Royalty Pharma plc and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
ROYALTY PHARMA PLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. Indirect Cash Flow
Adjustments to reconcile consolidated net income to net cash provided by operating activities are summarized below.below (in thousands):
| | | | | | | | | | | |
(in thousands) | For the six months ended June 30, | | |
| 2020 | | 2019 |
Cash flow from operating activities: | | | |
Consolidated net income | $ | 711,072 | | | $ | 574,864 | |
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | | | |
Provision for changes in expected cash flows from financial royalty assets | 135,290 | | | 22,177 | |
| | | |
Amortization of intangible assets | 11,466 | | | 12,332 | |
Amortization of loan issuance and discount on long-term debt | 4,340 | | | 5,964 | |
| | | |
Unrealized loss on derivative contracts | 32,798 | | | 65,254 | |
Unrealized gain on equity securities | (40,729) | | | (16,944) | |
Equity in (earnings)/loss of non-consolidated affiliates | (20,218) | | | 13,673 | |
| | | |
| | | |
Distributions from non-consolidated affiliates | 31,840 | | | 14,059 | |
| | | |
Loss on extinguishment of debt | 5,405 | | | — | |
| | | |
Share based compensation | 3,740 | | | — | |
Other | 3,398 | | | 289 | |
(Increase)/decrease in operating assets: | | | |
Financial royalty assets | (937,021) | | | (799,161) | |
Cash collected on financial royalty assets | 1,003,504 | | | 895,150 | |
Available for sale debt securities | — | | | (150,000) | |
Accrued royalty receivable | 1,218 | | | (600) | |
Other receivables | — | | | 150,000 | |
Other royalty income receivable | 2,094 | | | 5,670 | |
Other current assets | (12,634) | | | 4,171 | |
Other assets | 45,635 | | | (26,352) | |
Increase/(decrease) in operating liabilities: | | | |
Accounts payable and accrued expenses | 13,862 | | | (769) | |
| | | |
Derivative financial instruments | (34,952) | | | — | |
Net cash provided by operating activities | $ | 960,108 | | | $ | 769,777 | |
| | | | | | | | | | | |
| For the Nine Months Ended September 30, |
| 2022 | | 2021 |
Cash flow from operating activities: | | | |
Consolidated net income | $ | 840,094 | | | $ | 1,187,530 | |
Adjustments to reconcile consolidated net income to net cash provided by operating activities: | | | |
Income from financial royalty assets | (1,578,555) | | | (1,538,871) | |
Provision for changes in expected cash flows from financial royalty assets | 595,396 | | | 186,337 | |
Amortization of intangible assets | 5,670 | | | 17,200 | |
Amortization of debt discount and issuance costs | 16,026 | | | 14,822 | |
| | | |
(Gains)/losses on derivative financial instruments | (97,590) | | | 21,436 | |
Losses on equity securities | 22,970 | | | 17,980 | |
Equity in losses/(earnings) of equity method investees | 2,117 | | | (18,532) | |
| | | |
| | | |
Distributions from equity method investees | 33,316 | | | 28,213 | |
| | | |
Loss on extinguishment of debt | — | | | 358 | |
| | | |
Share-based compensation | 1,587 | | | 1,939 | |
Interest income accretion | (24,053) | | | (40,545) | |
Gains on available for sale debt securities | (97,985) | | | (8,246) | |
| | | |
Termination of derivative financial instruments | — | | | (16,093) | |
Other | 3,443 | | | 3,263 | |
Decrease/(increase) in operating assets: | | | |
Cash collected on financial royalty assets | 1,843,899 | | | 1,733,147 | |
| | | |
Accrued royalty receivable | 37,574 | | | (26,502) | |
| | | |
Other royalty income receivable | (4,108) | | | (7,833) | |
Other current assets and other assets | 8,253 | | | (473) | |
Increase/(decrease) in operating liabilities: | | | |
Accounts payable and accrued expenses | 10,492 | | | (2,138) | |
Interest payable | (44,497) | | | (25,413) | |
| | | |
| | | |
Net cash provided by operating activities | $ | 1,574,049 | | | $ | 1,527,579 | |
| | | |
Non-cash investing
14. Commitments and financing activities are summarizedContingencies
Funding Commitments
We have various funding commitments as of September 30, 2022 as described below. See Note 3–Available for Sale Debt Securities for additional discussion of the respective arrangements.
| | | | | | | | | | | |
(in thousands) | For the six months ended June 30, | | |
| 2020 | | 2019 |
Supplemental schedule of non-cash investing / financing activities: | | | |
Contribution of investment in Legacy Investors Partnerships (1) | $ | 303,679 | | | $ | — | |
Settlement of Epizyme forward purchase contract (2) | 5,700 | | | — | |
Accrued purchase obligation - Tazverik (3) | 220,000 | | | — | |
Repayments of long-term debt by contributions from non-controlling interest (4) | 1,103,774 | | | — | |
Accrued purchase obligation | 1,610 | | | — | |
Accrued capitalized offering costs (5) | 8,897 | | | — | |
| | | |
(1) See Note 9 | | | |
(2) See Note 4 | | | |
(3) See Note 17 | | | |
(4) Related to the pro rata portion of RPIFT's outstanding debt repaid by the Legacy Investors Partnerships | | | |
| | | |
(5) Related to capitalized offering costs incurred in connection with our IPO that have not been paid | | | |
Cytokinetics Commercial Launch Funding
As of September 30, 2022, $250 million of the Cytokinetics Commercial Launch Funding remained unfunded. Cytokinetics is required to draw $50 million if a certain contingency is met and has the option to draw the remaining $200 million upon the occurrence of certain regulatory and clinical development milestones. As of September 30, 2022, we expect $125 million of the optional $200 million to remain available under the Cytokinetics Commercial Launch Funding due to the likelihood that certain regulatory milestones will not be met by December 31, 2022.
Royalty Pharma plc and SubsidiariesROYALTY PHARMA PLC
Notes to the Condensed Consolidated Financial StatementsNOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)(UNAUDITED)
15. Accumulated Other Comprehensive Income (Loss)Series B Biohaven Preferred Shares
Comprehensive income is comprisedAs of net income and other comprehensive income/(loss). We include unrealized gains and losses on available for sale debt securities and unrealized gains/(losses) on the interest rate swaps that were designated as cash flow hedges in other comprehensive income/(loss).
Changes in accumulated other comprehensive income/(loss) by component are as follows:
| | | | | | | | | | | | |
| | Unrealized gain/(loss) on available for sale debt securities | Unrealized gain/(loss) on interest rate swaps | Total Accumulated Other Comprehensive Income/(Loss) |
| | (in thousands) | | |
Balance at December 31, 2019 | | $ | 6,159 | | $ | (4,066) | | $ | 2,093 | |
Reclassifications to income | | — | | 4,066 | | 4,066 | |
Activity for the period | | 48,378 | | — | | 48,378 | |
Reclassifications to NCI | | (24,022) | | — | | (24,022) | |
Balance at June 30, 2020 | | $ | 30,515 | | $ | — | | $ | 30,515 | |
16. Related Party Transactions
The Manager
The Manager is an affiliateSeptember 30, 2022, we have a remaining commitment of RP Ireland, is the Administrator of RPIFT and RPI 2019 Intermediate Finance Trust ("RPI Intermediate FT") and is the investment manager for RPI. The sole member of the Manager holds an interest in the Company and serves as the Company’s Chief Executive Officer and Chairman of the Board, and as a director on the board of RP Holdings.
Historically, the Manager received Operating and Personnel Payments payable in equal quarterly installments and increasing by 5% annually on a compounded basis$85.8 million under the termsCommercial Launch Preferred Equity to purchase 1,713 shares of its management agreement with Old RPISeries B Biohaven Preferred Shares. On October 3, 2022, Pfizer acquired Biohaven which was a change of control event that accelerated the issuance and the Legacy Investors Partnerships. RP Ireland receives an annual management fee payable in advance by Old RPI in equal quarterly installments under termsredemption of the Limited Partnership Agreements of the Legacy Investors Partnerships. Operating and Personnel Payments incurred during the three and six months ended June 30, 2019 were $15.0 million and $30.0 million, respectively and were recognized within General and administrative expenses on the condensed consolidated statements of comprehensive income.
all unissued Series B Biohaven Preferred Shares. In connection with the Exchange Offer Transactions (discussed in Note 1), the Manager has entered into new management agreements with RPI and its subsidiaries, the Continuing Investors Partnerships, and with the Legacy Investors Partnerships. Pursuantcompletion of Pfizer’s acquisition of Biohaven, we have no remaining commitment related to the new management agreements, RPI pays quarterly Operating and Personnel Payments in respect of operating and personnel expenses to the Manager or its affiliates equal to 6.5% of the Adjusted Cash Receipts (as defined therein) for such quarter and 0.25% of the GAAP value of our security investments as of the end of such quarter. The Operating and Personnel Payment 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 income statement, is payable in equal quarterly installments and increases by 5% annually on a compounded basis. Operating and Personnel Payments incurred during the three and six months ended June 30, 2020 were $27.6 million and $47.3 million, respectively.Series B Biohaven Preferred Shares.
Royalty Distribution Payable
The Royalty distribution payable to affiliates of $122.8 million at June 30, 2020 includes the following: (1) $96.2 million of royalty receipts due from Old RPI to RPI Intermediate FT in connection with the Legacy Investors Partnerships' non-controlling interest in Old RPI that arose in the Reorganization Transactions, and (2) $26.6 million of royalty receipts due from RPCT to RP Select Finance Trust in connection with its non-controlling interest in RPCT. The Royalty distribution payable to affiliates of $31.0 million at December 31, 2019 represents royalty receipts due from RPCT to RPSFT. The accrual is recorded based on estimated royalty receipts for the period, which are derived from estimates generated from analyst consensus forecasts for each product, and will be collected one quarter in arrears, and is payable to the non-controlling interest owners under the terms of collection account control agreements whereby RPCT and Old RPI are required to disperse royalty receipts collected to the minority owners in proportion to their ownership interests.
Royalty Pharma plc and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Acquisition from Epizyme Inc.
In November 2019, in connection with an equity investment in Epizyme Inc. of $100.0 million made by RPIFT, Pablo Legorreta, Royalty Pharma’s CEO, was appointed as a director of Epizyme, for which he will receive compensation in cash and shares, all of which will be contributed to the Manager and used to reduce costs and expenses which would otherwise be billed to the Company or its affiliates.
Acquisition from Bristol-Myers Squibb
In November 2017, RPI Acquisition entered into a Purchase Agreement with Bristol-Myers Squibb (“BMS”) to acquire from BMS a percentage of its future royalties on worldwide sales of Onglyza, Farxiga, and related diabetes products marketed by AstraZeneca. We agreed to make payments to BMS based on sales of the products over the eight quarters beginning with the first quarter of 2018 in exchange for a high single-digit royalty on worldwide sales of the products from 2020 through 2025.
On December 8, 2017, RPI Acquisitions entered into a purchase, sale and assignment agreement with a wholly owned subsidiary of BioPharma Credit PLC (LSE: BPCR, “BPCR”), an affiliate of RPI. BPCR is a related entity due to the sole member of the investment manager having significant influence over both entities. Under the terms of the Assignment Agreement, RPI Acquisitions assigned the benefit of 50% of the payment stream acquired from BMS to BPCR in consideration for BPCR meeting 50% of the funding obligations owed to BMS under the Purchase Agreement.Other Commitments
We began making installment paymentshave commitments to BMS duringadvance funds to counterparties through our investment in the second quarterAvillion Entities. Please refer to Note 8–Non-Consolidated Affiliates for details of 2018. Upon transfer of funds from BPCRthese arrangements. We also have requirements to RPI Acquisitions to meetmake Operating and Personnel Payments over the quarterly funding obligation to BMS, RPI Acquisitions derecognizes 50%life of the financial royalty asset. Cash received from BPCRManagement Agreement as described in respect of each funding obligation equals the carrying amount of the assigned transfer of interest, therefore no gain or loss is recognized upon the transfer. The financial royalty asset of $159.6 millionNote 15–Related Party Transactions, which are variable and $150.3 million included in financial royalty assets, netprimarily based on the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019, respectively, represents only the Company's right to the future payment streams acquired from BMS.cash receipts.
Our funding was completed in the first quarter of 2020. We have funded a cumulative amount of $162.4 million, net of the assignment. We began to recognize income from the BMS asset when our installment funding obligation was completed and we received our first royalty payment on the BMS asset in the second quarter of 2020.
Other transactions
During the three and six months ended June 30, 2020, the Company reimbursed Pablo Legorreta, Royalty Pharma’s CEO, approximately $1.0 million for the cost of purchasing and donating ventilators to hospitals on behalf of Royalty Pharma.
During the year ended December 31, 2019, RPIFT acquired 27,210 limited partnership interests in an affiliate of, and an equity method investor in, Old RPI and RPIFT, whose only substantive operations are its investment in Old RPI. The total investment of $4.3 million is recorded as treasury interests, of which $2.1 million is held by non-controlling interests in the consolidated balance sheet as of June 30, 2020.
Based on its ownership percentage of Royalty Pharma Investments 2019 ICAV relative to the Company, each Continuing Investor Partnership pays a pro rata portion of any costs and expenses in connection with the contemplation of, formation of, listing and ongoing operation of the Company and any subsidiary of the Company, including any third-party expenses of managing the Company and any subsidiary of the Company, such as accounting, audit, legal, reporting, compliance, administration (including directors’ fees), financial advisory, consulting, investor relations, and insurance expenses relating to the affairs of the Company and any subsidiary of the Company.
17. Commitments and ContingenciesIndemnifications
In the ordinary course of itsour business, we may enter into contracts or agreements that contain customary indemnifications relating to such things as confidentiality agreements and representations as to corporate existence and authority to enter into contracts. The maximum exposure under such agreements is indeterminable until a claim, if any, is made. However, no such claims have been made against Royalty Pharmaus to date and we believe that the likelihood of such proceedingsoccurrences taking place in the future is remote.
In November 2019, RPIFT agreed to pay $330.0 million to purchase Eisai’s royalties on future worldwide sales of Tazverik (tazemetostat), a novel targeted therapy in late-stage clinical development that was approved by the FDA in January 2020 for
Royalty Pharma plc and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
epithelioid sarcoma, and with the potential to be approved in several cancer indications. Under the terms of its agreement with Eisai, RPIFT acquired Eisai’s future worldwide royalties on net sales by Epizyme of Tazverik outside of Japan, for an upfront payment of $110.0 million plus up to an additional $220.0 million for the remainder of the royalty upon FDA approval of Tazverik for certain indications. The FDA approval of Tazverik in January 2020 triggered our obligation to fund the second $110.0 million tranche in November 2020. In June 2020, the FDA approval of additional indications of Tazverik triggered our obligation to fund the final $110.0 million tranche in November 2021. The second and the final $110.0 million tranches are recorded in the current and long-term liabilities on the condensed consolidated balance sheet at June 30, 2020, respectively.
We have commitments to advance funds to counterparties through our contingent funding of the Second Tranche of Biohaven Preferred Shares, our investment in the Avillion Entities, and research and development arrangements. Please refer to Notes 4, 9, and 10, respectively, for details of these arrangements. We also have requirements to make Operating and Personnel Payments over the life of the management agreement as described in Note 16, which are variable and based on projected cash receipts.
Legal Proceedings
We are a party to various legal actions. The most significantactions with respect to a variety of matters in the ordinary course of business. Some of these are described below.proceedings may be based on complex claims involving substantial uncertainties and unascertainable damages. Unless otherwise noted, it is not possible to determine the outcomeprobability of loss or estimate damages, and therefore we have not established accruals for any of these matters, and we cannot reasonably estimate the maximum potential exposure or the range of possible loss. We did not have any material accruals for the matter described below inproceedings on our condensed consolidated balance sheetssheets. When we determine that a loss is both probable and reasonably estimable, we record a liability, and, if the liability is material, we disclose the amount of the liability reserved. We do not believe the outcome of any existing legal proceedings to which we are a party, either individually or in the aggregate, will adversely affect our business, financial condition or results of operations.
15. Related Party Transactions
The Manager
The Manager is the investment manager of Royalty Pharma plc and its subsidiaries. The sole member of the Manager, Pablo Legorreta, holds an interest in us and serves as our Chief Executive Officer and Chairman of our board of directors.
Pursuant to 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 cash receipts from royalty investments for such quarter and 0.25% of the value of our security investments under GAAP as of Junethe end of such 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 on our consolidated net income, is calculated as the greater of $1 million per quarter and 0.3125% of Royalty Investments (as defined in the limited partnership agreements of the Legacy Investor Partnerships) during the previous twelve calendar months.
During the three and nine months ended September 30, 20202022, total operating and December 31, 2019.personnel payments incurred were $40.6 million and $117.8 million, respectively, including the amounts attributable to Old RPI, and were recognized within General and administrative expenses in the condensed consolidated statements of operations. During the three and nine months ended September 30, 2021, total operating and personnel payments incurred were $39.9 million and $108.0 million, respectively, including the amounts attributable to Old RPI, and were recognized within General and administrative expenses in the condensed consolidated statements of operations.
ROYALTY PHARMA PLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Distributions Payable to Non-Controlling Interests
The distributions payable to non-controlling interestsrepresent the contractual cash flows required to be distributed based on the Legacy Investors Partnerships’ non-controlling interest in Old RPI and RPSFT’s non-controlling interest in RPCT. The distributions payable to non-controlling interests include the following (in thousands):
| | | | | | | | | | | |
| As of September 30, 2022 | | As of December 31, 2021 |
Due to Legacy Investors Partnerships | $ | 98,601 | | | $ | 92,608 | |
Due to RPSFT | 7,130 | | | 15,326 | |
Total distributions payable to non-controlling interests | $ | 105,731 | | | $ | 107,934 | |
Acquisition from Bristol Myers Squibb
In November 2017, RPI Acquisitions, a consolidated subsidiary, entered into a purchase agreement with Bristol Myers Squibb (“BMS”) to acquire from BMS a percentage of its future royalties on worldwide sales of Onglyza, Farxiga and related diabetes products marketed by AstraZeneca (the “Purchase Agreement”). On December 2015, Boehringer Ingelheim International GmBH8, 2017, RPI Acquisitions entered into a purchase, sale and assignment agreement (“BI”Assignment Agreement”) notified Royalty Pharma that (a) BI had revised its interpretationwith a wholly-owned subsidiary of BioPharma Credit PLC (“BPCR”), an entity related to us. Under the terms of the license agreement between BI and Royalty Pharma, (b) as a result BI believed that it had overpaid royalties on salesAssignment Agreement, RPI Acquisitions assigned the benefit of Tradjenta, Jentadueto and Glyxambi, the DPP-IVs, for periods prior to 2015 by €7.7 million, and (c) BI was seeking a refund in that amount. Management does not agree with BI’s interpretation50% of the license agreement and has had extensive discussions with BIpayment stream acquired from BMS to BPCR in an effortconsideration for BPCR meeting 50% of the funding obligations owed to reach an amicable settlement of this dispute. On January 21, 2019, RPCT filed a lawsuit in England against BI seeking recovery of €23.1 million in underpaid royalties. We intend to pursue this claim vigorously, but there can be no assurance that we will prevail in this dispute. Due toBMS under the uncertainty at this time, we have not accrued any amounts related to this matter and any legal costs will be expensed as incurred.Purchase Agreement.
As of September 30, 2022 and December 31, 2021, the financial royalty asset of $110.9 million and $130.9 million, respectively, on the condensed consolidated balance sheets represents only our right to the future payment streams acquired from BMS.
18.
Other Transactions
Henry Fernandez, the lead independent director of our board of directors, serves as the chairman and chief executive officer of MSCI Inc. (“MSCI”). On April 16, 2021, we entered into an agreement with MSCI with an initial term of seven years to assist MSCI in the design of a classification framework and index methodologies in order to expand MSCI’s thematic index suite with the launch of new indexes. In return, we will receive a percentage of MSCI’s revenues from those indexes. No amounts were due from MSCI as of both September 30, 2022 and December 31, 2021. The financial impact associated with this transaction has not been material to date.
In connection with the Exchange Offer Transactions, we acquired the Legacy SLP Interest from the Continuing Investors Partnerships in exchange for issuing shares in our subsidiary. As a result, we became a special limited partner in the Legacy Investors Partnerships. The Legacy Investors Partnerships own a non-controlling interest in Old RPI. Refer to Note 8–Non-Consolidated Affiliates for additional discussion of the Legacy SLP Interest and our investments in other non-consolidated entities.
RPIFT owns 27,210 limited partnership interests in the Continuing Investors Partnership whose only substantive operations are their investment in our subsidiaries. The total investment of $4.3 million is recorded as treasury interests, of which $1.5 million and $1.6 million were held by non-controlling interests as of September 30, 2022 and December 31, 2021, respectively.
Based on its ownership percentage of RP Holdings relative to the Company, each Continuing Investor Partnership pays a pro rata portion of any costs and expenses in connection with the contemplation of, formation of, listing and ongoing operation of us and any of our subsidiaries, including any third-party expenses of managing us and any of our subsidiaries, such as accounting, audit, legal, reporting, compliance, administration (including directors’ fees), financial advisory, consulting, investor relations and insurance expenses relating to our affairs and those of any subsidiary.
ROYALTY PHARMA PLC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
16. Subsequent Events
In July 2020,October 2022, we acquiredentered into a royalty on risdiplam,R&D funding agreement with MSD International Business GmbH (“Merck”) to co-fund the development of MK-8189, an investigational oral PDE10A inhibitor currently being evaluated in a development-stage product candidatePhase 2b study for the treatment of spinal muscular atrophy (SMA) from PTC Therapeutics, Inc., inschizophrenia. We funded $50 million upon closing, and if Merck decides to proceed with Phase 3. we have the option to fund up to an additional $375 million. In exchange, for an upfront paymentwe are eligible to receive milestone payments upon certain regulatory approvals and royalties on annual worldwide sales of $650 million.any approved product.
In August 2020, we entered into an expanded agreement with Biohaven Pharmaceuticals for up to $450 million to fundOctober 2022, GSK plc (“GSK”) announced that the development of zavegepant andlimited efficacy demonstrated in the commercialization of Nurtec ODT. Biohaven will receive a $150 million upfront payment and an additional $100 million payment upon the start of the oral zavegepant phaseContRAst Phase 3 program in exchangedoes not support a suitable benefit/risk profile for otilimab as a potential treatment for rheumatoid arthritis. As a result, GSK has decided not to progress with regulatory submissions. Following this announcement, we wrote off the financial royalty on Nurtec ODT and zavegepant and success-based milestone payments based on zavegepant regulatory approvals. We will also provide further support for the ongoing launchasset associated with otilimab, which had a carrying value of Nurtec ODT through the purchase$160.1 million as of committed, non-contingent Commercial Launch Preferred Equity for a total of $200 million payable between 2021 and 2024.September 30, 2022.
Item 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Notesnotes to our consolidated financial statements included in the Company’s final prospectus filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amendedour Annual Report on June 17, 2020 (“the Prospectus”).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 Part II, Item 1A. Risk Factors” andin Special Note Regarding Forward-Looking Statements included elsewhere in this Quarterly Report on Form 10-Q and in the Prospectus.Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K.
Royalty Pharma plc is a newly formedan 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 (“the IPO”) of our Class A ordinary shares that was completed in June 2020.shares. “Royalty Pharma,” “Royalty Pharma Investments,” “RPI,” the “Company,” “we,” “us” and “our” refer to Royalty Pharma plc and its subsidiaries on a consolidated basis. After the consummation of the Reorganization Transactions and before the consummation of the Offering, “Royalty Pharma,” the “Company,” “we,” “us” and “our” refer to Royalty Pharma Investments 2019 ICAV. Prior to the Reorganization Transactions, “Royalty Pharma,” the “Company,” “we,” “us” and “our” refer to Old RPI. Refer to Note 1 to our condensed consolidated financial statements for further discussion.
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 35 commercial products, including Vertex’s Trikafta, Kalydeco, Orkambi and Symdeko, Biogen’s Tysabri, AbbVie and Johnson & Johnson’s Imbruvica, Januvia, Kalydeco, Trikafta, Truvada, TysabriAstellas and Xtandi.Pfizer’s Xtandi, GSK’s Trelegy, Novartis’ Promacta, Pfizer’s Nurtec ODT, Johnson & Johnson’s Tremfya, Roche’s Evrysdi,Gilead’s Trodelvy, and 13 development-stage product candidates. We fund innovation in the biopharmaceutical industry both directly and indirectly—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 inon the most attractive therapies across the biopharmaceutical industry. The success of our business has been the result of a focused strategy of actively identifying and tracking the development and commercialization of key new therapies, allowing us to move quickly to make acquisitions when opportunities arise. We acquire royalties on approved products, often in the early stages of their commercial launches, and development-stage product candidates with strong proof of concept data, mitigating development risk and expanding our opportunity set.
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 and through 2019,2021, we have deployed $12$15.0 billion of cash to acquire royalties on approved products. From 2012 through 2019,2021, we have acquired $7.0$10.2 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 2019,2021, we have deployed $6.1$7.8 billion to acquire royalties on development-stage product candidates.
While we classify our acquisitions in these two broad segments,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 acquisitions according to the followingpartners through a variety of structures:
•Third-party Royalties – Existing royalties on approved or late-stage development therapies with high commercial potential. 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 royalties that had been previously created by other parties prior to our acquisition.third-party royalties.
•Synthetic / Hybrid RoyaltiesRoyalties/R&D Funding – Newly-created royalties on approved or late-stage development therapies with strong proof of concept and high commercial potential. 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 ourA synthetic royalty acquisitions, wemay 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.
•R&D Funding –include contingent milestone payments. We also fund ongoing research and development (“R&D,&D”), typically for large biopharmaceutical companies, in exchange for future royalties and/or milestones if the product or indication we are funding is approved.
•Launch and Development Capital – Tailored supplemental funding solutions, generally included as a component within a transaction, increasing the scale of our capital. Launch and development capital is generally provided in exchange for a long-term stream of fixed payments with a predetermined schedule around the launch of a drug. Launch and development capital may also include a direct investment in the public equity of a company.
•Mergers and Acquisitions (“M&A&A”) Related – We acquire royalties in connection with mergers and acquisitionsM&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.
Additionally, we may identify additional opportunities, platforms or technologies that leverage our capabilities. One example is our strategic alliance with MSCI Inc. (“MSCI”) to develop thematic life sciences indices.
Background and Format of Presentation
We consummated an exchange offer on February 11, 2020 to facilitate our IPO. Through the exchange offer, investors which represented 82% of the aggregate limited partnership in the various partnerships (the “Legacy Investors Partnerships”) that owned Royalty Pharma plc isInvestments, an Irish unit trust (“Old RPI”), exchanged their limited partnership interests in the Legacy Investors Partnerships for limited partnership interests in RPI US Partners 2019, LP, a newly formed English publicDelaware limited company incorporatedpartnership or RPI International Holdings 2019, LP, a Cayman Islands exempted limited partnership (together, the “Continuing Investors Partnerships”). The exchange offer transaction together with (i) the concurrent incurrence of indebtedness under senior credit facilities and (ii) the lawsissuance of England and Wales created foradditional interests in Continuing Investors Partnerships to satisfy performance payments payable in respect of assets acquired prior to the purposedate of consolidating our predecessor entities and facilitating the IPO of our Class A ordinary shares that was completed in June 2020. Following our IPO, we operate andare referred to as the “Exchange Offer Transactions.”
We control the business affairs of Royalty Pharma Holdings Ltd.,Ltd (“RP Holdings”) through our ownership of 100% of the RP Holdings’ Class A ordinary shares (“and RP Holdings’ Class B ordinary shares (the “RP Holdings Class AB Interests”) and we include RP Holdings and its subsidiaries in our condensed consolidated financial statements.. RP Holdings is the sole owner of Royalty Pharma InvestmentsRPI 2019 ICAV, which is an Irish collective asset management entity formed to facilitate our Exchange Offer Transactions, (as discussed in Note 1 of our financial statements included in this Quarterly Report on Form 10-Q).and is the successor to Old RPI.
Pursuant to the Exchange Offer Transactions, which were consummated on February 11, 2020, certain investors who invested in Old RPI through the Legacy Investors Partnerships exchanged their limited partnership interests in the Legacy Investors Partnerships for limited partnership interests in the Continuing Investors Partnerships. As a result of the Exchange Offer Transactions, RPI, through its wholly-owned subsidiary RPI Intermediate FT, ownswe own indirectly an 82% economic interest in 82% of Old RPI. Through its 82% indirect ownership of Old RPI through our subsidiary RPI is legally2019 Intermediate Finance Trust, a Delaware statutory trust (“RPI Intermediate FT”). We are entitled to 82% of the economics of Old RPI’s wholly-owned subsidiaries, RPIFTRPI Finance Trust, a Delaware statutory trust (“RPIFT”) and RPI Acquisitions (Ireland) Limited (“RPI Acquisitions”), an Irish private limited company, and 82%66% of the 80% of theRoyalty Pharma Collection Trust, that is owned by RPIFT.a Delaware statutory trust (“RPCT”).
From the Exchange Date until the expirationThe remaining 34% of the Legacy Investors Partnerships’ investment period on the Legacy Date,RPCT is owned by the Legacy Investors Partnerships had the option to participate proportionately in any investment madeand Royalty Pharma Select Finance Trust, a Delaware statutory trust (“RPSFT”), which is wholly-owned by Old RPI. Following the Legacy Date, Old RPI has ceased making new investments and each of Old RPI and the Legacy Investors Partnerships became legacy entities. Following the Legacy Date, we will make new investments through our wholly-owned subsidiaries, including RPI Intermediate FT.
Our IPO was completed in June 2020, whereby we issued 89,333,920 shares of Class A ordinary shares at a price to the public of $28.00 per share, of which 71,652,250 and 17,681,670 shares were offered by the Company and selling shareholders, respectively. The number of Class A ordinary shares issued at closing included the exercise in full of the underwriters’ option to purchase 11,652,250 additional Class A ordinary shares from the Company. We received net proceeds of approximately $1.9 billion from the IPO after deducting underwriting discounts and commissions of approximately $86.3 million.The Class A ordinary shares began trading on the Nasdaq GlobalRoyalty Pharma Select, Market under the ticker symbol “RPRX” on June 16, 2020. Following the IPO, we are a holding company and our principal asset is a controlling equity interest in RP Holdings, the sole equity owner of RPI.an Irish unit trust.
Following management’s determination that a high degree of common ownership exists in RPI both before and after the Exchange Date, RPI 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 references in the following discussion to the three and six months ended June 30, 2019 refer to the financial results of Old RPI for the same periods.
Understanding Our Financial Reporting
In accordance with generally accepted accounting principles in the United States, or GAAP, mostMost 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 loansassets measured at amortized cost under the effective interest method in accordance with generally accepted accounting methodology.principles in the United States (“GAAP”). 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 requires significant judgments and estimates, 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 sales estimates for each of the products in which we own royalties. We then calculate our expected royalty cash flows using these consensus sales forecasts. In any given reporting period, any decline or increase in the expected future cash flows associated with a financial royalty asset is recognized as a provision which is expensed throughin our income statement as a non-cash charge.provision expense or provision income, respectively.
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 sales forecasts over a long timeterm horizon can result in an immediate non-cash income statement expense recognition which generates a corresponding cumulative allowance that reduces the gross asset balance, even though the applicable cash inflows will not be realized for many years into the future. For example, in late 2014 we acquired our financial royalty asset on the cystic fibrosis franchise. Beginningfranchise royalty and beginning in the second quarter of 2015, declines in near-term sales forecasts of sell-side equity research analysts caused us to build up arecognize non-cash provision for this royalty asset.expense. Over the course of 10 quarters, we recognized non-cash charges to the income statementprovision expense as a result of these changes in forecasts ultimately accumulating a peak cumulative non-cash provision of $1.30 billion by September 30, 2017, including non-cash provision expense of $743.2 million in 2016, ultimately reaching a peak cumulative allowance of $1.30 billion by September 30, 2017 related to this financial royalty asset. With the approval of the Vertex triple combination therapy, Trikafta, in October 2019, sell-side equity research analysts’ consensus sales forecasts increased to reflect the larger addressable market and the increase inextension of the expected duration of the Trikafta.Trikafta royalty. While small reductions in the cumulative provisionallowance for the cystic fibrosis franchise were recognized inas provision income over the course of 2017 and 2018, there remained a $1.10 billion cumulative provision balanceallowance that was fully offsetreduced by arecognizing provision income of $1.10 billion credit to the provision in 2019 as a result of an increase in sell-side equity research analysts’ consensus sales forecasts associated with the Trikafta approval. This example illustrates the volatility caused by our accounting model.
In addition, due to the nature of our effective interest methodology, there is no direct correlation between our income from financial royalty assets and our royalty receipts. 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 accounting methodology. Given the importance of cash flows and their predictability 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 Statementconsolidated statements of Cash Flows: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 affiliatesequity method investees (which line item is included in both Net cash provided by operating activities and Net cash used in investing activities).
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 theour 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.
Portfolio Overview
Our portfolio consists of royalties on more than 4535 marketed therapies and four13 development-stage product candidates. The therapies in our portfolio address therapeutic areas such as rare diseases, oncology,disease, cancer, neurology, HIV, cardiologyinfectious 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 sixnine months ended JuneSeptember 30, 20202022 and 2019, grouped2021 by Growth Products and Mature Products. “Growth Products” are defined as royalties with a duration expiring after December 31, 2020. We define all other royalties as Mature Products.product in order of contribution to royalty receipts for the nine months ended September 30, 2022 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Royalties | | Marketer(s) | | Therapeutic Area | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
Cystic fibrosis franchise (1) | | Vertex | | Rare disease | | $ | 207,882 | | | $ | 182,876 | | | $ | 591,733 | | | $ | 505,708 | |
Tysabri | | Biogen | | Neurology | | 91,252 | | | 95,805 | | | 281,819 | | | 274,796 | |
Imbruvica | | AbbVie, Johnson & Johnson | | Cancer | | 74,391 | | | 87,924 | | | 241,943 | | | 264,348 | |
Xtandi | | Pfizer, Astellas | | Cancer | | 45,717 | | | 40,237 | | | 141,100 | | | 117,049 | |
Promacta | | Novartis | | Hematology | | 50,067 | | | 48,151 | | | 132,679 | | | 124,617 | |
Januvia, Janumet, Other DPP-IVs (2) | | Merck & Co., others | | Diabetes | | 1,029 | | | 37,934 | | | 72,406 | | | 113,133 | |
Tremfya | | Johnson & Johnson | | Immunology | | 21,409 | | | 16,610 | | | 68,062 | | | 16,610 | |
Nurtec ODT/Biohaven payment (3) | | Pfizer (5) | | Neurology | | 20,459 | | | 17,948 | | | 59,549 | | | 51,170 | |
Trelegy | | GSK | | Respiratory | | 42,720 | | | — | | | 42,720 | | | — | |
Cabometyx/Cometriq | | Exelixis, Ipsen, Takeda | | Cancer | | 14,612 | | | 12,038 | | | 40,523 | | | 22,167 | |
Farxiga/Onglyza | | AstraZeneca | | Diabetes | | 11,522 | | | 9,321 | | | 32,336 | | | 26,996 | |
Evrysdi | | Roche | | Rare disease | | 9,602 | | | 5,897 | | | 26,933 | | | 10,546 | |
Prevymis | | Merck & Co. | | Infectious disease | | 11,052 | | | 9,929 | | | 25,174 | | | 27,331 | |
Trodelvy | | Gilead | | Cancer | | 6,496 | | | 2,521 | | | 17,428 | | | 8,118 | |
Orladeyo | | BioCryst | | Rare disease | | 6,265 | | | 2,502 | | | 15,456 | | | 3,471 | |
Erleada | | Johnson & Johnson | | Cancer | | 5,586 | | | 3,736 | | | 15,305 | | | 9,957 | |
Crysvita | | Ultragenyx, Kyowa Kirin | | Rare disease | | 5,241 | | | 4,576 | | | 14,887 | | | 12,092 | |
Emgality | | Lilly | | Neurology | | 4,657 | | | 4,542 | | | 13,845 | | | 11,356 | |
Oxlumo | | Alnylam | | Rare disease | | 596 | | | 653 | | | 1,945 | | | 653 | |
Other products (4) | | 73,349 | | | 129,003 | | | 212,260 | | | 349,242 | |
Total royalty receipts | | $ | 703,904 | | | $ | 712,203 | | | $ | 2,048,103 | | | $ | 1,949,360 | |
(1)
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| Marketer | Therapeutic area | 2020 | 2019 | | 2020 | 2019 |
Growth Products | | | | | | | |
Cystic fibrosis franchise (1) | Vertex | Rare diseases | $ | 136,119 | | $ | 85,745 | | | $ | 235,522 | | $ | 192,684 | |
Tysabri | Biogen | Neurology | 92,517 | | 81,985 | | | 176,324 | | 164,620 | |
Imbruvica | AbbVie/Johnson & Johnson | Cancer | 81,513 | | 66,247 | | | 159,222 | | 127,349 | |
HIV franchise (2) | Gilead, others | Infectious diseases | 64,692 | | 52,193 | | | 148,579 | | 128,576 | |
Januvia, Janumet, Other DPP-IVs (3) | Merck & Co., others | Diabetes | 34,859 | | 41,082 | | | 69,647 | | 73,820 | |
Xtandi | Pfizer, Astellas | Cancer | 34,131 | | 27,040 | | | 68,908 | | 54,608 | |
Promacta | Novartis | Hematology | 26,653 | | 19,335 | | | 62,401 | | 19,335 | |
Farxiga/Onglyza | AstraZeneca | Diabetes | 8,257 | | — | | | 8,257 | | — | |
Prevymis | Merck & Co. | Infectious diseases | 6,413 | | — | | | 6,413 | | — | |
Crysvita | Ultragenyx, Kyowa Kirin | Rare diseases | 2,620 | | — | | | 2,620 | | — | |
Erleada | Johnson & Johnson | Cancer | 1,772 | | — | | | 3,210 | | — | |
Emgality | Eli Lilly | Neurology | 2,236 | | — | | | 4,213 | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other Growth Products (4) | | | 76,211 | | 36,206 | | | 144,929 | | 92,846 | |
Total Royalty Receipts - Growth Products | | | $ | 567,993 | | $ | 409,833 | | | $ | 1,090,245 | | $ | 853,838 | |
| | | | | | | |
Mature Products | | | | | | | |
Tecfidera (5) | Biogen | Neurology | $ | — | | $ | — | | | $ | — | | $ | 150,000 | |
Lyrica | Pfizer | Neurology | 6,470 | | 35,134 | | | 12,557 | | 64,739 | |
Letairis | Gilead | Cardiology | 7,713 | | 22,458 | | | 22,275 | | 60,917 | |
Remicade | Johnson & Johnson, Merck & Co. | Immunology | — | | — | | | — | | 6,068 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other mature products (6) | | | 2,802 | | 7,761 | | | 3,545 | | 17,924 | |
Total Royalty Receipts - Mature Products | | | $ | 16,985 | | $ | 65,353 | | | $ | 38,377 | | $ | 299,648 | |
(1) The cystic fibrosis franchise includes the following approved products: Kalydeco, Orkambi, SymdekoSymdeko/Symkevi and Trikafta.Trikafta/Kaftrio.
(2) The HIV franchise includes the following approved products: Atripla, Truvada, Emtriva, Complera, Stribild, Genvoya, Descovy, Odefsey, Symtuza and Biktarvy. The HIV franchise is marketed by Gilead, Bristol-Myers Squibb and Merck & Co.
(3) Januvia, Janumet, Other DPP-IVs include the following approved products: Eli Lilly, Tradjenta, Onglyza, Kombiglyze, Galvus, Eucreas and Nesina. The Other DPP-IVs are marketed by Boehringer Ingelheim, AstraZeneca, Novartis and Takeda.
(3)Quarterly redemption payments of $15.6 million commenced in the first quarter of 2021 related to the Series A Biohaven Preferred Shares (presented as Proceeds from available for sale debt securities on the statements of cash flows). The remaining amounts are related to royalty receipts from Nurtec ODT.
(4)Other Growth Productsproducts primarily include royaltiesroyalty receipts on the following products: Bosulif (a product co-developed by our joint venture investee, Avillion I, for which receipts are presented as Distributions received from non-consolidated affiliatesequity method investees on the Statementstatements of Cash Flows)cash flows), Cimzia, Conbriza/Fablyn/Viviant, Emgality, Entyvio, Erleada, Farxiga/Onglyza,Gavreto, HIV franchise, IDHIFA, Letairis, Lexiscan, Mircera, Myozyme, Nesina, Nurtec, Prevymis, Priligy, Soliqua, Tazverik and Trodelvy. Other Growth Products also include contributions from the Legacy SLP Interest and a distribution from Avillion in respect of the Merck Asset, for which development ceased in 2020, and 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.(defined below).
(5) Receipts from Tecfidera milestone payments are presented as Proceeds from available for sale debt securities on the StatementIn October 2022, Pfizer completed its acquisition of Cash Flows.Biohaven.
(6)Other Mature Products primarily include royalties on the following products: Prezista, Rotateq, Savella and Thalomid.
Financial Overview
Financial highlightsHighlights
•Net cash provided by operating activities totaled $960.1 million$1.6 billion and $769.8 million$1.5 billion for the sixnine months ended JuneSeptember 30, 20202022 and 2019,2021, respectively. Net cash provided by operating activities is the mostclosest comparable GAAP financial measure to the supplemental non-GAAP liquidity measures that follow.
•Adjusted Cash Receipts (a non-GAAP metric) totaled $844.1 million$1.7 billion and $1,075.6 million$1.6 billion for the sixnine months ended JuneSeptember 30, 20202022 and 2019,2021, respectively.
•Adjusted EBITDA (a non-GAAP metric) totaled $774.1 million$1.6 billion and $1,028.5 million$1.5 billion for the sixnine months ended JuneSeptember 30, 20202022 and 2019,2021, respectively.
•Adjusted Cash Flow (a non-GAAP metric) totaled $666.5 million$1.3 billion and $823.2 million$1.2 billion for the sixnine months ended JuneSeptember 30, 20202022 and 2019,2021, respectively.
Understanding Our Results of Operations
Following our IPO, Royalty Pharma plc is a holding company whose principal asset is a controlling equity interest in RP Holdings, which is the sole equity owner of Royalty Pharma Investments 2019 ICAV and is included in our condensed consolidated financial statements. We report non-controlling interests related to four minoritythe portion of ownership interests in ourof consolidated subsidiaries heldnot owned by third parties.us which are attributable to:
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 the RP Holdings Class C Special Interests held by EPA Holdings described under “Certain Relationships and Related Party Transactions—Equity Performance Awards” in our Prospectus. 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 Class B Interests held indirectly by the Continuing Investors Partnerships, which represent approximately 40%an approximate 27% ownership interest in RP Holdings as of September 30, 2022 and are exchangeable for our Class A ordinary shares of Royalty Pharma plc following the expiration of the underwriter lockup.shares. The value of this non-controlling interest will decline over time if the investors who indirectly own the RP Holdings Class B Interests exchange those sharesconduct exchanges for our Class A ordinary shares of Royalty Pharma plc.shares.
4.The fourth minority interest is attributable to a3. A de minimis interest in the Collection TrustRPCT held by certain legacy investorsRPSFT as a result of a 2011 reorganization transaction that created a prior legacy entity.transaction. The value of this non-controlling interest will decline over time as the royalty assets in the Collection Trustowned by RPCT expire and is expected to be substantially eliminated by the end of 2022.
334. The RP Holdings Class C ordinary share (the “RP Holdings Class C Special Interest”) held by RPI EPA Holdings, LP (“EPA Holdings”), an affiliate of RP Management, LLC (the “Manager”). Income will not be allocated to this non-controlling interest until certain performance conditions are met.
The fourth non-controlling interest related to RPSFT’s ownership in the Collection Trust is the only non-controlling interest that existed prior to the Reorganization Transactions and, therefore, exists in the historical financial statements for periods through December 31, 2019 discussed in this MD&A. The non-controlling interest related to the Legacy Investors Partnerships’ 18% ownership interest in Old RPI exists from the Exchange Date and is reflected in our financial statements for the first quarter of 2020. 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 of RP Holdings, Old RPI and the Collection TrustRPCT are consolidated into theour financial statements of Royalty Pharma plc.statements.
Following the Reorganization Transactions, the Manager is entitled to receive Operating and Personnel Payments while EPA Holdings is entitled to receive Equity Performance Awards through its RP Holdings Class C Special Interests following the IPO.Interest. Equity Performance Awards owed to EPA Holdings will be recognized as an equity transaction when the obligation becomes due and will impact the income allocated to non-controlling interestsinterest related to the RP Holdings Class C Special Interest. The Equity Performance Awards will be payable in RP Holdings Class B Interests at that time.will be exchanged upon issuance for Class A ordinary shares. EPA Holdings may also receive a periodic cash advance in respect of the RP Holdings Class C Special Interest to the extent necessary for EPA Holdings or any of its beneficial owners to pay when due any income tax imposed on it or them as a result of holding such RP Holdings Class C Special Interest. We do not currently expect any material Equity Performance Awards to be payable until certain performance conditions are met, which we do not expect to occur 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 generally arising from successful commercialization of products developed through joint researchR&D funding arrangements, and development funding arrangements.a declining contribution of royalty revenue from our intangible royalty assets for which patent rights have materially expired. 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 assetsroyalties as intangible assets.
The majority of our royalties are recorded as financial assets, for which we
We recognize interest income.income related to our financial royalty assets. Royalty revenue relates solely to revenue from our DPP-IV patent estateproducts for which the patent rights have been licensed to various counterparties. For the three and sixnine months ended JuneSeptember 30, 20202022 and 2019,2021, the royalty payors accounting for greater than 10% of our total income and other revenues in any one period are shown in the table below:
| | | | | | | | | | | | | | | | | |
| | Contribution to total income and other revenues for the | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2020 | 2019 | 2020 | 2019 |
Royalty payor | Royalty asset | | | | |
Vertex | Cystic fibrosis franchise | 29 | % | 23 | % | 29 | % | 23 | % |
AbbVie | Imbruvica | 19 | % | 19 | % | 19 | % | 19 | % |
Gilead | HIV franchise | 12 | % | 14 | % | 13 | % | 14 | % |
Biogen | Tysabri | 11 | % | 12 | % | 11 | % | 13 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
Royalty Payor | | Royalties | | 2022 | | 2021 | | 2022 | | 2021 |
Vertex | | Cystic fibrosis franchise | | 35 | % | | 33 | % | | 36 | % | | 33 | % |
AbbVie | | Imbruvica | | 13 | % | | 16 | % | | 15 | % | | 17 | % |
| | | | | | | | | | |
| | | | | | | | | | |
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. The accretable yieldInterest income is accreted into incomerecognized at the effective rate of return over the expected life of the assets,asset, which is calculated at the end of each reporting period and applied prospectively. As changes in sell-side equity research analystanalysts’ consensus sales estimates are updated on a quarterly basis, the effective rate of return changes. For example, if sell-side equity research analysts’ consensus sales forecasts increase, the yield to derive income on a financial royalty asset will increase and result in higher income for subsequent periods. Refer to Note 2 in our 2019 audited consolidated financial statements for additional information.
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 sales 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) changes in amounts and timing of projected royalty receipts.receipts and milestone payments. Our royalties classified as 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 oursales of Januvia, Janumet and other DPP-IV patents classified as intangible assets.products by our licensees. Our royalties on Januvia and Janumet expired in the three months ended March 31, 2022. Our royalties on other DPP-IVs have also substantially ended and we do not expect any material revenue from our DPP-IVs in the future periods.
Other royalty income
Other royalty income primarily includes income from former royalties for which the asset balancesfinancial royalty assets that have been fully depletedamortized by the expected expiration date and royalty income from synthetic royalties and milestones arising out of research and developmentR&D funding arrangements. Occasionally, a royalty asset may be depletedamortized 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 dateduration by which the financial asset was amortized in full.fully amortized. In each scenario where a financial royalty asset no longer remains,has been fully amortized, income onfrom such royalty asset is recognized as Other royalty income. Other royalty income also includes income from royalties that are recorded at fair value on our condensed consolidated balance sheets.
Research and development funding expense
R&D funding expense (“R&D”) consists of (1) upfront R&D payments we have made to counterparties to acquire royalties on development-stage product candidates and (2) amounts we incurred to jointly 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.
Below is a summary of the R&D agreements in place and the associated R&D funding expense during the three and six months ended June 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | Three Months Ended June 30, | | Six Months Ended June 30, | |
Partner/ Counterparty | Product | Current stage of development | 2020 | 2019 | 2020 | 2019 |
| | | | | | |
| | | | | | |
Pfizer | Palbociclib/ Ibrance | In Phase III clinical trial for adjuvant breast cancer; approved for other indications | $ | — | | $ | 17,818 | | $ | — | | $ | 36,337 | |
Other | Various | Various | 5,776 | | 3,639 | | 13,415 | | 8,111 | |
| Total R&D funding expense | | $ | 5,776 | | $ | 21,457 | | $ | 13,415 | | $ | 44,448 | |
Provision for changes in expected cash flows from financial royalty assets
The provisionProvision for changes in expected future cash flows from financial royalty assets includes the following activities:following:
• the movement in the Cumulative allowance for changes in expected future cash flows, and
• the movement in the allowance for credit losses upon adoption of ASU 2016-13 on January 1, 2020.
The provision for changes in expected cash flows isexpense or income related to the current period activity resulting from adjustments to the cumulative allowance for changes in expected cash flows,flows; and
•expense or income related to the provision for current expected credit losses, which is a contra balance sheet account linkedreflects the activity for the period, primarily due to our Financialnew financial royalty assets with limited protective rights and changes to cash flow estimates for financial royalty assets with limited protective rights.
,
net balance on the condensed consolidated balance sheet. 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 significantan 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 provision income (i.e., a credit to provision expense.the provision).
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 sales 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) changes in amounts and timing of projected royalty receipts.receipts and milestone payments.
R&D funding expense
Upon
R&D funding expense consists of payments that we have made to counterparties to acquire royalties or milestones on product candidates. It includes development-stage funding payments that are made upfront or upon pre-approval milestones, and development-stage funding payments that are made over time as the adoption on January 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 the portion ofrelated product candidates undergo clinical trials with our portfolio of financial royalty assets that is subject to credit risk. 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 changes in the credit ratings of the marketers responsible for paying our royaltiescounterparties.
General and changes in the underlying cash flow forecasts used in the effective interest model to measure income from our financial royalty assets.administrative expenses
General and administrative (“G&A”) expenses
G&A expenses includes include primarily Operating and Personnel Payments bad debt expense,(defined below), legal reserves,expenses, other expenses for professional services and share basedshare-based compensation.
Beginning The expenses incurred in 2020, we expect therespect of Operating and Personnel Payments paidare expected to our Manager to be significantly higher than they were in historical periods. Priorcomprise the most significant component of G&A expenses on an ongoing basis.
Under the management agreements (collectively, the “Management Agreement”), we pay quarterly operating and personnel expenses to the Reorganization Transactions, the Manager or its affiliates (“Operating and Personnel Payments were fixed, growing at 5% per annum and not linkedPayments”) equal to any financial line item. Under the New Management Agreement effective from the Exchange Date, the Operating and Personnel Payment for RPI is calculated as 6.5% of the Adjusted Cash Receiptscash receipts from royalty investments for eachsuch quarter and 0.25% of the GAAP value of our security investments under GAAP as of the end of such quarter, adjusted to reflect the actual GAAP value of our security investments. 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 condensed consolidated statements of income, is payable in equal quarterly installments and increases by 5% annually on a compounded basis through the Legacy Date, after which it will beG&A expenses, are calculated as the greater of $1 million per quarter and 0.3125% of royalties from Royalty Investments (as defined therein). The expenses incurred in respectthe limited partnership agreements of the Operating and Personnel Payments are expected to compriseLegacy Investors Partnerships) during the most significant componentprevious twelve calendar months.
Equity in losses/(earnings) of G&A expenses in 2020 and on an ongoing basis.equity method investees
Equity in losses/(earnings) of equity method investees primarily includes the results of our share of income or loss of nonconsolidated affiliatesfrom the following non-consolidated affiliates:
1. Legacy SLP Interest
Interest.
In connection with the Exchange Offer Transactions, we acquired a newan 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 the Company.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 the Legacy Investors Partnerships.
As the Legacy Investors Partnerships are no longer participatingparticipate in investment opportunities, the value of the Legacy SLP Interest is expected to decline over time. As of the Exchange Date, our equity method investee, the Legacy Investors Partnerships, also owns a non-controlling interest in Old RPI.
2. The Avillion Entities.The Avillion Entities
During 2014, we entered into an agreement with our equity method investee (“Avillion I”) to invest up to $46.0 million over three years to fund a portion of the costs of a pivotal Phase III study for Pfizer’s Bosulif to expand its label into front-line chronic myeloid leukemia. The FDA approved a supplemental New Drug Application (“sNDA”) for Pfizer’s bosutinib in December 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.
In 2018, we agreed to fund up to approximately $105 million over multiple years to fund a portion of the costs for Phase III clinical trials of our equity method investee (“Avillion II,” or together with Avillion I, the “Avillion Entities”), 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 a series of deferred payments and success-based milestones.
In March 2017, and through an amendment in December 2019, we entered into an agreement to invest $19.0 million to fund approximately 50% of the costs of a phase II clinical trial for the use of Merck KGaA’s anti-IL 17 nanobody M1095 (the “Merck Asset”) for the treatment of psoriasis in exchange for certain milestone and royalty payments. Development for the Merck Asset ceased in 2020 and we do not expect to record significant earnings or losses in the future related to this investment.
The business model of the Avillion Entities includes partnering (as defined below) partner with global biopharmaceutical companies to perform R&D in exchange for success-based milestones and/orand royalties onceif products are commercialized. Our investments in Avillion Financing I, LP (“Avillion I”) and BAv Financing II, LP (“Avillion II”, or, together with Avillion I, the “Avillion Entities”) are accounted for using the equity method.
Other (income) expense,/expenses, net
Other (income) expense,/expenses, net primarily includes the unrealized gains or losses on our derivatives, the change in fair market value of our equity securities, the unrealized gains or losses on extinguishment ofderivative instruments and available for sale debt securities, including related forwards and funding commitments, and interest income.
Net income attributable to non-controlling interestinterests
The net income attributable to non-controlling interest prior tointerests includes the Exchange Date, as discussed earlier in this MD&A, relates to RPSFT’s 20%Legacy Investors Partnerships’ approximately 18% share of earnings in the Collection Trust, which is a consolidated subsidiary of Old RPI.
As of the Exchange Date, the non-controlling interest balance on the unaudited condensed consolidated balance sheets includes a new non-controlling interest related to the ownership in Old RPI by the Legacy Investors Partnerships of approximately 18%. As the Legacy Investors Partnerships are no longer participatingparticipate in investment opportunities, of RPI, the value ofrelated net income attributable to this non-controlling interest is expected to decline over time.
Following the IPO, this line item also includes netNet income attributable to thenon-controlling interests includes RP Holdings Class B Interests held by the Continuing Investors Partnerships and will include net income attributable to the RP Holdings Class C Special InterestsInterest held by EPA Holdings once certain performance conditions have been met. NetFuture net income attributable to the non-controlling interest related to the RP Holdings Class B Interests held by the Continuing Investors Partnerships will decline over time if the investors who indirectly own the RP Holdings Class B Interests exchange those sharesconduct exchanges for our Class A ordinary shares of Royalty Pharma plc.shares.
Net income attributable to non-controlling interests also includes 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 royalty assets owned by RPCT expire and to be substantially eliminated by the end of 2022.
Net income attributable to non-controlling interests above can fluctuate significantly from period to period, primarily driven by volatility in the income statement activity of the respective underlying entity as a result of the non-cash charges associated with applying the effective interest accounting methodology to our financial royalty assets as described in section titled “Understanding Our Financial Reporting.”
Results of Operations
For the threeThree and six months ended JuneNine Months Ended September 30, 20202022 and 20192021
The comparison of our historical results of operations for the three and sixnine months ended JuneSeptember 30, 20202022 and 20192021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | For the Three Months Ended September 30, | | Change | | For the Nine Months Ended September 30, | | Change |
| 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Income and other revenues: | | | | | | | | | | | | | | | |
Income from financial royalty assets | $ | 551,682 | | | $ | 505,832 | | | $ | 45,850 | | | 9.1 | % | | $ | 1,578,555 | | | $ | 1,538,871 | | | $ | 39,684 | | | 2.6 | % |
Revenue from intangible royalty assets | 1,073 | | | 63,406 | | | (62,333) | | | (98.3) | % | | 37,196 | | | 139,594 | | | (102,398) | | | (73.4) | % |
Other royalty income | 20,708 | | | 16,535 | | | 4,173 | | | 25.2 | % | | 55,716 | | | 35,298 | | | 20,418 | | | 57.8 | % |
Total income and other revenues | 573,463 | | | 585,773 | | | (12,310) | | | (2.1) | % | | 1,671,467 | | | 1,713,763 | | | (42,296) | | | (2.5) | % |
Operating expenses: | | | | | | | | | | | | | | | |
Provision for changes in expected cash flows from financial royalty assets | 305,061 | | | 137,837 | | | 167,224 | | | 121.3 | % | | 595,396 | | | 186,337 | | | 409,059 | | | 219.5 | % |
Research and development funding expense | 25,500 | | | 90,500 | | | (65,000) | | | (71.8) | % | | 126,606 | | | 96,263 | | | 30,343 | | | 31.5 | % |
Amortization of intangible assets | — | | | 5,796 | | | (5,796) | | | (100.0) | % | | 5,670 | | | 17,200 | | | (11,530) | | | (67.0) | % |
General and administrative expenses | 50,692 | | | 48,588 | | | 2,104 | | | 4.3 | % | | 154,075 | | | 136,665 | | | 17,410 | | | 12.7 | % |
| | | | | | | | | | | | | | | |
Total operating expenses, net | 381,253 | | | 282,721 | | | 98,532 | | | 34.9 | % | | 881,747 | | | 436,465 | | | 445,282 | | | 102.0 | % |
Operating income | 192,210 | | | 303,052 | | | (110,842) | | | (36.6) | % | | 789,720 | | | 1,277,298 | | | (487,578) | | | (38.2) | % |
Other expense/(income): | | | | | | | | | | | | | | | |
Equity in losses/(earnings) of equity method investees | 3,251 | | | (2,749) | | | 6,000 | | | (218.3) | % | | 2,117 | | | (18,532) | | | 20,649 | | | (111.4) | % |
Interest expense | 46,977 | | | 44,327 | | | 2,650 | | | 6.0 | % | | 141,006 | | | 119,168 | | | 21,838 | | | 18.3 | % |
| | | | | | | | | | | | | | | |
Other (income)/expenses, net | (78,432) | | | 39,678 | | | (118,110) | | | (297.7) | % | | (193,497) | | | (10,868) | | | (182,629) | | | * |
Total other (income)/expenses, net | (28,204) | | | 81,256 | | | (109,460) | | | (134.7) | % | | (50,374) | | | 89,768 | | | (140,142) | | | (156.1) | % |
Consolidated net income | 220,414 | | | 221,796 | | | (1,382) | | | (0.6) | % | | 840,094 | | | 1,187,530 | | | (347,436) | | | (29.3) | % |
Net income attributable to non-controlling interests | 77,763 | | | 119,867 | | | (42,104) | | | (35.1) | % | | 341,178 | | | 575,706 | | | (234,528) | | | (40.7) | % |
Net income attributable to Royalty Pharma plc | $ | 142,651 | | | $ | 101,929 | | | $ | 40,722 | | | 40.0 | % | | $ | 498,916 | | | $ | 611,824 | | | $ | (112,908) | | | (18.5) | % |
*Percentage change is not meaningful.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended June 30, | | Change | | | Six Months Ended June 30, | | Change | |
| 2020 | 2019 | $ | % | | 2020 | 2019 | $ | % |
Income and other revenues: | | | | | | | | | |
Income from financial royalty assets | $ | 474,177 | | $ | 416,945 | | $ | 57,232 | | 13.7 | % | | $ | 937,021 | | $ | 799,161 | | $ | 137,860 | | 17.3 | % |
Revenue from intangible royalty assets | 33,445 | | 35,476 | | (2,031) | | (5.7) | % | | 68,428 | | 78,722 | | (10,294) | | (13.1) | % |
Other royalty income | 3,310 | | 5,187 | | (1,877) | | (36.2) | % | | 6,362 | | 14,608 | | (8,246) | | (56.4) | % |
Total income and other revenues | 510,932 | | 457,608 | | 53,324 | | 11.7 | % | | 1,011,811 | | 892,491 | | 119,320 | | 13.4 | % |
Operating expenses: | | | | | | | | | |
Research and development funding expense | 5,776 | | 21,457 | | (15,681) | | (73.1) | % | | 13,415 | | 44,448 | | (31,033) | | (69.8) | % |
Provision for changes in expected cash flows from financial royalty assets | 47,278 | | 72,210 | | (24,932) | | (34.5) | % | | 135,290 | | 22,177 | | 113,113 | | 510.0 | % |
Amortization of intangible royalty assets | 5,733 | | 5,733 | | — | | — | % | | 11,466 | | 12,332 | | (866) | | (7.0) | % |
General and administrative expenses | 42,799 | | 30,349 | | 12,450 | | 41.0 | % | | 80,864 | | 54,775 | | 26,089 | | 47.6 | % |
Total operating expenses | 101,586 | | 129,749 | | (28,163) | | (21.7) | % | | 241,035 | | 133,732 | | 107,303 | | 80.2 | % |
Operating income | 409,346 | | 327,859 | | 81,487 | | 24.9 | % | | 770,776 | | 758,759 | | 12,017 | | 1.6 | % |
Other (income)/expense: | | | | | | | | | |
Equity in (earnings)/loss of non-consolidated affiliates | (29,292) | | 8,144 | | (37,436) | | (459.7) | % | | (20,218) | | 13,673 | | (33,891) | | (247.9) | % |
Interest expense | 34,189 | | 69,168 | | (34,979) | | (50.6) | % | | 87,773 | | 136,434 | | (48,661) | | (35.7) | % |
Other (income) expense, net | (197,527) | | 71,777 | | (269,304) | | (375.2) | % | | (7,851) | | 33,788 | | (41,639) | | (123.2) | % |
Total other (income) expenses, net | (192,630) | | 149,089 | | (341,719) | | (229.2) | % | | 59,704 | | 183,895 | | (124,191) | | (67.5) | % |
Consolidated net income | 601,976 | | 178,770 | | 423,206 | | 236.7 | % | | 711,072 | | 574,864 | | 136,208 | | 23.7 | % |
Less: Net income attributable to non-controlling interest | (159,902) | | (27,057) | | (132,845) | | 491.0 | % | | (197,758) | | (55,707) | | (142,051) | | 255.0 | % |
Net income attributable to controlling interest | $ | 442,074 | | $ | 151,713 | | $ | 290,361 | | 191.4 | % | | $ | 513,314 | | $ | 519,157 | | $ | (5,843) | | (1.1) | % |
Total income and other revenues
Income from financial royalty assets
Income from financial royalty assets by product for our top products for the three and sixnine months ended JuneSeptember 30, 20202022 and 20192021 is as follows, in order of contribution to income for the sixnine months ended JuneSeptember 30, 2020:2022:
| (in thousands) | (in thousands) | Three Months Ended June 30, | | Change | | | Six Months Ended June 30, | | Change | | (in thousands) | For the Three Months Ended September 30, | | Change | | For the Nine Months Ended September 30, | | Change |
| | 2020 | 2019 | $ | % | | 2020 | 2019 | $ | % | | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
Cystic fibrosis franchise | Cystic fibrosis franchise | $ | 149,013 | | $ | 103,470 | | $ | 45,543 | | 44.0 | | | $ | 289,044 | | $ | 205,578 | | $ | 83,466 | | 40.6 | | Cystic fibrosis franchise | $ | 203,383 | | | $ | 192,832 | | | $ | 10,551 | | | 5.5 | % | | $ | 599,504 | | | $ | 563,245 | | | $ | 36,259 | | | 6.4 | % |
Imbruvica | Imbruvica | 97,228 | | 85,596 | | 11,632 | | 13.6 | | | 195,467 | | 167,097 | | 28,370 | | 17.0 | | Imbruvica | 76,251 | | | 94,626 | | | (18,375) | | | (19.4) | % | | 244,515 | | | 290,056 | | | (45,541) | | | (15.7) | % |
HIV franchise | 63,726 | | 63,626 | | 100 | | 0.2 | | | 129,502 | | 122,804 | | 6,698 | | 5.5 | | |
Tysabri | Tysabri | 53,955 | | 56,981 | | (3,026) | | (5.3) | | | 110,230 | | 113,706 | | (3,476) | | (3.1) | | Tysabri | 54,029 | | | 54,335 | | | (306) | | | (0.6) | % | | 157,953 | | | 156,083 | | | 1,870 | | | 1.2 | % |
Xtandi | Xtandi | 25,849 | | 26,371 | | (522) | | (2.0) | | | 49,236 | | 52,095 | | (2,859) | | (5.5) | | Xtandi | 24,724 | | | 28,527 | | | (3,803) | | | (13.3) | % | | 73,662 | | | 81,245 | | | (7,583) | | | (9.3) | % |
Tremfya | | Tremfya | 30,493 | | | 6,765 | | | 23,728 | | | * | | 72,309 | | | 6,765 | | | 65,544 | | | * |
Promacta | Promacta | 12,872 | | 10,382 | | 2,490 | | 24.0 | | | 26,389 | | 13,211 | | 13,178 | | 99.8 | | Promacta | 22,321 | | | 19,287 | | | 3,034 | | | 15.7 | % | | 66,911 | | | 55,250 | | | 11,661 | | | 21.1 | % |
Other | Other | 71,534 | | 70,519 | | 1,015 | | 1.4 | | | 137,153 | | 124,670 | | 12,483 | | 10.0 | | Other | 140,481 | | | 109,460 | | | 31,021 | | | 28.3 | % | | 363,701 | | | 386,227 | | | (22,526) | | | (5.8) | % |
Total income from financial royalty assets | Total income from financial royalty assets | $ | 474,177 | | $ | 416,945 | | $ | 57,232 | | 13.7 | | | $ | 937,021 | | $ | 799,161 | | $ | 137,860 | | 17.3 | | Total income from financial royalty assets | $ | 551,682 | | | $ | 505,832 | | | $ | 45,850 | | | 9.1 | % | | $ | 1,578,555 | | | $ | 1,538,871 | | | $ | 39,684 | | | 2.6 | % |
*Percentage change is not meaningful.
Three months ended JuneSeptember 30, 20202022 and 20192021
Income from financial royalty assets increased by $57.2$45.9 million, or 9.1%, in the second quarter of 2020three months ended September 30, 2022 compared to the same period of the prior year,three months ended September 30, 2021, primarily driven by strong performance of the cystic fibrosis franchise following the prior year approval of Trikafta as well as strong performance of Imbruvica. Additionally, we recorded $23.2 million in income related to recently acquired assets, primarily Trelegy and Tremfya, acquired in the second quarter of 2020 related to new assets acquired subsequent to the second quarter of 2019, including primarily Tazverik, Crysvita,three months ended September 30, 2022 and Prevymis, which2021, respectively. The increase was partially offset by declines from maturing assets, such as Lyrica and Letairis.in sell-side equity research analysts’ consensus sales forecasts for Imbruvica.
SixNine Months Ended JuneSeptember 30, 20202022 and 20192021
Income from financial royalty assets increased by $137.9$39.7 million, or 2.6%, in the sixnine months ended JuneSeptember 30, 20202022 compared to the same period of the prior year,nine months ended September 30, 2021, primarily driven by income from recently acquired assets, primarily Trelegy and Tremfya, in addition to the same factors as described above. Additionally, we recorded $38.8 millionstrong performance of the cystic fibrosis franchise. The increase in income in the first six months of 2020 related to the new assets acquired subsequent to the second quarter of 2019 discussed above, which was partially offset by the maturing of our royalties from the HIV franchise and declines in sell-side equity research analysts’ consensus sales forecasts for Imbruvica and Tazverik.
Revenue from maturingintangible royalty assets such as Lyrica
Three months ended September 30, 2022 and Letairis.2021
Revenue from intangible royalty assets decreased by $62.3 million, or 98.3%, in the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily driven by the maturity of our royalties on Januvia and Janumet in the three months ended March 31, 2022 and the recognition of underpaid royalties on Tradjenta of approximately $21.7 million in the three months ended September 31, 2021.
Three months ended JuneNine Months Ended September 30, 20202022 and 20192021
Revenue from intangible royalty interests declinedassets decreased by $2.0$102.4 million, or 73.4%, in the second quarter of 2020nine months ended September 30, 2022 compared to the prior year period primarily due to the Januvia, Janumet and other DPP-IV royalties approaching maturity.
Six Months Ended June 30, 2020 and 2019
Revenue from intangible royalty interests declined by $10.3 million in the sixnine months ended JuneSeptember 30, 2020 compared to the prior year period2021, primarily driven by the same factors as described above.maturity of our royalties on Januvia and Janumet and the recognition of underpaid royalties on Tradjenta in the prior year period.
Other royalty income
Three months ended JuneSeptember 30, 20202022 and 20192021
Other royalty income increased by $4.2 million, or 25.2%, in the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily related to growth in the ongoing product launches of Trodelvy and Nurtec ODT that arose from our R&D funding agreements with Immunomedics and Biohaven, respectively.
Nine Months Ended September 30, 2022 and 2021
Other royalty income decreasedincreased by $1.9$20.4 million, or 57.8%, in the second quarter of 2020 primarily due to the expiration of our Prezista royalty in 2019.
Six Months Ended June 30, 2020 and 2019
Other royalty income decreased by $8.2 million in the sixnine months ended JuneSeptember 30, 20202022 compared to the prior year primarily due to Remicade, which expired in 2018 but for which we continued collecting royalties through the first quarter of 2019.
Research and development funding expense
Threenine months ended JuneSeptember 30, 20202021, primarily related to income from Trodelvy and 2019
R&D funding expense declined in the second quarter of 2020 as compared to the same period of the prior year as a result of satisfying our funding commitments in the fourth quarter of 2019 under our agreement with Pfizer.
Six Months Ended June 30, 2020 and 2019
R&D funding expense declined in the six months ended June 30, 2020 as compared to the same period of the prior year due to the same reason as described above.Nurtec ODT.
Provision for changes in expected cash flows from financial royalty assets
The breakdown of our provision for changes in expected future cash flows includes the following:
(1)•expense or income related to the current period activity resulting from adjustments to the cumulative allowance for changes in expected cash flows; and
•expense or income related to the provision for current expected credit losses, andlosses.
(2)
income and expense activity for financial royalty assets whose cash flow forecasts have changed from the prior period.
As the latterprovision activity is a combination of income and expense items, the provision breakdown by product,royalty, exclusive of the provision for current expected credit losses, is as follows, based on the largest contributors to each period’s provision income or expense:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | For the Three Months Ended September 30, 2022 | | | | For the Three Months Ended September 30, 2021 |
Royalty | | | Royalty | |
Imbruvica | | $ | 133,750 | | | Tazverik | $ | (98,381) | | $ | 115,546 | |
Tysabri | | 119,691 | | | Xtandi | (53,142) | | 58,917 | |
Xtandi | | 73,063 | | | Cabometyx/Cometriq | (44,263) | | 12,022 | |
Tazverik | | 46,804 | | | Promacta | (19,900) | | 9,682 | |
Cystic fibrosis franchise | | (54,609) | | | Nesina | 127,241 | | 2,506 | |
Other | | 41,976 | | | Other | 24,589 | | (2,261) | |
Total provision, exclusive of provision for credit losses | | 360,675 | | | Total provision, exclusive of provision for credit losses | | 196,412 | |
Provision for current expected credit losses | | (55,614) | | | Provision for current expected credit losses | | (58,575) | |
Total provision | | $ | 305,061 | | | Total provision | | $ | 137,837 | |
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | For the Nine Months Ended September 30, 2022 | | | | For the Nine Months Ended September 30, 2021 |
Royalty | | | Royalty | |
Imbruvica | | $ | 314,044 | | | Tazverik | | $ | 176,937 | |
Tazverik | | 124,975 | | | Imbruvica | | 107,542 | |
Tysabri | | 103,073 | | | Emgality | | 54,902 | |
Xtandi | | 54,116 | | | Cabometyx/Cometriq | | 40,499 | |
Cystic fibrosis franchise | | (48,636) | | | Tysabri | | (112,720) | |
Other | | 166,397 | | | Other | | (57,480) | |
Total provision, exclusive of provision for credit losses | | 713,969 | | | Total provision, exclusive of provision for credit losses | | 209,680 | |
Provision for current expected credit losses | | (118,573) | | | Provision for current expected credit losses | | (23,343) | |
Total provision | | $ | 595,396 | | | Total provision | | $ | 186,337 | |
| | | | | | | | | | | | | | |
(in thousands) | | | | |
| Three months ended June 30, | | | Three months ended June 30, |
Product | 2020 | | Product | 2019 |
Cystic fibrosis franchise | $ | 98,381 | | | Xtandi | $ | 109,071 | |
Soliqua | 29,491 | | | Tysabri | 28,950 | |
Crysvita | 9,764 | | | Erleada | 13,169 | |
Tysabri | (94,842) | | | HIV franchise | 10,571 | |
Xtandi | (11,188) | | | Cystic fibrosis franchise | (69,852) | |
Other | (11,053) | | | Other | (19,699) | |
Total provision, exclusive of provision for credit losses | 20,553 | | | Total provision, exclusive of provision for credit losses | 72,210 | |
Provision for current expected credit losses | 26,725 | | | Provision for current expected credit losses | — | |
Total provision | $ | 47,278 | | | Total provision | $ | 72,210 | |
Three months ended September 30, 2022 and 2021
| | | | | | | | | | | | | | |
(in thousands) | | | | |
| Six months ended June 30, | | | Six months ended June 30, |
Product | 2020 | | Product | 2019 |
Cystic fibrosis franchise | $ | 98,381 | | | Xtandi | $ | 94,092 | |
Crysvita | 44,263 | | | Tysabri | 17,038 | |
Imbruvica | 31,543 | | | Erleada | 13,169 | |
Xtandi | (113,219) | | | Cystic fibrosis franchise | (81,918) | |
Tysabri | (37,437) | | | Alogliptin | (21,714) | |
Other | 3,076 | | | Other | 1,510 | |
Total provision, exclusive of provision for credit losses | 26,607 | | | Total provision, exclusive of provision for credit losses | 22,177 | |
Provision for current expected credit losses | 108,683 | | | Provision for current expected credit losses | — | |
Total provision | $ | 135,290 | | | Total provision | $ | 22,177 | |
In the
Threethree months ended JuneSeptember 30, 2020 and 2019
2022
In the second quarter of 2020,, we recordedrecorded provision expense of $47.3$305.1 million, comprised of $360.7 million in provision expense for changes in expected cash flows and $55.6 million in comparison to aprovision income for current expected credit losses. We recorded provision expense of $72.2 millionfor changes in expected cash flows primarily related to Imbruvica, Tysabri, Xtandi and Tazverik due to significant declines in sell-side equity research analysts’ consensus sales forecasts, which was partially offset by provision income for the same period of the prior year. Increases to the provision for Cysticcystic fibrosis franchise Soliqua and Crysvita weredue to an increase in sell-side equity research analysts’ consensus sales forecasts. The provision income for credit losses was primarily driven by a change in the payor for a particular product.
In the three months ended September 30, 2021, we recorded provision expense of $137.8 million, comprised of $196.4 million in provision expense for changes in expected cash flows and $58.6 million in provision income for current expected credit losses. We recorded provision expense for changes in expected cash flows for Tazverik and Xtandi, primarily due to significant declines in sell-side equity research analysts’ consensus forecasts. Offsetting theThe provision expenseincome for credit losses was driven by a large reversalsignificant decrease in current expected credit losses related to Tazverik as a result of the cumulative allowances for Tysabricorresponding significant decline in the financial asset value.
Nine Months Ended September 30, 2022 and Xtandi due to an increase in consensus forecasts.2021
In the nine months ended September 30, 2022, we recorded secondprovision expense of $595.4 million, comprised of $714.0 million in provision quarter of 2019, we recognizedexpense for changes in expected cash flows and $118.6 million in provision income for current expected credit losses. We recorded provision expense for Xtandi,changes in expected cash flows for Imbruvica, Tazverik, and Tysabri Erleada, and Emtriva primarily due to significant declines in sell-side equity research analysts’ consensus sales forecasts. The provision income for credit losses was primarily driven by a significant decrease in current expected credit losses related to Tazverik as a result of the decline in the financial asset value as well as a change in the payor for a particular product.
In the nine months ended September 30, 2021, we recorded provision expense of $186.3 million, comprised of $209.7 million in provision expense for changes in expected cash flows and $23.3 million in provision income for current expected credit losses. We recorded provision expense for changes in expected cash flows for Tazverik, Imbruvica and Emgality, primarily due to declines in sell-side equity research analysts’ consensus forecasts, which was partially offset by a large reversal of the cumulative allowanceprovision income forCystic fibrosis franchise Tysabri due to an increase in consensus forecasts.
In connection with the adoption of ASU 2016-13 on January 1, 2020, we recognized a provision for current expected credit losses of $26.7 million in the second quarter of 2020 for which we did not have comparable activity in the same period prior year. The primary drivers of the current period provision expense relate to an increase in the balance of financial royalty assets subject to credit risk and the credit rating of associated marketers.
Six Months Ended June 30, 2020 and 2019
In the first six months ended June 30, 2020, we recorded provision expense of $135.3 million for changes in expected cash flows in comparison to a provision expense of $22.2 million for the same period of the prior year. Increases to the provision for Cystic fibrosis franchise, Crysvita and Imbruvica were primarily driven by declines in sell-side equity research analysts’ consensus forecasts. Offsetting theThe 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 wasfor credit losses recognized as a large reversalresult of the cumulative allowanceincreases 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.
R&D funding expense
Three months ended September 30, 2022 and 2021
R&D funding expense decreased by $65.0 million, or 71.8%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily driven by lower upfront R&D funding expense. In the three months ended September 30, 2022, we recognized upfront R&D funding expense of $25.0 million in exchange for Xtandia royalty on a development-stage product from Theravance Biopharma, Inc. (“Theravance”). In the three months ended September 30, 2021, we recognized upfront R&D funding expense of $90.0 million in exchange for royalties on two development-stage products from MorphoSys AG (“MorphoSys”), paid on the closing of our strategic funding partnership with MorphoSys in July 2021.
Nine Months Ended September 30, 2022 and Tysabri due2021
R&D funding expense increased by $30.3 million, or 31.5%, for the nine months ended September 30, 2022 as compared to an increasethe nine months ended September 30, 2021. In the nine months ended September 30, 2022, we recognized upfront R&D funding expense of $125.0 million in consensus forecasts.
exchange for royalties on development-stage products from Cytokinetics and Theravance. In the nine months ended September 30, 2021, we recognized upfront R&D funding expense of $90.0 million in exchange for royalties on two development-stage products from MorphoSys.
In the first six months of 2019, we recognized provision expense for Xtandi, Tysabri and Erleada primarily driven by declines in sell-side equity research analysts’ consensus forecasts, offset by a large reversal of the cumulative allowance forCystic fibrosis franchise due to an increase in consensus forecasts.
In addition, we recognized a provision for current expected credit losses of $108.7 million in the first six months of 2020 for which we did not have comparable activity in the same period prior year. The primary drivers of the current period provision expense are the same as those described above.
G&A expenses
Three months ended JuneSeptember 30, 20202022 and 20192021
G&A expenses were relatively flat in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.
Nine Months Ended September 30, 2022 and 2021
G&A expenses increased $12.5by $17.4 million, or 12.7%, in the second quarter of 2020nine months ended September 30, 2022 compared to the same period of the prior year,nine months ended September 30, 2021, primarily as a result of an increase in thedriven by higher Operating and Personnel Fees following the execution of the New Management Agreement,Payments due to increased cost of non-recurring professional services incurred in preparation for our IPO, and share-based compensation associated with shares granted in the second quarter of 2020, offset by lower legal expenses.
Six Months Ended June 30, 2020 and 2019
G&A expenses increased $26.1 million in the six months ended June 30, 2020 compared to the same period of the prior year, primarily driven by the factors as described above. Additionally, the increase is also driven by higher cost of non-recurring professional services incurred in connection with the Reorganization Transactions and our IPO, including fees related to the refinancing of our debt in the first quarter of 2020.cash receipts from royalty investments.
Equity in loss/losses/(earnings) of non-consolidated affiliatesequity method investees
Three months ended JuneSeptember 30, 20202022 and 2019
In connection with the Exchange Offer, we acquired the Legacy SLP Interest valued at $303.7 million in exchange for issuing shares in the Company. During the second quarter of 2020, we recorded equity in earnings of $20.2 million attributable to our income allocation in the Legacy Investors Partnerships.2021
Equity in losses of equity method investees was $3.3 million in the three months ended September 30, 2022 compared to equity in earnings of the Avillion Entities was higherequity method investees of $2.7 million in the second quarter of 2020 compared to the same period in 2019three months ended September 30, 2021, primarily driven by a gain related todecline in equity in earnings from the completion of the Merck development program during the second quarter of 2020, which triggered a distribution received in the period.Legacy SLP Interest.
SixNine Months Ended JuneSeptember 30, 20202022 and 2019
During the six months ended June 30, 2020, we recorded equity in earnings of $23.4 million attributable to our income allocation in the Legacy Investors Partnerships.2021
Equity in losses of equity method investees was $2.1 million in the nine months ended September 30, 2022 compared to equity in earnings of the Avillion Entities was higherequity method investees of $18.5 million in the sixnine months ended JuneSeptember 30, 2020 compared to2021, primarily driven by a decline in equity in earnings from the same periodLegacy SLP Interest which was partially offset by lower equity in 2019 for the reasons as described above.losses from Avillion.
Interest expense
Three months ended JuneSeptember 30, 20202022 and 20192021
Interest expense declined $35.0slightly increased by $2.7 million, or 6.0%, in the second quarter of 2020three months ended September 30, 2022 as compared to the same periodthree months ended September 30, 2021, primarily driven by the issuance of $1.3 billion senior unsecured notes in July 2021 (“2021 Notes”). The weighted average coupon rate was 2.245% and 2.212% in the three months ended September 30, 2022 and 2021, respectively.
Nine Months Ended September 30, 2022 and 2021
Interest expense increased by $21.8 million, or 18.3% in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the issuance of the prior year as a result of2021 Notes. The weighted average coupon rate was 2.245% and 2.154% in the Reorganization Transactionsnine months ended September 30, 2022 and subsequent refinancing of RPIFT’s prior credit facilities that occurred in February 2020. Our subsidiary issued $6.0 billion of new debt in February of 2020 at lower interest rates. 2021, respectively.
Refer to the Liquidity“Liquidity and Sources of Capital Resources” section within this MD&A for additional discussion of our new credit facilities.
Six Months Ended June 30, 2020 and 2019
Interest expense declined $48.7 million in the six months ended June 30, 2020 as compared to the same period of the prior year as a result of the Reorganization Transactions and subsequent refinancing of RPIFT’s prior credit facilities as described above.Notes.
Other (income) expense,/expenses, net
Three months ended JuneSeptember 30, 20202022 and 20192021
Other income, net was $197.5$78.4 million in the second quarter of 2020three months ended September 30, 2022 compared to other expense, net of $71.8$39.7 million in the second quarterthree months ended September 30, 2021. During the three months ended September 30, 2022, we recognized $44.2 million of 2019. We recorded unrealized gains on equityavailable for sale debt securities in the second quarterand $25.8 million of 2020gains on our milestone acceleration option derivative financial instruments, primarily driven by our estimate that a change of $193.9 million primarily due to an increased share price of our investees.control event for Biohaven was imminent. In the prior year period,three months ended September 30, 2021, we recorded $39.4recognized $17.0 million of losses on derivative financial instruments, primarily driven by the change in unrealized lossfair value of the treasury lock contracts related to our interest swap2021 Notes and $36.8the recognition of $14.9 million in unrealized loss related to our equityof losses on available for sale debt securities.
Nine Months Ended JuneSeptember 30, 20202022 and 20192021
Other income, was $7.9net increased by $182.6 million in the sixnine months ended JuneSeptember 30, 20202022 compared to other expense of $33.8 million in the sixnine months ended JuneSeptember 30, 2019.2021. The increase was primarily attributed to $98.0 million of gains on our available for sale debt securities and $97.6 million of gains on our milestone acceleration option derivative financial instruments recognized during the nine months ended September 30, 2022, primarily driven by our estimate that a change of control event for Biohaven was imminent. In the first sixnine months of 2020,ended September 30, 2021, we recorded unrealized gains on equity securitiesrecognized $21.4 million of $40.7 million primarily an net increased share price of our investees which was offset by unrealized losses on derivative contracts of $32.8 millioninstruments, primarily related to unrealized lossthe treasury lock contracts and we recognized $8.2 million of gains on our interest rate swaps due to adverse movements in the LIBOR curve and a decrease in fair value related to our Epizyme warrant. In the prior year period, we recorded $65.3 million in unrealized loss on derivative contracts related to our interest rate swaps and $16.9 million in unrealized gain on equityavailable for sale debt securities.
Net income attributable to non-controlling interestinterests
Three months ended JuneSeptember 30, 20202022 and 20192021
As of the Exchange Date, a new non-controlling interest exists related to the ownership in Old RPI by the Legacy Investors Partnerships of approximately 18%. As a result of the IPO, holders of our Class B ordinary shares also represent a non-controlling interest.
During the second quarter of 2020, we recorded netNet income attributable to the Legacy Investors Partnerships anddecreased by $42.0 million in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily driven by lower net income attributable to Old RPI.
Net income attributable to the Continuing Investors Partnerships for their ownership ofincreased by $11.8 million in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily driven by higher net income attributable to RP Holdings in the three months ended September 30, 2022. This was partially offset by exchanges by investors in the Continuing Investors Partnerships who indirectly own RP Holdings Class B Interests of $107.7 million and $31.6 million, respectively. The net income attributable to non-controlling interestfor our Class A ordinary shares resulted in each period of 2020 is larger thana decline in the comparable prior year periods as a resultContinuing Investors Partnerships’ ownership of ownership changes related to the Reorganization Transactions and the IPO. We now have four different components of non-controlling interest and total ownership by non-controlling interest of 56% versus ownership by non-controlling interest related solely to RPSFT in the prior year period of less than 1%.RP Holdings.
During the second quarter of 2020 and 2019, we recorded net income attributable to RPSFT of $20.6 million and $27.1 million, respectively. Net income attributable to RPSFT is expecteddecreased by $11.9 million in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. We expect net income attributable to RPSFT to continue to decline as the assets held by RPCT mature.
SixNine Months Ended JuneSeptember 30, 20202022 and 20192021
In the six months ended June 30, 2020, we recorded netNet income attributable to the Legacy Investors Partnerships anddecreased by $99.8 million in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily driven by lower net income attributable to Old RPI.
Net income attributable to the Continuing Investors Partnerships for their ownership ofdecreased by $99.8 million in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily driven by lower net income attributable to RP Holdings in the nine months ended September 30, 2022. Exchanges by investors in the Continuing Investors Partnerships who indirectly own RP Holdings Class B Interests for our Class A ordinary shares resulted in a decline in the Continuing Investors Partnerships’ ownership of $120.6 million and $31.6 million, respectively.RP Holdings.
DuringNet income attributable to RPSFT decreased by $34.9 million in the sixnine months ended JuneSeptember 30, 2020 and 2019, we recorded2022 as compared to the nine months ended September 30, 2021. We expect net income attributable to RPSFT of $45.6 million and $55.7 million, respectively. Income attributable to RPSFT is expected to continue to decline as the assets held by the Collection TrustRPCT mature.
Key developments relatingDevelopments and Upcoming Events Relating to our portfolio in 2019-2020Our Portfolio
The key developments impacting our cash receipts and income and revenue from our royalty interests are discussed below:
Commercial Products
•Erleada.Cystic fibrosis franchise. In September 2019, the FDA approved an supplemental New Drug Application ("sNDA"April 2021, Vertex announced European Commission (“EC”) approval for ErleadaKaftrio in combination with ivacaftor for the treatment of menpatients with cystic fibrosis ages 12 and older who have at least one F508del mutation.
In June 2021, Vertex announced that U.S. Food and Drug Administration (“FDA”) approved Trikafta for the treatment of children with cystic fibrosis ages 6 through 11 who have at least one F508del mutation or have certain mutations that are responsive to Trikafta based on in vitro data.
In January 2022, Vertex announced that the EC granted approval for the label expansion of Kaftrio in combination with ivacaftor for the treatment of cystic fibrosis in patients ages 6 through 11 years old who have at least one F508del mutation in the cystic fibrosis transmembrane conductance regulator gene.
In November 2022, Vertex announced the submission of a New Drug Application (“NDA”) with the FDA for Trikafta in patients ages 2 through 5 years and that filings for approvals with the European Medicines Agency (“EMA”) and the Medicines and Healthcare products Regulatory Agency are expected by the end of 2022.
•Tysabri. In April 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 from the FDA for its supplemental biologics license application for subcutaneous Tysabri. The complete response letter indicated that the FDA was unable to approve Biogen’s filing as submitted.
In August 2021, Biogen announced results from Phase 3b NOVA study evaluation every six-week dosing with Tysabri intravenous administration in relapsing-remitting multiple sclerosis. Results show that every six-week Tysabri intravenous 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 June 2021, Johnson and Johnson announced Phase 3 GLOW study results for Imbruvica in combination with Venetoclax for the treatment of first-line chronic lymphocytic leukemia and small lymphocytic lymphoma demonstrated superior progression-free survival versus chlorambucil plus obinutuzumab as a first-line treatment of chronic lymphocytic leukemia. The study also showed improved duration of remission and significantly improved depth of remission. Johnson & Johnson had indicated that approval could occur in 2022.
In August 2021, AbbVie announced that the U.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 to March 30, 2032, assuming pediatric exclusivity is granted.
In June 2022, Johnson & Johnson announced primary results from the Phase 3 SHINE study, which demonstrated that the combination of once-daily oral Imbruvica plus bendamustine-rituximab (BR) and rituximab maintenance significantly reduced the risk of disease progression or death by 25% compared to patients who received placebo plus BR and rituximab maintenance in patients aged 65 years or older with newly diagnosed mantle cell lymphoma. With a median follow-up of 84.7 months, the Imbruvica plus BR and rituximab maintenance combination showed a statistically significant and clinically meaningful 2.3 year improvement in median progression-free survival (6.7 years) vs. BR (4.4 years). The safety profile of the Imbruvica plus BR regimen was consistent with the known safety profiles of Imbruvica as well as BR.
In August 2022, AbbVie and Johnson & Johnson announced that the FDA approved Imbruvica for the treatment of pediatric patients one year and older with chronic graft-versus-host disease.
In August 2022, Johnson & Johnson announced that the European Commission granted marketing authorization for the expanded use of Imbruvica in an all-oral, fixed-duration treatment combination with venetoclax for adults with previously untreated chronic lymphocytic leukemia. The approval is based on the pivotal Phase 3 GLOW study and the fixed-duration cohort of the Phase 2 CAPTIVATE study.
•Xtandi. In May 2021, Astellas and Pfizer announced that the EC approved Xtandi for the treatment of patients with metastatic castration-sensitivehormone-sensitive prostate cancer.
In September 2021, Astellas and Pfizer announced that Xtandi plus androgen deprivation therapy reduced the risk of death by 34% compared to placebo plus androgen deprivation therapy in the Phase 3 ARCHES study in men with metastatic hormone-sensitive prostate cancer. The primary results from the ARCHES trial were published in 2019.
In October 2022, Pfizer announced positive top-line results from the Phase 3 TALAPRO-2 study of Talzenna, an oral poly ADP-ribose polymerase inhibitor, in combination with Xtandi compared to placebo plus Xtandi in men with metastatic castration-resistant prostate cancer. The study met its primary endpoint with a statistically significant and clinically meaningful improvement in radiographic progression-free survival. The results of the primary endpoint exceeded the pre-specified hazard ratio of 0.696. The safety of Talzenna plus Xtandi was generally consistent with the known safety profile of each medicine. Pfizer intends to share data with global regulatory authorities to potentially support a regulatory filing.
In November 2022, Pfizer indicated that there could be a potential readout of the Phase 3 EMBARK trial for high-risk non-metastatic prostate cancer in the first half of 2023.
•Nurtec ODT. In May 2021, Biohaven announced that the FDA approved Nurtec ODT for the preventative treatment of migraine, indicated for adult patients with episodic migraine who experience less than 15 headache days per month.
In April 2022, Pfizer and Biohaven announced that the EC has granted marketing authorization for Vydura (rimegepant) for both the acute treatment of migraine with or without aura, and prophylaxis of episodic migraine in adults who have at least four migraine attacks per month.
In October 2022, Pfizer completed its acquisition of Biohaven. Pfizer acquired all outstanding shares of Biohaven not already owned by Pfizer for $148.50 per share in cash for a total of approximately $11.6 billion. Pfizer also made payments at closing to settle Biohaven’s third-party debt and to redeem all of Biohaven’s outstanding redeemable preferred shares which we owned.
•Trodelvy. In April 2021, Gilead announced the FDA granted full approval to Trodelvy for adult patients with unresectable locally advanced or metastatic triple-negative breast cancer (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.
In April 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 or a programmed death-ligand 1 inhibitor. The accelerated approval was based on data from the international Phase 2, single-arm TROPHY study.
In June 2021, Gilead announced superior outcomes to standard of care in second-line treatment of metastatic TNBC in the Phase 3 ASCENT study. Trodelvy more than doubled overall survival as a second-line treatment in the new ASCENT subgroup analysis.
In October 2021, Gilead announced a collaboration with Merck & Co. to investigate Trodelvy in combination with Keytruda as a first-line treatment for people with locally advanced or metastatic TNBC.
In November 2021, Gilead announced that the EC granted marketing authorization for Trodelvy as a monotherapy indicated for the treatment of 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 EC’s decision is supported by results from the Phase 3 ASCENT study where Trodelvy reduced the risk of death by 49% and improved median overall survival to 11.8 months versus 6.9 months with physician’s choice of chemotherapy.
In January 2022, Gilead announced it has entered into two clinical trial collaboration and supply agreements with Merck & Co. to evaluate the combination of Trodelvy and Merck & Co.’s anti-PD-1 therapy Keytruda in first-line metastatic non-small cell lung cancer (NSCLC). As part of the collaboration, Merck & Co. will sponsor a global Phase 3 clinical trial of Trodelvy in combination with Keytruda as a first-line treatment of patients with metastatic NSCLC.
Additionally, Gilead and Merck & Co. established an agreement where Gilead will sponsor a Phase 2 signal-seeking study evaluating combinations that include pembrolizumab in first-line NSCLC.
In June 2022, Gilead announced results from the primary analysis of the Phase 3 TROPiCS-02 study of Trodelvy versus physicians’ choice of chemotherapy in heavily pre-treated HR+/HER2- metastatic breast cancer patients who received prior endocrine therapy, CDK4/6 inhibitors and two to four lines of chemotherapy. The study met its primary endpoint of progression-free survival with a statistically significant and clinically meaningful 34% reduction in the risk of disease progression or death. The first interim analysis of the key secondary endpoint of overall survival demonstrated a trend in improvement. Patients will be followed for a subsequent overall survival analysis. The safety profile for Trodelvy was consistent with prior studies.
In September 2022, Gilead announced positive overall survival results from the Phase 3 TROPiCS-02 study evaluating Trodelvy versus comparator physicians’ choice of chemotherapy in patients with HR+/HER2- metastatic breast cancer who received endocrine-based therapies and at least two chemotherapies. In the study, Trodelvy demonstrated a statistically significant and clinically meaningful improvement of 3.2 months in overall survival compared to chemotherapy. The TROPiCS-02 study met its primary endpoint of progression-free survival earlier this year, and demonstrated improved median progression-free survival in both HER2-low and IHC0 groups. The FDA has accepted for priority review the supplemental Biologics License Application based on this data and assigned a Prescription Drug User Fee Act (“PDUFA”) date for February 2023.
•Cabometyx. In January 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 March 2021, Ipsen announced that the EC approved the combination of Cabometyx and Opdivo for the first-line treatment of advanced RCC.
In August 2021, Exelixis announced that their partners Takeda and Ono received approval in Japan for Cabometyx in combination with Opdivo for the treatment of unresectable or metastatic RCC.
In September 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 castration-resistant prostate cancer, which included patients with metastatic castration-resistant prostate cancer who had been previously treated with novel hormone therapies enzalutamide or abiraterone acetate used along with prednisone. Following discussions with FDA, Exelixis announced that it will not pursue a regulatory submission for the combination regimen based on cohort 6 of COSMIC-021. Exelixis believes that CONTACT-02, a global Phase 3 pivotal trial that initiated enrollment in June 2020 may serve as a basis for future regulatory applications.
In September 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.
In March 2022, Exelixis announced results from the final analysis of the second primary endpoint of overall survival from the Phase 3 COSMIC-312 trial, which evaluated cabozantinib in combination with atezolizumab versus sorafenib in patients with previously untreated advanced hepatocellular carcinoma. The final analysis showed neither improvement nor detriment in overall survival for cabozantinib in combination with atezolizumab versus sorafenib.
In May 2022, Ipsen announced that it received approval from the EC for Cabometyx as a monotherapy for the treatment of adult patients with locally advanced or metastatic differentiated thyroid carcinoma, refractory or not eligible to radioactive iodine who have progressed during or after prior systemic therapy.
In September 2022, Exelixis announced detailed results from COSMIC-313, an ongoing Phase 3 trial evaluating Cabometyx, nivolumab and ipilimumab versus the combination of nivolumab and ipilimumab in patients with previously untreated advanced intermediate- or poor-risk RCC, which met its primary endpoint, demonstrating significant improvement in progression-free survival at the primary analysis. At a prespecified interim analysis for the secondary endpoint of overall survival, the combination of Cabometyx, nivolumab and ipilimumab did not demonstrate a significant benefit. Following discussions with FDA, Exelixis does not intend to submit a supplemental NDA based on currently available data, but will plan to discuss a potential regulatory submission with FDA when results of the next overall survival analysis are available.
Exelixis has indicated it expects initial Phase 3 data by year-end 2022 from CONTACT-01 in metastatic NSCLC and in the first half of 2023 from CONTACT-03 in advanced or metastatic RCC.
•Evrysdi. In March 2021, Roche announced that the EC approved Evrysdi for the treatment of spinal muscular atrophy (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 copies.
In June 2021, Evrysdi was approved in Japan for the treatment of SMA.
In May 2022, Roche announced that the FDA has approved a label extension for Evrysdi to include infants under two months old with SMA. The approval is based on the interim efficacy and safety data from the RAINBOWFISH study in newborns, which showed that the majority of pre-symptomatic infants treated with Evrysdi achieved key milestones such as sitting and standing with half walking after 12 months of treatment.
•Orladeyo. In January 2021, Orladeyo was approved in Japan, becoming the first and only prophylactic hereditary angioedema (HAE) medication approved in the region.
In April 2021, BioCryst announced that the EC approved Orladeyo for the prevention of recurrent HAE attacks in patients 12 years and older.
In April 2021, BioCryst announced approval of Japanese National Health Insurance System price listing of Orladeyo for prophylactic treatment of HAE.
•Oxlumo.In July 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 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 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 and injection site reactions as the most common adverse event.
In March 2022, the FDA accepted Alnylam’s supplemental NDA for lumasiran for the reduction of plasma oxalate in the treatment of patients with advanced primary hyperoxaluria type 1. The FDA has set an action date for October 6, 2022. Additionally, a Type II Variation for lumasiran to amend the label in patients with advanced primary hyperoxaluria Type 1 was submitted and validated by the EMA in December 2021.
In October 2022, Alnylam announced that the FDA approved a label expansion for Oxlumo, now indicated for the treatment of primary hyperoxaluria type 1 to lower urinary oxalate and plasma oxalate levels in pediatric and adult patients. The approval is based on positive efficacy and safety results of the ILLUMINATE-C Phase 3 study of Oxlumo in patients with severe renal impairment, including those on hemodialysis.
•Tremfya.In February 2022, Johnson & Johnson announced results from the Phase 2a VEGA proof-of-concept study. Results showed that the combination of Tremfya and golimumab, a tumor necrosis factor-alpha antagonist, induced higher rates of clinical response, clinical remission, endoscopic improvement and a composite histologic-endoscopic endpoint at 12 weeks than either treatment alone in adults with moderately to severely active ulcerative colitis. Rates of adverse events were comparable among treatment groups.
In February 2022, Johnson & Johnson announced results from the Phase 2b QUASAR Induction Study 1. Results showed that a significantly greater proportion of adults with moderately to severely active ulcerative colitis who previously had an inadequate response or intolerance to conventional therapies or selected advanced therapies and were treated with Tremfya achieved clinical response at week 12 (Tremfya 200 mg: 61.4% and Tremfya 400 mg: 60.7%), the study’s primary endpoint compared with placebo (27.6%). Safety data at week 12 was consistent with the safety profile for Tremfya in approved indications.
•Tazverik: In August 2022, Ipsen completed its acquisition of Epizyme. Ipsen acquired all the outstanding shares of Epizyme at a price of $1.45 per share plus a contingent value right of $1 per share.
Development-Stage Product Candidates
•Aficamten. In December 2021, Cytokinetics announced the FDA granted breakthrough therapy designation for aficamten for the treatment of symptomatic obstructive hypertrophic cardiomyopathy (oHCM) based on results from REDWOOD-HCM.
In February 2022, Cytokinetics announced positive topline results from Cohort 3 of the REDWOOD-HCM Phase 2 trial. Results from Cohort 3 showed that substantial reductions in the average resting left ventricular outflow tract pressure gradient (LVOT-G) as well as the post-Valsalva LVOT-G were achieved for patients with oHCM and a resting or post-Valsalva LVOT-G of greater than 50 mmHg whose background therapy included disopyramide and in the majority a beta-adrenergic blocker. The safety and tolerability of aficamten were consistent with prior experience in REDWOOD-HCM with no treatment interruptions and no serious adverse events attributed to treatment reported by the investigators.
•BCX9930. In April 2022, BioCryst announced that it is pausing enrollment in clinical trials with BCX9930, while BioCryst investigates elevated serum creatinine levels seen in some patients. BioCryst will not enroll new patients in the REDEEM-1, REDEEM-2 or RENEW clinical trials during the investigation. Patients currently enrolled in the trials are expected to continue on the study drug.
In May 2022, BioCryst announced that it plans to discuss with regulators whether clinical trials with amended protocols could resume using stepped dosing to 400 milligrams twice-daily of BCX9930 by the end of the third quarter of 2022.
In August 2022, BioCryst announced that FDA lifted its partial clinical hold on the BCX9930 program. BioCryst will resume enrollment in global clinical trials under revised protocols at a reduced dose of 400 mg twice daily of BCX9930. This includes the REDEEM-1 and REDEEM-2 pivotal trials in patients with paroxysmal nocturnal hemoglobinuria and the RENEW proof-of-concept trial in patients with C3 glomerulopathy, immunoglobulin A nephropathy and primary membranous nephropathy. Additionally, screening has begun for new patients to participate in the trials and BioCryst expects to have data from approximately 15 newly-enrolled patients by the middle of 2023 to inform its decision to either fully invest in the pivotal program, or to discontinue the BCX9930 program.
•Gantenerumab. In October 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.
In March 2022, Roche announced a new Phase 3 Alzheimer’s disease prevention trial (SKYLINE). Roche has stated that it intends to enter into a collaboration agreement with Banner Alzheimer’s Institute’s Alzheimer’s Prevention Initiative, Massachusetts General Hospital and the University of Southern California Alzheimer’s Therapeutic Research Institute to further exchange scientific insights and advance the trial goals. SKYLINE aims to evaluate the potential of gantenerumab to slow disease progression in people with the earliest biologic signs of Alzheimer’s disease and who show no signs of cognitive impairment.
Roche has indicated it expects Phase 3 data from the GRADUATE 1/2 trial in Alzheimer’s disease in the fourth quarter of 2022.
•Omecamtiv mecarbil. In February 2022, Cytokinetics announced that FDA has accepted and filed its NDA for omecamtiv mecarbil. The FDA assigned the NDA a standard review with a PDUFA date of November 30, 2022. The FDA also indicated that it is currently not planning to hold an advisory committee meeting to discuss the application. The submission is supported by 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.
In February 2022, Cytokinetics announced results from METEORIC-HF, a Phase 3 trial evaluating the effect of treatment with omecamtiv mecarbil compared to placebo on exercise capacity in patients with heart failure with reduced ejection fraction. After 20 weeks of treatment, there was no change in peak oxygen uptake in patients treated with omecamtiv mecarbil versus placebo.
In June 2022, Cytokinetics announced that the FDA had informed the company that the Cardiovascular and Renal Drugs Advisory Committee will review its NDA on December 13, 2022. Additionally, the FDA has assigned the NDA a PDUFA date of February 28, 2023.
•Otilimab. In October 2022, GSK plc (“GSK”) announced that the limited efficacy demonstrated in the ContRAst Phase 3 program does not support a suitable benefit/risk profile for otilimab as a potential treatment for rheumatoid arthritis. As a result, GSK has decided not to progress with regulatory submissions.
•Pelabresib. In December 2021, MorphoSys presented data from the Phase 2 MANIFEST study evaluating pelabresib in the treatment of myelofibrosis. As of September 10, 2021, the data cut-off, a total of 84 JAK inhibitor-naive patients were enrolled and received the first-line combination of pelabresib and ruxolitinib. The data showed 68% (n=57) of patients treated with the combination achieved a greater than or equal to 35% reduction in spleen volume from baseline at week 24 and 60% (n=47) maintained a greater than or equal to 35% reduction in spleen volume at week 48. Most patients also saw their symptoms reduced with 56% (n=46) achieving greater than or equal to 50% reduction in total symptom score from baseline at week 24.
•PT027. In September 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. The FDA has accepted for filing the NDA for AstraZeneca’s PT027 and a regulatory decision is currently expected by the second half of 2022.
In May 2022, Avillion LLP, a drug development company focused on the co-development and financing of pharmaceutical candidates from proof-of-concept through to regulatory approval, announced that FDA accepted for filing the NDA for AstraZeneca’s PT027. The proposed indication is for the as-needed treatment or prevention of bronchoconstriction and for the prevention of exacerbation of asthma. The co-development partnership between AstraZeneca and Avillion also recently expanded to include the BATURA study, a randomized Phase 3b decentralized trial to further assess the role of PT027 in preventing asthma exacerbations.
•Tulmimetostat: In October 2022, MorphoSys announced preliminary Phase 1/2 results of tulmimetostat (CPI-0209), an oral, investigational next-generation selective dual inhibitor of EZH2 and EZH1, in heavily pretreated patients with advanced cancers. Results showed responses or disease stabilization in five cohorts with evaluable patients. The safety profile of tulmimetostat was consistent with the mechanism of action of EZH2 inhibition.
•Cystic fibrosis franchise.Zavegepant. In October 2019, Trikafta, the Vertex triple combination therapy, received FDA approval for the treatment of cystic fibrosis in people ages 12 years and older who have at least one F508del mutation of the cystic fibrosis transmembrane conductance regulator (CFTR) gene. This approval significantly expanded the addressable market that can be treated with Vertex’s cystic fibrosis products, all of which we are entitled royalties on, and also increased the duration of our royalty to 2037.
In November 2019, VertexMarch 2021, Biohaven announced that it reached anenrolled the first patient in a Phase 2/3 clinical trial of oral zavegepant for the preventive treatment of migraine. Accordingly, per the agreement with France’s Economic Committee of Health Care Products (CEPS) for a national reimbursement deal of Orkambi. As a result,Biohaven announced in August 2020, we experienced a reduction in our royalty receipts in 2020 of approximately $41paid $100 million to reflect a true-up related to prior periods where we collected royalties on sales in France of Orkambi at a higher selling price. In October 2019, Vertex announced that it reached an agreement with National Health Service England, where eligible patients will receive access to Orkambi and Symkevi, and access to Kalydeco will be expanded.
In June 2020, Vertex announced that EMA’s Committee for Medicinal Products for Human Use (CHMP) adopted a positive opinionBiohaven for the triple combination therapyachievement of this milestone, bringing total zavegepant funding to $250 million. Pfizer expects data from the trial in a combination with Kalydeco in people ages 12 and older with cystic fibrosis with the most common genotype. If granted Marketing Authorization, people ages 12 and older in Europe who have one F508del mutation and one minimal function mutation will for the first time be able to benefit from a medicine that treats the underlying causethird quarter of the disease, and people 12 years of age and older who have two F508del mutations also will be eligible for the new triple combination regimen.
In June 2020, Vertex announced that it had expanded its reimbursement agreement with NHS England for the company’s cystic fibrosis medicines to include Kaftrio, in a combination regimen with Kalydeco, ahead of the medicine’s anticipated approval by the European Commission. The new expanded agreement includes reimbursed access to Vertex’s currently licensed medicines, as well as the triple combination therapy if approved, and any future additional licensed indications for all of these medicines.
•Imbruvica. In January 2019, the FDA approved Imbruvica in combination with obinutuzumab as the first non-chemotherapy anti-CD20 combination regimen for treatment-naïve chronic lymphocytic leukemia (“CLL”) patients. In August 2019, the EMA broadened the label for Imbruvica to include two new uses: in combination with obinutuzumab in adult patients with previously untreated CLL and in combination with rituximab for the treatment of adult patients with WM. In November 2019, AbbVie submitted an sNDA to the FDA for Imbruvica in combination with rituximab for treatment-naïve younger adults with CLL.2023.
•Soliqua. In February 2019, the FDA approved the expanded use of Soliqua to include patients with type 2 diabetes who are uncontrolled on oral antidiabetic medicines.
•Bosulif. On December 19, 2017, Avillion announced that the FDA approved an sNDA for Pfizer’s Bosulif (bosutinib). Avillion is eligible to receive fixed payments from Pfizer based on this approval over a 10-year period. We received our first annual distribution of $39.4 million from Avillion in the first quarter of 2018 and our second annual distribution of $14.1 million in the first quarter of 2019, reflected as Distributions from non-consolidated affiliates on the Statement of Cash Flows.
•Tazverik.In December 2019, the Oncologic Drugs Advisory Committee of the FDA voted in favor of the benefit-risk profile of tazemetostat as a treatment for patients with metastatic or locally advanced epithelioid sarcoma (“ES”), not eligible for curative surgery. On January 23, 2020, the FDA granted accelerated approval of Tazverik (tazemetostat) in ES.
In addition, in December 2019 Epizyme submitted an NDA to the FDA for accelerated approval of tazemetostat for the treatment of patients with relapsed or refractory follicular lymphoma (“rrFL”), both with or without EZH2 activating mutations, who have received at least two prior lines of systemic therapy.
In February 2020, the FDA accepted Epizyme’s regulatory submission for accelerated approval of Tazverik in rrFL and set a Prescription Drug User Fee Act (“PDUFA”) in June 2020. In June 2020, Epizyme2021, Biohaven announced that the FDA approved the sNDA for Tazverik (tazemetostat) for rrFL.
In June 2020, Epizyme, Inc. announced that the FDA granted accelerated approval of the supplemental New Drug Application (sNDA) for Tazverik for two distinct follicular lymphoma (FL) indications, including adult patients with relapsed or refractory FL whose tumors are positive for an EZH2 mutation as detected by an FDA-
approved test and who have received at least two prior systemic therapies and adult patients with relapsed or refractory FL who have no satisfactory alternative treatment options.
•Trodelvy (sacituzumab govitecan-hziy). In December 2019, Immunomedics announced the resubmission of the biologics licensing application seeking accelerated approval of sacituzumab govitecan for the treatment of patients with metastatic triple-negative breast cancer who have received at least two prior therapies for metastatic disease in December 2019. This resubmission followed the receipt of a complete response lettertopline results from the FDA in January 2019.
In April 2020, Immunomedics announced thatsecond pivotal clinical trial evaluating the FDA granted accelerated approvalsafety and efficacy of Trodelvy (sacituzumab govitecan-hziy) for the treatment of patients with metastatic triple-negative breast cancer (“TNBC”) who have received at least two prior therapies for metastatic disease. Trodelvy is the first antibody-drug conjugate (“ADC”) approved by the FDA specifically for TNBC.
•Nurtec ODT (rimegepant). Biohaven submitted two New Drug Applications (“NDAs”) to the FDA for two formulations of rimegepant in the second quarter of 2019 using a priority review voucher to expedite the regulatory review period. In February 2020, Biohaven announced that the FDA approved Nurtec ODT (rimegepant)intranasal zavegepant for the acute treatment of migraine in adults. The Phase 3 study achieved its co-primary regulatory endpoints of pain freedom and freedom of most bothersome symptom at two hours and showed broad efficacy by demonstrating statistically significant superiority to placebo across a total of 15 prespecified primary and secondary outcome measures.
•Ibrance.In May 2020, Pfizer reported2022, Biohaven announced that the independent data monitoring committeeFDA accepted for review a NDA for zavegepant nasal spray for the PALLAS trial had concluded after the recent interim analysis that the PALLAS trialacute treatment of migraine in adults. The PDUFA date is “unlikely to show a statistically significant improvement in the primary endpoint of invasive disease-free survival.” If Pfizer’s PENELOPE-B trial is successful, we will be entitled to receive approval-based fixed milestone payments of $250 million.
•Tecfidera. We continued collecting milestone receipts quarterly throughout 2018; however, our contractual agreement covering our milestones on cumulative sales of Tecfidera ended in 2018, and therefore receipts from Tecfidera ceased after the final milestone was collected in the first quarter of 2019.2023.
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 classified as 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 ReconciliationReconciliations” 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 Statementstatements of Cash Flowscash flows and includes (1) royalty receipts by royalty asset:product: (i) Cash collections from royalty assets (financial assets and intangible assets), (ii) Other royalty cash collections, (iii) Distributions from non-consolidated affiliatesequity method investees, and (iv)plus (2) Proceeds from available for sale debt securities;securities; less (1) Distributions to non-controlling interestinterests, which representsrepresent 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 in February 2020interests related to the Legacy Investors Partnerships' ownership of approximately 18% in Old RPI.Partnerships and RPSFT. 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 under the credit agreementCredit Agreement as Adjusted Cash Receipts less paymentsPayments for operating and professional costs. OperatingPayments for operating and professional costs are comprised of Payments for operating costs and professional servicescosts andPayments for rebates from the Statementstatements of Cash Flows.cash flows.
Adjusted Cash Flow is defined as Adjusted EBITDA less (1) Development-stage funding payments - ongoing, (2) Development-stage funding payments – ongoing - upfront and milestone, (2) (3) Interest paid, net (3) Swap collateral (posted) orof Interest received, net, (4) Swap termination payments,Investments in equity method investees and (5) Other (including Investment in non-consolidated affiliatesDerivative collateral posted, net of Derivative collateral received,and Termination payments on derivative instruments) plus (1) Contributions from non-controlling interest-interests- R&D, all directly reconcilable to the Statementstatements of Cash Flows.cash flows.
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 sixthree and nine months ended JuneSeptember 30, 20202022 and 20192021 by product in order of contribution to royalty receipts for our Growth Products and Mature Products, as defined in “—Portfolio Overview” above, and the period-over-period variance.nine months ended September 30, 2022 (in thousands).
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended June 30, | | Six Months Ended June 30, | | Six-Months Year-to-date Change | |
| 2020 | 2019 | 2020 | 2019 | $ | % |
Growth Products | | | | | | |
Cystic fibrosis franchise | $ | 136,119 | | $ | 85,745 | | $ | 235,522 | | $ | 192,684 | | $ | 42,838 | | 22.2 | % |
Tysabri | 92,517 | | 81,985 | | 176,324 | | 164,620 | | 11,704 | | 7.1 | % |
Imbruvica | 81,513 | | 66,247 | | 159,222 | | 127,349 | | 31,873 | | 25.0 | % |
HIV franchise | 64,692 | | 52,193 | | 148,579 | | 128,576 | | 20,003 | | 15.6 | % |
Januvia, Janumet, Other DPP-IVs | 34,859 | | 41,082 | | 69,647 | | 73,820 | | (4,173) | | (5.7) | % |
Xtandi | 34,131 | | 27,040 | | 68,908 | | 54,608 | | 14,300 | | 26.2 | % |
Promacta | 26,653 | | 19,335 | | 62,401 | | 19,335 | | 43,066 | | 222.7 | % |
Farxiga/Onglyza | 8,257 | | — | | 8,257 | | — | | 8,257 | | — | |
Prevymis | 6,413 | | — | | 6,413 | | — | | 6,413 | | — | |
| | | | | | |
Crysvita | 2,620 | | — | | 2,620 | | — | | 2,620 | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Erleada | 1,772 | | — | | 3,210 | | — | | 3,210 | | — | |
Emgality | 2,236 | | — | | 4,213 | | — | | 4,213 | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Other Growth Products (1) | 76,211 | | 36,206 | | 144,929 | | 92,846 | | 52,083 | | 56.1 | % |
Total Royalty Receipts - Growth Products | $ | 567,993 | | $ | 409,833 | | $ | 1,090,245 | | $ | 853,838 | | $ | 236,407 | | 27.7 | % |
| | | | | | |
Mature Products | | | | | | |
Tecfidera (2) | $ | — | | $ | — | | $ | — | | $ | 150,000 | | $ | (150,000) | | (100.0) | % |
Lyrica | 6,470 | | 35,134 | | 12,557 | | 64,739 | | (52,182) | | (80.6) | % |
Letairis | 7,713 | | 22,458 | | 22,275 | | 60,917 | | (38,642) | | (63.4) | % |
Remicade | — | | — | | — | | 6,068 | | (6,068) | | (100.0) | % |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Other mature products (3) | 2,802 | | 7,761 | | 3,545 | | 17,924 | | (14,379) | | (80.2) | % |
Total Royalty Receipts - Mature Products | $ | 16,985 | | $ | 65,353 | | $ | 38,377 | | $ | 299,648 | | $ | (261,271) | | (87.2) | % |
Distributions to non-controlling interest | (123,159) | | (36,398) | | (284,546) | | (77,858) | | (206,688) | | 265.5 | % |
Adjusted Cash Receipts (non-GAAP) | $ | 461,819 | | $ | 438,788 | | $ | 844,076 | | $ | 1,075,628 | | $ | (231,552) | | (21.5) | % |
Payments for operating and professional costs | (44,147) | | (29,439) | | (69,985) | | (47,144) | | (22,841) | | 48.4 | % |
Adjusted EBITDA (non-GAAP) | $ | 417,672 | | $ | 409,349 | | $ | 774,091 | | $ | 1,028,484 | | $ | (254,393) | | (24.7) | % |
Development-stage funding payments - ongoing | (5,776) | | (21,457) | | (13,415) | | (44,448) | | 31,033 | | (69.8) | % |
Interest paid, net | (30,967) | | (61,458) | | (79,834) | | (115,807) | | 35,973 | | (31.1) | % |
Swap collateral received or (posted), net | — | | (25,950) | | 45,252 | | (26,310) | | 71,562 | | (272.0) | % |
Swap termination payments | — | | — | | (35,448) | | — | | (35,448) | | — | |
Investment in non-consolidated affiliates | (16,120) | | (9,842) | | (29,262) | | (18,684) | | (10,578) | | 56.6 | % |
Contributions from non-controlling interest- R&D | 3,854 | | — | | 5,114 | | — | | 5,114 | | — | |
Adjusted Cash Flow (non-GAAP) | $ | 368,663 | | $ | 290,642 | | $ | 666,498 | | $ | 823,235 | | $ | (156,737) | | (19.0) | % |
| | | | | | |
Fully diluted shares outstanding | 607,107 | | n/a | 607,107 | | n/a | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Royalties | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | Nine Months Year-to-Date Change |
| 2022 | | 2021 | | 2022 | | 2021 | | $ | | % |
Cystic fibrosis franchise (1) | | $ | 207,882 | | | $ | 182,876 | | | $ | 591,733 | | | $ | 505,708 | | | $ | 86,025 | | | 17.0 | % |
Tysabri | | 91,252 | | | 95,805 | | | 281,819 | | | 274,796 | | | 7,023 | | | 2.6 | % |
Imbruvica | | 74,391 | | | 87,924 | | | 241,943 | | | 264,348 | | | (22,405) | | | (8.5) | % |
Xtandi | | 45,717 | | | 40,237 | | | 141,100 | | | 117,049 | | | 24,051 | | | 20.5 | % |
Promacta | | 50,067 | | | 48,151 | | | 132,679 | | | 124,617 | | | 8,062 | | | 6.5 | % |
Januvia, Janumet, Other DPP-IVs (2) | | 1,029 | | | 37,934 | | | 72,406 | | | 113,133 | | | (40,727) | | | (36.0) | % |
Tremfya | | 21,409 | | | 16,610 | | | 68,062 | | | 16,610 | | | 51,452 | | | * |
Nurtec ODT/Biohaven payment (3) | | 20,459 | | | 17,948 | | | 59,549 | | | 51,170 | | | 8,379 | | | 16.4 | % |
Trelegy | | 42,720 | | | — | | | 42,720 | | | — | | | 42,720 | | | — | % |
Cabometyx/Cometriq | | 14,612 | | | 12,038 | | | 40,523 | | | 22,167 | | | 18,356 | | | 82.8 | % |
Farxiga/Onglyza | | 11,522 | | | 9,321 | | | 32,336 | | | 26,996 | | | 5,340 | | | 19.8 | % |
Evrysdi | | 9,602 | | | 5,897 | | | 26,933 | | | 10,546 | | | 16,387 | | | 155.4 | % |
Prevymis | | 11,052 | | | 9,929 | | | 25,174 | | | 27,331 | | | (2,157) | | | (7.9) | % |
Trodelvy | | 6,496 | | | 2,521 | | | 17,428 | | | 8,118 | | | 9,310 | | | 114.7 | % |
Orladeyo | | 6,265 | | | 2,502 | | | 15,456 | | | 3,471 | | | 11,985 | | | * |
Erleada | | 5,586 | | | 3,736 | | | 15,305 | | | 9,957 | | | 5,348 | | | 53.7 | % |
Crysvita | | 5,241 | | | 4,576 | | | 14,887 | | | 12,092 | | | 2,795 | | | 23.1 | % |
Emgality | | 4,657 | | | 4,542 | | | 13,845 | | | 11,356 | | | 2,489 | | | 21.9 | % |
Oxlumo | | 596 | | | 653 | | | 1,945 | | | 653 | | | 1,292 | | | 197.9 | % |
Other products (4) | | 73,349 | | | 129,003 | | | 212,260 | | | 349,242 | | | (136,982) | | | (39.2) | % |
Total royalty receipts | | $ | 703,904 | | | $ | 712,203 | | | $ | 2,048,103 | | | $ | 1,949,360 | | | $ | 98,743 | | | 5.1 | % |
Distributions to non-controlling interests | | (107,183) | | | (125,427) | | | (322,726) | | | (363,624) | | | 40,898 | | | (11.2) | % |
Adjusted Cash Receipts (non-GAAP) | | $ | 596,721 | | | $ | 586,776 | | | $ | 1,725,377 | | | $ | 1,585,736 | | | $ | 139,641 | | | 8.8 | % |
Payments for operating and professional costs | | (48,650) | | | (53,509) | | | (141,653) | | | (135,272) | | | (6,381) | | | 4.7 | % |
Adjusted EBITDA (non-GAAP) | | $ | 548,071 | | | $ | 533,267 | | | $ | 1,583,724 | | | $ | 1,450,464 | | | $ | 133,260 | | | 9.2 | % |
Development-stage funding payments - ongoing | | (500) | | | (500) | | | (1,606) | | | (6,263) | | | 4,657 | | | (74.4) | % |
Development-stage funding payments - upfront and milestone | | (25,000) | | | (90,000) | | | (125,000) | | | (90,000) | | | (35,000) | | | 38.9 | % |
Interest paid, net | | (75,302) | | | (64,587) | | | (158,920) | | | (126,755) | | | (32,165) | | | 25.4 | % |
Investments in equity method investees | | (6,846) | | | (10,893) | | | (9,896) | | | (28,320) | | | 18,424 | | | (65.1) | % |
Contributions from non-controlling interests- R&D | | 240 | | | 2,003 | | | 971 | | | 6,083 | | | (5,112) | | | (84.0) | % |
Other | | — | | | (18,223) | | | — | | | (16,093) | | | 16,093 | | | (100.0) | % |
Adjusted Cash Flow (non-GAAP) | | $ | 440,663 | | | $ | 351,067 | | | $ | 1,289,273 | | | $ | 1,189,116 | | | $ | 100,157 | | | 8.4 | % |
| | | | | | | | | | | | |
Weighted average Class A ordinary shares outstanding - diluted | | 607,226 | | 607,174 | | 607,209 | | 607,152 | | | | |
*Percentage change is not meaningful.
(1)The cystic fibrosis franchise includes the following approved products: Kalydeco, Orkambi, Symdeko/Symkevi and Trikafta/Kaftrio.
(2)Januvia, Janumet, Other Growth ProductsDPP-IVs include royaltiesthe following approved products: Onglyza, Kombiglyze, Galvus, Eucreas and Nesina. The Other DPP-IVs are marketed by AstraZeneca, Novartis and Takeda.
(3)Quarterly redemption payments of $15.6 million commenced in the first quarter of 2021 related to the Series A Biohaven Preferred Shares (presented as Proceeds from available for sale debt securities on the statements of cash flows). The remaining amounts are related to royalty receipts from Nurtec ODT.
(4)Other products primarily include royalty receipts on the following products: Bosulif (a product co-developed by our joint venture investee, Avillion I, for which receipts are presented as Distributions received from non-consolidated affiliatesequity method investees on the Statementstatements of Cash Flows)cash flows), Cimzia, Conbriza/Fablyn/Viviant, Entyvio, Gavreto, HIV franchise, IDHIFA, Letairis, Lexiscan, Mircera, Myozyme, Nesina, Priligy,Soliqua, Tazverik and Soliqua. Other Growth Products also include contributions from the Legacy SLP Interest and a distribution from Avillion in respect of the Merck Asset, for which development ceased inInterest.
2020, and 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.
(2) Receipts from our Tecfidera milestone payments are presented as Proceeds from available for sale debt securities on the Statement of Cash Flows.
(3) Other Mature Products primarily include royalties on the following products: Prezista, Rotateq, Savella and Thalomid.
Adjusted Cash Receipts (non-GAAP)
Nine Months Ended September 30, 2022 and 2021
Adjusted Cash Receipts declinedincreased by $231.6$139.6 million to $1.7 billion in the sixnine months ended JuneSeptember 30, 20202022 compared to the same period of 2019nine months ended September 30, 2021, primarily driven by increased distribution to non-controlling interest as a result of a new non-controlling interest created related to the Legacy Investors Partnerships' ownership of approximately 18% in Old RPI following our Exchange Offer Transactions in February 2020. The decline in Adjusted Cash Receipts is further attributable to a decline in royalty receipts related to Mature Products, the most significant of which was Tecfidera. The decline was offset by an increase in royalty receipts from our Growth Products of $236.4 millionthe cystic fibrosis franchise and newly acquired royalties. This growth was partially offset by a decline in royalty receipts from maturing royalties, such as the six months ended June 30, 2020 comparedHIV franchise and Januvia, Janumet and other DPP-IVs, as well as unfavorable foreign exchange movements. The increase in Adjusted Cash Receipts also reflects a decline in distributions to the same period of 2019, driven primarilynon-controlling interests due to maturing royalties jointly owned by the performance of Cystic fibrosis franchise, Imbruvica, the 2019 acquisition of Promacta,Legacy Investors Partnerships and 2020 acquisitions including Entyvio and the Legacy SLP Interest, both of which are included in Other Growth Products. RPSFT.
Below we discuss the key drivers of royalty receipts from our Growth Products.receipts.
Growth ProductsRoyalty Receipts
•Cystic fibrosis franchise – Royalty receipts from the cystic fibrosis franchise, which includes Kalydeco, Orkambi, SymdekoSymdeko/Symkevi and Trikafta, all approvedTrikafta/Kaftrio, which are marketed by Vertex for patients with certain mutations causing cystic fibrosis, increased by $42.8$86.0 million in the sixnine months ended JuneSeptember 30, 20202022 compared to the same period of 2019,nine months ended September 30, 2021. The increase was primarily driven by the highly successful launch of Kaftrio in additional countries outside the United States and the performance of Trikafta in the U.S. and partially offset by a clawback adjustment related to Vertex’s agreement with the French Authorities for a national reimbursement deal for Orkambi during the first quarter of 2020.United States, including its uptake in children 6 through 11 years old.
•Tysabri – Royalty receipts from Tysabri, which is marketed by Biogen for the treatment of multiple sclerosis, increased by $11.7$7.0 million in the sixnine months ended JuneSeptember 30, 20202022 compared to the same period of 2019, benefiting from extra shipping daysnine months ended September 30, 2021, largely due to continued global patient growth and a pricing adjustmentpositive channel dynamics in Italy related to prior periods as well asaccelerated sales that occurred related to COVID-19.the United States.
•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, increaseddecreased by $31.9$22.4 million in the sixnine months ended JuneSeptember 30, 20202022 compared to the same periodnine months ended September 30, 2021. The decrease was largely due to a slower-than-anticipated recovery of 2019, driven by continued penetration in patients withthe chronic lymphocytic leukemia.leukemia market from COVID-19 and increased competition from newer therapies in the United States.
•HIV franchiseXtandi – Royalty receipts from the HIV franchise,Xtandi, which is based on products marketed by Gilead that contain emtricitabine, including Biktarvy, GenvoyaPfizer and Truvada, among others,Astellas for the treatment of prostate cancer, increased by $20.0$24.1 million in the sixnine months ended JuneSeptember 30, 20202022 compared to the same period of 2019. This increase wasnine months ended September 30, 2021, primarily driven by strong performancedemand across various prostate cancer indications and a true-up of Biktarvy offset by decreases in sales of other combination products.royalties from prior periods.
•Promacta – Royalty receipts from Promacta, which is marketed by Novartis for the treatment of chronic immune thrombocytopenia purpura (ITP) and aplastic anemia, increased by $8.1 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This growth was mainly driven by increased use in ITP and uptake as first-line treatment for severe aplastic anemia.
•Januvia, Janumet, Other DPP-IVs – Royalty receipts from the DPP-IVs for type 2 diabetes, which includes Januvia and Janumet, both marketed by Merck & Co., declined slightly primarily drivendecreased by the continued pricing pressure$40.7 million in the U.S.nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Royalty receipts from Januvia, Janumet and other DPP-IVs substantially ended in the three months ended June 30, 2022.
•XtandiTremfya – Royalty receipts from Xtandi,Tremfya, which is marketed by Pfizer and AstellasJohnson & Johnson for the treatment of prostate cancer, increased by $14.3plaque psoriasis and active psoriatic arthritis, were $68.1 million in the sixnine months ended JuneSeptember 30, 2020 compared to the same period of 2019,2022, largely driven by demandmarket growth and continued market share gains. We acquired the Tremfya royalty in across various prostate cancer indications.July 2021.
• Promacta – Royalty receipts from Promacta, which is marketed by Novartis for the treatment of chronic immune thrombocytopenia and aplastic anemia, increased by $43.1 million in the six months ended June 30, 2020 compared to the same period of 2019. We acquired the Promacta royalty in March 2019 and did not record royalty receipts for Promacta until the second quarter of 2019.
Mature Products
The declines in our royalty receipts from Mature Products were primarily related to Tecfidera. Our contractual agreement covering our milestones on cumulative sales of Tecfidera up to $20 billion ended in 2018 and therefore, receipts
•Nurtec ODT/Biohaven payment – Royalty receipts from Tecfidera ceased afterNurtec ODT, which is marketed by Pfizer for the final milestone was collectedacute and preventative treatment of migraine, increased by $8.4 million in the first quarternine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by prescription volume growth. In addition, we received $46.9 million in fixed payments from Biohaven related to the Series A Biohaven Preferred Shares during each of 2019. We also saw declines in receipts from the losses of exclusivity for Lyricanine months ended September 30, 2022 and Letairis.2021.
•Trelegy – Royalty receipts from Trelegy, which is marketed by GSK for the maintenance treatment of chronic obstructive pulmonary disease and asthma, were $42.7 million in the nine months ended September 30, 2022, primarily attributable to strong patient demand and growth of the single inhaler triple therapy market. We acquired the Trelegy royalty in July 2022.
•Cabometyx/Cometriq – Royalty receipts from Cabometyx/Cometriq, which is marketed by Exelixis, Ipsen and Takeda, were $40.5 million in the nine months ended September 30, 2022, primarily due to the uptake of Cabometyx in combination with Opdivo as a first-line treatment for patients with advanced renal cell carcinoma. We acquired the Cabometyx/Cometriq royalty in March 2021.
Distributions to Non-Controlling Interests
Distributions to non-controlling interests increaseddecreased by $206.7$40.9 million to $322.7 million in the sixnine months ended JuneSeptember 30, 20202022 compared to the same period of 2019,nine months ended September 30, 2021, which negatively impactspositively impacted Adjusted Cash Receipts. This increaseThe decrease in distributions to non-controlling interests is primarily due to the additional 18% contractual non-controlling interest heldmaturing royalties jointly owned by the Legacy Investors Partnerships that arose in the Exchange Offer. The increased distributions related to the Legacy Investors Partnerships were partially offset by a decline in distributions related to RPSFT from the maturation of several royalties held by the RPCT, including Humira and Remicade.RPSFT.
Adjusted EBITDA (non-GAAP)
Nine Months Ended September 30, 2022 and 2021
Adjusted EBITDA declinedincreased by $254.4$133.3 million to $1.6 billion in the sixnine months ended JuneSeptember 30, 20202022 compared to the same period of 2019, alsonine months ended September 30, 2021 as a result of the factors noted above in “Adjusted Cash Receipts (Non-GAAP).” In addition, paymentsPayments for operating and professional costs, the only adjustment between Adjusted Cash Receipts and Adjusted EBITDA, increased in 2020 as a result ofthe nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by higher costs for Operating and Personnel Payments under the terms offrom increased cash receipts from our New Management Agreement and increased costs for professional services paid in connection with the Reorganization Transactions and our IPO.royalties.
Adjusted Cash Flow (non-GAAP)
Nine Months Ended September 30, 2022 and 2021
Adjusted Cash Flow declinedincreased by $156.7$100.2 million to $1.3 billion in the sixnine months ended JuneSeptember 30, 20202022 compared to the same period of 2019nine months ended September 30, 2021, primarily fordriven by the same reasonsfactors noted above in “Adjusted Cash Receipts (Non-GAAP)(non-GAAP)” and “Adjusted EBITDA (non-GAAP).” In 2020, we paid $35.4 million to terminate our interest rate swaps executed in connection with the Reorganization Transactions, whichThe increase was partially offset by the return of collateral, lower ongoing development stagehigher upfront and milestone development-stage funding payments of $35.0��million and lowerhigher net interest paid of $32.2 million due to the first interest payments made on our new credit facilities.the 2021 Notes in the nine months ended September 30, 2022.
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.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 theour 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’sour ability to generate cash from operations. Both measures are an indication of theour 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 the Company’sour 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.our credit agreement. Noncompliance with the interest coverage ratio and leverage ratio covenants under the credit agreement could result in our lenders requiring the Companyus 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 andfrom operations, the performance of the business and to evaluate the Company’sour performance as compared to itsour 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.
The non-GAAP financial measures used in this earnings releaseQuarterly 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 beingNet 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 Statementstatements of Cash Flows:cash flows: to add back (1) Proceeds from available for sale debt securities (Tecfidera milestone payments) (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 affiliatesequity method investees which are classified as Cash used incash inflows from investing activities, (3) Interest paid, net of interest Interest received, (4) Development-stage funding payments, that are intended to generate royalties in the future, (5) Payments for operating and professional services,costs, (6) Payments for rebates and (7) Swap termination Termination payments on derivative instruments, and to deduct (1) Distributions to non-controlling interests, 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 2020interests related to the Legacy Investors Partnerships' ownership of approximately 18% in Old RPI,Partnerships and RPSFT, and (2) SwapDerivative 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 Statementstatements of Cash Flows:cash flows: to add back (1) Proceeds from available for sale debt securities (Tecfidera milestone payments) (redemption of Biohaven Preferred Shares), (2) Distributions from non-consolidated affiliatesequity method investees which are classified as Cash used incash inflows from investing activities, (3) Interest paid, net of interestInterest received, and (4) Development-stage funding payments and (5) Swap termination Termination payments on derivative instruments, and to deduct (1) Distributions to non-controlling interestinterests and (2) SwapDerivative 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 Statementstatements of Cash Flows:cash flows: to add back (1) Proceeds from available for sale debt securities (Tecfidera milestone payments) (redemption of Biohaven Preferred Shares), (2) Distributions from non-consolidated affiliatesequity method investees classified as Cash used incash inflows from investing activities and (3) Development-stage funding payments – upfront, and (4) Contributions from non-controlling interest- Rinterests-R&D, and to deduct (1) Distributions to non-controlling interestinterests and (2) Investment Investments in non-consolidated affiliates.equity method investees. 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.
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Net cash provided by operating activities (GAAP) | $ | 538,827 | | | $ | 469,759 | | | $ | 1,574,049 | | | $ | 1,527,579 | |
Adjustments: | | | | | | | |
Proceeds from available for sale debt securities (1), (2) | 15,625 | | | 15,625 | | | 46,875 | | | 46,875 | |
Distributions from equity method investees – investing (2) | — | | | — | | | — | | | 523 | |
Interest paid, net (2) | 75,302 | | | 64,587 | | | 158,920 | | | 126,755 | |
Development-stage funding payments - ongoing (3) | 500 | | | 500 | | | 1,606 | | | 6,263 | |
Development-stage funding payments - upfront and milestone (3) | 25,000 | | | 90,000 | | | 125,000 | | | 90,000 | |
Payments for operating and professional costs | 48,650 | | | 53,509 | | | 141,653 | | | 135,272 | |
Termination payments on derivative instruments | — | | | 16,093 | | | — | | | 16,093 | |
Distributions to non-controlling interests (2) | (107,183) | | | (125,427) | | | (322,726) | | | (363,624) | |
Derivative collateral received, net (2) | — | | | 2,130 | | | — | | | — | |
Adjusted Cash Receipts (non-GAAP) | $ | 596,721 | | | $ | 586,776 | | | $ | 1,725,377 | | | $ | 1,585,736 | |
| | | | | | | |
Net cash provided by operating activities (GAAP) | $ | 538,827 | | | $ | 469,759 | | | $ | 1,574,049 | | | $ | 1,527,579 | |
Adjustments: | | | | | | | |
Proceeds from available for sale debt securities (1), (2) | 15,625 | | | 15,625 | | | 46,875 | | | 46,875 | |
Distributions from equity method investees – investing (2) | — | | | — | | | — | | | 523 | |
Interest paid, net (2) | 75,302 | | | 64,587 | | | 158,920 | | | 126,755 | |
Development-stage funding payments - ongoing (3) | 500 | | | 500 | | | 1,606 | | | 6,263 | |
Development-stage funding payments - upfront and milestone (3) | 25,000 | | | 90,000 | | | 125,000 | | | 90,000 | |
Termination payments on derivative instruments | — | | | 16,093 | | | — | | | 16,093 | |
Distributions to non-controlling interests (2) | (107,183) | | | (125,427) | | | (322,726) | | | (363,624) | |
Derivative collateral received, net (2) | — | | | 2,130 | | | — | | | — | |
Adjusted EBITDA (non-GAAP) | $ | 548,071 | | | $ | 533,267 | | | $ | 1,583,724 | | | $ | 1,450,464 | |
| | | | | | | |
Net cash provided by operating activities (GAAP) | $ | 538,827 | | | $ | 469,759 | | | $ | 1,574,049 | | | $ | 1,527,579 | |
Adjustments: | | | | | | | |
Proceeds from available for sale debt securities (1), (2) | 15,625 | | | 15,625 | | | 46,875 | | | 46,875 | |
Distributions from equity method investees – investing (2) | — | | | — | | | — | | | 523 | |
| | | | | | | |
Contributions from non-controlling interests-R&D (2) | 240 | | | 2,003 | | | 971 | | | 6,083 | |
Distributions to non-controlling interests (2) | (107,183) | | | (125,427) | | | (322,726) | | | (363,624) | |
Investments in equity method investees (2), (4) | (6,846) | | | (10,893) | | | (9,896) | | | (28,320) | |
Adjusted Cash Flow (non-GAAP) | $ | 440,663 | | | $ | 351,067 | | | $ | 1,289,273 | | | $ | 1,189,116 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | |
(in thousands) | For the three months ended June 30, | | For the six months ended June 30, | |
| 2020 | 2019 | 2020 | 2019 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Net cash provided by operating activities (GAAP) | $ | 489,004 | | $ | 336,881 | | $ | 960,108 | | $ | 769,777 | |
Adjustments: | | | | |
Tecfidera milestone payments (1) | — | | — | | — | | 150,000 | |
Distributions from non-consolidated affiliates - investing (2) | 15,084 | | — | | 15,084 | | — | |
Interest paid, net (2) | 30,967 | | 61,458 | | 79,834 | | 115,807 | |
Development stage funding payments - ongoing (3) | 5,776 | | 21,457 | | 13,415 | | 44,448 | |
| | | | |
Payments for operating costs and professional costs | 44,147 | | 29,439 | | 69,985 | | 47,144 | |
| | | | |
Swap termination payments | — | | — | | 35,448 | | — | |
Distributions to non-controlling interests | (123,159) | | (36,398) | | (284,546) | | (77,858) | |
Swap collateral posted or received, net (2) | — | | 25,950 | | (45,252) | | 26,310 | |
Adjusted Cash Receipts (non-GAAP) | $ | 461,819 | | $ | 438,787 | | $ | 844,076 | | $ | 1,075,628 | |
| | | | |
Net cash provided by operating activities (GAAP) | 489,004 | | 336,881 | | 960,108 | | 769,777 | |
Adjustments: | | | | |
Tecfidera milestone payments (1) | — | | — | | — | | 150,000 | |
Distributions from non-consolidated affiliates - investing (2) | 15,084 | | — | | 15,084 | | — | |
Interest paid, net (2) | 30,967 | | 61,458 | | 79,834 | | 115,807 | |
| | | | |
Development stage funding payments - ongoing (3) | 5,776 | | 21,457 | | 13,415 | | 44,448 | |
Swap termination payments | — | | — | | 35,448 | | — | |
Distributions to non-controlling interests | (123,159) | | (36,398) | | (284,546) | | (77,858) | |
Swap collateral posted or received, net (2) | — | | 25,950 | | (45,252) | | 26,310 | |
Adjusted EBITDA (non-GAAP) | $ | 417,672 | | $ | 409,348 | | $ | 774,091 | | $ | 1,028,484 | |
| | | | |
Net cash provided by operating activities (GAAP) | 489,004 | | 336,881 | | 960,108 | | 769,777 | |
Tecfidera milestone payments (1) | — | | — | | — | | 150,000 | |
Distributions from non-consolidated affiliates - investing (2) | 15,084 | | — | | 15,084 | | — | |
| | | | |
Distributions to non-controlling interests (2) | (123,159) | | (36,398) | | (284,546) | | (77,858) | |
Investment in non-consolidated affiliates (2) | (16,120) | | (9,842) | | (29,262) | | (18,684) | |
Contributions from non-controlling interests-R&D (2), (4) | 3,854 | | — | | 5,114 | | — | |
Adjusted Cash Flow (non-GAAP) | $ | 368,663 | | $ | 290,641 | | $ | 666,498 | | $ | 823,235 | |
(1)Receipts from the quarterly redemption of the Series A Biohaven Preferred Shares are presented as Proceeds from available for sale debt securities on the statements of cash flows.
(2)The table below shows the line item for each adjustment and the direct location for such line item on the statements of cash flows.
| | | | | |
(1) Receipts from our Tecfidera milestone payments are presented as Reconciling Adjustment | Statements of Cash Flows Classification |
Proceeds from available for sale debt securities on the Statement of Cash Flows. | |
(2) The table below shows the line item for each adjustment and the direct location for such line item on the Statement of Cash Flows. | |
| |
Reconciling adjustment | Statement of Cash Flows classificationInvesting activities |
Investments in non-consolidated affiliatesequity method investees | Investing activities |
Distributions to non-controlling interests | Financing activities |
Interest paid, net | Operating activities (Interest(Interest paid less Interest received)received) |
SwapDerivative collateral posted or (received),received, net | Operating activities (Swap(Derivative collateral received less Derivative collateral received less Swap collateral posted)posted) |
Contributions from non-controlling interest-interests- R&D | Financing activities |
Distributions from non-consolidated affiliatesequity method investees - investing | Investing activities |
| |
(3) Our lenders consider all payments made to support R&D activities for products undergoing late-stage development similar to asset acquisitions as these funds are expected to generate operational returns in the future. All development-stage funding payments - ongoing and upfront - run through R&D funding expense in net income and are added back in aggregate to Net cash provided by operating activities to arrive at Adjusted EBITDA. As a result, Adjusted EBITDA captures the full add-back for R&D funding payments while Adjusted Cash Flow only reflects the add-back for the upfront portion of development-stage funding payments due to the fact that development-stage funding payments – ongoing are considered an ongoing business expense. | |
(4) We consider all payments to fund our operating joint ventures that are performing research and development activities for products undergoing late stage development similar to asset acquisitions as these funds are expected to generate operational returns in the future. As a result, amounts funded through capital calls by our equity method investees, the Avillion entities, are added back to Adjusted Cash Flow. | |
(3)Our lenders consider all payments made to support R&D activities for development-stage product candidates similar to asset acquisitions as these funds are expected to generate operational returns in the future. All ongoing development-stage funding payments and upfront and milestone development-stage funding payments are reported as R&D funding expense in net income and are added back in aggregate to Net cash provided by operating activities to arrive at Adjusted EBITDA. As a result, Adjusted EBITDA captures the full add-back for development-stage funding payments.
(4)
We consider all payments to fund our operating joint ventures that are performing R&D activities for development-stage product candidates similar to asset acquisitions as these funds are expected to generate operational returns in the future. As a result, amounts funded through capital calls by our equity method investees, the Avillion Entities, are deducted to arrive at Adjusted Cash Flow, but are not deducted in Adjusted EBITDA.
Investments Overview
Ongoing investment in new royalties is fundamental to the long-term prospects of our business. New investments provide a source of growth for our royalty receipts, supplementing growth within our existing portfolio and offsetting declines for royalties on products in our portfolio that have lost market exclusivity. Our team hasWe evaluate an array of royalty acquisition opportunities on a continuous basis and expect to continue to make acquisitions in the ordinary course of our business. We have established a strong track record of identifying, evaluating and investing in royalties tied to leading products across therapeutic areas and treatment modalities. We invest in approved products and development-stage product candidates that have generated robust proof of concept data. We invest in these therapies through the purchase of royalties, by making hybrid investments and by acquiring businesses with significant existing royalty assets or the potential for the creation of such assets.
DuringFor the second quarter of 2020,nine months ended September 30, 2022, we invested $497.2 million$2.1 billion in royalties and related assets, including two new investments. For the first six months of 2020, we invested $667.3 million in royalties and related assets, including 4 new investments.assets. While volatility exists in the quantumtotal amount of our new acquisitions on a year-to-year basis due to the unpredictable timing of new investment opportunities, we have consistently deployed significant amounts of cash when measured over multi-year periods. Our approach is rooted in a highly disciplined evaluation process that is not dictated by a minimum annual investment threshold.
Summary of royalty acquisition activityRoyalty Acquisition Activity
•In August 2020,October 2022, we entered into an expandeda R&D funding agreement with Biohaven Pharmaceuticals for upMSD International Business GmbH (“Merck”) to $450 million to fundco-fund the development of zavegepantMK-8189, an investigational oral PDE10A inhibitor currently being evaluated in a Phase 2b study for the treatment of schizophrenia. We funded $50 million upon closing, and if Merck decides to proceed with Phase 3, we have the commercialization of Nurtec ODT. Biohaven will receive a $150 million upfront payment andoption to fund up to an additional $100 million payment upon the start of the oral zavegepant phase 3 program. Royalty Pharma will$375 million. In exchange, we are eligible to receive a royalty on Nurtec ODT and zavegepant and success-based milestone payments basedassociated with certain regulatory approvals as well as royalties on zavegepant regulatory approvals. We will also provide further support for the ongoing launchannual worldwide sales of Nurtec ODT through the purchase of committed, non-contingent Commercial Launch Preferred Equity for a total of $200 million payable between 2021 and 2024.any approved product.
•In July of 2020,2022, we acquired a royaltyall of the equity interests in Theravance Respiratory Company, LLC from Theravance and Innoviva, Inc. which entitles us to the right to receive royalties on risdiplam, a development-stage product for the treatmentannual worldwide sales of treatment of Types 1, 2 and 3 spinal muscular atrophy (SMA) from PTC Therapeutics, Inc., in exchangeTrelegy for an upfront payment of $650 million. Evrysdi (risdiplam) was subsequently approved by$1.31 billion and up to $300 million in additional payments contingent upon the FDAachievement of certain sales milestones. Additionally, we agreed to provide Theravance $25 million in August 2020, representingupfront funding and a potential $15 million regulatory milestone payment to support the first at home, oral treatment approved for infants, children and adults with all SMA types.clinical development of ampreloxetine.
•In the second quarter of 2020,June 2022, we acquired aan ex-U.S. royalty on 1) Prevymis, an approved product to prevent cytomegalovirus (“CMV”) infectioninterest in stem cell transplants,Gavreto from AiCuris Anti-infective Cures GmbH in exchangeBlueprint Medicines for an upfront payment of $220$175 million and 2) IDHIFA, an approved product a product for the treatment of adult patients with relapsed or refractory acute myeloid leukemia (AML) with an isocitrate dehydrogenase-2 (IDH2) mutation, from Agios Pharmaceuticals, Inc. in exchange for an upfront payment of $255contingent sales-based milestones up to $165 million.
•In the first quarter of 2020,April 2022, we acquired common stock and a revenue participation right from ApiJect Holdings, Inc. for $50 million.
•In January 2022, we acquired a royalty on Entyvio, an approved productinterest in aficamten from Cytokinetics, Incorporated (“Cytokinetics”) for the treatment$150 million comprised of ulcerative colitis and Crohn’s disease, from The General Hospital Corporation in exchange for an upfront payment of $86.6 million.$50 million and two additional $50 million payments, conditional upon the initiation of potential pivotal clinical trials for oHCM and nonobstructive hypertrophic cardiomyopathy, respectively. In February 2022, Cytokinetics announced that it initiated the clinical trial for oHCM, which triggered a $50 million payment from us in March 2022. Additionally, we will provide Cytokinetics long-term capital of up to $300 million (“Cytokinetics Commercial Launch Funding”) to support further development of aficamten and potential commercialization of omecamtiv mecarbil. The Cytokinetics Commercial Launch Funding is available in five tranches, including an initial tranche of $50 million funded upon closing.
•In the first quarterNovember 2021, we acquired incremental royalty interests in BCX9930 and Orladeyo (berotralstat) from BioCryst for an upfront cash payment of 2019,$150 million. Additionally, we entered into a preferred share purchase agreement with Biohaven through which we purchased $125paid $50 million in preferred shares and may be required to purchase up to an3,846 thousand shares of BioCryst common stock, which was calculated based on the volume-weighted average price of BioCryst common stock over a period preceding the closing of the transaction. The funds from this transaction will enable further advancement of BCX9930 and support additional $75 millioninvestment in preferred shares at Biohaven’s option, providing us with a fixed return on redemptionthe global launch of two times our investment on FDA approval of Biohaven’s pipeline product, Nurtec ODT (rimegepant), for migraine treatment. The FDA approved Nurtec ODT (rimegepant) for the acute treatment of migraine in adults in February 2020.Orladeyo (berotralstat).
•In June 2021, we announced a long-term strategic funding partnership with MorphoSys to support its acquisition of Constellation Pharmaceuticals, Inc. (“Constellation”), which closed on July 15, 2021. We agreed to provide up to $2.025 billion of funding to MorphoSys, comprised of an upfront payment of $1.425 billion, additional milestone payments of up to $150 million, up to $350 million of capital (“Development Funding Bonds”). In connection with the first quarterclosing of 2019,its acquisition of Constellation, we purchased 1,337,552 ordinary shares of MorphoSys for $100 million at a price of €63.35 per ordinary share, based on the average trading price of the ordinary shares over a period preceding the closing of the acquisition. In September 2022, we funded $300 million under the Development Funding Bonds.
•In April 2021, we acquired the following: (1) a royalty on Promacta,interest in Oxlumo from Dicerna Pharmaceuticals, Inc. for an upfront cash payment of $180 million and up to $60 million in contingent sales-based milestone payments. Oxlumo, which has been approved productby the FDA and EMA for the treatment of chronic immune thrombocytopeniaprimary hyperoxaluria type 1, is marketed by Alnylam.
•In March 2021, we acquired a royalty interest in the cabozantinib products Cabometyx and aplastic anemia,Cometriq from Ligand in exchangeGSK for an upfront payment of $827$342 million (2)and up to $50 million in additional payments contingent on the achievement of regulatory approvals of cabozantinib for prostate cancer and lung cancer in the United States and Europe.
•In January 2021, we acquired a royalty interest in seltorexant from Minerva Neurosciences, Inc. for an upfront payment of $60 million and up to $95 million in additional milestone payments, contingent on Eli Lilly’s Emgality, an approved productthe achievement of certain clinical, regulatory and commercialization milestones. Seltorexant is currently in Phase 3 development for the treatment of migraine, from Atlas Ventures and Orbimed for $260 million and (3) a royalty onmajor depressive disorder with insomnia symptoms by Johnson & Johnson’s Erleada, an approved product for the treatment of prostate cancer, from the Regents of the University of California for $105.4 million and potential future milestones.Johnson.
Additionally, in April 2021, we entered into an agreement with MSCI, a leading provider of critical decision support tools and services, to assist MSCI in the design of a classification framework and index methodologies to expand MSCI’s thematic index suite with the launch of new indexes. In return, we will receive a portion of MSCI’s revenues from those indexes. The financial impact associated with this transaction has not been material to date and is not expected to be material for the year ended December 31, 2022.
Liquidity and Capital Resources
Overview
Our primary source of liquidity is cash provided by operations. For the sixnine months ended JuneSeptember 30, 20202022 and 2019,2021, we generated $960.1 million$1.6 billion and $769.8 million,$1.5 billion, respectively, inNet cash provided by operations.operating activities. We believe that our existing capital resources, and cash provided by operationsoperating activities and our Revolving Credit Facility (defined below) will continue to allow us to meet our operating and working capital requirements, to fund planned strategic acquisitions and research and developmentR&D funding arrangements, and to meet our debt service obligations for the foreseeable future. We have historically operated at a low level of fixed operating costs. Our primary cash operating expenses, after this offering, other than research and developmentR&D funding commitments, will include interest expense, our Operating and Personnel Payments, and legal and professional fees.
We have access to substantial sources of funds at numerous banks worldwidein the capital markets and we may, from time to time, seek additional capital through a combination of additional debt or equity financings. In June 2020,July 2021, we completedissued $1.3 billion of senior unsecured notes. Additionally, we have a Revolving Credit Facility (defined below) which provides for borrowing capacity of up to $1.5 billion that remains undrawn and available to us as of September 30, 2022. As of September 30, 2022 and December 31, 2021, the par value of our IPOtotal outstanding borrowings was $7.3 billion and received net proceeds$7.3 billion, respectively. A summary of approximately $1.9 billion from the IPO after deducting underwriting discountsour borrowing activities, balances and commissions of approximately $86.3 million. Our ability to satisfy our working capital needs,compliance with certain debt service and other obligations, and to comply with the financial covenants under ourvarious financing agreements dependsarrangements is included in Note 10. Borrowings of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on our future operating performance and cash flow, which are in turn subject to prevailing economic conditions and other factors, many of which are beyond our control.Form 10-Q.
We have historically funded our acquisition program through free cash flow, equity contributions and debt. Our low operating costs coupled with a lack of capital expenditures and low taxes have contributed to our strong financial profile, resulting in high operating leverage and high conversion of our Adjusted Cash Receipts to Adjusted Cash Flow. We expect to continue funding our current and planned operating costs (excluding acquisitions) principally through our cash flow from operations and our acquisition program through cash flow and issuances of equity and debt. In the past, we have supplemented our available cash and cash equivalents on hand with attractive debt capital to fund certain strategic acquisitions.
As of June 30, 2020, we had total long-termOur ability to satisfy our working capital needs, debt outstanding of $5.7 billion. As of December 31, 2019, we had total long-term debt outstanding of $6.0 billion. In February 2020, in connectionservice and other obligations, and to comply with the Exchange Offer Transactions, we repaidfinancial covenants under our outstanding debt held by RPIFTfinancing agreements depends on our future operating performance and cash flow, which are in fullturn subject to prevailing economic conditions and issued new long-term debt at RPI Intermediate FT.other factors, many of which are beyond our control.
Cash flowsFlows
The following table summarizesand analysis of cash flow changes presents a summary of our cash flow activities:activity for the nine months ended September 30, 2022 and 2021:
| (in thousands) | (in thousands) | Six Months Ended June 30, | | (in thousands) | For the Nine Months Ended September 30, | |
| | 2020 | 2019 | | 2022 | | 2021 | | Change |
Cash provided by (used in): | Cash provided by (used in): | | Cash provided by (used in): | | | | | |
Operating activities | Operating activities | $ | 960,108 | | $ | 769,777 | | Operating activities | $ | 1,574,049 | | | $ | 1,527,579 | | | $ | 46,470 | |
Investing activities | Investing activities | $ | (922,316) | | $ | (1,475,537) | | Investing activities | (1,444,163) | | | (1,318,634) | | | (125,529) | |
Financing activities | Financing activities | $ | 2,121,956 | | $ | (625,135) | | Financing activities | (679,306) | | | 583,183 | | | (1,262,489) | |
The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses. Certain of these policies are considered critical as they have the most significant impact on the Company’sour financial condition and results of operations and require the most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain. On an ongoing basis, we evaluate our estimates that are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of income and expenses that are not readily apparent from other sources. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) prior to the filing of this Quarterly Report on Form 10-Q. Based on thatthis evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were, in design and operation, effective to the reasonable assurance level.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There have been no material changes with respect to the risk factors disclosed in the Prospectus.Annual Report on Form 10-K.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.and results of operations.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS
The following exhibits are filed as a part of this Quarterly Report on Form 10-Q:
Pursuant to the requirement of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.