Royalty Pharma plc (RPRX) Earnings Call Transcript & Summary

I mean it's unique. It's the first time that you've seen a true scaled alternative to pharma, right? Historically, the company has raised equity along the way and then you really need capital at scale partner with pharma, a lot of times you lay yourselves department. But now we're able to come in and say, we can step [indiscernible] of that pharma partnership I mean, equity is available and equity would have been available to Rev Med. But at a certain point, you want to supplement that with additional sources of capital. And the reality is royalties are lower cost than a certainly were for Rev Med. And so adding royalties to the mix and sort of pushing off that decision point of pharma to turn that card over and you're into your launch and you're showing that you can do this on your own that tremendous value can accrue to the equity of those companies with [indiscernible]. And so we're excited about the potential. It's not -- it doesn't fit every company and there's some companies that simply can't go in alone and they kind of know that. But for the companies that really can or can go further alone, this is -- we think it would be a very powerful school.

So you had mentioned that the royalties have made a comparison to the cost of equity. So that's a significant share of the announced deal value. Is there a natural upper bound to how large synthetic royalties can become within your portfolio? And does broader adoption risk doesn't make terms less favorable over time?

I mean at this point, we don't see an upper bad. It's not obvious. It's not like we're feeling -- we're saturated the market. We're about 5% share of the market. Synthetic royalties for small mid-cap biotech companies, 5% share. nothing. So there's a lot of room to go from that perspective. In terms of competition, I think the reality is the market is growing a lot faster than the competition is growing and we have a lot of competitive differentiators. It's still risky. You can't forget that. And so you have to be prepared to dilutes. You're going to have some things -- you're going to have some misses. And so from our perspective, we obviously hate when things don't work, but it's not going to change our business one way or another. We have huge scale, huge diversified cash flows that's reproducing every quarter. We know that we're going to be able to, over time, generate really attractive returns across the entire portfolio. And so -- you can -- if you invest a couple of hundred million dollars, $1 billion, $2 billion to development stage investments, it's not going to change the overall outlook of Royalty Pharma, but it's going to open up a whole new pool opportunities that we may not have otherwise seen. So I don't think this is going to be for everyone, but there will certainly be some competition at this level. It's just -- it's complicated.

And Richard, I think that the competition is from other capital allocators as it is from alternate forms of capital. Terry mentioned equity, there's convertible debt. There's licensing dollars and we view that pool of alternatives to be as much competition to our dollars would monthly view as a strategic partner. So we're replacing the capital that otherwise would have come to a company through a licensing transaction. And then I think we can successfully make the cost of capital argument next to common equity or convertible debt and again, complement. There's always going to be a case where we truly substituting, but as a complement to help companies scale their capital base. I think is the way we see it. .

Yes. It's all right. It's not [indiscernible] or the other. But it's -- it should be a piece very successful, really successful biopharma company. I think we see a future where royalties are just part of the mix. Not the whole thing, but a healthy part of the next supplementing that with that equity. And once they get to later stages debt. But we've seen it with revolution medicines. We saw with [indiscernible]. We saw it from [indiscernible]. We saw it with [indiscernible], probably a couple of others that I'm not thinking of. But where royalties were 20, 30% of the total capital that they raised, I think that's a road map for the industry.

Going back to the Rev Med transaction. So the contingent payments -- so to confirm that future tranches under that kind of agreement do apply against it guided $2 billion to $2.5 billion of target deal flow?

Yes. So when we say $2 billion to $2.5 billion, that's capital that we -- that's straight from our cash flow statement, capital that we deploy every year. And so there are going to be years where it's a mix of deals we signed up in prior years and deals that we announced that year. And so that is -- there is an element of, like, for example, the Johnson & Johnson deal we announced earlier this year, is a $500 million commitment to co-fund the clinical trials, that will be -- a portion of that will hit our capital deployment this year. A portion of it will hit next year, and I'm not sure exactly how long that goes, but [indiscernible]

And so the annual run rate of $2 billion to $2.5 billion, so that's -- should investors understand it as a conservative proxy the royalty gets suppressed if the right deals come along. I guess the question is really, is there an incentive to guide higher because I would commit yourself to higher deal.

That's exactly it. I mean we're going to take the opportunities as they come. we feel like $2 billion to $2.5 billion is kind of -- we don't need to do a lot to achieve that each year. So we described that as more conservative modeling assumptions. There's a lot of reasons to believe that the number could be much higher. But we're -- if it's not, it's because we're patient and we're waiting for the right opportunities. We're not -- we don't want to ever feel force to deploy capital, that's a very bad situation to be in. It would impact returns with impact probabilities of success. And we're just not in that business. I want to be making investments in the right products. And I think if you look at where we've invested, take last year, we had a funnel of 480 opportunities that we looked at the top of the funnel and we did 8 transactions. And you look at those products that we invested in there, they're going to be almost across the board, they're going to be amazing products. And so the bar is high. It was a 2% rate that we invest of the total amount deals we've looked at. So it's -- the bar is going to stay that high. I think that sort of pull-through rate is going to stay probably very well.

So your total debt adjusted EBITDA, your leverage is about 2.8. You have significant liquidity. Is there a hard leverage ceiling when you move, for example, the 3.5 in particular compelling transaction?

Absolutely. Yes. I mean we wouldn't go above 4. You have to be really, really compelling to go about 4. We would need to know that we're going to delever pretty quickly from there. We're now BBB rated across all by all 3 agencies, something we're really happy about. It's a long time coming, but I think it just speaks to the quality of the predictability of the portfolio. But look, we want to always have the right things come along, we've been really clear the -- with the -- both our lenders and our equity investors that we would take leverage up but critical to maintain that investment-grade credit rating.

On buybacks, I understand that you apply your capital to deals into buybacks. So internally, I mean considering want engage and buybacks, what are you comparing? Is it the internal rate of return on new deals versus the implied rate of return on repurchasing your own shares implying that there might be a stock price or valuation where buybacks again?

Yes. So it's dynamic. I think we're looking at the relative value of our equity and comparing that directly against the attractiveness of royalty opportunities. And so I think 2025 is a really good example of how we think about it. So first half of that year, particularly in the first quarter, our stock was -- we thought very depressed deal flow is a little bit slower for whatever reason. And so we dialed up buybacks. And in the first half of the year, we bought back $1 billion of stock. And then as we got into the second half of the year, yield flow picked up in a huge way. We get the Rev Med deal. We bought the delta royalty that you mentioned earlier from B1. And we were just seeing a lot of opportunities. And so we dialed down buybacks and do of investments. And I think as we've continued from the second half of 2025 into 2026, we're just continuing to see really, really interesting inflow. And so that's where our focus has been. We're still doing buybacks, but it's definitely been it's not been at the same scale as it was in the first half of '25. But look, if we see a pullback, flow slows down, how that back up again. And that's a really kind of nice tool to have, I think, in you look at I think we've been pretty good about where we bought back. We probably bought back $2 billion of stock, and it's been in the 30s -- so it's $30 per share. The stock is close to $60 now. So I think we've been pretty disciplined about that. I think our investors have been policy is part.

So you've guided 2030 cash flow target of $7.50 per share that implies a certain level of return at 11% CAGR. Highlighted conservatism around your deployment assumptions, and we're also planning for downside on the Vertex royalty resolution with [indiscernible]. If either factor or to be more favorable for Royalties, so either faster deployment of capital or positive arbitration outcome in the first half of '27. Would there be potential upside in how should investors think about?

Yes. So just to sort of clarify, we're planning to downside for tax. But the -- for that arbitration, we just are comfortable that we can hit that target regardless of what happens with that -- so if the downside case out, we'll still -- we're still comfortable with [indiscernible] but I think that we feel really good about it. We've been deploying capital in really great deals. The portfolio is warming really well. Just amazing performance from things like Tremfya and [indiscernible] and we're very excited to see this launch of [indiscernible]. So I think that we feel like we're in a really good position. Deal flow continues to be strong as well. So it's still been a year since we gave that guidance. So we feel like we're in a very nice spot right now.

So you had mentioned some of the top 5 products that contributed being share of the receipts. So does your late-stage pipeline portfolio reduce that concentration at quickly announced or conversely, those who become skewed to a few binary assets like [indiscernible]?

Yes. So it's not driven -- going to be driven by any one asset. That's the amazing thing about our business is that right now, the top 3 products account for around 45% of our top line. You compare that to pharma, it's around 55%. So we're a little better than pharma, but as we get towards the end of this decade, we think the top 3 products are going to be around 30%. And pharma is probably going to stay about the same at like around 50%. So we feel like we're confident that, that's going to happen under a range of scenarios, just sort of naturally as we're -- we have a lot of products that are better ramping significantly making new investments every day or not every day, but every quarter, every year. And we feel like -- we feel really confident that the diversification is going to look, that's going to improve pretty significantly by in this decade. And then as you get into the following decade, it's going to continue to improve. And the other thing that I think is worth pointing out is that when you look at our diversification on the top line, it's the exact same on the bottom line. versus a pharma company where everyone knows that their biggest products are such outside contributors on the bottom line to their province. We don't have that issue. So there's a lot more predictability and safety in our earnings as well from that diversification, which I think is something that all oftentime [indiscernible].

You mentioned your pipeline, what are the 3 to 4 most important readouts in the next 18 months, second half [indiscernible]

Yes. So one that we're looking forward to later this year is litifilimab. Biogen product lupus [indiscernible] the end of the year, getting into 2027, we'll see [indiscernible]. And then the other big ones that we're focused on [indiscernible], which is very interesting. And then frexalimab and multiple sclerosis. And we're also going to be looking forward to seeing the whole data for pelacarsen and that doesn't have -- we know what happened to [indiscernible] that was a disappointing outcome, but we'll see the data, and I think it will probably have some read-through to [indiscernible], which is another [indiscernible] little bit longer. I think that's 2028. I could be staging, but a little further out there, but it's obviously something that we think could be -- could still be a big drug.

Are there any questions in the room? So if I could continue. So that when assets acquired by major pharma is a common exit for biotech, how do you -- how does Royalty think about those takeouts impacting future value? So you can imagine settings like migraine would positive for the asset value to have large pharma marketing support as opposed to a targeted specialty market where the takeout [indiscernible]

So every investment we make is done on the premise that a marketing partner that we have, at the time of the investment is the one that will be commercializing the drug and doing so independently. So when an acquisition occurs as common in biopharma and marketing partner then becomes a farm and large biotech has, in most cases, a positive impact on expectations on the forecast being achieved in the time frame that we model it that an upside driver in our investments. But that's not something that we can predict for the win. And so I think that's why we have to have conviction and that the marketing part of the time of the deal, they have the right team, they have the right plan that we have conviction in the product, they have enough capital to see their way through a successful commercialization. Those are about attributes that we have to have conviction in P&L spend.

Okay. Going back to the '26, '27. So you mentioned the litifilimab. Is one or the other indication more important to the value for the transaction?

[indiscernible] it's tough for me to say right now. I think CLA certainly differentiated because there's therapies for CLA, but SLE is also a very large market. So I think we're excited about both.

Any pushes and pulls in the portfolio in 2027 before considering the new deals, the LOE headwinds, I think mostly in '26?

Yes. So in '26, '25, we have LOE amazingly. And I think, again, it speaks to the strength of the business that we're growing through that just fine. And we've seen it before. I actually think that this proving out has been something which is very helpful for our investors to understand we're different. We have an easier time managing through the bottom line impact for sure, but also on the top line, managing through LOE. So in 2021, we lost our fourth largest royalty stream. It was Gilead's HIV franchise. '22, we lost maybe our fifth largest that was Merck's JANUVIA. And then over that period, we also had some headwinds from was underperforming. And we grew -- I think our CAGR from 2020 to 2025 was like 13%. We grew right through that, still right through it. And now in 2025, we saw Lumacta going generic and that had an impact in the second half of '25 and even more in 2026 and again, continuing to grow through that. So I think it's an amazing strength of the business is our ability to grow through LOEs, something that would be much harder for a pharma to achieve. When we look at '27, as we get towards the end of the year, I don't think it's really going to have much of an impact XTANDI generic in the U.S. like late summer. So it could have kind of a little bit of an impact in the fourth quarter.But then we're pretty clean...

Sort of normal through the end of the decade.

Okay. And no questions [indiscernible] Thank you very much.