Royalty Pharma plc Q4 FY2022 Earnings Call

Good morning and good afternoon to everyone on the call. Thank you for joining us to review Royalty Pharma's fourth quarter and full year 2022 results. You can find the press release with our earnings results and 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 from these statements. I refer you to our 10-K on file with the SEC for a description of these risks. All forward-looking statements are based on information currently available to Royalty Pharma and we assume no obligation to update any such forward-looking statements. Non-GAAP financial measures will be used to help you understand our financial performance. The GAAP to non-GAAP reconciliations are provided in the earnings press release available on our website. And with that, please advance to Slide 4. Our speakers on the call today are Pablo Legorreta, Founder and Chief Executive Officer; Chris Hite, EVP, Vice Chairman; Marshall Urist, EVP, Head of Research and Investments; and Terry Coyne, EVP, Chief Financial Officer. Pablo will discuss the key highlights and Chris will discuss trends in our transaction pipeline. Marshall will then provide a portfolio update, after which Terry will review the financials. Following concluding remarks from Pablo, we will hold a Q&A session. And 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 another year of strong execution on our strategy as a leading funder of Innovation and Life Sciences. Slide 6 summarizes our financial and portfolio achievements in 2022 which underscore our strong momentum and the power of our business model. First, we delivered a strong financial performance. Adjusted cash receipts, our top line grew by 10%, adjusted EBITDA by 10% and adjusted cash flow by 15% which are all prior to an accelerated Biohaven redemption payments were received in the quarter which I will discuss on the next slide. Our reported growth, of course, was significantly higher as a result of this Biohaven payment. Second, we strengthened our Royalty portfolio. We added 6 new therapies, including the blockbuster Trelegy and we expanded our development stage pipeline through the acquisition of several attractive therapies such as Cytokinetics, aficamten and Amgen's olpasiran. We also entered into a novel R&D funding collaboration with Merck which could form the blueprint for future deals with large biopharma. Meanwhile, Pfizer's acquisition of Biohaven resulted in accelerated value creation to Royalty Pharma. Third, we had another strong year of capital deployment. Building off of the momentum since our IPO, we announced up to $3.5 billion in transactions, maintaining our leading share of the royalty funding market. Given the rapidly expanding opportunity set at our Investor Day last May, we raised our capital deployment goal to $10 billion to $12 billion over the next 5 years. On Slide 7, you can see our financials in a little more detail. We received an accelerated Biohaven redemption payment resulting from Pfizer's acquisition of Biohaven which benefited adjusted cash receipts by $458 million. Prior to this payment, as just mentioned, we delivered 12% growth in our top line in the quarter and 10% for the full year. Foreign exchange continued to represent a headwind impacting our top line by around 5% for the quarter and 3% to 4% for the full year. Including the Biohaven payment, our top line nearly doubled in the quarter. Consistent with our top line, we grew our adjusted EBITDA by 13% in the quarter and by 10% for the full year prior to the Biohaven payment. Adjusted EBITDA is an important non-GAAP measure for us which is arrived at by deducting payments for operating and professional costs from our top line. Lastly, our adjusted cash flow, our bottom line, grew by 35% in the quarter and by 15% for the full year prior to the Biohaven payment. The substantial increase in our fourth quarter partially reflected lower upfront development stage payments when compared to the prior period. Slide 8 shows our impressive track record of strong top line growth since our IPO in June 2020. This reflects our ability to execute successfully against our strategy. Slide 9 digs deeper into our top line performance in 2022 to show the various moving parts. Royalty expiries and foreign exchange represented a significant headwind to our growth in 2022. Despite this, the strong performance of our base business and the acquisition of Trelegy royalties allowed us to deliver approximately 10% top line growth before taking into account the accelerated Biohaven payment. We have absorbed significant losses of exclusivity over the past 2 years and still delivered top line growth in the double digits. This speaks to the unique power of our business model to replenish the portfolio and to drive compounding growth. My final slides expand on this critical point. Slide 10 shows that since 2020, we have announced approximately $10 billion in transactions across close to 20 deals and acquired Royalty interest in some of the most transformative therapies in the industry. Roughly 70% of our capital deployed since 2020 has been on approved therapies and 30% on development stage products. These new royalties already account for around 10% of our adjusted cash receipts by 2025. They are expected to add around $1 billion to our top line. Put simply, we have replenished a significant portion of our business over a 5-year period and at the same time, sustained double-digit growth. Very few companies in the life sciences industry have the ability to do this. With that, I will hand it over to Chris to update you on our transaction pipeline.

Thanks, Pablo. Let's move to Slide 12. The strong momentum in our business is underpinned by encouraging trends in the royalty market as well as the fact that royalties are becoming a mainstream tool to fund innovation. Between 2015 and 2022, the number of royalty funding transactions increased more than sixfold to 27 deals while the dollar value of transactions rose tenfold to $6.2 billion. Over that period, Royalty Pharma has maintained the leading share of the royalty market. In 2022, we accounted for more than $0.5 value of transactions and over 1/4 of transaction volume and we remain the clear leader in larger transactions. Slide 13 details the funnel of opportunities we saw in 2022. We reviewed more than 350 potential transactions. This resulted in 106 confidentiality agreements signed, 70 in-depth reviews and 38 proposals submitted. Our disciplined and highly selective approach resulted in us executing 9 transactions across 6 new therapies were just 3% of our initial reviews. This is consistent with our historical average in the low single-digit percentage range and reflects the exceptionally high bar we apply to royalty funding opportunities. Slide 14 shows the growth in our pipeline opportunity set. Between 2019 and 2022, we saw a 75% increase in initial reviews and in-depth reviews and the value of the transactions we executed on increased by 58%. Clearly, the difficult equity market for biotechs in 2022 helped us. However, we have seen positive market trends for a number of years as royalty funding has become an increasingly mainstream funding modality. This supports our confidence in meeting our raised 5-year capital deployment target that Pablo mentioned. And with that, I will hand it over to Marshall.

Thanks, Chris. On the next few slides, I want to cover two recent transactions that provided us with two exciting opportunities in the lipoprotein A or LP(a) class of cardiovascular medicines. Last month, we were excited to announce a beneficial partnership with Ionis. We acquired royalties on Spinraza, a leading treatment for spinal muscular atrophy, and pelacarsen, a promising therapy for cardiovascular disease in development. In this collaboration, we invested $500 million upfront and committed up to $625 million in potential milestones. The unique structure of this deal offers an appealing risk-reward ratio for Royalty Pharma. Our interest in Spinraza, a drug approved in over 60 countries with 2022 sales of $1.8 billion, reinforces the investment with a lower risk royalty. However, the most thrilling aspect of this deal is the significant upside potential from pelacarsen, which Novartis anticipates could exceed $3 billion in peak sales. Pelacarsen is the most advanced of the two leading clinical-stage compounds in the LP(a) class, with Phase III cardiovascular outcomes data expected in 2025. On Slide 17, I want to point out that we also acquired royalties on another promising investigational therapy in the LP(a) class, Amgen's olpasiran. We obtained this royalty from Arrowhead Pharmaceuticals in November 2022 for a $250 million upfront payment and potential milestones of up to $160 million. The Phase II clinical data on olpasiran is very encouraging. Like pelacarsen, a Phase III outcome study is currently underway and is expected to conclude in late 2026. Analysts predict that this new class of cardiovascular treatments will generate over $4 billion in sales by the beginning of the next decade, and there are many reasons to believe these projections could be conservative. Slide 18 revisits our concept from investor day last May. Strategically, the LP(a) class reflects two of our key investment themes. The first is the idea of under-innovated large markets. The transition toward specialty markets over the last decade, characterized by smaller patient populations and higher price points, has meant that some significant innovations have not reached larger markets with substantial unmet patient needs to the same degree. Cardiology is a clear example, and the LP(a) class has transformative potential. Additionally, we've observed that targeted therapies can significantly benefit patients in cancer, but there has been comparatively less progress in developing targeted therapies outside of oncology. This is another area we find encouraging. We believe there is substantial potential for patients to gain from targeted therapies in cardiology, especially with an improved understanding of the mechanistic drivers of disease, as evidenced by our partnership with Cytokinetics. So why does Royalty Pharma invest in the transformative potential and multi-blockbuster opportunities within this class? First, LP(a) is recognized as an independent cardiovascular risk factor, backed by extensive genetic studies and other evidence. Second, there is a vast unmet need, as over 8 million people globally have elevated LP(a) and face more than double the risk of cardiovascular events. Notably, LP(a) cannot be managed through diet modifications or existing lipid-lowering medications. Third, both pelacarsen and olpasiran have demonstrated robust reductions in LP(a) with a favorable safety profile in Phase II studies. Finally, there are two well-structured outcome studies enrolling over 14,000 participants, which are expected to report results around the middle of the decade, backed by two leading companies in cardiovascular medicine, Amgen and Novartis. Collectively, we believe that reducing LP(a) could mark one of the next significant advances in cardiovascular disease treatment and become a major growth driver for Royalty Pharma towards the end of this decade and into 2030. On the next slide, I want to emphasize Royalty Pharma's unique capability to invest in multiple products within a specific therapeutic area. We have historically demonstrated success in areas such as multiple sclerosis, prostate cancer, migraine, and the anti-TNF category. Thanks to our Arrowhead and Ionis agreements, we currently hold royalties on two important treatments for spinal muscular atrophy, as well as two leading investigational LP(a) therapies. This distinct ability to invest in numerous products within the most innovative therapeutic classes is a key differentiator of our business model. Moving to Slide 21, AstraZeneca's Airsupra, previously known as PT027, was just approved by the FDA last month for asthma treatment. This first-in-class, fixed-dose combination therapy addresses both the symptoms and underlying inflammation of asthma. This demonstrates how our development-stage portfolio can significantly contribute to our business. We're entitled to a low single-digit tiered royalty on annual U.S. net sales, success-based milestones, and other potential payments. The market size is substantial; there are over 25 million asthma patients in the U.S., with 71 million rescue inhalers used each year. Current consensus projections indicate that Airsupra could approach $1 billion in sales by 2030. On Slide 22, looking at the early performance of our transactions since 2020, the results are promising. Most of the approved therapies we've recently acquired have seen their sales forecasts increase since the acquisition date, with some rising over 40%. While we base our investments on internal forecasts and do not require products to exceed consensus projections to meet our return goals, this assessment provides a useful indicator of our high-quality standards. One disappointment in our approved product investments has been Gavreto, a therapy we and Roche have fully impaired based on updated commercial forecasts. However, we’ve seen important advancements in development-stage therapies, including approvals and positive data readouts for zavegepant and Tremfya. Despite the discontinuation of otilimab and gantenerumab's development, we remain optimistic about the MorphoSys transaction, particularly due to Tremfya's significant performance. Finally, we look forward to several important upcoming events in 2023 from these new deals, including the potential approval of intranasal zavegepant, Phase III data from oral zavegepant for migraine prevention, aficamten for obstructive hypertrophic cardiomyopathy, and Tremfya for ulcerative colitis and chronic disease. With that, I'll turn it over to Terry.

Thanks, Marshall. Let's move to Slide 24. Total royalty receipts grew 79% in the fourth quarter and 24% for full year 2022 versus the respective year-ago periods. Excluding the accelerated Biohaven payment, royalty receipts grew 7% for Q4 and 5% for full year. The magnitude of growth in the fourth quarter reflects the accelerated Biohaven payment together with strong contributions from cystic fibrosis franchise, Xtandi, Tremfya, and the Trelegy royalty which we acquired in July. We also saw growing royalty contributions from Cabometyx and from several medicines not shown on this slide, particularly Evrysdi, Trodelvy and Orladeyo. These positive factors were partially offset by the loss of the DPP-IV royalties by weakness in Imbruvica and, to a lesser extent, Tysabri and by the adverse FX impact. Full year growth was also partially offset by a decline in royalty receipts from the HIV franchise which reached the end of its royalty term in 2021. Slide 25 shows how our efficient business model generates substantial cash flow to be redeployed. As you're aware, adjusted cash receipt is a key non-GAAP metric for us which we arrived at after deducting distributions to non-controlling interests. This amounted to $1.1 billion in the quarter or growth of 96% compared with last year's fourth quarter. For the full year, adjusted cash receipts were up $2.8 billion, up 31%. As Pablo noted earlier, prior to the impact of the accelerated Biohaven payment, growth would have been approximately 12% in the quarter and 10% for the full year. As we move down the column, operating and professional costs were approximately 8% of adjusted cash receipts in the fourth quarter and for the full year. As a consequence, we reported 99% growth in adjusted EBITDA in the quarter and 32% for the full year, consistent with our top line growth. When we think of the cash generated by the business to then be redeployed into value-enhancing royalties, we look to adjusted EBITDA less net interest paid. Net interest received in the quarter of $14 million reflected the semiannual timing of the payments on our $7.3 billion of unsecured notes which occurs in the first and third quarters and the strong cash position on our balance sheet which benefited from higher interest rates. For the full year, net interest paid of $145 million included interest received of $25 million on our cash position. After the $50 million upfront payment for development stage funding of MK-8189, we generated adjusted cash flow, our bottom line of $946 million or $1.56 per share for the fourth quarter. This resulted in an adjusted cash flow margin of 89% which once again highlights the efficiency of our business model. For the full year, adjusted cash flow was $2.2 billion or $3.68 per share and our adjusted cash flow margin was 80%. Let's move now to Slide 26 in our financial position. We continue to maintain significant financial firepower for future royalty acquisitions. In 2022, we deployed $2.5 billion of capital on royalty acquisitions as well as $461 million on dividends. This more than offset our strong cash flow generation over the year so that our cash and marketable securities stood at $1.7 billion at the end of December. In the beginning of 2023, we deployed an additional $500 million on the Ionis transaction that Marshall described. If we adjust for this post year-end outflow, our leverage on a pro forma basis would have been 2.7x net debt to EBITDA and 2.3x total debt-to-EBITDA. As a reminder, the fixed rate average coupon on our debt is slightly above 2% which compares to our target returns on royalty acquisitions in the high single digits to teens percentage range. I would also note that around 60% of our debt matures in 2030 or beyond. Taken together, we believe our cost of capital and debt maturity profile represent a durable competitive advantage for our business. Based on our financial strength and efficient business model, we remain confident in our ability to execute on our business plan and create value for shareholders. Slide 27 provides our full year 2023 financial guidance. We expect adjusted cash receipts to be in the range of $2.375 billion to $2.475 billion. This outlook does not include the $475 million milestone which we expect to receive from Pfizer if the FDA approves zavegepant for migraine which has a PDUFA date in the first quarter. However, if zavegepant is approved and the $475 million milestone is included in our guidance, it would imply an adjusted range of $2.85 billion to $2.95 billion. I will explain the other key considerations underlying our top line guidance in a moment. However, importantly and consistent with our standard practice, this guidance is based on our portfolio as of today and does not take into account any future royalty acquisitions. Turning to our operating costs. We expect payments for operating and professional costs to be approximately 8% to 9% of adjusted cash receipts in 2023, slightly above the 2022 level. We continue to believe that the degree of margin protection provided by our unique business model is impressive in today's inflationary environment. Interest paid for full year 2023 is expected to be around $170 million and to follow the established quarterly pattern with de minimis amounts payable in Q2 and Q4. This does not take into account any interest received on our cash balance which is particularly attractive at today's rates. Finally, we expect to make a $50 million milestone payment to Cytokinetics in the second half of 2023, based on the company's guidance of initiating their pivotal trial of aficamten in non-obstructive hypertrophic cardiomyopathy. My final slide drills down further on our adjusted cash receipt guidance. The graphic is illustrative but sets out the various pushes and pulls behind our outlook for 2023. Starting with the left-hand side, we face a high base of comparison from the $458 million accelerated Biohaven payment which we received in the fourth quarter of 2022. Since the preferred shares were redeemed, we will also no longer receive the quarterly Series A fixed payments which is another $52 million annual headwind. This brings the underlying base for 2022 adjusted cash receipts to $2.28 billion. On the right side, if we start from the adjusted cash receipt base prior to Biohaven, we expect underlying growth of between 4% to 9% this year which is expected to be largely driven by the CF franchise, Trelegy, and Tremfya, partially offset by the losses of exclusivity on the DPP-IVs and Lexiscan as well as Imbruvica weakness. We also expect a modest contribution from 3 quarters of Spinraza royalties. Given the recent moderation of the U.S. dollar strength, FX is expected to represent a relatively modest headwind of minus 1% to minus 2% using today's rates. With that, I would like to hand the call back to Pablo for his closing comments.

Thanks, Terry. Let me close by saying how pleased I am with our strong performance in 2022. Not only do we enter 2023 with solid momentum but our prospects have never looked better. To finish on Slide 30, I would like to take a moment to remind you where Royalty Pharma's business model offers a unique way to invest in biopharma, maximizing our exposure to many positive industry trends while minimizing exposure to many of its common challenges. We offer attractive diversification on the top line and bottom line. We offer strong exposure to transformative therapies, including 15 therapies with more than $1 billion in end market sales and many well-known brands in the industry. Our portfolio benefits from an average expected duration of approximately 13 years, exceeding many big pharmas and large biotechs. From a financial return perspective, we have a track record of delivering consistent and predictable double-digit unlevered returns on deployed capital. When we think about industry challenges, we do not take on significant early-stage development risk which clearly differentiates us from biopharma. Also, we have no therapeutic area bias and minimal exposure to binary risks. The differentiated reward profile, combined with our strong financial position and powerful business model is what makes Royalty Pharma a unique and, I believe, highly attractive investment proposition. With that, we will be happy to take your questions.

We will now open up the call to your questions. Operator, please take the first question.

Our first question comes from Chris Shibutani with Goldman Sachs.

Two questions, if I may. One in general about your funnel and certain characteristics of that, that you're seeing. And another on your comment from Marshall on targeted therapy. On the funnel, we appreciate the updates and the historical trend starts with over 300, I think it was 350 and then you go through various levels of evaluation before you finally conclude on closing something that's in the low single digits. As you think about the mix of what's entering the funnel in terms of commercial versus various developmental stages and how you go further down, are you seeing that remain consistent? Or is there a bias or shift in particular, as you noticed the recent years? And then on the comment on the targeted therapy for cardiovascular and Lp(a), appreciated that from Marshall I think it's interesting to see how that's evolving across other therapeutic areas, immunology in particular. Marshall would love to hear your thoughts on how you're viewing how that could shape up? Large areas we're seeing increased vocabulary around targeted therapy development there?

Thanks for your question, Chris. And I'm going to ask Chris Hite to answer your question on the funnel. But if you recall, one of the comments I made in my remarks is that over the last 3 years since our IPO, we have deployed about $10 billion, the ratio has been 70% approved and 30% unapproved. Now, if you look over a longer period of time, it tends to be closer to 50-50 or 55-45, 55 approved, 45 unapproved. But Chris, go ahead.

Yes. Thanks for your question, Chris. The answer to your question is things haven't really changed. We actually provided a great level of detail to answer that question at our Analyst Day last year which looked at the reviews and in-depth reviews by approved and preapproved products and by pre-existing royalties versus synthetic. And that really, that mix hasn't changed. But in general, the initial reviews are basically about 80% pre-approval and 20% approved drugs. The in-depth review sort of is about 50-50, it's 55% preapproved and 45% approved. On the synthetic side, on the in-depth reviews, it's 60% synthetic, 40% pre-existing that was in 2021 and the mix didn't really change in 2022.

And then, on your second question on targeted therapies outside of oncology. Absolutely. I mean, this is why at the Analyst Day, we highlighted this as an interesting theme that we think is going to create some interesting new opportunities in the future. We mentioned cardiology is a good example. But I would agree with you in immunology starting to see good examples of that. Neurology is another area where I think we'll see more and more of those. So definitely interesting, something to watch. Although I would just take the opportunity to remind everyone when we talk about themes, those are not necessarily themes that we're saying we're going out and actively looking for those opportunities today. We think those are really interesting thematically that guide our thinking over the long term. But I think our core strategy of staying focused on exciting opportunities that offer a meaningful benefit to patients, physicians to the system and what we're seeing and getting access to those things overall is going to be the most important driver of our strategy.

Our next question comes from Chris Schott with JPMorgan.

This is Chris Schott. I wanted to hear your thoughts on the current deal environment. Are you surprised we haven't seen more deals given some of the funding challenges out there?

Sure. And I'll ask Chris and Marshall, if they feel appropriate to add to my comments. But I think we have definitely seen a very significant increase in our funnel as you see from prior years which reflects the challenging funding environment today in life sciences. I think consistent with that, we have deployed significantly more capital than we had in the past. If you look at sort of the average deployment maybe at the time of our IPO, we were talking about something like $1.5 billion. We guided to $1.5 billion, $7 billion over 5 years. Obviously, the increased activity has enabled us to increase our guidance to more like $10 billion to $12 billion deployment over the next 5 years and $2 billion to $2.5 billion guidance now. We reported today that we really deployed something like $3.5 billion last year. It does reflect a lot more activity and significantly more capital deployed on our side. What really is critical is the quality of the underlying product. While we have seen many more opportunities discussions, at the end of the day, we remain very disciplined with our capital deployment. That obviously results in the deals we're excited about where we see significant upside. Marshall this morning talked about Lp(a) which we think is going to be a very significant class and we have 2 royalties now in the 2 really the 2 drugs that are being developed for that class.

Yes. I would add that the royalty market has been very strong. Last year set a record in 2022. As I mentioned in my prepared remarks, Slide 12 shows that the number of transactions has increased sixfold since 2015. The dollar value of those transactions has increased tenfold since 2015, and last year was also a record year for the market overall. The level of activity is quite strong, so we believe there’s real potential and that growth will continue.

Our next question comes from Terence Flynn with Morgan Stanley.

Two for me. I was wondering maybe either for Pablo or Chris, if you think the IRA is going to impact your analysis of royalty opportunities as you think about how to look at returns under this new law? And then maybe for Marshall. Again, I appreciate all the background on Lp(a). Just wondering how you think about market creation here versus the PCSK9 drugs? Obviously, those have been less robust than people initially anticipated. So how do you think Lp(a) plays out relative to PCSK9s?

Sure. Regarding the IRA question, I will take that question and then Marshall can provide the other answers. One noteworthy point about the changes happening in our industry is that we have been very innovative in assisting people with their challenges. This creates a solid foundation for us to work with companies in achieving their goals. The challenges posed by the IRA also create opportunities for us. Go ahead, Chris.

Thank you for your question. I would like to mention that we have seen some of the implementation and redesign taking place, which will continue now. We'll need to see how the price negotiations are handled, particularly if there are any changes regarding the 9-year class. We believe we are well-positioned for these significant changes in the industry. Our ability to quickly adapt to changes in laws and pricing is a distinct advantage when making future investments. This adaptability is a key aspect of our business model, as we consistently deploy capital and make new investments, allowing us to respond swiftly to legal changes.

Great. So, Terence, regarding your second question about Lp(a), I appreciate your inquiry. Firstly, the outcome studies will be crucial for creating that market. If these studies demonstrate a significant benefit in reducing cardiovascular events, it will strongly drive market development. Another key point is that unlike PCSK9 therapies, there are limited ways to significantly lower Lp(a); these agents will be the primary option, placing them in a distinct category. Additionally, while testing for Lp(a) is not yet standard in many places, especially outside some academic centers, the technology for testing is relatively straightforward. Once we have approved agents with compelling clinical benefits, the need to assist these patients from both medical professionals and families will significantly propel the market forward. We have two excellent companies in cardiovascular disease, Novartis and Amgen, to facilitate this progress.

Our next question comes from Geoff Meacham with Bank of America.

This is Susan on behalf of Geoff. We would like to know how changes in interest rates will impact the company's net interest income and expenses. Additionally, what are the company's assumptions for interest rate changes in 2023?

Thank you for the question, Terry, you should take that one.

So as we mentioned in the prepared remarks, we are in a very fortunate position where 60% of our debt matures in 2030 and beyond and we're currently borrowing at very low rates. We feel very fortunate there. Our guidance does not imply any additional debt. It's just the $7.3 billion we have outstanding at our current coupon of around 2.25%. As we look longer term, we do have a $1 billion maturity towards the end of this year. We are in a nice position there because we have a lot of cash flow coming in particularly with the Biohaven acquisition. So we have some flexibility depending on how the pipeline plays out over the year, we could repay that debt, refinance, or also use our revolver. If the rate environment is not particularly attractive at that time, because the revolver is prepayable. We feel like we're in a very good position. We have plenty of access to capital. We have a nice cash flow generation and a strong balance sheet to be opportunistic and to deploy capital in great new royalties. So we feel very good.

Our next question comes from Umer Raffat with Evercore.

This is Mike DiFiore in for Umer. I just want to ask on the recent deal regarding your acquiring a share of Ionis' Spinraza royalties. What are your view with the long-term prospects of Spinraza, especially given the fact that U.S. sales have struggled although BIB does note a possible ex-U.S. resiliency and how much meaningful contribution to Univision for high-dose Spinraza as well as the adult SMA opportunity?

Sure. Marshall?

Thank you for the question, Mike. Overall, we've closely monitored the SMA market for years and have analyzed all the major treatments available. Spinraza, being the first-in-class and the first approved for this condition, plays a crucial role in the treatment strategy for patients, their families, and physicians. During our due diligence for Ionis, we adopted a fresh perspective and strongly believe in Spinraza's significant role in managing SMA globally in the future. This belief underpinned our investment in Ionis' Spinraza and highlights the urgent unmet needs of these patients who require options. We're pleased to also be involved with Evrysdi alongside Spinraza. Regarding the high-dose Spinraza and the adult market, when we make an investment, we consider all scenarios. We acknowledged the high-dose data and the potential for further growth in adults, as well as the competition from Zolgensma, the gene therapy aimed at adults, in the future. However, it's important to remember that our royalty applies only to sales up to $1.5 billion each year, meaning that certain developments like high-dose Spinraza could have a limited impact on our share due to the way it's structured. Nonetheless, we consistently take a scenario-based approach to evaluate how these factors may influence our investment, and we are very pleased to include Spinraza in our portfolio.

And to add, looking at the total capital deployed and how we allocated the $500 million, we are confident in various scenarios unfolding for Spinraza, which should yield our target returns for approved products in the high single digits to low double digits. This is a crucial element of the transaction. The capital set aside for the promising Lp(a) aspect of the deal is expected to provide substantial upside for this new class. We approach this investment with careful discipline, ensuring that each investment is poised to deliver attractive, unlevered returns. Spinraza also has the advantage of being able to leverage with a very low cost of debt, significantly enhancing our returns.

Our next question comes from Ashwani Verma with UBS.

I have two questions. The first is about the cystic fibrosis franchise. The vanza triplet's Phase III SKYLINE study is expected to complete by the end of this year. I'm curious about your thoughts on how its profile might compare to Trikafta. Can the arbitration process for the royalty on the triplet begin with the Phase III top line, or does it have to wait until product launches? My second question is that after a pause, the biotech market seems to be opening up a bit since the start of the year. Do you think this will affect your deal activity this year?

Sure. Terry, do you want to take the first part of the question and maybe, Chris, the second one?

Certainly. Regarding the new Vertex triple, I want to emphasize our previous statements that Trikafta sets a very high standard. We believe that Trikafta will remain a significant contributor to Royalty Pharma in the long run. We have access to the same Phase II data as everyone else, and at this time, it is difficult to state that the new triple is clearly different. However, we will need to review the full Phase III data, including long-term safety, to gain a comprehensive understanding. As for your question about legal strategies, we have not provided further details at this moment. We will keep assessing the situation and inform investors when the time is right.

And with regard to your second question on if the equity markets came back strong and opened up for the biotech sector, would that impact our deal activity. I think what I would say is, just going back to that Slide 12, we had in our presentation just shows the growth of the market, generally speaking. It's really been a change of mindset, I believe, in the biopharmaceutical sector, broadly speaking, between large pharma, mid-cap pharma, and biotech, where considering royalty monetization or synthetic royalties as a piece of your capital structure is an evolution that's happening right now in the sector. So whether the markets are really strong or not so strong, we think the mindset has been sort of evolving. We don't really see that impacting our deal activity. There's been a just the evolution of the growth of this market as potentially a piece of the capital structure.

If you actually look at this with a bit more perspective over the last 10, 15 years, we went through some incredibly strong equity capital market for biotech where huge amounts of capital were raised by the industry. We still did incredibly well in those years, deploying multiple billions of dollars of capital every year in really exciting products. I think the comment that Chris made is really key here because if the equity markets were to be more favorable again in the near term, the underlying really important shift in the way companies are funding themselves now includes royalties, is a really strong tailwind we have for our industry. In addition to that, we are very excited about where we see a lot of potential interesting transactions and potentially transformative product with big pharma. An example of that is the transaction we did with Merck at the end of the year. We're very encouraged by that because we're having discussions with many companies about potentially funding attractive products. It's about continuing discussions with management teams and explaining how funding with royalties is beneficial to them and that's a really important underlying trend. But thank you for your question.

Our last question comes from Stephen Scala with Cowen.

I have 2 questions. The current trajectory of ibrutinib is increasingly concerning I am wondering if you believe AbbVie guidance adequately captures all risks? How are the challenges similar to or different from what you expected 3 years ago? The second question is a little bit bigger picture for Pablo. It is clear that Royalty Pharma's business has great momentum, a bright future, and is very consistent. But many quarters, including this one, you get questioned about potential risks such as IRA and/or competition which you were asked about the CF situation with Vertex which you were asked about. Other quarters, you get asked about competition and sometimes even adverse tax legislation. Now these are real risks but they're just manageable from your perspective and therefore, your answers tend to be kind of high level. Since they are risks, I am wondering if you would be willing to rank them by your perception of the challenge they represent to the company over the long term? To provide a reference point, please allow me to speculate on the order. I think probably CFS at the top; competition, two; IRA and innovation, number three; and adverse tax legislation is last.

Sure. So I guess, Terry will take your first question and then I can come back and provide some perspective on this bigger strategic question.

Yes. Steve, so on Imbruvica, we certainly have been disappointed by the recent commercial performance of that product. Like many people, we had expected it to be more resilient in the face of competition. We do take the recent trends on board. We continue to make sure we understand what's going on in that market. I think that our guidance, I don't want to really get into or have an opinion on what AbbVie has said but I can speak to what we include in our guidance and we have taken what we think is an appropriately conservative approach to our guidance, including all of the recent trends. We obviously look at a range of scenarios but certainly for this asset, that range of scenarios based on recent trends has been more focused on the downside. So that's probably all I can say on Imbruvica specifically at this point.

Yes. Just to remind you about our investment in Imbruvica, when we initially made the purchase of our royalty interest for the drug, our expectations were around a couple of billion dollars. It has greatly surpassed those sales projections. Even though future sales may decline, they are still significantly above what we had forecasted. From a return perspective, this investment has been very successful for us. When considering the long-term strategic opportunities and risks for Royalty Pharma, the most critical factor we focus on is product selection. This is our top priority. To mitigate potential risks as we invest, we need to understand the product, whether it is differentiated, the value it offers to patients, and the competitive landscape over the next 5, 10, or 15 years. Innovation is important, but we also have to balance it with the substantial upside from investing in blockbuster drugs. Historically, our track record demonstrates a consistent ability to identify therapeutic classes that will develop into significant drugs, allowing us to make multiple investments in these new classes that will improve lives. Regarding risks like CF, we believe we have a strong and defensible position. We thoroughly examined the IP situation when we invested in 2014 and again with our acquisition of the residual interest from the Cystic Fibrosis Foundation. We gained additional knowledge about the IP situation during our last investment, which gave us confidence, leading us to invest another $600 million. Currently, Terry has outlined the revenue potential from this franchise, which stands at about $800 million and is expected to grow. In the long run, we anticipate our revenues will be significantly higher. Our competitive position strengthens over time for various reasons, including our excellent team, low cost of capital, and our business scale. I feel very confident today about our competitive stance compared to two, three, or four years ago when new entrants emerged that were strong companies, including private equity firms with substantial resources. After competing with them over the years, we feel very strong about our market position. While risks exist, Royalty Pharma uniquely offers an investment approach with an attractive risk/reward profile because we invest in approved products, which means the risk is generally lower at that stage. Though there are still risks, they are significantly reduced. Our structure allows us to make appealing investments in approved products that yield high returns. With unapproved products, we adopt a portfolio approach to invest in various opportunities with considerable upside potential. Overall, this strategy enables us to invest in an innovative industry and in some of the most promising therapies while keeping additional costs very low.

I would now like to turn the conference back to Pablo Legorreta for closing remarks.

Thank you, operator. Thank you to everyone on the call for your continued interest in Royalty Pharma. If you have any follow-up questions, please feel free to reach out to George Grofik. Thank you, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.