 to 90, 30 programs that get delayed or shelf. And they wanted -- when we started to talk to them, they would say, oh, look at the bottom 30. And we would say, thank you, but no, thank you. How are we going to get excited with a program that you're not excited about, you decided not to fund. And we would say to them, and eventually, we managed to figure out how to persuade them to open up and let us look at the more interesting programs. And -- what I would say to them is we want to win with you. And if we want to be your partner, if you want us to be your partner in 5 years, 10 years, we need to win with you. So we need to be funding the top program, and we're going to be able to put a lower discount rate on something that is priority. And the math also works, Terence, because if you think of us funding one of the bottom programs, we're not going to do it because there's no interest. Why would we do it? But just as a mathematical exercise, if the drug is going to be smaller, $0.5 billion, for us to put a lot of money on the table, hundreds of millions, so that it really matters for them, we would require a high royalty, big burden. It doesn't work. If we are able to fund some of the top programs, multibillion-dollar drugs, we can put hundreds of dollars on the -- millions of dollars on the table and ask for a mid-single-digit royalty, the math works. So everything works. Now how does this work? Years ago, there was a transaction that was taken to the SEC by a big pharma and unfortunately, the conclusion after analyzing the accounting was negative. And it really put slowed down the -- building this business for us. And we didn't like it. And we said, no, no, no, we need to fix this because we want to build a business from the big pharma. So we had to go out, hire a guy that used to work in an accounting -- one of the top accounting firms that is help us to work with big pharma, how they account for deals. Bottom in, with him, we spent years, 4, 5 years trying to fix this. And we managed to do it. We were able to change the way that FASB and the accounting firms account for this transaction. And the solution is that it's contra R&D. If like in this deal we did with J&J where we committed $0.5 billion, we're going to spend that say, over 3 years. And in one quarter, and it's going to be every quarter, we will write a check for half of the money spent. And if in one quarter, the amount was $80 million, we would write a check for $40 million. And that $40 million that we spent becomes contra R&D for the big pharma. It lowers their R&D expenditure. So what happens is that we essentially, by doing that, created $50 million of capacity for them to go and fund another program that might be program 61, 65, they can decide. But by doing that, what we're really doing is we're expanding the P&L bandwidth. Now the other important thing is risk mitigation. If it doesn't work, they're not going to lose $1 billion. They will lose half. Obviously, for us, that will be a negative thing, and we want to make sure that, that doesn't happen. But it's both things, risk mitigation and allowing them to fund more things. I think there's many things in our business that when I started where it's just not the case, it was a greenfield. Investing in royalties was not done before I started it. And it's been a question of just focusing, trying to get the market and players change their mentality and accept things and for those things to become mainstream. I think the idea, for example, of us funding biotech companies has become mainstream. I think the idea of us funding big pharma could become mainstream, and that will be a huge source of opportunity for us.

So it sounds like if it's not mainstream yet, it's not as competitive. Is that a fair assumption on...

I think it's a good question. We've always kind of existed in a competitive environment. I think there are other people who are doing this. It's a smaller group. There's no question. But I don't think we're super focused on competition right now in this space. I think to Pablo's point, it's really about growing the pie and trying to make this a large ongoing source of business for us. And honestly, having multiple players in the market is a good thing, right, where if there's depth of the market, it gives all the pharmas out there confidence that this is -- that they're getting sort of good competitive tension and a good price.

Okay. What -- and then maybe just talk about the return profile for those. I'm assuming it's pre-commercial that would require a higher return potentially because you're taking on risk.

So since we went public, we guided investors to a high single-digit, low double-digit return on approved products unlevered. The reality when we look at what's happened over the last 3-ish years, maybe a bit longer, when we look at capital that has been deployed in approved products is that the returns are higher than that. It's probably ranging in the 12%, 13% unlevered, which we're very happy about. But then in unapproved, the returns are in the high teens and even into the 20s depending on the asset and the risk. But they are higher, and those returns are unlevered. And what I think happens with our business all the time is we make an investment that was modeled at high teens, low 20s, it gets approved. And all of a sudden, that asset now can be levered, not before, but once approved, they can be levered. And if you add leverage at our cost of debt, which is right now, it's 3.7%, the weighted average coupon is 3.7%, it really boosts the returns to a much higher level. So it's become part of our -- an important part of our business and with very attractive returns. Now obviously, there's things that don't work. You saw what happened with pelacarsen. It was a $150 million investment. It's part of our portfolio. There's many. And we would expect that in a portfolio, there are some things that are not going to work. And obviously, the ones that work and that have compensated for the ones that have not worked.

But these pharma R&D deals are without question in the targets that we've set out for unapproved projects. And I think something that is maybe overlooked a little bit is having a partner where the scale and the people and the infrastructure to run Phase III to commercialize globally is a massively positive thing, right? When we work with smaller companies, part of our calculus is what is achievable, is someone going to come along and buy them. So here, we don't -- it's a very different way of thinking.

Okay. Makes sense. Maybe just on pelacarsen. I have some other questions first, but maybe there, just given the timeliness, maybe just anything you want to share in terms of your views? I know it's early, Marshall, but like we haven't seen the data, but what was your kind of big picture takeaway? I know you guys put out a press release kind of to frame the financial impact. But just maybe from a high level, how do you think about what that means for olpasiran, I guess?

Yes. So the negative outcome for pelacarsen, obviously a disappointing thing for us. I think like we outlined, we did, of course, buy it in a very kind of risk-protected way, which I think is an important lesson for all of our shareholders about how we think about structuring and how -- and when we deploy capital. It's very early to say. I mean, I think we can have a much more informed conversation about this once we see the full data here in a couple of months. But there are certain reasons to think that olpasiran could have a better outcome. It wouldn't be the first time that the first person who runs a big cardiovascular outcome study, everyone else coming behind them learns the lessons of their unfortunate outcome. So we're excited to see it, and we can have a conversation when we know more.

Yes. Okay. Maybe just the one important thing there is that the deal with olpasiran and the Amgen drug is for much bigger dollars to put a lot more money in that investment and also the royalty is higher. So there's a scenario here where if that one does work, which we think there's reasons to believe why it will work, Amgen could end up for a period of time, dominating the space, bigger drug, there's not going to be a competition and us having a bigger royalty and also have invested more money could result in a very attractive outcome for us.

Okay. Great. Maybe going back to the high level. I mean, I think another thing you guys have talked about in terms of a competitive advantage is just your data platform. You guys have spent a lot of time building that out. And so as you think about kind of layering AI on top of that data platform, maybe just talk to us through kind of like how that's going? What are the advantages that you see in terms of your kind of business model leaning into that and how you think that really sets you apart from some other?

I'll give you some top-level comments and then maybe Marshall can drill into how we're using it and what we see on a day-to-day basis. But we've been investing in data since I started the business 30 years ago, initially, it was like IMS data on subscriptions. And a decade ago, we started to buy data from many data providers. And as you know, we have data on 200 million Americans, claims data, which is really interesting data, gives you much more information than, for example, historically other sources. Electronic medical records for 44 million Americans, we have longitudinal data. So we've been investing. We've been building a data science team, and we have a team in place for 5, 6 years. And we hired a guy that used to be the CTO of Verisk, this company that actually gathers insurance policy and casualty information for the entire insurance industry and then gives data back to the insurance company. He was CTO of Verisk. He came to work with us like 3, 4 years ago and started to help us take the data science part of our business to the next level. But more recently, I was very excited because we wanted to bring to Royalty Pharma someone with a lot of AI expertise. And we looked at -- I think we interviewed like 30 people. And at the end of the process, we found one person that top of the list, and I was super happy that he agreed to join us. And he was the guy that was responsible for AI of IQVIA. So this is the biggest CRO in the world that has 1,200 clinical trials running at any point in time. And then they have the data side of the business, which used to be IMS Health. IQVIA is a merger between Quintiles and IMS Health. So this Lucas Glass had about 300 people under him, and he was introducing AI throughout all of IQVIA, a company with 100,000 people, and he decided to join a company with 100 people, Royalty Pharma, so you understand the scale. Now the reality is that in conversations, what we concluded was that he was the right person because of a lot of things. He's a guy that loves to code really hands-on versus other people we have interviewed that were not that nature. But also what I think he concluded was that he wanted to join a company smarter, more entrepreneurial that could really drive how AI is going to impact this entire ecosystem. And he thought that with our platform, he could really help us to take this to the next level. And that is already happening. I mean, he's already starting to have an impact in our business with a lot of things that we're doing. And I'm super excited. When I had the interview with him, I showed him 2 slides. One slide, many more, but he focused on 2, one that had 1,700 opportunities that we have reviewed over the last 3 years, 450 in oncology, 250 in CNS and so on. And I said, Lucas, we get agreement, we get patient level data for all of these assets that we review, we get FDA minutes and many more information. And when we use -- the way we used to do things is you would put clinical trial side by side and compare and say, okay, this trial worked, it didn't. What are the -- what happened? And the human brain cannot connect the dots when you have 450 trials in oncology, maybe you're looking at specific cancer, could be 40 trials and also so many variables, right? But you apply AI to that and the insights that you gain are really interesting. And that is going to help us, again, make us a better investor, but we can share those insights with the companies we're working with. That's a big distinction between us and our competitors, where we are trying to position Royalty Pharma not only as a capital provider, but also as a partner that can share insights based on data with our partners to help them think about their clinical trials, about commercial. But I showed them that slide, and he said, absolutely, like anyway. And then I showed them another slide, which has all of the modules of all of the diligence. All of the things we do, 20 different modules. And he basically concluded every one of the things we do with diligence with doctors, with payers, every one of those things can be made more efficient with AI. And I think what's going to happen with our business over the next years is it's going to evolve, and we're going to embrace AI. But maybe you want to talk a little bit about how it's helping the diligence process and the...