Royalty Pharma plc Q2 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the Royalty Pharma Second Quarter 2021 Earnings Conference Call. I would now like to turn the call over to George Grofik, SVP, Head of Investor Relations and Communications. Please go ahead, sir.

Good morning and good afternoon to everyone on the call. Thank you for joining us to review Royalty Pharma's second quarter results. You can find the slides to this call on the Investors page of our website at royaltypharma.com. Moving to Slide 3, I would like to remind you that information presented in this call contains forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. I refer you to our 10-K on file with the SEC for a description of these risks. With that, please advance to Slide 4. Our speakers on the call today are Pablo Legorreta, Founder and Chief Executive Officer; Jim Reddoch, EVP, Co-Head of Research and Investments & Chief Scientific Officer; Marshall Urist, EVP, Co-Head of Research and Investments; and Terry Coyne, EVP, Chief Financial Officer. Pablo will discuss the key highlights, after which Jim and Marshall will provide an update on our Royalty portfolio and acquisitions. Terry will then review the financials. And after concluding remarks from Pablo, we will hold a Q&A session. Chris Hite, our Vice Chairman, will also join the Q&A session. With that, I’d like to turn the call over to Pablo.

Thank you, George, and welcome to everyone on the call. I am delighted to report that Royalty Pharma continued to execute very well against our strategy in the second quarter. We continue to deliver double-digit bottom line growth despite losses of exclusivity. We maintained our strong deal momentum with year-to-date transactions announced of $2.8 billion, and we completed an innovative bond issuance to strengthen our capital structure and expand our competitive advantage. Taken together based on our strong business dynamics, we're again raising our guidance for adjusted cash receipts for full-year 2021. On Slide 7, you can see our financials in a little more detail. In the second quarter, we delivered 3% growth in adjusted cash receipts and 16% in adjusted cash flow, what we consider to be our top and bottom line respectively. The continued business momentum puts us in a great position to deliver another year of strong financial performance in 2021, as Terry will speak to when he discusses our raised guidance for the current year. Slide 8 takes a step back and sets out where we have achieved since our IPO in June 2020. I am particularly proud of this slide as it really speaks to the strength of our business model and our competitive position. In just over a year, we have announced $4.7 billion in Royalty acquisitions across nine transactions, spanning four therapeutic categories and 17 therapies. Meanwhile, we have converted our top-line efficiency to cash with an 85% adjusted cash flow margin over the period. And we have grown our bottom line by 25%. These milestones are a testament to our market leadership position in a rapidly growing Royalty funding market and the innovative approach of our team. And as you will hear through the course of this presentation, our prospects for sustained long-term growth continue to be excellent. With that, I will hand over to Jim and Marshall to update you on the Royalty portfolio.

Thank you, Pablo, and hello, everyone. As shown on Slide 10, we have seen strong early progress of our recently acquired royalties. As noted on the last slide, we deployed about $4.7 billion in capital since our IPO. However, if we look a little further back to the beginning of 2020, our capital deployment is around $5.3 billion. The graphic on the right here shows the evolution and consensus sales forecast since we acquired each of the royalties. And while the products underlying our royalties do not need to outperform consensus to reach our targeted returns, we were very encouraged to see the consensus has evolved positively for most of our recent Royalty acquisitions, with four therapies outperforming consensus estimates at the time of the deal and only one underperforming. While it is still early days for these deals, with many of the products expected to generate growing royalties well into the next decade, we were definitely encouraged by these trends. We believe this speaks to our ability at Royalty Pharma through our deep due diligence and unique competitive advantages to identify therapies that deliver important and potentially transformative benefits to patients. Slide 11 analyzes our Royalty acquisitions by therapy area and type of royalty deal. Around 40% of the new therapies we added to our portfolio since the beginning of last year are for rare diseases, with the balance divided between oncology, immunology and neurology. All are targeted at areas of high unmet patient need. And as a reminder, a strength of our business model is that we are therapeutic category agnostic, and we evaluate each opportunity on a case-by-case basis, so we can quickly pivot our focus to areas where breakthrough medical innovations are happening. And when we look at our Royalty acquisitions by type, roughly two-thirds had been existing royalties and one-third are newly created or synthetic royalties. Through our MorphoSys transaction, a significant portion of each category relates to enabling midcap M&A where we see considerable opportunity for future deal flow. And with that, I'll hand it over to Marshall.

Thank you, Jim, and good morning and afternoon to everyone. Let me just add that I'm really excited about the Royalty acquisitions we have announced since our IPO, and our team remains very busy in assessing new potential opportunities. I want to take a couple of minutes now to highlight the MorphoSys transaction and to discuss upcoming portfolio events. Slide 13 provides a summary of what was a highly customized transaction of up to $2 billion, which enabled MorphoSys to acquire Constellation Pharmaceuticals. Pablo described this at the time as our biggest and boldest transaction since we went public, and I would echo this with my personal view that Royalty Pharma is uniquely positioned with the technical, scientific, and financial capabilities in place to deliver such a carefully tailored funding structure in what we believe is a true win-win M&A deal. As a reminder, we paid $1.425 billion upfront to MorphoSys and purchased $100 million of equity. Beyond this, we agreed to provide up to $150 million in clinical, regulatory, and commercial milestone payments, and up to $350 million in Development Funding Bonds. In return, we will receive six cash flow streams with the cornerstone being the royalty on Tremfya, a leading immunology blockbuster marketed by Johnson & Johnson. On top of this, we added four attractive development stage opportunities to our Royalty pipeline. We received royalty rights to otilimab, a novel approach to rheumatoid arthritis by targeting GMCSF under development in GSK. At a June Investor event, we noted that GSK provided an outlook for peak otilimab sales of between £1 billion to £2 billion on a non-risk adjusted basis, with Phase 3 data expected towards the end of 2022. As a reminder, we acquired 80% of MorphoSys' tiered double-digit royalty. We also receive Royalty rights on gantenerumab for Alzheimer's, which is in development at Roche. Since the deal was announced, Biogen's agile home was approved by the FDA, indicating a potentially more favorable regulatory environment for Alzheimer's therapies, and we are cautiously optimistic that the upcoming gantenerumab Phase 3 data will support a best-in-class profile. The opportunity is clearly significant, and we like the upside potential this therapy offers in the context of the MorphoSys deal, as well as our broader portfolio. As a reminder, we acquired 60% of MorphoSys' 5.5% to 7% royalty. We also created two synthetic royalties on oncology assets from Constellation, mainly collaborative for myelofibrosis and CP-0209, which is being assessed in several oncology settings. Lastly, we're entitled to receive stable fixed payments on the Development Funding Bonds. These fixed payments, which will generate a 2.2x multiple and roughly 13% unlevered IRR, mitigate the risk return profile of the deal. Our ability to execute such a complex transaction underscores the breadth of our funding capabilities and our unique role in M&A, which we see as a major business opportunity going forward. Slide 14 sets out the upcoming clinical and regulatory events that are expected over the next 12 months to 18 months for our portfolio. Looking to the balance of 2021, we expect several important data readouts, including the Phase 3 results for AstraZeneca's PT027 in asthma, Biohaven's Phase 2, 3 results for intranasal zavegepant in migraine, and Gilead pivotal results for Trodelvy in HR positive breast cancer. When we look out into 2022, we have potentially very meaningful clinical trial readouts, particularly the Phase 3 results for gantenerumab in Alzheimer's, as well as Tremfya in ulcerative colitis in Crohn's, and otilimab in rheumatoid arthritis among several others. Turning to regulatory decisions, in the past quarter, the FDA approved Trodelvy in urothelial cancer as well as the expansion of the NURTEC ODT label to include migraine prevention and Trikafta in CF in six to 11-year olds. In summary, we're approaching a number of clinical and regulatory milestones over the next 12 months to support the continued development of our portfolio. And if positive, many of these could add significantly to our long-term outlook for adjusted cash flow. With that, I will hand it over to Terry.

Thanks, Marshall. Let's move to Slide 16. Total Royalty receipts were slightly ahead of year ago period, consistent with the commentary we provided on our first quarter earnings calls. Growth drivers in the quarter included our largest franchise cystic fibrosis, together with payments from Biohaven and the addition of new royalties such as Cabometyx. These positive factors were largely offset by a more than 50% decline in Royalty receipts from the HIV franchise. As a reminder, our royalties are generally booked one quarter in the rear from actual performance and that many biopharma companies reported a softer first quarter. These dynamics will largely reverse next quarter, as you have seen in the recent reporting season. Slide 17 shows how our Royalty receipts translated to strong adjusted cash flow in the second quarter. As you're aware, adjusted cash receipts is a key non-GAAP metric for us, which we arrive at after deducting non-controlling interest. This amounted to $475 million in the quarter, growth of 3% compared with last year's second quarter as Pablo noted earlier. The NCI line declined 9% as royalties from products with a larger NCI percentage like emtricitabine and Truvada have declined in 2021 due to loss of exclusivity. When we move from left to right, operating professional costs of $40 million equated to 8% of adjusted cash receipts, representing a similar ratio to the first quarter. Net interest was de minimis and reflected the fact that this quarter along with the fourth quarter we did not incur the semi-annual interest payment associated with our $6 billion unsecured note offering in 2020. As a reminder, the next semi-annual interest payment of approximately $64 million will be in the third quarter. This does not reflect our recent $1.3 billion debt offering, with the first interest payment from that offering expected in the first quarter of 2022. After other items of $5 million plus adjusted cash flow, our bottom line earnings were $429 million or $0.71 per share. This resulted in an adjusted cash flow margin of 90.2%, again underscoring the strong leverage in our business model. Slide 18 shows how we continue to strengthen our balance sheet after the quarter end through an innovative debt issuance, which raised $1.3 billion in July. With maturities of 2031 and 2051 for the two tranches, we extended the majority of our debt profile to 2030 and beyond at very attractive rates. On the right-hand side of the slide, you can see how our total debt profile compares favorably with our biopharma peers. We are particularly pleased that $600 million of the bonds we issued are in the form of a social bond, which underscores our commitment to ESG and corporate responsibility. Specifically, our social bond framework is linked to SDGs three and nine, which promotes social health and wellbeing, as well as enhanced scientific research and innovation. The proceeds from the social bond will go towards funding innovation in areas such as orphan diseases, top diseases as defined by the WHO and/or UN, as well as other underserved diseases. This can also be applied retroactively to deals that were done in the two years prior to the bond offering, such as the residual royalty interest in the CF franchise that we acquired from the CF Foundation in November of last year. On Slide 19, you can see we ended the quarter with cash and marketable securities of $2 billion, similar to our position at the end of 2020. Cash inflows over the six months included adjusted cash flow of $838 million. These inflows were broadly offset by the $719 million we deployed on Royalty acquisitions and by $226 million in dividends and distributions, hence the limited change over the period on a net basis. Following the quarter end, we closed the MorphoSys transaction and the debt offering I just described. If we adjust for these factors, our performance cash and marketable securities would have been just over $1.7 billion. We currently have $7.3 billion in investment-grade debt. And our pro forma leverage is approximately three times EBITDA on a net basis and four times EBITDA on a total basis. Our cash balance, strong cash generation of the business, along with our untapped $1.5 billion revolving credit facility, gives us a strong liquidity position and leaves us well-positioned to execute on our business plan. Slide 20 demonstrates why we believe we are uniquely positioned to fund innovation. First, we have deep access to debt capital to fund Royalty acquisitions. For example, we have raised $2.2 billion in debt at attractive rates since 2020, which compares to the $5.3 billion in deals we've announced. Second, we have aligned our debt maturity profile with the average duration of our Royalty profile at around 13 to 14 years. And third, with conservative leverage, we can considerably amplify the returns to our shareholders. We target returns in the high-single-digit to teens percentage range, depending on the transaction type, which compares with our average debt coupon of 2.24%. We believe the power of our capital structure is a strength that is consistently overlooked, providing us with the lowest cost of capital to buy assets, while also delivering attractive returns to equity holders. My final slide sets out our new full-year 2021 guidance. We now expect adjusted cash receipts to be in the range of $2.08 billion to $2.12 billion, an increase of approximately $140 million from our previous guidance. Around half of this increase was driven by the strength of our portfolio, with particularly strong performance from the CF franchise, Tysabri, as well as recently launched therapies. Around a quarter of the increase was driven by the addition of Tremfya and another quarter was driven by a one-time $37 million milestone payment related to our Soliqua royalty, which we previously expected to occur in 2022. Our new adjusted cash receipt guidance represents growth of between 16% to 18% over the $1.8 billion we delivered in 2020. At the mid-point, it is around 8% above where analyst consensus stood for adjusted cash receipt at the time of our IPO. Turning to operating costs, we expect these to be approximately 9% to 10% of adjusted cash receipts, which is unchanged versus our prior guidance. While our operating costs have been around 8% of our adjusted cash receipts in the first half of this year, our guidance implies a bit of a step-up in the second half due to the timing of various expenses. Lastly, our interest paid guidance for 2021 is unchanged at $130 million. Our recent $1.3 billion debt offering will not impact our net interest line in 2021 but will increase net interest paid in 2022 to approximately $170 million, with semi-interest payments split fairly evenly between the first and third quarter. Although in 2022, the payments will be skewed slightly to the first quarter. In line with our established practice, you should note that this guidance is based on our portfolio as of today and does not take into account any future acquisitions. With that, I'd like to hand the call back to Pablo for his closing comments.

Thanks, Terry. Let me close by first reiterating that I'm extremely pleased with how our business has progressed in 2021. We have delivered strong financial performance raising our full-year guidance. We have continued to find innovative funding solutions for our partners. And we have demonstrated that same innovative approach to our own capital structure, which positions us to compete in the growing biopharma royalty market. Our market has strong momentum, growing over 70% by volume and value in the past year. And we have captured the majority share of that value. Looking ahead, we expect the powerful fundamental tailwind supporting this growth to continue for the foreseeable future based on the rapid pace of scientific advance across the biopharma ecosystem and the need to fund that innovation. On my final two slides, I want to step back and put our deal activity over the past couple of years in perspective. Over our history, we have maintained a consistent and strong pace of capital deployment. Up to the year prior to going public, we deployed a total of around $18 billion in capital from $5 billion in 2012, or a total of $13 billion deployed over eight years. Since the start of 2020, we have continued the strong trend with $5.3 billion in announced transactions. This puts us well above the run rate we have previously indicated for $7 billion of capital deployed through 2025. This pace of capital deployment positions us well to deliver strong long-term growth, and importantly, to deliver value to our shareholders. It also really speaks to the increased awareness and acceptance of Royalty funding in biopharma and the significant opportunities for growth ahead of us. On this next slide, when we look back at our deals over the past five years, we deployed about $1.8 billion per year, which demonstrates our ability to consistently identify attractive Royalty funding opportunities. The second graphic shows that based on actual results and the current consensus sales estimates, this level of capital deployment is expected to result in significant cash receipts five years later, about $350 million on average. In other words, every $1 billion of capital we deploy is estimated to translate to approximately $170 million in royalty receipts five years later. This shows how our scale and expertise enables us to grow and diversify and drive value enhancing long-term growth. Furthermore, we believe the compounding effect of our business is very powerful as we're adding new royalties each year on top of an attractive portfolio of leading products and franchises. We remain as excited as ever about our pipeline and expect to continue to layer new cash flow streams on our existing business, and deliver top-tier growth in biopharma. With that, I would like to open the call to Q&A. Back to you, George.

Thanks, Pablo. We will now open the call for your questions. Operator, please take the first question.

Our first question comes from Chris Schott with J.P. Morgan. Your line is open.

Hi, great. Thanks so much for the questions. Just two for me. First in Alzheimer's, I know you talked a little bit about this, but can you just elaborate on your thoughts and the development of this market since the Genmab deal? I guess, do you see an attractive opportunity for your product for the Royalty stream, even if we don't see a meaningful cognitive benefit with the data next year with the new guidelines or do you think cognition is really going to be key to success in this market? And then, my second question, I know you've talked about this in the past. But when we think about the new triple that Vertex is advancing, what would that mean for your royalty levels if approved? And probably importantly with that, to the extent there is a disagreement between the parties in interpreting the agreement, what is the resolution pathway? Is that something that we'll be able to get clarity on ahead of a launch or something we'll have to wait until an approval to see how that plays out? Because it does seem like the companies are maybe communicating slightly different things about the implications for the longer-term royalties. Thanks so much.

Sure. Thanks, Chris. Good to hear you, and I'll ask Marshall to take on the first question about Alzheimer's. And then Terry and I will touch on your question regarding a lot of topics related to CF. Marshall?

Yes. Thanks, Pablo. Hey Chris, good morning. So on our view on Alzheimer's and everything that's happened, it's certainly been an active area since we announced the MorphoSys transaction and our interest in gantenerumab. And we're like everyone, I think in our industry watching and observing what's happening with the agile home launch. And as we come into the NCD sometime next year and watching how this market develops, but I wanted to just remind everyone, what we liked about gantenerumab to your question about cognition is we really thought Roche had designed a very large, robust clinical trial program to really give gantenerumab its best chance to succeed. So I think Roche is at the same way as they commented on their call this year. So I think, like we said, we are cautiously optimistic about those data next year, and we're going to see what the data show and how this market develops. So we are excited, like we said, to have that in the portfolio.

Yes. Regarding your question about the new triple that Vertex is developing, we don't expect a low-single-digit royalty rate for the new triple combination. Our royalties on the capital will set the royalty rate for the new triple at 4%. Additionally, we consider deuterated Kalydeco to be equivalent to Kalydeco, which would increase the royalty rate to 8%. As for the third component, we need to see if it generates royalties and what the rate will be, so we can't provide details on that right now. It's important to keep in mind that Trikafta has established a very high standard for safety and efficacy. We share the views of others regarding the recent Phase 2 data; the patient numbers are small, and we didn't find anything suggesting that the new triple would significantly improve upon Trikafta. We also learned that the new triple will necessitate large non-inferiority trials with 48-week endpoints, enrolling patients who are already well-managed by Trikafta. If the new triple does succeed, it likely won't be available until the middle of the decade, by which time many patients will have over five years of experience with Trikafta, a drug that has notably transformed the lives of many CF patients. For these reasons, we are confident that the CF franchise will play an essential role in our long-term business. Regarding the resolution pathway, there is a dispute resolution clause in our contract, and we will ensure we protect our rights. However, it's too early to discuss any potential legal strategy at this time.

Chris, I'd like to just add to some of Terry's comments, and I'll just start by saying that from our perspective, investors and analysts have expressed some concern about a potential impact to Royalty Pharma from issues with our CF royalties. Personally, I believe it's so overblown the concern for many reasons that Terry already talked about some, but I'm going to add some color. So just thinking of timelines, which are really critical here, we're in 2021. If we look at what might take to develop this triple thinking of a trial that is probably going to take a couple of years to enroll, and then 48-week follow-up on patients. So we're talking about two to three years, more likely three years, so 2022, 2023, 2024. Then the trial will be completed. It takes time to go through data to file FDA approval. So we're talking about mid-2025, late 2025 for a potential launch. And then obviously, we're not conceding one bit that there's going to be an issue with Kalydeco. We're super comfortable. You have to also just think of the fact that we've been following this for a very long time since we made the investment in 2014. We actually invested a lot more last year when we bought the residual interest and did an incredibly thorough analysis of everything around this investment, which gave us a very significant level of confidence to go ahead and make this additional $600 million investment. So we're not considering anything. Just thinking of what may happen, if there is a small shortfall in revenue when you look at what analysts have projected for CF in our numbers, which is somewhere in the $800 million plus revenue, and if there is a smaller shortfall, just think about this launch in 2025, 2026, for it to get some traction, we're probably looking at the latter half of this decade. By then, Royalty Pharma will be much, much bigger, just think of the revenues that analysts have projected, analysts estimates by 2025 of around $2.7 billion. And then think, and that's based on what we have today, the portfolio we have today. As you know, we're going to be very active adding much more capital deployed more revenue to our top-line. And we went through the figures of what every billion dollars of investment adds to our top-line. So now if we think of where our revenue might be by the end of the decade, we're probably looking at something north of $3 billion, somewhere in the $3 billion to $4 billion, maybe more. So if you think of a potential shortfall in one asset of a couple of hundred million dollars, it is really immaterial, we're talking about a couple percentage points to the top-line. So that's why I think this issue has been overblown. And maybe just in summary, I think I'd like to mention a couple of important concepts here. This is an industry that has uncertainty, whether it is competition, clinical study results, patents etc. So focusing on any one issue for any one product in our portfolio misses the bigger picture, which is that the strength of our business model and the unique role we play in this industry really makes Royalty Pharma such a highly diversified business with some of the most attractive assets in the industry, and with very high predictable growth. And again just to put this in context, my last slide showed that over the past five years, every billion we deployed resulted in an average of around $170 million in adjusted cash receipts five years later. We've announced over $5 billion transactions since the beginning of 2020, a year-and-a-half. So I think if we project into the future, I think it's important to just realize what's going to happen with this business as we continue to deploy billions of capital every year. And I think I'll just finish by saying that, when we went public, we tried to come out with conservative assumptions, but there's no question that looking now, a year-and-a-half, or a year after our public offering, we have a feeling in our, among myself and the team that this opportunity set for us is pretty big. And that's why we're so confident on our long-term growth prospects. So concerns about any single product in our portfolio misses the most important driver of our business. That we add enough therapies to our portfolio year-in and year-out, growing and diversifying our revenue base. I'm sorry to extend myself, but I just wanted to make sure that I share this view with you.

Our next question comes from Matthew Harrison with Morgan Stanley. Your line is open.

Hi, thanks for taking the question. This is Charlie on for Matthew. Just kind of think about the long-term in terms of the large transaction that potentially coming out over the next few years. How you're thinking about given your existing current guidance of greater than $7 billion through 2025. And I know you're exceeding that by quite a bit. But I think that you're also trying to maintain that investment grading, and it seems like the leverage right now is close to 4, just wanting to know how you're thinking about that in terms of taking down more that or doing more large transactions in the coming years. Thank you.

Sure, thanks for the question. Terry, can you please take this question?

Yes, sure. So, yes, we feel very, very confident in our ability to continue to pursue large Royalty deals over the coming years. We have $1.7 billion of cash on the balance sheet. And we're just going to naturally de-lever over time as EBITDA grows. And when we bring in cash flow products that have cash flows, we can obviously add leverage then as well. And then the business throws off a lot of cash. So we feel like we're very well-positioned with the opportunity set ahead of us, feel really good about the trajectory. Obviously, Pablo mentioned we're tracking well ahead of the original target that we gave, and we feel very good about the opportunities ahead of us. And that target is something that we'll look to update as we update other long-term guidance metrics, because they're all related. We feel very, very, very confident in the business and very confident in the opportunity set.

Thank you. Our next question comes from Geoff Meacham with Bank of America. Your line is open.

Hi, good morning. This is Bill Maughan on for Geoff Meacham. So my question is on the social bonds, just wanted to feel a little more color on exactly kind of the intent and plan for those for what we might be seeing for the investment from those social bonds. And correct me, if I misheard, but you mentioned, I believe, that it can be applied sort of retroactively to CF from the past few years. Can you just kind of walk through what that means logistically in terms of what that looks like on the balance sheet? Thanks.

Sure. Thanks for the question. And I think, look, Terry will answer it. But I think this again highlights how we can be creative and innovative. I think we're the second life sciences company to issue social bonds. And we just realized that there was this very attractive new instrument that we could use to fund the business. And we moved quickly, took advantage of it, and ended up being able to issue bonds with a lower cost than normal bonds. So Terry, do you want to?

Yes, sure. I mean, I think that they sort of taking a step back the social bonds and we published our social bond framework on our website, but they really highlight the unique role that we play in this industry. So in terms of how we can help to recycle capital back into the industry, for places like the Cystic Fibrosis Foundation, to go and fund their mission to attempt to find a permanent cure for this disease. So types of deals that would be eligible would be sort of the CF Foundation deal. The deal that we did with UCLA back in 2016, where the proceeds that we gave them were going back into funding medical research and funding scholarships and things like that. So in terms of how it could be applied retroactively, and that we're not saying that that's exactly how it's going to happen, but we will ultimately provide an Annual Report until the funds are allocated. And so that would be disclosed in the Annual Report and how those funds were allocated. We also would attempt to show sort of the impact metrics of how those funds were allocated.

Our next question comes from Steve Scala with Cowen. Your line is open.

Thank you and congratulations on another well-executed quarter. I have two questions. Can you discuss the $37 million milestone on Soliqua performance that will be booked in the Q3 quarter? Soliqua has been a modest success for Sanofi, so the milestone really seems outsized versus its sales. So maybe you can tell us how that milestone is calculated. And then secondly, I'm curious and I apologize if you've addressed this in the past. But I'm curious if the royalty on gantenerumab also covers the brain shuttle version of gantenerumab, which at least to our understanding is a distinct and separate molecular entity. Thank you.

Thank you for the question. Terry is going to answer the first question related to the Soliqua milestone and then Marshall will address your question on gantenerumab.

Yes. So on Soliqua, it was a commercial milestone. We haven't gotten into any of those specifics, but it is something that we previously we were obviously a little conservative forecast that it would happen in 2022 and it's now a 2021 event. But we haven't got, we are not going to be any more specific than that on the sort of threshold there.

And can you tell us are there future milestones on Soliqua that we should anticipate?

We do have other milestones in the portfolio. While we’re not going to discuss specific milestones right now, we will try to give you advance notice when we expect them to impact adjusted cash receipts. That’s why we addressed this in the current quarter. To the best of our ability, we will provide guidance ahead of time if we know something will be a factor in a particular year.

And hey Steve, good morning. Thanks for the question on the brain shuttle version. So yes, the brain shuttle version of gantenerumab is included in the royalty agreement between MorphoSys and Roche, but we have not gotten into any more details on it beyond the fact that yes it is included.

Our next question comes from Terence Flynn with Goldman Sachs. Your line is open.

Great. Thanks for taking the questions. Two for me, I guess, on Slide 24 Pablo, you've talked a lot about capital deployment and how you're tracking above your historical run rate. Maybe just give us your views on sustainability of that run rate. Should we think about that as kind of the go-forward or do you expect some kind of mean reversion over time? And then the second question I had relates to Dicerna's recent lumasiran data. Just wondering if that changes how you're thinking about the peak opportunity for your Oxlumo royalty stream. Thank you.

Thank you for the questions. As Terry mentioned, we plan to provide updates to analysts and investors regarding several of our metrics in the near future. With a year of experience since going public, we realize that the opportunities available to us are much larger than we previously anticipated. On Page 24, if I reflect on the market from five or ten years ago, we had to work hard to educate owners of royalties about the benefits of monetizing them to support funding for universities, hospitals, and research projects. Companies were initially hesitant to adopt royalty structures for financing their R&D, which made it a significant challenge for us. However, this approach is becoming more mainstream now. Chris Hite has discussed how the perspective has shifted in boardrooms, leading to a greater acceptance of what we do in collaboration with companies, creating mutually beneficial arrangements. Chris, would you like to elaborate on the change in mindset within boardrooms and how this approach is gaining traction?

Yes. Thank you, Pablo. Thank you for the question, Terence. Pablo is correct. There has been a shift in mindset at the board level and among the CFO and executive teams, where they are actively seeking alternative financing options for both R&D and commercial launches, as evidenced by the recent MorphoSys acquisition. As we've continued to innovate, our strategies have gained acceptance within these boards and executive teams, allowing us to leverage our innovations through various approaches such as development stage bond offerings, commercial funding, and M&A support. We see a wealth of opportunities ahead, thanks to our innovations and the growing openness to adopt these ideas at the board level.

So I think maybe just to finish, I mean, look at what happened in 2019, 2020 and 2022, we're investing at a rate of $2 billion plus. So as I said, we'll come back in the near term to talk about the metrics of how you should judge our business. But I hope that answers your question.

Great. Good morning, Terence. Regarding your question about Dicerna, as we mentioned previously, we expected the Dicerna data to show similarities to Oxlumo rather than differences. We are thrilled to be collaborating with a company like Alnylam, which is making significant strides in creating a global rare disease platform. The Dicerna data in PH1 met our expectations, although it is certainly disappointing for patients on page 2. We will keep monitoring the situation, and their decision to seek a commercial partner may slow progress, ultimately benefiting Oxlumo in the long run. Overall, the results from PH1 were in line with what we anticipated.

Our next question comes from Umer Raffat with Evercore ISI. Your line is open.

Hi everyone, thank you for taking my question. I would like to discuss two things. First, regarding the potential Alzheimer's opportunity, it's important to consider not just gantenerumab subcutaneous compared to competitors, but also that gantenerumab is targeting a different patient group than donanemab and aducanumab, especially in Part B. My question is how significant this is for your commercial prospects and how it influences your peak opportunity modeling. Secondly, could you share your thoughts on gantenerumab lacking breakthrough designation and Roche's choice not to pursue approval based on biomarkers, especially since other approvals in this field have relied on biomarkers rather than data? Lastly, Terry, you mentioned something I’ve been pondering: the notion that deuterated Kalydeco is equivalent to Kalydeco. If deuterated Kalydeco possesses its own composition of matter patent, how would you approach that legally, particularly since there have been similar cases with deuterated molecules that had their own patents due to structural differences? Thank you.

Sure. Marshall will address your first question about Alzheimer's, Umer, and then Terry will discuss CF. I want to reflect on my earlier comments regarding CF. While it's currently a significant part of our revenues, as the business expands, we expect to become more diversified and larger. I believe the emphasis many have placed on the immediate impact of CF may be a bit overblown. The reality is that if things unfold as we anticipate, we are looking at very long timeframes for any effects to materialize. So, with that in mind, let's have Marshall discuss the Alzheimer's question.

Sure, good morning, Umer. You asked two important questions. Regarding gantenerumab, although it has a unique commercial perspective due to its subcutaneous administration, which differs from a Part B scenario, we have considered various scenarios and how differing payer structures might influence the product. We believe that in the Alzheimer’s market, the long-term volume potential is substantial, and there will be diverse segments for it. The subcutaneous method has its advantages in terms of delivery, and we expect Roche to enhance that. Therefore, as this market evolves, we see a significant opportunity with space for multiple competitors. Additionally, other players in this market are also looking into subcutaneous options for existing products and pipeline candidates, which highlights the clear delivery benefits that will cater to different market segments. Your second question concerned Roche's remarks about gantenerumab and its breakthrough designation. We have heard the same comments from Roche that you have. Overall, their perspective aligns with our understanding of their development program, which is extensive and has nearly complete data. This seems to be a pivotal factor in their decision-making. It also appears from Roche's statements that they might still need to file regarding biomarkers and are exploring ways to expedite the regulatory process. The data for gantenerumab is expected next year, so we’re looking forward to that and will do everything possible to support efforts to accelerate the regulatory journey.

And then, Umer, on your question on deuterated Kalydeco, we totally understand why analysts and investors are very curious about what gives us confidence in our position on deuterated Kalydeco, but we really can't get into our legal strategy around that at this time.

Umer, I want to add something because I might not have expressed my perspective clearly the first time. I see the whole issue of CF, deuterated versus non-deuterated Kalydeco as short-term noise. There's a lot of focus on this noise, but it is ultimately irrelevant and will become insignificant in five to ten years. The real focus should be on the positives; this franchise is performing exceptionally well, and we have a strong interest in it. People should be paying attention to the attractive growth it's generating for Royalty Pharma, rather than getting caught up in what is essentially trivial noise, which will be resolved in the future when it matters even less. That's what I wanted to add.

Our next question comes from Andrew Baum with Citi. Your line is open.

Thank you. A couple of questions please. Firstly, your stock has underperformed since the IPO. You don't need to tell you that. But yet as you outlined, you've completely executed on what you said in terms of capital allocation, consensus upgrades, and the ROIC at least based on consensus forecast. Now you've addressed cystic fibrosis concerns as being overblown. I know there's some discussion about whether Royalty is more exposed to future U.S. drug pricing legislation, but I'm interested in what other factors you think there are which are keeping investors away from the name, given the valuation construct? Is it a definition of the investor base? So you're bisecting healthcare investors versus credit. Is it concerns about emerging competition, is the drug pricing concerns or do you think it's all driven by the overhang from CF? So that's the first question. At the second in relation to the previous question on gantenerumab, Roche has indicated that they intend to seek reimbursement under Medicare Part B similar to Neulasta B for Part D. I just want to make sure that's consistent with your expectation, even the subcue drug. And then finally, could you remind us that duration or durability of your IP on Imbruvica. Many thanks.

Thank you for your question. I'll start by addressing the stock performance. There are some distractions that don't have much relevance to Royalty Pharma's performance in the short term. What truly matters is the overall picture and the fundamentals of our business. Royalty Pharma has established itself as one of the most innovative funders in a rapidly evolving industry that requires significant capital. Our unique position allows us to scale creatively and make long-term investments that yield results over time, making us a patient partner for numerous companies. These attributes set us apart from our peers and enable us to capitalize on a growing number of opportunities. This is what investors should really focus on. There's a notable appetite for growth in the investment community. In our industry, there's a stark divide; on one hand, there are high-growth, high-risk biotech companies that sometimes yield substantial returns but often result in significant losses. On the other, there are larger companies that typically experience modest growth rates of 2% to 3%, with few achieving mid-single-digit growth. What distinguishes Royalty Pharma is our ability to grow at a rate considerably higher than these larger firms. This year, we've seen growth in the teens, which is driven by both the solid foundation of our portfolio and contributions from acquisitions. Our growth over the past few years has reinforced this trend, making our mid-teen growth rate quite remarkable given our diverse revenue base. Our diversified growth makes our projections more reliable and allows for higher growth potential, which investors should take into account. We're able to deliver growth that is managed, diverse, and durable—qualities that are notably rare in our sector. I believe we can offer this level of growth to our investors in such an exciting industry.

Yes, Pablo, hi, Andrew. Regarding gantenerumab, thanks for bringing it up. As I mentioned in response to Umer's question, we explored various scenarios related to physician-administered subcutaneous products and how these might change over time, including the different mixes and scenarios from a payer and access viewpoint. We indeed considered how different profiles might evolve over time. Terry, if you want to, Andrew had one more question about Imbruvica.

Yes. So what we said on Imbruvica is that we expect the royalty to run through 2027 through 2029. We haven't been more specific. Obviously there's various different scenarios that can play out with any product in terms of patent extensions or additional patents, but we've said 2027 through 2029.

Our next question comes from Greg Fraser with Truist Securities. Your line is open.

Good morning, folks, and thanks for taking the questions. You're generally agnostic of therapeutic area; you have a broad portfolio of royalties on drugs in many areas. But I'm curious if there are any particular areas that you would point to that are of high interest where you haven't yet transacted. And then my second question is on the guidance. Are there any milestone payments baked in that are tied to the clinical or regulatory events that you laid out in the slides? Thank you.

Yes, I can start, and Marshall may add. Regarding therapeutic areas, we are in an exciting time for exploring new targets that can lead to new opportunities. This is true even in areas where we have previously invested, such as rheumatoid arthritis, where otilimab represents a new approach to treatment resulting from improved understanding of immunology. This advancement allows us to explore beyond traditional treatments like TNFs and JAKs. I believe there is still significant potential in this field, possibly extending into lupus and other challenging conditions. We are also considering new modalities, such as cell and gene therapy. Although we have not invested in this space yet, many innovative products are developing that could involve royalties, as these technologies are often highly engineered and come with multiple royalty opportunities. Overall, due to advancements in understanding these diseases, there are many more opportunities arising, even in areas where we have previously invested.

Regarding your question about guidance, the only milestone included for this year is the $37 million Soliqua milestone I mentioned. We were pleased to report a significant increase in our guidance of approximately $140 million, with about a quarter of that resulting from the Soliqua impact.

Operator, we'll take the next question.

Our last question comes from Ivan Feinseth with Tigress Financial. Your line is open.

Yes. Thank you for taking my question and congratulations on the great results and ongoing progress. Can you give some detail into your M&A strategy and pipeline and where do you see breakthroughs happening and what areas do you feel that your funding presence could make the biggest impact?

Thank you for the question. Chris is well-suited to address this. To provide some context, Chris joined us just over a year ago and brings exceptional experience as a leading M&A banker in the life sciences sector. What excites me is the potential for expanding our M&A activities and collaborating with companies in this space. Since the beginning, Royalty Pharma has focused on developing these markets. In the past, we have navigated through different phases, primarily operating in open markets, which I believe is now ripe for further exploration. Our recent deal with MorphoSys highlights a type of M&A in life sciences that hasn’t been seen before and could lead to promising mid-sized transactions for both midcap companies and us. Chris, would you like to share your thoughts on this?

Thank you, Pablo, and thank you for the question, Ivan. I agree with Pablo. Looking back, there has been a scarcity of midcap to midcap mergers and acquisitions in the industry. This mainly stems from the preference of a seller’s Board of Directors, which usually favors cash deals over stock transactions. It can also be challenging to value the stock of an acquiring company when dealing with two development-stage companies or when one has recently approved a drug, but its performance remains uncertain. Consequently, there has been little M&A activity in the midcap sector, and banks that typically finance these deals are hesitant to lend to companies lacking a reliable cash flow history. The MorphoSys Constellation deal serves as a strong example of how a midcap company can engage in M&A; while MorphoSys has an approved product, it hadn't become profitable yet. We were able to use all cash for the deal, which highlights the funding support we can provide. Marshall presented a compelling slide that illustrated our ability to advance funds to an acquiring company through various means, such as development stage funding, equity investment, or royalties. We perceive this as a significant opportunity moving forward. We can offer the necessary cash where banks are unwilling to step in, enabling the target company’s board to become comfortable and proceed with the transaction. Thus, we see substantial potential in this area looking ahead.

But anyway, I'll end there and just thank all of you and everyone on the call for your continued interest in Royalty Pharma. And I'll just finish by saying that my team and I look forward to continuing to share our progress with you and that if you have any questions, please feel free to reach out to George Grofik and Terry. Thank you for spending time with us today on our call. Bye.

Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone have a great day.