ROYALTY PHARMA PLC
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help the reader understand our
results of operations and financial condition, cash flows and other changes in
financial condition. MD&A is provided as a supplement to, and should be read in
conjunction with, our audited consolidated financial statements and the
accompanying notes to our consolidated financial statements included in our
Annual Report on Form 10-K. This discussion may contain forward-looking
statements based upon current expectations that involve risks and uncertainties.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth in Special Note Regarding Forward-Looking Statements included elsewhere in
this Quarterly Report on Form 10-Q and in Part I, Item 1A. Risk Factors in our
Annual Report on Form 10-K.
Royalty Pharma plc is an English public limited company incorporated under the
laws of England and Wales that was created for the purpose of consolidating our
predecessor entities and facilitating the initial public offering ("IPO") of our
Class A ordinary shares that was completed in June 2020 . "Royalty Pharma ," the
"Company," "we," "us" and "our" refer to Royalty Pharma plc and its subsidiaries
on a consolidated basis. After the consummation of the Exchange Offer
Transactions (as defined below) and execution of the Management Agreement (as
defined below) (collectively, the "Reorganization Transactions") in February
2020 and before the consummation of the IPO, "Royalty Pharma ," the "Company,"
"we," "us" and "our" refer to Royalty Pharma Investments 2019 ICAV ("RPI 2019
ICAV"). Prior to the Reorganization Transactions, "Royalty Pharma ," the
"Company," "we," "us" and "our" refer to Royalty Pharma Investments, an Irish
unit trust ("Old RPI").
Business Overview
We are the largest buyer of biopharmaceutical royalties and a leading funder of
innovation across the biopharmaceutical industry. Since our founding in 1996, we
have been pioneers in the royalty market, collaborating with innovators from
academic institutions, research hospitals and not-for-profits through small and
mid-cap biotechnology companies to leading global pharmaceutical companies. We
have assembled a portfolio of royalties which entitles us to payments based
directly on the top-line sales of many of the industry's leading therapies,
which includes royalties on more than 45 commercial products, including AbbVie
and Johnson & Johnson's Imbruvica, Astellas and Pfizer's Xtandi, Biogen's
Tysabri, Gilead's Trodelvy, Merck's Januvia, Novartis' Promacta, Vertex's
Kalydeco, Orkambi, Symdeko/Symkevi and Trikafta/Kaftrio, and nine
development-stage product candidates. We fund innovation in the
biopharmaceutical industry both directly and indirectly - directly when we
partner with companies to co-fund late-stage clinical trials and new product
launches in exchange for future royalties, and indirectly when we acquire
existing royalties from the original innovators.
Our capital-efficient business model enables us to benefit from many of the most
attractive characteristics of the biopharmaceutical industry, including long
product life cycles, significant barriers to entry and noncyclical revenues, but
with substantially reduced exposure to many common industry challenges such as
early stage development risk, therapeutic area constraints, high research and
development costs, and high fixed manufacturing and marketing costs. We have a
highly flexible approach that is agnostic to both therapeutic area and treatment
modality, allowing us to acquire royalties on the most attractive therapies
across the biopharmaceutical industry.
We classify our royalty acquisitions by the approval status of the therapy at the time of acquisition:
•Approved Products - We acquire royalties in approved products that generate predictable cash flows and may offer upside potential from unapproved indications. Since inception in 1996 through 2020, we have deployed$13.2 billion of cash to acquire royalties on approved products. From 2012 through 2020, we have acquired$8.4 billion of royalties on approved products.
•Development-Stage Product Candidates - We acquire royalties on
development-stage product candidates that have demonstrated strong clinical
proof of concept. From 2012, when we began acquiring royalties on
development-stage product candidates, through 2020, we have deployed
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--------------------------------------------------------------------------------ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) While we classify our acquisitions in these two broad categories, several of our acquisitions of royalties on approved products were driven by the long-term potential of these products in other, unapproved indications. Similarly, some of our royalty acquisitions in development-stage product candidates are for products that are approved in other indications. We acquire product royalties in a variety of ways that can be tailored to the needs of our partners. We classify our product royalty acquisitions according to the following structures: •Third-party Royalties - A royalty is the contractual right to a percentage of top-line sales from a licensee's use of a product, technology or intellectual property. The majority of our current portfolio consists of third-party royalties. •Synthetic / Hybrid Royalties - A synthetic royalty is the contractual right to a percentage of top-line sales created by the developer and/or marketer of a therapy in exchange for funding. In many of our synthetic royalties, we also make investments in the public equity of the company, where the main value driver of the company is the product on which we concurrently acquired a royalty. •Research & Development ("R&D") Funding - We fund R&D, typically for large biopharmaceutical companies, in exchange for future royalties and/or milestones if the product or indication we are funding is approved. •Mergers and Acquisitions ("M&A") - We acquire royalties in connection with M&A transactions, often from the buyers of biopharmaceutical companies when they dispose of the non-strategic assets of the target company following the closing of the acquisition. We also seek to partner with companies to acquire other biopharmaceutical companies that own significant royalties. We may also seek to acquire biopharmaceutical companies that have significant royalties or where we can create royalties in subsequent transactions.
Background and Format of Presentation
In connection with our IPO, we consummated an exchange offer onFebruary 11, 2020 (the "Exchange Date"). Through the exchange offer, investors representing 82% of the aggregate limited partnership in the various partnerships owned by Old RPI (the "Legacy Investors Partnerships"), exchanged their limited partnership interests in the Legacy Investors Partnerships for limited partnership interests inRPI US Partners 2019, LP, aDelaware limited partnership orRPI International Holdings 2019, LP, aCayman Islands exempted limited partnership (together, the "Continuing Investors Partnerships"). The exchange offer transaction together with (i) the concurrent incurrence of indebtedness under a new credit facility and (ii) the issuance of additional interests in Continuing Investors Partnerships to satisfy performance payments payable in respect of assets acquired prior to the date of the IPO are referred to as the "Exchange Offer Transactions." Following our IPO, we operate and control the business affairs ofRoyalty Pharma Holdings Ltd , ("RP Holdings ") through our controlling ownership ofRP Holdings' Class A ordinary shares (the "RP Holdings Class A Interests") andRP Holdings' Class B ordinary shares (the "RP Holdings ClassB Interests "). We includeRP Holdings and its subsidiaries in our consolidated financial statements.RP Holdings is the sole owner of RPI 2019 ICAV, which is an Irish collective asset management entity formed to facilitate our Exchange Offer Transactions. As a result of the Exchange Offer Transactions, we own, through our subsidiary RPI 2019Intermediate Finance Trust , aDelaware statutory trust ("RPI Intermediate FT"), an 82% economic interest in Old RPI. Through our 82% indirect ownership of Old RPI, we are legally entitled to 82% of the economics of Old RPI's wholly-owned subsidiaries,RPI Finance Trust , aDelaware statutory trust ("RPIFT") andRPI Acquisitions (Ireland), Limited ("RPI Acquisitions"), an Irish private limited company, and 66% ofRoyalty Pharma Collection Trust , aDelaware statutory trust ("RPCT"). The remaining 34% of RPCT is owned by theLegacy Investors Partnerships and Royalty Pharma Select Finance Trust , aDelaware statutory trust ("RPSFT"), which is wholly owned by Royalty Pharma Select, an Irish unit trust. From the Exchange Date until the expiration of the Legacy Investors Partnerships' investment period onJune 30, 2020 (the "Legacy Date"), the Legacy Investors Partnerships had the option to participate proportionately in any investment made by Old RPI. Following the Legacy Date, Old RPI ceased making new investments and each of Old RPI and the Legacy Investors Partnerships became legacy entities. Following the Legacy Date, we have made and plan to make new investments solely through our subsidiaries, including RPI Intermediate FT. 35 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Following management's determination that a high degree of common ownership exists inRoyalty Pharma both before and after the Exchange Date,Royalty Pharma recognized Old RPI's assets and liabilities at the carrying value reflected on Old RPI's balance sheet as of the Exchange Date. Old RPI is our predecessor for financial reporting purposes. The results of operations in the following discussion is comprised of the financial results of Old RPI prior to the Reorganization Transactions, RPI 2019 ICAV subsequent to the Reorganization Transactions and before the consummation of the IPO, andRoyalty Pharma plc subsequent to the consummation of the IPO.
Understanding Our Financial Reporting
In accordance with generally accepted accounting principles inthe United States ("GAAP"), most of the royalties we acquire are treated as investments in cash flow streams and are thus classified as financial assets. These investments have yield components that most closely resemble loans measured at amortized cost under the effective interest accounting methodology. Under this accounting methodology, we calculate the effective interest rate on each financial royalty asset using a forecast of the expected cash flows to be received over the life of the financial royalty asset relative to the initial acquisition price. The yield, which is calculated at the end of each reporting period and applied prospectively, is then recognized via accretion into our income at the effective rate of return over the expected life of the financial royalty asset. The preparation of our financial statements in this manner requires the use of estimates, judgments and assumptions that affect both our reported assets and liabilities and our income and revenue and expenses. The most significant judgments and estimates applied by management are associated with the measurement of income derived from our financial royalty assets, including management's judgment in forecasting the expected future cash flows of the underlying royalties and the expected duration of the financial royalty asset. Our cash flow forecasts are generated and updated each reporting period by manually compiling sell-side equity research analysts' consensus estimates for each of the products in which we own royalties. We then calculate our expected royalty cash flows using these consensus forecasts. In any given reporting period, any decline in the expected future cash flows associated with a financial royalty asset is recognized as a provision which is expensed through our income statement as a non-cash charge. As a result of the non-cash charges associated with applying the effective interest method accounting methodology, our income statement activity in respect of many of our royalties can be volatile and unpredictable. Small declines in sell-side equity research analysts' consensus forecasts over a long time horizon can result in an immediate non-cash income statement expense recognition, even though the applicable cash inflows will not be realized for many years into the future. For example, in late 2014 we acquired the cystic fibrosis franchise royalty, which is classified as a financial royalty asset. Beginning in the second quarter of 2015, declines in near-term sales forecasts of sell-side equity research analysts caused us to recognize non-cash provision expenses to the income statement and build up a corresponding cumulative allowance which reduced the gross balance for this financial royalty asset. Over the course of 10 quarters, we recognized non-cash provision expenses as a result of these changes in forecasts including non-cash provision expense of$743.2 million in 2016, ultimately reaching a peak cumulative allowance of$1.30 billion bySeptember 30, 2017 related to this financial royalty asset. With the approval of the Vertex triple combination therapy, Trikafta, inOctober 2019 , sell-side equity research analysts' consensus forecasts increased to reflect the larger addressable market and the increase in the expected duration of the Trikafta royalty. While small reductions in the cumulative allowance for the cystic fibrosis franchise were recognized as provision income in 2017 and 2018, there remained a$1.10 billion cumulative allowance that was fully reduced by$1.10 billion in 2019 as a result of an increase in sell-side equity research analysts' consensus forecasts associated with the Trikafta approval. This example illustrates the volatility caused by our accounting model. Therefore, management believes investors should not look to income from royalties and the associated provision for changes in future cash flows as a measure of our near-term financial performance or as a source for predicting future income or growth trends. Our operations have historically been financed primarily with cash flows generated by our royalties. Due to the nature of our accounting methodology for our financial royalty assets, there is no direct correlation between our income from royalties and our royalty receipts. As noted above, income from such royalties is measured at amortized cost under the effective interest method accounting methodology. Given the importance of cash flows to management's operation of the business and their predictability, management uses royalty receipts as the primary measure of our operating performance. Royalty receipts refer to the summation of the following line items from our GAAP Statement of Cash Flows: Cash collections from financial royalty assets, Cash collections from intangible royalty assets, Other royalty cash collections, Proceeds from available for sale debt securities, and Distributions from non-consolidated affiliates. 36 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) In addition to analyzing our results on a GAAP basis, management also reviews our results on a non-GAAP basis. The closest comparable GAAP measure to each of the non-GAAP measures that management review is Net cash provided by operating activities. The key non-GAAP metrics we focus on are Adjusted Cash Receipts, Adjusted EBITDA and Adjusted Cash Flow, each of which is further discussed in the section titled "Non-GAAP Financial Results." Adjusted Cash Receipts and Adjusted Cash Flow are used by management as key liquidity measures in the evaluation of our ability to generate cash from operations. Both measures are an indication of the strength of the Company and the performance of the business. Management uses Adjusted Cash Flow to compare its performance against non-GAAP adjusted net income used by companies in the biopharmaceutical industry. Adjusted EBITDA, which is derived from Adjusted Cash Receipts, is used by our lenders to assess our ability to meet our financial covenants.
Refer to the section titled "Non-GAAP Reconciliations" for additional discussion of management's use of non-GAAP measures as supplemental financial measures.
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ROYALTY PHARMA PLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Portfolio Overview
Our portfolio consists of royalties on more than 45 marketed therapies and nine
development-stage product candidates. The therapies in our portfolio address
therapeutic areas such as rare disease, cancer, neurology, infectious disease,
hematology and diabetes, and are delivered to patients across both primary and
specialty care settings. The table below includes royalty cash receipts for the
three and nine months ended September 30, 2021 and 2020 in order of contribution
to income for the nine months ended September 30, 2021 .
Three Months Ended Nine Months Ended
(in thousands) September 30, September 30,
Marketer Therapeutic area 2021 2020 2021 2020
Products
Cystic fibrosis franchise (1) Vertex Rare disease $ 182,876 $ 156,952 $ 505,708 $ 392,474
Tysabri Biogen Neurology 95,805 76,617 274,796 252,941
Imbruvica AbbVie/Johnson & Johnson Cancer 87,924 77,816 264,348 237,038
Promacta Novartis Hematology 48,151 39,734 124,617 102,135
Xtandi Pfizer, Astellas Cancer 40,237 38,498 117,049 107,406
Januvia, Janumet, Other DPP-IVs
(2) Merck, others Diabetes 37,934 34,485 113,133 104,132
HIV franchise (3) Gilead, others Infectious disease 1,858 66,869 76,981 215,448
Nurtec ODT/Biohaven payment (4) Biohaven Neurology 17,948 227 51,170 227
Prevymis Merck Infectious disease 9,929 6,786 27,331 13,199
Farxiga/Onglyza AstraZeneca Diabetes 9,321 8,290 26,996 16,547
Cabometyx/Cometriq Exelixis, Ipsen, Takeda Cancer 12,038 - 22,167 -
Tremfya Johnson & Johnson Immunology 16,610 - 16,610 -
Crysvita Ultragenyx, Kyowa Kirin Rare disease 4,576 3,384 12,092 6,004
Emgality Lilly Neurology 4,542 2,598 11,356 6,811
Evrysdi Roche Rare disease 5,897 - 10,546 -
Erleada Johnson & Johnson Cancer 3,736 2,104 9,957 5,314
IDHIFA Bristol Myers Squibb Cancer 3,079 3,282 8,568 3,282
Trodelvy Gilead Cancer 2,521 833 8,118 833
Orladeyo BioCryst Rare disease 2,502 - 3,471 -
Tazverik Epizyme Cancer 958 166 2,165 262
Other products (5) 123,761 69,819 262,181 253,028
Total royalty receipts$ 712,203 $ 588,460 $ 1,949,360
(1) The cystic fibrosis franchise includes the following approved products: Kalydeco, Orkambi, Symdeko/Symkevi, and Trikafta/Kaftrio. (2) Januvia, Janumet, Other DPP-IVs include the following approved products: Tradjenta, Onglyza, Kombiglyze, Galvus, Eucreas and Nesina. The Other DPP-IVs are marketed byBoehringer Ingelheim , AstraZeneca, Novartis and Takeda. (3) The HIV franchise includes the following approved products: Atripla, Truvada, Emtriva, Complera, Stribild, Genvoya, Descovy, Odefsey, Symtuza and Biktarvy. Royalties are received on the emtricitabine portion of sales only. (4) Includes royalty receipts for Nurtec ODT of$2.3 million and$4.3 million for the three and nine months endedSeptember 30, 2021 , respectively, and quarterly redemptions of$15.6 million of the Series A Biohaven Preferred Shares (presented as Proceeds from available for sale debt securities on the Statement of Cash Flows) in 2021. (5) Other products primarily include royalties on the following products: Bosulif (a product co-developed by our joint venture investee, Avillion, for which receipts are presented as Distributions from non-consolidated affiliates on the Statement of Cash Flows), Letairis, Lyrica, Cimzia, Entyvio, Lexiscan, Mircera, Myozyme, Nesina, Soliqua and a one-time$21.3 million distribution from Avillion in respect of the Merck KGaA Asset (defined below) in the three months endedJune 30, 2020 , for which the receipt is presented as Distributions received from non-consolidated affiliates in both the operating and investing section of the Statement of Cash Flows. In the three months endedSeptember 30, 2021 , we collected a one-time$45.0 million milestone payment on Soliqua. Subsequent to the Exchange Offer Transactions, other products also includes contributions from the Legacy SLP Interest (defined below). 38 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Financial Overview Financial highlights •Net cash provided by operating activities totaled$1.5 billion and$1.5 billion for the nine months endedSeptember 30, 2021 and 2020, respectively. Net cash provided by operating activities is the closest comparable GAAP financial measure to the supplemental non-GAAP liquidity measures that follow. •Adjusted Cash Receipts (a non-GAAP metric) totaled$1.6 billion and$1.3 billion for the nine months endedSeptember 30, 2021 and 2020, respectively. •Adjusted EBITDA (a non-GAAP metric) totaled$1.5 billion and$1.2 billion for the nine months endedSeptember 30, 2021 and 2020, respectively. •Adjusted Cash Flow (a non-GAAP metric) totaled$1.3 billion and$1.1 billion for the nine months endedSeptember 30, 2021 and 2020, respectively. 39 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Understanding Our Results of Operations
In connection with our IPO,Royalty Pharma plc became a holding company whose principal asset is a controlling equity interest inRP Holdings , which is the sole equity owner of RPI 2019 ICAV, an entity that is included in our condensed consolidated financial statements. We report non-controlling interest related to four minority interests in our subsidiaries held by third parties.
1. The first minority interest is attributable to the Legacy Investors Partnerships' 18% ownership interest in Old RPI. The value of this non-controlling interest will decline over time as the assets in Old RPI expire.
2. The second minority interest is attributable to theRP Holdings' Class C ordinary share (the "RP Holdings ClassC Special Interest") held byRPI EPA Holdings, LP ("EPA Holdings "), an affiliate of the Manager. Income will not be allocated to this non-controlling interest until certain conditions are met, which we do not expect to occur for several years. 3. The third minority interest is attributable to the RP Holdings ClassB Interests held indirectly by the Continuing Investors Partnerships, which represent an approximate 29% ownership interest inRP Holdings as ofSeptember 30, 2021 and are exchangeable for our Class A ordinary shares. The value of this non-controlling interest will decline over time if the investors who indirectly own the RP Holdings ClassB Interests exchange those shares for our Class A ordinary shares. During the three and nine months endedSeptember 30, 2021 , 2,503 thousand and41,313 thousand RP Holdings ClassB Interests were exchanged for our Class A ordinary shares, respectively. 4. The fourth minority interest is attributable to a de minimis interest in RPCT held by RPSFT as a result of a 2011 reorganization transaction. The value of this non-controlling interest will decline over time as the assets in RPCT expire and is expected to be substantially eliminated by the end of 2022. The fourth non-controlling interest related to ownership in RPCT held by RPSFT, is the only non-controlling interest that existed prior to the Exchange Offer Transactions. The non-controlling interest related to theLegacy Investors Partnerships' 18% ownership interest in Old RPI is reflected in our financial statements from and after the Exchange Date. The other two non-controlling interests are reflected in our financial statements from and after the date of our IPO. All of the results of operations ofRP Holdings , Old RPI and RPCT are consolidated into our financial statements. Following the IPO,EPA Holdings is entitled to receive Equity Performance Awards through its RP Holdings ClassC Special Interest. Equity Performance Awards owed toEPA Holdings will be recognized as an equity transaction when the obligation becomes due and will impact the income allocated to non-controlling interest related to the RP Holdings ClassC Special Interest at that time. We do not currently expect any material Equity Performance Awards to be payable until the mid-2020s.
Total income and other revenues
Total income and other revenues is primarily comprised of income from our
financial royalty assets, royalty revenue from our intangible royalty assets,
and royalty income arising from successful commercialization of products
developed through joint R&D funding arrangements. Most of our royalties on both
approved products and development-stage product candidates are classified as
financial assets as our ownership rights are generally passive in nature. In
instances in which we acquire a royalty asset that does include more substantial
rights or ownership of the underlying intellectual property, we classify such
royalty assets as intangible assets.
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ROYALTY PHARMA PLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We recognize interest income related to our financial royalty assets. Royalty
revenue relates solely to revenue from our DPP-IV patent estate for which the
patent rights have been licensed to various counterparties. For the three and
nine months ended September 30, 2021 and 2020, the royalty payors accounting for
10% or more of our total income and other revenues in any one period are shown
in the table below:
Three Months Ended September 30, Nine Months Ended September 30,
Royalty payor Royalty asset 2021 2020 2021 2020
Vertex Cystic fibrosis franchise 33 % 27 % 33 % 28 %
AbbVie Imbruvica 16 % 19 % 17 % 19 %
HIV franchise, Letairis, * 14 % * 15 %
Gilead Lexiscan, Trodelvy (1)
Biogen Tysabri * 10 % * 11 %
(1) We began recognizing income related to Trodelvy in the three months ended
June 30, 2020 .
* Represents less than 10%.
Income from financial royalty assets
Our financial royalty assets represent investments in cash flow streams with yield components that most closely resemble loans measured at amortized cost under the effective interest method. We calculate the effective interest rate using forecasted expected cash flows to be received over the life of the royalty asset relative to the initial acquisition price. Interest income is recognized at the effective rate of return over the expected life of the asset, which is calculated at the end of each reporting period and applied prospectively. As changes in sell-side equity research analysts' consensus estimates are updated on a quarterly basis, the effective rate of return changes. For example, if sell-side equity research analysts' consensus forecasts increase, the yield to derive income on a financial royalty asset will increase and result in higher income for subsequent periods. Variables affecting the recognition of interest income from financial royalty assets on individual products under the prospective effective interest method include any one of the following: (1) additional acquisitions, (2) changes in expected cash flows of the underlying pharmaceutical products, derived primarily from sell-side equity research analysts' consensus forecasts, (3) regulatory approval of additional indications which leads to new cash flow streams, (4) changes to the estimated duration of the royalty (i.e., patent expiration date) and (5) amounts and timing of royalty receipts. Our financial royalty assets are directly linked to sales of underlying pharmaceutical products whose life cycle typically peaks at a point in time, followed frequently by declining sales trends due to the entry of generic competition, resulting in natural declines in the asset balance and periodic interest income over the life of our royalties. The recognition of interest income from royalties requires management to make estimates and assumptions around many factors, including those impacting the variables noted above.
Revenue from intangible royalty assets
Revenue from intangible royalty assets is derived from our Januvia, Janumet and other DPP-IV patents classified as intangible royalty assets.
Other royalty income
Other royalty income primarily includes income from former royalties for which
the asset balances have been fully amortized and royalty income from synthetic
royalties arising out of R&D funding arrangements. Occasionally, a royalty asset
may be amortized on an accelerated basis due to collectability concerns, which,
if resolved, may result in future cash collections when no financial royalty
asset remains. Similarly, we may continue to collect royalties on a financial
royalty asset beyond the estimated patent expiration date by which the financial
asset was amortized in full. In each scenario where a financial royalty asset
has been fully amortized, income from such royalty is recognized as Other
royalty income.
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--------------------------------------------------------------------------------ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Provision for changes in expected cash flows from financial royalty assets
The provision for changes in expected future cash flows from financial royalty assets includes the following:
•the movement in the cumulative allowance for changes in expected future cash flows, and •expense or income related to the provision for current expected credit losses subsequent to adoption of ASU 2016-13 onJanuary 1, 2020 . The provision for changes in expected cash flows is the current period activity resulting from adjustments to the cumulative allowance for changes in expected cash flows, which is netted against the Financial royalty assets, net balance on the condensed consolidated balance sheets. As discussed above, income is accreted on our financial royalty assets using the effective interest method. As we update our forecasted cash flows on a periodic basis and recalculate the present value of the remaining future cash flows, any shortfall when compared to the carrying value of the financial royalty asset is recorded directly to the income statement through the line item Provision for changes in expected future cash flows from financial royalty assets. If, in a subsequent period, there is an increase in expected cash flows or if actual cash flows are significantly greater than cash flows previously expected, we reduce the cumulative allowance previously established for a financial royalty asset for the incremental increase in the present value of cash flows expected to be collected. This results in a credit to provision expense. Most of the same variables and management's estimates affecting the recognition of interest income on our financial royalty assets also impact the provision. In any period, we will recognize provision income (i.e., a credit to the provision) or expense as a result of the following factors: (1) changes in expected cash flows of the underlying pharmaceutical products, derived primarily from sell-side equity research analysts' consensus forecasts, (2) regulatory approval of additional indications which leads to new cash flow streams, (3) changes to the estimated duration of the royalty (i.e., patent expiration date) and (4) amounts and timing of royalty receipts. Upon the adoption onJanuary 1, 2020 of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), we recorded a cumulative adjustment to Retained earnings of$192.7 million to recognize an allowance for current expected credit losses on our portfolio of financial royalty assets. The Provision for changes in expected cash flows from financial royalty assets reflects the activity for the period that relates to the change in estimates applied to calculate the allowance for current expected credit losses, namely any new financial royalty assets with limited protective rights and changes in the underlying cash flow forecasts used in the effective interest model to measure income from our financial royalty assets.
R&D funding expense
R&D funding expense consists of (1) upfront R&D payments we have made to counterparties to acquire royalties on development-stage product candidates and (2) ongoing R&D expense to fund development-stage product candidates undergoing clinical trials with our partners in exchange for royalties if the products are successfully developed and commercialized. These expenditures relate to the activities performed by our counterparties to develop and test new products, to test existing products for treatment in new indications, and to ensure product efficacy and regulatory compliance prior to launch.
General and administrative expenses
General and administrative ("G&A") expenses primarily include Operating and Personnel Payments (defined below), legal expenses, other expenses for professional services and share-based compensation.
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--------------------------------------------------------------------------------ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Beginning in 2020, the Operating and Personnel Payments paid to our Manager were significantly higher than they were in historical periods. Prior to the Reorganization Transactions, the operating and personnel payments were fixed, growing at 5% annually and not linked to any financial line item. Under the management agreement which is effective from the Exchange Date (the "Management Agreement"), we pay quarterly operating and personnel expenses to the Manager or its affiliates ("Operating and Personnel Payments") equal to 6.5% of the Adjusted Cash Receipts for each quarter and 0.25% of the GAAP value of our security investments as of the end of each quarter. The operating and personnel payments for Old RPI, an obligation of the Legacy Investors Partnerships as a non-controlling interest in Old RPI and for which the expense is reflected in our net income, is payable in equal quarterly installments and is calculated as the greater of$1 million per quarter and 0.3125% of royalties from Royalty Investments (as defined in the limited partnership agreements of the Legacy Investors Partnerships). The expenses incurred in respect of Operating and Personnel Payments are expected to comprise the most significant component of G&A expenses on an ongoing basis.
Equity in (earnings)/loss of non-consolidated affiliates
Legacy SLP Interest
In connection with the Exchange Offer Transactions, we acquired a new equity method investment from the Continuing Investors Partnerships in the form of a special limited partnership interest in the Legacy Investors Partnerships (the "Legacy SLP Interest") in exchange for issuing shares in our subsidiary. The Legacy SLP Interest entitles us to the equivalent of performance distribution payments that would have been paid to the general partner of the Legacy Investors Partnerships and a performance income allocation on a similar basis. The performance income allocation attributable to us is equal to the general partner's former contractual rights to the income of theLegacy Investors Partnerships. As the Legacy Investors Partnerships no longer participates in investment opportunities, the value of the Legacy SLP Interest is expected to decline over time. Our equity method investee, the Legacy Investors Partnerships, also owns a non-controlling interest in Old RPI.
The Avillion Entities
During 2014, we entered into an agreement with our equity method investeeAvillion Financing I, LP ("Avillion I") to invest up to$46.0 million over three years to fund a portion of the costs of a pivotal Phase 3 study for Pfizer's Bosulif to expand its label into front-line chronic myeloid leukemia. TheU.S. Food and Drug Administration ("FDA") approved a supplemental New Drug Application ("sNDA") for Pfizer's Bosulif inDecember 2017 , which triggered a series of contractual fixed payments from Pfizer to Avillion I over a 10-year period, which we recognize through receipt of Distributions from non-consolidated affiliates on the Statement of Cash Flows. InMarch 2017 , we entered into an agreement withBAv Financing II, LP ("Avillion II", or, together with Avillion I, the "Avillion Entities"), which was amended in 2019, to invest approximately$19.0 million to fund approximately 50% of the costs of a Phase 2 clinical trial for the use of Merck KGaA's anti-IL 17 nanobody M1095 (the "Merck KGaA Asset") for the treatment of psoriasis in exchange for certain milestone and royalty payments. Our involvement in the development for the Merck KGaA Asset ceased during the three months endedJune 30, 2020 and we do not expect to record significant earnings or losses in the future related to this investment. In 2018, we entered into an agreement with Avillion II, which was amended inJuly 2021 , to fund up to approximately$122.5 million over multiple years to fund a portion of the costs for Phase 2 and 3 clinical trials of Avillion II, who simultaneously entered into a co-development agreement with AstraZeneca to advance PT027 (the "AZ Asset") through a global clinical development program for the treatment of asthma in exchange for royalties, a series of success-based milestones and other potential payments.
The business model of the Avillion Entities includes partnering with global biopharmaceutical companies to perform R&D in exchange for success-based milestones and/or royalties once products are commercialized.
43
--------------------------------------------------------------------------------ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Other (income)/expense, net Other (income)/expense, net primarily includes the change in fair market value of our equity securities, the unrealized losses/(gains) on our available for sale debt securities, including related forwards and derivatives. Other (income)/expense, net also includes losses on extinguishment of debt and interest income.
Net income attributable to non-controlling interest
Prior to the Exchange Date, the net income attributable to non-controlling interest relates to RPSFT's 20% share of earnings in RPCT, which is a consolidated subsidiary of Old RPI. We expect net income attributable to this non-controlling interest to decline over time as the assets in RPCT expire and to be substantially eliminated by the end of 2022. As of and following the Exchange Date, the net income attributable to non-controlling interest also includes the Legacy Investors Partnerships' approximately 18% share of earnings in Old RPI. As theLegacy Investors Partnerships no longer participate in investment opportunities, the related net income attributable to this non-controlling interest is expected to decline over time. In periods subsequent to our IPO, this line item also includes net income attributable to the RP Holdings ClassB Interests held by the Continuing Investors Partnerships, and will include net income attributable to the ClassC Special Interest held byEPA Holdings once certain conditions have been met. Net income attributable to the non-controlling interest related to theRP Holdings ClassB Interests held by the Continuing Investors Partnerships will decline over time if the investors who indirectly own the RP Holdings ClassB Interests exchange those shares for our Class A ordinary shares. 44 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Results of Operations
For the three and nine months ended
The comparison of our historical results of operations for the three and nine
months ended
Three Months Ended
(in thousands) September 30, Change Nine Months Ended September 30, Change
2021 2020 $ % 2021 2020 $ %
Income and other revenues:
Income from financial royalty assets $ 505,832 $ 498,515 $ 7,317 1.5 % $ 1,538,871 $ 1,435,536 $ 103,335 7.2 %
Revenue from intangible royalty assets 63,406 34,550 28,856 83.5 % 139,594 102,978 36,616 35.6 %
Other royalty income 16,535 5,334 11,201 210.0 % 35,298 11,696 23,602 201.8 %
Total income and other revenues 585,773 538,399 47,374 8.8 % 1,713,763 1,550,210 163,553 10.6 %
Operating expenses:
Provision for changes in expected cash
flows from financial royalty assets 137,837 (33,792) 171,629 (507.9) % 186,337 101,498 84,839 83.6 %
Research and development funding
expense 90,500 5,096 85,404 1,675.9 % 96,263 18,510 77,753 420.1 %
Amortization of intangible royalty
assets 5,796 5,796 - - % 17,200 17,262 (62) (0.4) %
General and administrative expenses 48,588 50,732 (2,144) (4.2) % 136,665 131,596 5,069 3.9 %
Total operating expenses, net 282,721 27,832 254,889 915.8 % 436,465 268,866 167,599 62.3 %
Operating income 303,052 510,567 (207,515) (40.6) % 1,277,298 1,281,344 (4,046) (0.3) %
Other (income)/expense
Equity in earnings of non-consolidated
affiliates (2,749) (13,743) 10,994 (80.0) % (18,532) (33,961) 15,429 (45.4) %
Interest expense 44,327 31,444 12,883 41.0 % 119,168 119,217 (49) - %
Other expense/(income), net 39,678 (131,388) 171,066 (130.2) % (10,868) (139,238) 128,370 (92.2) %
Total other expense/(income), net 81,256 (113,687) 194,943 (171.5) % 89,768 (53,982) 143,750 (266.3) %
Consolidated net income 221,796 624,254 (402,458) (64.5) % 1,187,530 1,335,326 (147,796) (11.1) %
Net income attributable to
non-controlling interest 119,867 333,622 (213,755) (64.1) % 575,706 531,380 44,326 8.3 %
Net income attributable to controlling
interest $ 101,929 $ 290,632 $ (188,703) (64.9) % $ 611,824 $ 803,946 $ (192,122) (23.9) %
45--------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Total income and revenues
Income from financial royalty assets
Income from financial royalty assets by product for our top products for the three and nine months endedSeptember 30, 2021 and 2020 is as follows, in order of contribution to income for the nine months endedSeptember 30, 2021 : (in thousands) Three Months Ended September 30, Nine Months Ended Change September 30, Change 2021 2020 $ % 2021 2020 $ % Cystic fibrosis franchise$ 192,832 $ 147,924 $ 44,908 30.4 %$ 563,245 $ 436,968 $ 126,277 28.9 % Imbruvica 94,626 99,709 (5,083) (5.1) % 290,056 295,176 (5,120) (1.7) % Tysabri 54,335 56,111 (1,776) (3.2) % 156,083 166,341 (10,258) (6.2) % Xtandi 28,527 26,217 2,310 8.8 % 81,245 75,453 5,792 7.7 % HIV franchise - 59,338 (59,338) (100.0) % 67,802 188,840 (121,038) (64.1) % Tazverik 18,818 19,196 (378) (2.0) % 56,833 35,748 21,085 59.0 % Other 116,694 90,020 26,674 29.6 % 323,607 237,010 86,597 36.5 % Total income from financial royalty assets$ 505,832 $ 498,515 $ 7,317 1.5 %$ 1,538,871 $ 1,435,536 $ 103,335 7.2 %
Three months ended
Income from financial royalty assets increased by$7.3 million , or 1.5%, in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , primarily driven by the performance of the cystic fibrosis franchise, including additional interest income attributable to the residual royalty interest that we acquired inOctober 2020 . We also recorded$26.2 million in income in the three months endedSeptember 30, 2021 related to new assets acquired subsequent to the three months endedSeptember 30, 2020 , primarily Cabomeytx/Cometriq, Tremfya and Orladeyo. The increase in income was partially offset by the maturity of our royalties from the HIV franchise in the three months endedSeptember 30, 2021 .
Nine Months Ended
Income from financial royalty assets increased by$103.3 million , or 7.2%, in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , primarily driven by strong performance from the cystic fibrosis franchise. Additionally, we recorded$49.7 million of income from financial royalty assets in the nine months endedSeptember 30, 2021 related to new assets acquired subsequent to the nine months endedSeptember 30, 2020 , primarily Cabomeytx/Cometriq, Orladeyo, Oxlumo and Tremfya. The increase in income was partially offset by declines from maturing assets, mainly the maturity of our royalties from the HIV franchise.
Revenue from intangible royalty assets
Three months ended
Revenue from intangible royalty interests increased by$28.9 million , or 83.5%, in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , primarily related to the expected recovery of underpaid royalties on Tradjenta of approximately$21.7 million based on a legal judgement received in a litigation withBoehringer Ingelheim .
Nine Months Ended
Revenue from intangible royalty interests increased by$36.6 million , or 35.6%, in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , primarily related to the expected recovery of underpaid royalties on Tradjenta of approximately$21.7 million based on a legal judgement received in a litigation withBoehringer Ingelheim . 46 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Other royalty income
Three months ended
Other royalty income increased by$11.2 million , or 210.0%, in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , primarily related to income from Letairis and the HIV franchise, financial royalty assets that were fully amortized byJune 30, 2021 , but for which we still expect minimal residual royalty income. Other royalty income also includes income from Nurtec ODT and Trodelvy that arose from our R&D funding agreements with Biohaven and Immunomedics, respectively.
Nine Months Ended
Other royalty income increased by$23.6 million , or 201.8%, in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , primarily related to income from Trodelvy, Letairis, Nurtec ODT and the HIV franchise.
Provision for changes in expected cash flows from financial royalty assets
The breakdown of our provision for changes in expected cash flows includes the •the movement in the cumulative allowance for changes in expected future cash flows, and •expense or income related to the provision for current expected credit losses subsequent to the adoption of ASU 2016-13 onJanuary 1, 2020 . As the former activity is a combination of income and expense items, the provision breakdown by product, exclusive of the provision for current expected credit losses, is as follows, based on the largest contributors to each period's income or expense: (in thousands) Three Months Ended Three Months Ended September 30, September 30, Product 2021 Product 2020 Tazverik$ 115,546 Cystic fibrosis franchise$ (98,381) Xtandi 58,917 Xtandi (53,142) Cabometyx/Cometriq 12,022 Crysvita (44,263) Promacta 9,682 Nesina (19,900) Nesina 2,506 Tysabri 127,241 Other (2,261) Other 24,589 Total provision, exclusive of 196,412 Total provision, exclusive of (63,856) provision for credit losses provision for credit losses Provision for current expected (58,575) Provision for current expected 30,064 credit losses credit losses Total provision$ 137,837 Total provision$ (33,792) (in thousands) Nine Months Ended Nine Months Ended September 30, September 30, Product 2021 Product 2020 Tazverik$ 176,937 Tysabri$ 89,805 Imbruvica 107,542 Imbruvica 34,664 Emgality 54,902 Soliqua 25,977 Cabometyx/Cometriq 40,499 Xtandi (166,361) Tysabri (112,720) Nesina (25,593) Other (57,480) Other 4,259 Total provision, exclusive of 209,680 Total provision, exclusive of (37,249) provision for credit losses provision for credit losses Provision for current expected (23,343) Provision for current expected 138,747 credit losses credit losses Total provision$ 186,337 Total provision$ 101,498 47
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ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Three months ended
In the three months endedSeptember 30, 2021 , we recorded provision expense of$137.8 million , of which$196.4 million and$58.6 million related to provision expense for changes in expected cash flows and provision income for current expected credit losses, respectively. We recorded provision expense for Tazverik and Xtandi, primarily due to significant declines in sell-side equity research analysts' consensus forecasts. During the three months endedSeptember 30, 2021 , the provision income for credit losses was driven by a significant decrease in current expected credit losses related to Tazverik as a result of the corresponding significant decline in the financial asset value. In the three months endedSeptember 30, 2020 , we recorded provision income of$33.8 million , of which$63.9 million and$30.1 million related to provision income for changes in expected cash flows and provision expense for current expected credit losses, respectively. We recorded provision income for the cystic fibrosis franchise, Xtandi and Crysvita primarily due to increases in sell-side equity research analysts' consensus forecasts. Offsetting the provision income was provision expense recorded for Tysabri, primarily driven by declines in sell-side equity research analysts' consensus forecasts. During the three months endedSeptember 30, 2020 , the provision expense for current expected credit losses was primarily driven by increases to our portfolio of financial royalty assets, including Nurtec ODT.
Nine Months Ended
In the nine months endedSeptember 30, 2021 , we recorded provision expense of$186.3 million , of which$209.7 million and$23.3 million related to provision expense for changes in expected cash flows and provision income for current expected credit losses, respectively. We recorded provision expense for Tazverik, Imbruvica and Emgality, primarily due to declines in sell-side equity research analysts' consensus forecasts. Offsetting the provision expense was provision income from a significant increase in sell-side equity research analysts' consensus forecasts for Tysabri. During the nine months endedSeptember 30, 2021 , the provision income for credit losses was driven by a significant decrease in current expected credit losses related to Tazverik. The provision income for credit losses was partially offset by provision expense for credit losses recognized as a result of the increases to our portfolio of financial royalty assets, including the incremental$100.0 million financial royalty asset related to the start of the oral zavegepant Phase 3 program and a new royalty interest in Cabometyx/Cometriq. In the nine months endedSeptember 30, 2020 , we recorded provision expense of$101.5 million , of which$37.2 million and$138.7 million related to provision income for changes in expected cash flows and provision expense for current expected credit losses, respectively. We recorded provision expense for Tysabri and Imbruvica, primarily due to declines in sell-side equity research analysts' consensus forecasts. Offsetting the provision expense was provision income for increases in sell-side equity research analysts' consensus forecasts for Xtandi and Nesina. During the nine months endedSeptember 30, 2020 , we recognized provision expense for current expected credit losses, primarily driven by increases to our portfolio of financial royalty assets, including the final two$110.0 million tranches of Tazverik, and Nurtec ODT.
R&D funding expense
Three months ended
R&D funding expense increased by
Nine Months Ended
R&D funding expense increased by
48
--------------------------------------------------------------------------------ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) G&A expenses
Three months ended
G&A expenses were relatively flat in the three months ended
Nine Months Ended
G&A expenses were relatively flat in the nine months ended
Equity in earnings of non-consolidated affiliates
Three months ended
Equity in earnings of non-consolidated affiliates decreased$11.0 million , or 80.0%, in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Equity in earnings from the Legacy SLP Interest was$11.2 million and$24.2 million , in the three months endedSeptember 30, 2021 and 2020, respectively. The decrease in equity in earnings of the Legacy SLP Interest was primarily driven by lower net income attributable to Old RPI in the three months endedSeptember 30, 2021 .
Equity in losses of the Avillion entities was relatively flat in the three
months ended
Nine Months Ended
Equity in earnings of non-consolidated affiliates decreased$15.4 million , or 45.4%, in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Equity in earnings from the Legacy SLP Interest was$41.9 million and$47.6 million in the nine months endedSeptember 30, 2021 and 2020, respectively. The equity in earnings of the Legacy SLP Interest reflects a partial period of equity in earnings subsequent to the Exchange Date in the nine months endedSeptember 30, 2020 . The decrease in equity in earnings of the Legacy SLP Interest was primarily driven by lower net income attributable to Old RPI in the three months endedSeptember 30, 2021 . Equity in losses of the Avillion Entities was$23.4 million and$13.6 million for the nine months endedSeptember 30, 2021 and 2020, respectively. In the nine months endedSeptember 30, 2020 , the equity in losses was smaller due to a one-time gain we recognized related to the cessation of our involvement in the development of the Merck KGaA Asset.
Interest expense
Three months ended
Interest expense increased by$12.9 million , or 41.0%, in the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 , primarily driven by interest expense related to the$1.3 billion senior unsecured notes issued inJuly 2021 ("2021 Notes"). 49 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine Months Ended
Interest expense was relatively flat in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase in interest expense related to the 2021 Notes was offset by the lower interest expense related to the$6.0 billion senior unsecured notes issued inSeptember 2020 (the "2020 Notes"), which had a lower weighted average interest rate compared to the senior secured credit facilities that were in place during the nine months endedSeptember 30, 2020 .
Refer to the "Liquidity and Capital Resources" section for additional discussion of the Notes and our debt refinancings in 2020.
Other expense/(income), net
Three months ended
Other expense, net of
Other income, net was$131.4 million in the three months endedSeptember 30, 2020 , primarily comprised of gains on equity securities of$160.2 million driven by an increase in the share price of our investment in Immunomedics common stock following the announcement of the acquisition of Immunomedics by Gilead. Partially offsetting these gains was a loss on debt extinguishment of$25.1 million recorded in the three months endedSeptember 30, 2020 , which primarily consisted of unamortized loan issuance costs and original issue discount related to our senior secured credit facilities that were written off as a result of the refinancing completed inSeptember 2020 .
Nine Months Ended
Other income, net was$10.9 million in the nine months endedSeptember 30, 2021 , primarily comprised of interest income of$40.5 million related to our Series A Biohaven Preferred Shares. We also recognized losses of$21.4 million related to decreases in the fair market value of our derivative financial instruments and losses of$18.0 million related to equity securities due to a net decrease in the share price of our investees. Other income, net was$139.2 million in the nine months endedSeptember 30, 2020 , primarily comprised of gains on equity securities of$201.0 million , primarily due to an increase in the share price of Immunomedics common stock, which was partially offset by a decrease in share price of our investment in Epizyme common stock. The gains were partially offset by losses on derivative financial instruments of$39.9 million primarily related to a decrease in fair value of our Epizyme warrant and losses on our interest rate swaps due to adverse movements in the LIBOR curve prior to the termination of interest rate swaps inFebruary 2020 . Additionally, we recorded a loss on debt extinguishment of$30.5 million in the nine months endedSeptember 30, 2020 related to the debt refinancings completed in 2020.
Net income attributable to non-controlling interest
Three months ended
Net income attributable to the Legacy Investors Partnerships, which arose inFebruary 2020 in connection with the Exchange Offer Transactions, was$63.4 million in the three months endedSeptember 30, 2021 , a decrease of$62.0 million , compared to the three months endedSeptember 30, 2020 , primarily driven by lower net income attributable to Old RPI in the three months endedSeptember 30, 2021 . Net income attributable to the Continuing Investors Partnerships, which arose in connection with the IPO, was$42.6 million in the three months endedSeptember 30, 2021 , a decrease of$143.7 million compared to the three months endedSeptember 30, 2020 , primarily driven by lower net income attributable toRP Holdings in the three months endedSeptember 30, 2021 .
Net income attributable to RPSFT was
50
--------------------------------------------------------------------------------ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nine Months Ended
Net income attributable to the Legacy Investors Partnerships was$233.4 million and$246.1 million in the nine months endedSeptember 30, 2021 and 2020, respectively. The net income attributable to the Legacy Investors Partnerships reflects a partial period of net income subsequent to the Exchange Date in the nine months endedSeptember 30, 2020 . The decrease in net income attributable to the Legacy Investors Partnerships was primarily driven by lower net income attributable to Old RPI in the nine months endedSeptember 30, 2021 . Net income attributable to the Continuing Investors Partnerships was$294.1 million and$217.9 million , in the nine months endedSeptember 30, 2021 and 2020, respectively. The net income attributable to theContinuing Investors Partnerships reflects a partial period of net income subsequent to the IPO in the nine months endedSeptember 30, 2020 .
Net income attributable to RPSFT was
Key developments and upcoming events relating to our portfolio
The key developments impacting our cash receipts and income and revenue from our royalty interests are discussed below:
Commercial Products
•Cystic fibrosis franchise. InAugust 2020 , Vertex announced that theEuropean Commission (EC) had granted marketing authorization of Kaftrio in a combination regimen with ivacaftor for the treatment of patients with cystic fibrosis ages 12 years and older with one F508del mutation and one minimal function mutation, or two F508del mutations in the CFTR gene.
In
In
InJune 2021 , Vertex announced that the FDA approved Trikafta for the treatment of children with cystic fibrosis ages 6 to 11 who have at least one F508del mutation or have certain mutations that are responsive to Trikafta based on in vitro data. Vertex has also filed a regulatory submission for the use of Kaftrio in children ages 6 to 11 to theEuropean Medicines Agency (EMA). •Tysabri. InJune 2020 , Biogen submitted a supplemental Biologics License Application (sBLA) for a subcutaneous formulation of Tysabri to the FDA. This followed a regulatory submission for a subcutaneous formulation of Tysabri to the EMA inMarch 2020 . InApril 2021 Biogen announced that the EC granted marketing authorization for a subcutaneous injection of Tysabri to treat relapsing-remitting multiple sclerosis. Biogen also announced that it had received a Complete Response Letter (CRL) from the FDA for its sBLA for subcutaneous Tysabri. The CRL indicates that the FDA is unable to approve Biogen's filing as submitted. Biogen announced that it is evaluating the CRL and will determine next steps inthe United States . InAugust 2021 , Biogen announced results from Phase 3b NOVA study evaluation every six-week dosing with Tysabri IV administration in relapsing-remitting multiple sclerosis. Results show that every six-week Tysabri IV administration provides a high level of efficacy in controlling multiple sclerosis disease activity in patients who switched from the approved every four-week dosing regimen.
•Imbruvica. In
InAugust 2020 , the EC granted marketing authorization for Imbruvica in combination with rituximab for the treatment of adult patients with previously untreated CLL. This milestone marked the 11th FDA approval for Imbruvica since it was first approved in 2013 and sixth in CLL. 51 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) InJune 2021 , Phase 3 GLOW study results were announced for Imbruvica in combination with Venetoclax for the treatment of first-line CLL and SLL demonstrated superior progression-free survival versus chlorambucil plus obinutuzumab as a first-line treatment of CLL. The study also showed improved duration of remission and significantly improved depth of remission. AbbVie has indicated that approval could occur in 2022. InAugust 2021 , AbbVie announced that theU.S. District Court for the District of Delaware had issued a decision holding patent rights relating to Imbruvica were valid and infringed by a generic product from Alvogen and Natco. The decision, which is subject to appeal, prohibits regulatory approval of that generic product until the last AbbVie patent expires. Previously, AbbVie entered into several settlement and license agreements with other generic companies. Consequently, Abbvie does not expect any generic product entry prior toMarch 30, 2032 , assuming pediatric exclusivity is granted. •Xtandi. Astellas and Pfizer have indicated that there could be a potential readout of the Phase 3 EMBARK trial for high-risk non-metastatic prostate cancer in 2022, with a primary trial completion date anticipated in 2023.
In
InSeptember 2021 , Astellas Pharma and Pfizer announced that Xtandi plus androgen deprivation therapy (ADT) reduced the risk of death by 34% compared to placebo plus ADT in the Phase 3ARCHES study in men with mHSPC. Overall survival was a key secondary endpoint in the study.
•Trodelvy. In
InSeptember 2020 , Gilead and Immunomedics announced that Gilead would acquire Immunomedics for approximately$21 billion in cash and the transaction closed inOctober 2020 . In 2018, we entered into a partnership with Immunomedics whereby we acquired a tiered sales-based royalty on Trodelvy for$175.0 million and acquired 4,373,178 shares of Immunomedics common stock for$75.0 million . Gilead's acquisition of Immunomedics closed inOctober 2020 , resulting in gross cash proceeds upon redemption of our Immunomedics common stock of approximately$385 million . InApril 2021 , Gilead announced the FDA granted full approval to Trodelvy for adult patients with unresectable locally advanced or metastatic TNBC who have received two or more prior systemic therapies, at least one of them for metastatic disease. The approval is supported by data from the Phase 3 ASCENT study. InApril 2021 , Gilead announced that the FDA granted an accelerated approval of Trodelvy for use in adult patients with locally advanced or metastatic urothelial cancer who have previously received a platinum-containing chemotherapy and either a programmed death receptor-1 (PD-1) or a programmed death-ligand 1 (PD-L1) inhibitor. The accelerated approval was based on data from the international Phase 2, single-arm TROPHY study.
In
InOctober 2021 , Gilead announced that the EMA adopted a positive opinion for Trodelvy as a monotherapy indicated for adult patients with unresectable or metastatic TNBC who have received two or more prior systemic therapies, at least one of them for advanced disease. The final EC decision on the MAA for Trodelvy is anticipated later in 2021. InOctober 2021 , Gilead announced that progression-free survival data from the Phase 3 TROPiCS-02 trial testing Trodelvy versus physician's choice in hormone receptor positive/human epidermal growth factor receptor 2 negative metastatic breast cancer who have previously failed at least two, and no more than four, prior chemotherapy regimens for metastatic disease was expected in the first quarter of 2022. 52 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) •Nurtec ODT. InFebruary 2020 , Biohaven announced that the FDA approved Nurtec ODT for the acute treatment of migraine in adults. The FDA approval of Nurtec ODT triggered a redemption provision related to our investment in the Series A Biohaven Preferred Shares, which entitles us to receive a fixed payment amount of$250.0 million payable in equal quarterly payments fromMarch 31, 2021 throughDecember 31, 2024 . InOctober 2020 , Biohaven announced that the FDA had filed and accepted for review its recently submitted sNDA for Nurtec ODT for the preventive treatment of migraine. The Prescription Drug User Fee Act target date for completion of the FDA review of the preventive application for Nurtec ODT was the second quarter of 2021. InMarch 2021 , Biohaven announced that its filing for rimegepant was submitted and accepted for review by the EMA for the treatment of migraine, inclusive of both acute and preventive treatment.
In
InNovember 2021 , Biohaven announced a strategic collaboration with Pfizer for the commercialization of rimegepant outsidethe United States . Pfizer also gains rights outsidethe United States to zavegepant, which is being studied in an intranasal delivery and an oral formulation in Phase 3 clinical trials for migraine indications.Royalty Pharma is entitled to royalties on annual worldwide net sales of rimegepant (commercialized as Nurtec ODT inthe United States ) and zavegepant. •Evrysdi. InAugust 2020 , the FDA approved Evrysdi, the first at-home, orally administered treatment for spinal muscular atrophy (SMA) in adults and children ages 2 months and older. InMarch 2021 , Roche announced that the EC approved Evrysdi for the treatment of SMA in patients two months of age and older, with a clinical diagnosis of SMA Type 1, Type 2 or Type 3 or with one to four splicing modifier of motor neuron 2 (SMN2) copies.
In
•Orladeyo. InDecember 2020 , BioCryst announced that Orladeyo was approved by the FDA for prophylaxis to prevent attacks of hereditary angioedema (HAE) in patients ages 12 years and older.
In
In
In
•Cabometyx. InJanuary 2021 , Exelixis announced that the FDA approved Cabometyx for patients with advanced renal cell carcinoma (RCC) as a first-line treatment in combination with Bristol Myers Squibb's Opdivo. The approval was based on the Phase 3 CheckMate -9ER trial, in which the combination of Cabometyx and Opdivo significantly improved overall survival while doubling progression-free survival and objective response rate versus sunitinib as a first-line treatment for patients with advanced RCC.
In
InMay 2021 , Exelixis announced results from cohort six of COSMIC-021, a Phase 1b trial evaluating Cabometyx in combination with atezolizumab in patients with locally advanced or metastatic solid tumors, including patients with metastatic castration-resistant prostate cancer (CRPC). In high-risk patients, the combination of Cabometyx and atezolizumab resulted in objective response rates of 27% and 18% per investigator assessment and Blinded Independent Radiology Committee, respectively. 53 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) InJune 2021 , Exelixis and Ipsen announced that COSMIC-312, a Phase 3 trial evaluating Cabometyx in combination with atezolizumab versus sorafenib in patients with previously untreated advanced hepatocellular carcinoma (HCC). The trial met one of its primary endpoints by demonstrating significant improvement in progression-free survival at the planned primary analysis. However, a prespecified interim analysis was not statistically significant for the second primary endpoint of overall survival. Based on the preliminary overall survival data, Exelixis anticipates that the probability of reaching statistical significance at the time of the final analysis is low. Exelixis announced that it plans to present these results at a future medical meeting. Based on recent feedback from the FDA, Exelixis plans to file an sNDA in early 2022 once final OS data is available. InAugust 2021 , Exelixis announced that their partners Takeda and Ono received approval inJapan for Cabometyx in combination with Opdivo for the treatment of unresectable or metastatic RCC. Approval is based on the CheckMate -9ER trial of Cabometyx in combination with Opdivo, which demonstrated superior overall survival and doubled mean progression-free survival and objective response rate versus sunitinib, with a favorable safety profile. InSeptember 2021 , Exelixis announced detailed results from the expanded Cohort 6 of the Phase 1b COSMIC-021 trial of Cabometyx in combination with atezolizumab in patients with metastatic CRPC, which included patients with metastatic CRPC who had been previously treated with novel hormone therapies enzalutamide and/or abiraterone acetate used along with prednisone. Following discussions with FDA, Exelixis will not pursue a regulatory submission for the combination regimen based on cohort 6 of COSMIC-021. CONTACT-02, a global Phase 3 pivotal trial that initiated enrollment inJune 2020 may serve as a basis for future regulatory applications. InSeptember 2021 , Exelixis announced FDA approved Cabometyx for patients with previously treated radioactive iodine-refractory differentiated thyroid cancer. The approval was based on the Phase 3 COSMIC-311 pivotal trial.
Development-Stage Product Candidates
•Gantenerumab: InOctober 2021 , Roche announced that gantenerumab, an anti-amyloid beta antibody developed for subcutaneous administration, has been granted Breakthrough Therapy Designation by the FDA for the treatment of people living with Alzheimer's disease. This designation is based on data showing that gantenerumab significantly reduced brain amyloid plaque, a pathological hallmark of Alzheimer's disease, in the ongoing SCarlet RoAD and Marguerite RoAD open-label extension trials, as well as other studies. •PT027: InSeptember 2021 , AstraZeneca and Avillion announced positive results from MANDALA and DENALI, two Phase 3 trials evaluating PT027 (albuterol/budesonide) in patients with asthma. PT027 is a potential first-in-class inhaled, fixed-dose combination of albuterol, a short-acting beta2-agonist, and budesonide, an inhaled corticosteroid. In MANDALA, PT027 demonstrated a statistically significant and clinically meaningful reduction in the risk of severe exacerbations compared to albuterol, when used as a rescue medicine in response to symptoms. In DENALI, PT027 showed a statistically significant improvement in lung function measured by forced expiratory volume in one second, compared to the individual components albuterol and budesonide, and compared to placebo. The safety and tolerability of PT027 in both trials was consistent with the known profiles of the components. •Oxlumo. InJuly 2021 , Alnylam announced results from ILLUMINATE-C, a phase 3 open-label study of lumasiran in patients of all ages with advanced primary hyperoxaluria type 1 (PH1) associated with progressive decline in renal function. Results from the primary analysis at six months demonstrated a substantial reduction in plasma oxalate from baseline in patients (n=21) with advanced disease, including those on hemodialysis. The safety and tolerability profile of lumasiran following six months of treatment was encouraging across all ages, with no drug related serious adverse events (SAEs) and injection site reactions (ISRs) as the most common adverse event (AE). Based on these results, Alnylam announced that it plans to submit a sNDA for lumasiran with the FDA and a Type II Variation with the EMA in late 2021. •Zavegepant. InOctober 2020 , Biohaven began a one-year long-term safety trial of zavegepant. Biohaven expects a potential NDA filing by end of 2021 if the pivotal acute trial proves to be positive. InMarch 2021 , Biohaven announced that it enrolled the first patient in a Phase 2/3 clinical trial of oral zavegepant for the preventive treatment of migraine. Accordingly, per the agreement with Biohaven announced inAugust 2020 ,Royalty Pharma paid$100 million to Biohaven for the achievement of this milestone, bringing the total zavegepant funding to$250 million . 54 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) •Omecamtiv mecarbil. InNovember 2020 , Amgen, Cytokinetics andServier presented the results of GALACTIC-HF study, a Phase 3 trial of omecamtiv mecarbil in patients with heart failure, at the American Heart Association Scientific Sessions. The trial met the primary composite endpoint of reduction in cardiovascular death or heart failure events, but did not meet the secondary endpoint of reduction in cardiovascular death. Cytokinetics subsequently regained global rights to develop and commercialize omecamtiv mercarbil when Amgen andServier elected to terminate their collaboration agreement effective,May 2021 . Following the Phase 3 results and termination of the collaboration, we recorded a$90 million write-off inDecember 2020 to the royalty investment given the uncertainty around the future of omecamtiv. In the second quarter of 2021, Cytokinetics announced that it has engaged with the FDA in both a Type C meeting and a pre-NDA meeting to inform its plans to submit NDA for omecamtiv mecarbil in the fourth quarter of 2021. The submission will be based on GALACTIC-HF which demonstrated a positive effect on the primary composite endpoint of cardiovascular death or heart failure events in patients with heart failure and reduced ejection fraction who were receiving standard of care plus omecamtiv mecarbil. •Ibrance. InMay 2020 , Pfizer reported that the independent data monitoring committee for the PALLAS trial had concluded after the interim analysis that the PALLAS trial was "unlikely to show a statistically significant improvement in the primary endpoint of invasive disease-free survival." InOctober 2020 , Pfizer announced that the Phase 3 PENELOPE-B trial did not meet the primary endpoint of improved invasive disease-free survival in women with hormone receptor-positive, human epidermal growth factor-negative early breast cancer who have residual invasive disease after completing neoadjuvant chemotherapy. As a result, we will not be entitled to any royalties or milestone payments from this R&D funding arrangement. Non-GAAP Financial Results In addition to analyzing our results on a GAAP basis, management also reviews our results on a non-GAAP basis. There is no direct correlation between income from financial royalty assets and royalty receipts due to the nature of the accounting methodology applied for financial royalty assets. Further, income from financial royalty assets and the provision for changes in expected cash flows related to these financial royalty assets can be volatile and unpredictable. As a result, management places importance on royalty receipts as they are predictable and we use them as a measure of our operating performance. Refer to section titled "Non-GAAP Reconciliations" for additional discussion of management's use of non-GAAP measures as supplemental financial measures and reconciliations from the most directly GAAP comparable measures of Net cash provided by operating activities. Adjusted Cash Receipts is a measure calculated with inputs directly from the Statement of Cash Flows and includes (1) royalty receipts by product: (i) Cash collections from royalty assets (financial assets and intangible assets), (ii) Other royalty cash collections, (iii) Distributions from non-consolidated affiliates, plus (2) Proceeds from available for sale debt securities and less (3) Distributions to non-controlling interest, which represents contractual distributions of royalty receipts and proceeds from available for sale debt securities to our historical non-controlling interest attributable to a de minimis interest in RPCT held by certain legacy investors and to a new non-controlling interest that was created as a result of the Exchange Offer Transactions inFebruary 2020 related to the Legacy Investors Partnerships' ownership of approximately 18% in Old RPI. Adjusted Cash Receipts is most directly comparable to the GAAP measure of Net cash provided by operating activities. Adjusted EBITDA and Adjusted Cash Flow are similar non-GAAP liquidity measures that are both most closely comparable to the GAAP measure, Net cash provided by operating activities. Adjusted EBITDA is important to our lenders and is defined as Adjusted Cash Receipts less Payments for operating and professional costs. Payments for operating and professional costs are comprised of Payments for operating and professional costs and Payments for rebates from the Statement of Cash Flows. Adjusted Cash Flow is defined as Adjusted EBITDA less (1) Ongoing development-stage funding payments, (2) Interest paid, net of interest received, (3) Other (including Derivative collateral posted, net of Derivative collateral received and Termination payments on derivative instruments), and (4) Investments in non-consolidated affiliates, and plus (1) Contributions from non-controlling interest- R&D, all directly reconcilable to the Statement of Cash Flows. 55 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Adjusted Cash Receipts and Adjusted Cash Flow are used by management as key
liquidity measures in the evaluation of our ability to generate cash from
operations. Both measures are an indication of the strength of the Company and
the performance of the business. Management also uses Adjusted Cash Flow to
compare its performance against non-GAAP adjusted net income used by companies
in the biopharmaceutical industry. Adjusted EBITDA, as derived from Adjusted
Cash Receipts, is used by our lenders to assess our ability to meet our
financial covenants.
The table below includes the royalty receipts and non-GAAP financial results for
the three and nine months ended September 30, 2021 and 2020 by product in order
of contribution to income for the nine months ended September 30, 2021 .
Three Months Ended Nine Months Ended Nine-Months
(in thousands) September 30, September 30, Year-to-date Change
2021 2020 2021 2020 $ %
Products
Cystic fibrosis franchise (1)$ 182,876 $ 156,952 $ 505,708 $ 392,474 $ 113,234 28.9 % Tysabri 95,805 76,617 274,796 252,941 21,855 8.6 % Imbruvica 87,924 77,816 264,348 237,038 27,310 11.5 % Promacta 48,151 39,734 124,617 102,135 22,482 22.0 % Xtandi 40,237 38,498 117,049 107,406 9,643 9.0 % Januvia, Janumet, Other DPP-IVs (2) 37,934 34,485 113,133 104,132 9,001 8.6 % HIV franchise (3) 1,858 66,869 76,981 215,448 (138,467) (64.3) % Nurtec ODT/Biohaven payment (4) 17,948 227 51,170 227 50,943 * Prevymis 9,929 6,786 27,331 13,199 14,132 107.1 % Farxiga/Onglyza 9,321 8,290 26,996 16,547 10,449 63.1 % Cabometyx/Cometriq 12,038 - 22,167 - 22,167 - % Tremfya 16,610 - 16,610 - 16,610 - % Crysvita 4,576 3,384 12,092 6,004 6,088 101.4 % Emgality 4,542 2,598 11,356 6,811 4,545 66.7 % Evrysdi 5,897 - 10,546 - 10,546 - % Erleada 3,736 2,104 9,957 5,314 4,643 87.4 % IDHIFA 3,079 3,282 8,568 3,282 5,286 161.1 % Trodelvy 2,521 833 8,118 833 7,285 874.5 % Orladeyo 2,502 - 3,471 - 3,471 - % Tazverik 958 166 2,165 262 1,903 726.3 % Other products (5) 123,761 69,819 262,181 253,028 9,153 3.6 % Total royalty receipts$ 712,203 $ 588,460 $ 1,949,360 $ 1,717,081 $ 232,279 13.5 % Distributions to non-controlling interest (125,427) (116,347) (363,624) (400,893) 37,269 (9.3) %
Adjusted Cash Receipts (non-GAAP)
20.5 %
Payments for operating and
professional costs (53,509) (59,398) (135,272) (129,382) (5,890) 4.6 %
Adjusted EBITDA (non-GAAP) $ 533,267 $ 412,715 $ 1,450,464 $ 1,186,806 $ 263,658 22.2 %
Interest paid, net (64,587) (15,119) (126,755) (94,953) (31,802) 33.5 %
Investments in non-consolidated
affiliates (10,893) - (28,320) (29,262) 942 (3.2) %
Ongoing development-stage funding
payments $ (500) $ (5,095) $ (6,263) $ (18,510) $ 12,247 (66.2) %
Other (18,223) - (16,093) 9,804 (25,897) (264.1) %
Contributions from non-controlling
interest- R&D 2,003 1,107 6,083 6,221 (138) (2.2) %
Adjusted Cash Flow (non-GAAP)
20.7 %
Weighted average Class A ordinary
shares outstanding - diluted 607,174 ** 607,152 **
*Percentage change is not meaningful.
** Prior year figures are not meaningful for comparison purposes.
56
--------------------------------------------------------------------------------ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) The cystic fibrosis franchise includes the following approved products: Kalydeco, Orkambi, Symdeko/Symkevi and Trikafta/Kaftrio. (2) Januvia, Janumet, Other DPP-IVs include the following approved products: Tradjenta, Onglyza, Kombiglyze, Galvus, Eucreas and Nesina. The Other DPP-IVs are marketed byBoehringer Ingelheim , AstraZeneca, Novartis and Takeda. (3) The HIV franchise includes the following approved products: Atripla, Truvada, Emtriva, Complera, Stribild, Genvoya, Descovy, Odefsey, Symtuza and Biktarvy. Royalties are received on the emtricitabine portion of sales only. (4) Includes royalty receipts for Nurtec ODT of$2.3 million and$4.3 million for the three and nine months endedSeptember 30, 2021 , respectively, and quarterly redemptions of$15.6 million of the Series A Biohaven Preferred Shares (presented as Proceeds from available for sale debt securities on the Statement of Cash Flows) in 2021. (5) Other products primarily include royalties on the following products: Bosulif (a product co-developed by our joint venture investee, Avillion, for which receipts are presented as Distributions from non-consolidated affiliates on the Statement of Cash Flows), Letairis, Lyrica, Cimzia, Entyvio, Lexiscan, Mircera, Myozyme, Nesina, Soliqua and a one-time$21.3 million distribution from Avillion in respect of the Merck KGaA Asset in the three months endedJune 30, 2020 , for which the receipt is presented as Distributions received from non-consolidated affiliates in both the operating and investing section of the Statement of Cash Flows. In the three months endedSeptember 30, 2021 , we collected a one-time$45.0 million milestone payment on Soliqua. Subsequent to the Exchange Offer Transactions, other products also includes contributions from the Legacy SLP Interest.
Adjusted Cash Receipts (non-GAAP)
Nine Months Ended
Adjusted Cash Receipts increased by$269.5 million to$1.6 billion in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , primarily driven by an increase in royalty receipts from the cystic fibrosis franchise, including royalty receipts related to the residual interest in the cystic fibrosis franchise that we acquired inOctober 2020 , fixed payments from Biohaven on the Series A Biohaven Preferred Shares and new assets acquired subsequent to the nine months endedSeptember 30, 2020 . Offsetting the increase in royalty receipts is a decline in royalty receipts from maturing assets, primarily the HIV franchise, Lyrica and Letairis. Additionally, we received one-time payments of$45.0 million related to a commercial milestone for Soliqua and$21.3 million from Avillion II in connection with the cessation of our involvement in the Merck KGaA Asset development in the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in Adjusted Cash Receipts is further driven by a decrease in distributions to non-controlling interest, primarily due to a non-recurring distribution to theLegacy Investors Partnerships in connection with the Exchange Offer Transactions that occurred in the three months endedMarch 31, 2020 .
Below we discuss the key drivers of royalty receipts.
Royalty Receipts
•Cystic fibrosis franchise - Royalty receipts from the cystic fibrosis franchise, which includes Kalydeco, Orkambi, Symdeko/Symkevi and Trikafta/Kaftrio, all approved for patients with certain mutations causing cystic fibrosis, increased by$113.2 million in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The increase was driven by a clawback adjustment related to Vertex's agreement with French authorities around reimbursement for Orkambi that reduced royalty receipts in the three months endedMarch 31, 2020 , as well as growth in sales for the overall cystic fibrosis franchise resulting from continued uptake of Trikafta inthe United States and Kaftrio inEurope . Following our acquisition of the residual interest from theCystic Fibrosis Foundation in the three months endedDecember 31, 2020 , we are entitled to all royalty receipts on annual worldwide net sales above$5.8 billion and received royalty receipts related to the residual interest in the cystic fibrosis franchise in the nine months endedSeptember 30, 2021 . •Tysabri - Royalty receipts from Tysabri, which is marketed by Biogen for the treatment of multiple sclerosis, increased by$21.9 million in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , driven by continued patient growth. •Imbruvica - Royalty receipts from Imbruvica, which is marketed by AbbVie and Johnson & Johnson for the treatment of blood cancers and chronic graft versus host disease, increased by$27.3 million in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , driven by continued global penetration in patients with chronic lymphocytic leukemia and favorable pricing. This increase was partially offset by modest market share losses inthe United States , lower new patient starts due to the COVID-19 pandemic as well as the impact of a COVID-19 inventory stocking benefit in the nine months endedSeptember 30, 2020 . 57 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) •Promacta - Royalty receipts from Promacta, which is marketed by Novartis for the treatment of chronic immune thrombocytopenia and aplastic anemia, increased by$22.5 million in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . This growth was driven by increased use in immune thrombocytopenia and as first-line treatment for severe aplastic anemia inthe United States . •Xtandi - Royalty receipts from Xtandi, which is marketed by Pfizer and Astellas for the treatment of prostate cancer, increased by$9.6 million in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , driven by demand across various prostate cancer indications. •Januvia, Janumet, Other DPP-IVs - Royalty receipts from the DPP-IVs for type 2 diabetes, which includes Januvia and Janumet, both marketed by Merck, increased by$9.0 million in nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . •Nurtec ODT - Royalty receipts from Nurtec ODT, marketed by Biohaven for the acute treatment of migraine, were$4.3 million in the nine months endedSeptember 30, 2021 . In addition, as a result of the approval of Nurtec ODT inFebruary 2020 , we received$46.9 million in fixed payments from Biohaven during the nine months endedSeptember 30, 2021 , which represent the first three of 16 consecutive quarterly payments to be received from Biohaven relating to the Series A Biohaven Preferred Shares. •Cabometyx/Cometriq - Royalty receipts from Cabometyx/Cometriq, which is marketed by Exelixis, Ipsen and Takeda, were$22.2 million in the nine months endedSeptember 30, 2021 . We acquired the Cabometyx/Cometriq royalty inMarch 2021 .
•Tremfya - Royalty receipts from Tremfya, which is marketed by Johnson &
Johnson, were
•HIV franchise - Royalty receipts from the HIV franchise, which is based on products marketed by Gilead that contain emtricitabine, including Biktarvy, Genvoya and Truvada, among others, decreased by$138.5 million in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . This decrease was driven by the maturity of our royalties from the HIV franchise in the nine months endedSeptember 30, 2021 .
Distributions to Non-Controlling Interest
Distributions to non-controlling interest decreased by$37.3 million to$363.6 million in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , which positively impacted Adjusted Cash Receipts. The decrease in distributions to non-controlling interest is primarily due to a non-recurring distribution to the Legacy Investors Partnerships in connection with the Exchange Offer Transactions that occurred in the three months endedMarch 31, 2020 . Partially offsetting the decrease was a one-time distribution to non-controlling interest of$7.9 million related to the one-time$45.0 million milestone payment on Soliqua.
Adjusted EBITDA (non-GAAP)
Nine Months Ended
Adjusted EBITDA increased by$263.7 million to$1.5 billion in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 as a result of the factors noted above in "Adjusted Cash Receipts (Non-GAAP)". Payments for operating and professional costs, the only adjustment between Adjusted Cash Receipts and Adjusted EBITDA, increased in 2021 as a result of higher costs for Operating and Personnel Payments under the terms of our Management Agreement offset by a decrease in non-recurring professional services fees, restructuring fees and refinancing fees incurred in the nine months endedSeptember 30, 2020 in connection with the Exchange Offer Transactions and the IPO. 58 --------------------------------------------------------------------------------
ROYALTY PHARMA PLC NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Adjusted Cash Flow (non-GAAP)
Nine Months Ended
Adjusted Cash Flow increased by$219.0 million to$1.3 billion in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily for the same reasons noted above in "Adjusted Cash Receipts (Non-GAAP)." The increase in Adjusted Cash Flow was offset by a$31.8 million increase in net interest paid in the nine months endedSeptember 30, 2021 due to a shift to semi-annual interest payments on the 2020 Notes and a$16.1 million one-time payment related to the settlement of treasury rate lock contracts in connection with the 2021 Notes issuance. Further, the increase in Adjusted Cash Flow was attributed to the lower ongoing development-stage funding requirements under our co-funding agreement with Sanofi and the lower funding requirements by the Avillion entities following the cessation of our involvement in the Merck KGaA Asset development in 2020.
Non-GAAP Reconciliations
Adjusted Cash Receipts, Adjusted EBITDA and Adjusted Cash Flow are non-GAAP
measures presented as supplemental measures to our GAAP financial performance.
These non-GAAP financial measures exclude the impact of certain items and
therefore have not been calculated in accordance with GAAP. In each case,
because our operating performance is a function of our liquidity, the non-GAAP
measures used by management are presented and defined as supplemental liquidity
measures. We caution readers that amounts presented in accordance with our
definitions of Adjusted Cash Receipts, Adjusted EBITDA, and Adjusted Cash Flow
may not be the same as similar measures used by other companies. Not all
companies and analysts calculate the non-GAAP measures we use in the same
manner. We compensate for these limitations by using non-GAAP financial measures
as supplements to GAAP financial measures and by presenting the reconciliations
of the non-GAAP financial measures to their most comparable GAAP financial
measures, in each case being Net cash provided by operating activities.
We believe that Adjusted Cash Receipts and Adjusted Cash Flow provide meaningful
information about our operating performance because the business is heavily
reliant on its ability to generate consistent cash flows and these measures
reflect the core cash collections and cash charges comprising our operating
results. Management strongly believes that our significant operating cash flow
is one of the attributes that attracts potential investors to our business.
In addition, we believe that Adjusted Cash Receipts and Adjusted Cash Flow help
identify underlying trends in the business and permit investors to more fully
understand how management assesses the performance of the Company, including
planning and forecasting for future periods. Adjusted Cash Receipts and Adjusted
Cash Flow are used by management as key liquidity measures in the evaluation of
the Company's ability to generate cash from operations. Both measures are an
indication of the strength of the Company and the performance of the business.
Management uses Adjusted Cash Receipts and Adjusted Cash Flow when considering
available cash, including for decision-making purposes related to funding of
acquisitions, voluntary debt repayments, dividends and other discretionary
investments. Further, these non-GAAP financial measures help management, the
audit committee and investors evaluate our ability to generate liquidity from
operating activities.
Management believes that Adjusted EBITDA is an important non-GAAP measure in
analyzing our liquidity and is a key component of certain material covenants
contained within the Company's credit agreement. Noncompliance with the interest
coverage ratio and leverage ratio covenants under the credit agreement could
result in our lenders requiring the Company to immediately repay all amounts
borrowed. If we cannot satisfy these financial covenants, we would be prohibited
under our credit agreement from engaging in certain activities, such as
incurring additional indebtedness, paying dividends, making certain payments,
and acquiring and disposing of assets. Consequently, Adjusted EBITDA is critical
to the assessment of our liquidity.
Management uses Adjusted Cash Flow to evaluate its ability to generate cash and
performance of the business and to evaluate the Company's performance as
compared to its peer group. Management also uses Adjusted Cash Flow to compare
its performance against non-GAAP adjusted net income measures used by many
companies in the biopharmaceutical industry, even though each company may
customize its own calculation and therefore one company's metric may not be
directly comparable to another's. We believe that non-GAAP financial measures,
including Adjusted Cash Flow, are frequently used by securities analysts,
investors, and other interested parties to evaluate companies in our industry.
59
--------------------------------------------------------------------------------
ROYALTY PHARMA PLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The non-GAAP financial measures used in this Quarterly Report on Form 10-Q have
limitations as analytical tools, and you should not consider them in isolation
or as a substitute for the analysis of our results as reported under GAAP. We
have provided a reconciliation of each non-GAAP financial measure to the most
directly comparable GAAP financial measure, in each case being Net cash provided
by operating activities below.
To arrive at Adjusted Cash Receipts, we start with the GAAP line item, Net cash
provided by operating activities, and adjust for the following items from the
Statement of Cash Flows: to add back (1) Proceeds from available for sale debt
securities (redemption of Biohaven Preferred Shares), which are cash inflows
that management believes are derived from royalties and form part of our core
business strategy, (2) Distributions from non-consolidated affiliates classified
as Cash used in investing activities, (3) Interest paid, net of Interest
received, (4) Development-stage funding payments, (5) Payments for operating and
professional costs, (6) Payments for rebates, and (7) Termination payments on
derivative instruments, and to deduct (1) Distributions to non-controlling
interest, which represents distributions to our historical non-controlling
interest attributable to a de minimis interest in RPCT held by certain legacy
investors and to a new non-controlling interest that was created as a result of
the Exchange Offer Transactions in February 2020 related to the Legacy Investors
Partnerships' ownership of approximately 18% in Old RPI, and (2) Derivative
collateral posted or (received), net, both of which are excluded when management
assesses its operating performance through cash collections, or, Adjusted Cash
Receipts.
To arrive at Adjusted EBITDA, we start with Net cash provided by operating
activities and adjust for the following items from the Statement of Cash Flows:
to add back (1) Proceeds from available for sale debt securities (redemption of
Biohaven Preferred Shares), (2) Distributions from non-consolidated affiliates
classified as Cash used in investing activities, (3) Interest paid, net of
Interest received and (4) Development-stage funding payments and (5) Termination
payments on derivative instruments, and to deduct (1) Distributions to
non-controlling interest and (2) Derivative collateral posted or (received),
net.
To arrive at Adjusted Cash Flow, we start with Net cash provided by operating
activities and adjust for the following items from the Statement of Cash Flows:
to add back (1) Proceeds from available for sale debt securities (redemption of
Biohaven Preferred Shares), (2) Distributions from non-consolidated affiliates
classified as Cash used in investing activities, (3) Upfront development-stage
funding payments, and (4) Contributions from non-controlling interest-R&D, and
to deduct (1) Distributions to non-controlling interest and (2) Investments in
non-consolidated affiliates. This is intended to present an Adjusted Cash Flow
measure that is representative of cash generated from the broader business
strategy of acquiring royalty-generating assets that are available for
reinvestment and for discretionary purposes.
60
--------------------------------------------------------------------------------
ROYALTY PHARMA PLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands) For the three months ended For the nine months ended
September 30, September 30,
2021 2020 2021 2020
Net cash provided by operating activities $ 469,759 $ 508,848 $ 1,527,579 $ 1,468,956
(GAAP)
Adjustments:
Proceeds from available for sale debt 15,625 - 46,875 -
securities (1), (2)
Distributions from non-consolidated - - 523 15,084
affiliates - investing (2)
Interest paid, net (2) 64,587 15,119 126,755 94,953
Ongoing development-stage funding payments 500 5,095 6,263 18,510
(3)
Upfront development-stage funding payments 90,000 - 90,000 -
(3)
Payments for operating and professional costs 53,509 59,398 135,272 129,382 Termination payments on derivative 16,093 - 16,093 35,448
instruments
Distributions to non-controlling interest (2) (125,427) (116,347)
(363,624) (400,893)
Derivative collateral received, net (2) 2,130 - - (45,252)
Adjusted Cash Receipts (non-GAAP) $ 586,776 $
472,113
Net cash provided by operating activities$ 469,759 $ 508,848 $ 1,527,579 $ 1,468,956 (GAAP) Adjustments: Proceeds from available for sale debt 15,625 - 46,875 - securities (1), (2) Distributions from non-consolidated - - 523 15,084 affiliates - investing (2) Interest paid, net (2) 64,587 15,119 126,755 94,953 Ongoing development-stage funding payments 500 5,095 6,263 18,510
(3)
Upfront development-stage funding payments 90,000 - 90,000 -
(3)
Termination payments on derivative 16,093 - 16,093 35,448
instruments
Distributions to non-controlling interest (2) (125,427) (116,347)
(363,624) (400,893)
Derivative collateral received, net (2) 2,130 - - (45,252)
Adjusted EBITDA (non-GAAP) $ 533,267 $
412,715
Net cash provided by operating activities$ 469,759 $ 508,848 $ 1,527,579 $ 1,468,956 (GAAP) Adjustments: Proceeds from available for sale debt 15,625 - 46,875 - securities (1), (2) Distributions from non-consolidated - - 523 15,084 affiliates - investing (2) Upfront development-stage funding payments 90,000 - 90,000 -
(3)
Distributions to non-controlling interest (2) (125,427) (116,347)
(363,624) (400,893)
Investments in non-consolidated affiliates (10,893) - (28,320) (29,262)
(2), (4)
Contributions from non-controlling 2,003 1,107 6,083 6,221
interests-R&D (2)
Adjusted Cash Flow (non-GAAP) $ 441,067 $ 393,608 $ 1,279,116 $ 1,060,106
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