Royalty Pharma plc Q3 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Royalty Pharma Third Quarter Earnings Conference Call. I would like now to turn the conference over to George Grofik, Senior Vice President, 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 Third Quarter 2025 results. You can find the press release with our earnings results and slides of this call on the Investors page of our website at royaltypharma.com. On Slide 2, I'd 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. We refer you to our most recent 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 liquidity measures will be used to help you understand our financial results and the reconciliations of these measures to our GAAP financials is provided in the earnings press release available on our website. And with that, please advance to Slide 3, our speakers on the call today are Pablo Legorreta, Chief Executive Officer and Chairman of the Board; Marshall Urist, EVP, Head of Research and Investments; Chris Hite, EVP, Vice Chairman; and Terry Coyne, EVP, Chief Financial Officer. Pablo will discuss the key highlights, after which Marshall will provide a portfolio update. Chris will then discuss our development-stage pipeline, and Terry will review the financials. Following concluding remarks from Pablo, we will hold the 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 successful quarter of execution on our goal to be the premier capital allocator in life sciences with consistent compounding growth. Slide 5 summarizes our strong business momentum in the third quarter. Starting with the financials, we delivered 11% growth in both portfolio receipts, our top line and royalty receipts, which are recurring cash flow. The sustained momentum was driven by the strength of our diversified portfolio. We're also now starting to report on a quarterly basis, our return on invested capital and return on invested equity. In the third quarter, we maintained strong returns in our business with return on invested capital of 15.7%, and return on invested equity of 22.9% for the last 12 months. Turning to capital allocation, we deployed capital of $1 billion in the quarter on value-creating loyalty transactions. Taking our total to $1.7 billion in the first 9 months, and we repurchased 4 million shares in the quarter, taking the total value of share repurchases to $1.15 billion in the first 9 months. Looking at our portfolio, we remain very active in the growing market for Royalty. We acquired our Royalty interest on Amgen's lung cancer drug, Imdelltra, for up to $950 million. We entered into a funding agreement for up to $300 million with Zenas Biopharma for its development-stage autoimmune drug obexelimab. And since the quarter ended, we acquired a royalty on Alnylam's Amvuttra, a blockbuster therapy for ATTR amyloidosis for $310 million. We're excited by each of these three transactions, and Marshall will take you through the details momentarily. On the back of this busy year, our development-stage pipeline has expanded to 17 therapies. And as Chris will highlight, we're looking forward to multiple pivotal readouts in the relatively near future. Lastly, we're pleased to raise our full year 2025 top line guidance. This is the third time we have raised guidance this year and the 14th since our IPO in 2020. We now expect portfolio receipts to be between $3.2 billion and $3.25 billion, which represents impressive growth of around 14% to 16%, driven by our diversified portfolio. Consistent with our standard practice, our guidance is based on our current portfolio and does not include the benefit of any future transactions. Slide 6 is one I keep coming back to, as it demonstrates our consistent double-digit growth on average since our IPO. As you heard at our Investor Day in September, we have delivered this impressive record year in and year out, regardless of the market backdrop. This reflects our ability to execute successfully and consistently against our strategy. With that, I will hand it over to Marshall.

Thanks, Pablo. We've had a busy last few months, and I want to provide more color on our recent deal activity. The breadth of these transactions totaling approximately $1.6 billion in announced value across three very different disease areas really highlights the power of Royalty Pharma's therapeutic area agnostic investment approach that focuses on innovative important new medicines to drive our diversified, sustainable and attractive growth profile. Slide 8 takes you through our Imdelltra transaction. This is a great example of a large investment in the kind of transformational medicines that are the foundation of our market-leading portfolio. Amgen's Imdelltra was approved in 2024 as a first-in-class targeted immunotherapy for small-cell lung cancer, where median survival is only 1 year after initial therapy. We acquired an existing royalty of about 7% of sales from B1 for up to $950 million, including an upfront of $885 million. B1 has the option to sell an additional portion of the royalty to us for up to $65 million. Imdelltra has strong clinical data in the second-line setting. And looking ahead, we have high conviction for expansion into newly diagnosed patients with the ongoing Phase III trials beginning to read out in 2027. Imdelltra has had a strong launch, currently annualizing at over $700 million with consensus sales reaching $2.7 billion by 2035. Based on this outlook, we expect the transaction to deliver an unlevered return in the low double-digit range, consistent with our target for transactions on approved products. On Slide 9, I want to turn to our most recent transaction in which we acquired Blackstone's 1% royalty on Alnylam's Amvuttra for $310 million. Amvuttra is approved for TTR amyloidosis, a progressive, debilitating and fatal rare disease and is already a blockbuster medicine. The clinical data shows a compelling patient benefit with dosing once a quarter and an approximately 35% reduction in all-cause mortality for patients with the most common form of the disease, TTR cardiomyopathy. Alnylam recently reported very strong third quarter sales with TTR franchise guidance rising to between $2.475 billion and $2.525 billion for 2025, with Amvuttra adjusting its third year on the market. Consensus sales are expected to reach over $8 billion in 2030. We expect an unlevered IRR in the low double digits or better that factors in significant potential competition from Alnylam's follow-on therapy, nucresiran. The third transaction is our agreement with Zenas Biopharma for obexelimab, an exciting Phase III product for autoimmune disease. Slide 10 sets out the key elements. Obexelimab is potentially the first nondepleting B-cell modulating therapy for a rare autoimmune disorder called IgG4-related disease, with Phase III results expected around the end of this year. We will provide up to $300 million to acquire a 5.5% synthetic royalty on worldwide obexelimab sales. Importantly, consistent with our careful approach to risk management, this investment is staged with an upfront of $75 million and the remainder to be paid on the achievement of certain clinical and regulatory milestones. The Phase II proof-of-concept data in IgG4-RD are strong, and Zenas' recent Phase II results in relapsing multiple sclerosis, which showed an impressive near complete suppression of active inflammatory disease, further increases our conviction in obexelimab's mechanism of action. Commercially, we see blockbuster potential in IgG4-RD given a patient population of more than 20,000 and still low uptake of advanced therapies. As a result, we expect to deliver an unlevered IRR in the teens, consistent with our target for development-stage therapies. So to close three very different transactions, but all consistent with our commitment to creating value for shareholders by investing in innovative therapies with high patient impact. With that, let me hand it over to Chris.

Thank you, Marshall. I'm pleased to share an update on our development-stage pipeline. At our Investor Day, we noted that our pipeline is projected to yield over $36 billion in cumulative peak sales, leading to more than $2 billion in peak royalties for Royalty Pharma. This pipeline holds significant potential. Three of our five royalty transactions this year have involved development-stage therapies: litifilimab, daraxonrasib, and obexelimab, increasing our total pipeline to 17 therapies, most of which are capable of multi-blockbuster success. While I won't delve into the details of each transaction, there are several key points to highlight. Firstly, all three transactions feature a synthetic royalty element, reflecting the increasing acceptance of this attractive non-dilutive funding model that we pioneered, which allows us to provide customized solutions to our partners. Our Investor Day included insights from a Deloitte survey indicating that the biopharma industry is shifting towards a more diversified funding model, with royalties—particularly synthetic royalties—becoming a larger component of the capital structure. Our deal activity in 2025 emphasizes this trend. So far this year, we have announced synthetic royalty transactions amounting to as much as $1.8 billion, already surpassing 2024, which was our best year to date. The second point concerns risk management. Each of these therapies is currently in Phase III development, which tends to have a reduced risk profile. We only consider development-stage investments if there's solid proof-of-concept data pertaining to an unmet medical need, and if our commercial scenario modeling indicates potential returns in the teens or better. Third, the wide variety of indications demonstrates our agnostic approach to therapy areas. Since 2020, we have invested in 60 different disease areas, allowing us to see the full biopharma market as a pipeline of opportunities without the limitations faced by most biopharma companies. Our capital deployment balance between approved and development-stage investments varies each year due to the timing of opportunities but typically adheres to a 65-35 split between approved products and development-stage therapies. This has generally been a reliable guideline for how we deploy capital. However, this split alone does not portray the complete picture. Our successful track record in development-stage investments means our overall portfolio risk is quite low. For instance, 86% of our current capital is committed to approved products, a relatively stable figure averaging around 90% since 2012. Only 11% of our current capital is tied to development-stage products, with approximately 2% having already received positive pivotal results. Our industry’s probability of approval at various phases of development is also worth noting. Unlike biopharma, we do not invest in Phase I or Phase II projects; instead, we prioritize investments in areas with the highest success rates. By adhering to this disciplined approach and implementing additional risk mitigation through deal structuring, we have established a strong record of success, which contributes to our performance exceeding industry benchmarks, with around 90% of our development-stage investments eventually gaining approval. Looking ahead, we anticipate numerous pivotal readouts from our development-stage investments over the next couple of years. In the fourth quarter of 2025 and throughout 2026, we expect six Phase III readouts, starting with deucrictibant for hereditary angioedema, followed by obexelimab for IgG4-related disease. Additional readouts in 2026 will include the first outcomes trial for our investment in the LP(a) drug class with Novartis' pelacarsen, along with Phase III results for litifilimab in lupus and aficamten for non-obstructive hypertrophic cardiomyopathy. Among these six therapies, three have the potential to generate peak annual royalties up to $200 million, while daraxonrasib for pancreatic cancer could exceed $200 million. For 2027, we expect pivotal readouts from several promising blockbusters, including our second LP(a) investment olpasiran, as well as frexalimab for MS and daraxonrasib for lung cancer, to mention a few. In summary, the coming years will present multiple opportunities to unlock substantial value from our development-stage pipeline. Now, I'll hand it over to Terry.

Thanks, Chris. Let's move to Slide 17. This slide shows how our efficient business model generates substantial cash flow to be reinvested. As you heard from Pablo, royalty receipts grew by 11% in the third quarter, reflecting the excellent momentum of our diversified portfolio. Key drivers were the strong growth of Voranigo, Tremfya and the cystic fibrosis franchise. Milestones and other contractual receipts were modest, both in this quarter and the prior year quarter. As a result, we also delivered 11% growth in portfolio receipts, our top line to $814 million. As we move down the column, operating and professional costs equated to 4.2% of portfolio receipts. This reflected cash savings from the internalization transaction and compares with over 12% in the first 6 months of the year. Net interest paid was $123 million in the quarter, reflecting the semiannual timing of our interest payment schedule with payments primarily in the first and third quarters and the interest we received for our cash on our balance sheet. Moving further down the column. We have consistently stated that when we think of the cash generated by the business to then be redeployed into value-enhancing royalties, we look to portfolio cash flow, which is adjusted EBITDA less net interest paid. This amounted to $657 million in the quarter, equivalent to a margin of around 81%, and reflects a high underlying level of cash conversion and efficiency. Capital deployment in the quarter was just over $1 billion. This primarily included the $885 million upfront for Imdelltra, $75 million upfront for obexelimab and R&D funding for litifilimab. Lastly, our weighted average share count declined by 33 million shares versus the third quarter of 2024, reflecting the impact of our share buyback program. On Slide 18, I am pleased to share our first quarterly update on portfolio returns. We introduced these new metrics at our Investor Day, and I hope the message came across loud and clear. We are in the returns business, and every capital allocation decision we make is in an effort to create economic value for shareholders. Return on invested capital has been remarkably stable at around 15% on average from 2019 to 2024, and in the third quarter, was 15.7% for the last 12-month period ending September 30. Return on invested equity, which shows the impact of conservative leverage on our equity returns, has been consistently in the low 20% range, and was 22.9% for the last 12-month period ending September 30. We believe these new metrics facilitate a deeper understanding of the cash yield for our business and demonstrate that we are continuing to invest at attractive returns that will drive long-term value for our shareholders. Slide 19 shows that we continue to maintain the financial flexibility to execute our strategy and return capital to shareholders. At the end of the third quarter, we had cash and equivalents of $939 million. In terms of borrowings, we have investment-grade debt outstanding of $9.2 billion, including the $2 billion of notes we issued in the third quarter and a weighted average duration of around 13 years. Our leverage now stands at around 3.2x total debt to adjusted EBITDA or 2.9x on a net basis. We also have access to our $1.8 billion revolver, which is undrawn. Taken together, we have access to approximately $2.9 billion of financial capacity through cash on our balance sheet, the cash our business generates and access to the debt markets. Turning to our capital allocation framework. We have deployed $1.7 billion of capital on attractive royalty deals in the first 9 months of 2025. We have also returned a record $1.5 billion to our shareholders in the first 9 months of this year, including share repurchases of $1.15 billion and our growing dividend. On Slide 20, we are raising our full year 2025 financial guidance by approximately 4% at the midpoint. We now expect portfolio receipts to be in the range of $3.2 billion to $3.25 billion, an increase from $3.05 billion to $3.15 billion previously, representing growth of around 14% to 16%. The increase from our previous guidance primarily reflects the strong momentum of our diversified portfolio. Milestones and other contractual receipts are now expected to be around $125 million compared with $110 million previously. Importantly, and consistent with our standard practice, this guidance is based on our portfolio as of today and does not take into account the benefit of any future royalty acquisitions. Turning to operating costs. Payments for operating and professional costs are still expected to be 9% to 9.5% of portfolio receipts in 2025. As a reminder, costs in the first half of the year were greater than 12% of portfolio received, driven by approximately $70 million of one-time expenses related to the internalization and other one-time items. Collectively, these items are expected to impact full year cost by a little more than 2% of portfolio receipts. Lastly, interest paid in 2025 is expected to be around $275 million, with around $7 million to be paid in Q4. This guidance does not take into account interest received on our cash balance, which was $28 million in the first 9 months. In summary, we delivered a strong third quarter and 9 months, which puts us on track to achieve another year of strong financial performance in 2025, reflected in our raised guidance. To close, I want to highlight a few factors for 2026 to help with your modeling. First, we expect minimal royalties from Promacta next year, which is facing the launch of generics in the United States and Europe in 2025. And second, we currently anticipate interest paid to be between $350 million to $360 million in 2026, which includes interest payments on the $2 billion of senior secured notes issued in September 2025. We plan to provide full year 2026 guidance when we report fourth quarter 2025 earnings early next year. Consistent with our standard practice, this guidance will exclude contributions from any future investments. With that, I would like to hand the call back to Pablo.

Thanks, Terry. To conclude, I'm delighted with our performance in the quarter. We maintained our double-digit momentum, we expanded our portfolio, and we again raised our guidance. We also hosted a successful Investor Day, where we were thrilled to share our plans for shareholder value creation. On that note, I want to close by reiterating some of the key messages from the day. We're the clear leader in an expanding market with strong fundamental tailwinds, reflecting huge demand for funding life sciences innovation in even more creative ways. We have a best-in-class platform for investing in the most exciting and innovative products marketed by premier biopharma companies and expect to remain the undisputed leader. We have announced an outstanding track record of delivering consistent and attractive returns, including an IRR and return on invested capital in the mid-teens and return on invested equity of over 20%. Lastly, we're on track to deliver strong global volatility growth through 2030 and beyond. Together, we think this adds up to a very attractive investment proposition with a potential for annualized total shareholder returns, at least in the mid-teens over the next 5 years. With that, we would be happy to take your questions.

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

The first question comes from Asad Haider with Goldman Sachs.

Congratulations on the progress. I would like to ask about the external environment. Recently, there has been an increase in biotech mergers and acquisitions, and we are entering a lower interest rate environment. Could you discuss how these changing factors affect Royalty-driven deal activity, and your perspectives on the opportunities and target returns? Additionally, I would appreciate any updates on your strategy regarding the China opportunity that you mentioned during your Investor Day in September. Insights on your investment considerations in China and how the external environment may influence that would be helpful.

Thank you for the question. Chris, why don't you take this question, both of them?

Thank you for the question. You're correct that there's been an increase in the M&A marketplace, but this has minimal impact on our activities. Large pharmaceutical companies are looking to enhance their pipelines and address loss of exclusivity exposure, which we view positively for our own pursuits. Companies require significant capital, and we are a crucial provider of that capital in the sector, which is exciting for us. The uptick in M&A does not affect the royalty market. Regarding China, we're very enthusiastic. There has been considerable growth in out-licensing from China to multinational companies, representing another growth avenue for the royalty market. We often invest in companies post-proof of concept, focusing on early-stage development deals from China. We will monitor these transactions and the development of the associated compounds as the companies progress. There will certainly be chances to acquire royalties as more information becomes available about the out-licensed compounds. We have sent multiple teams to China this year to build relationships in this area, and we are looking forward to the opportunities this presents.

And our next question will come from Chris Schott with JPMorgan.

This is Hardik Parikh in for Chris Schott. Just wondering, I know Merck had recently announced a royalty deal with one of your peers. And you guys have also done a couple of R&D collaborations with Biogen and Merck in the past. Do you think the frequency of these types of collaborations with large pharma will increase as those names head towards their patent cycles? What type of factors drive these deals from pharma's perspective?

Yes. Thank you for the question. And I think, I'll start by just saying that as the largest royalty buyer in the market, you can sort of assume that we look at every deal. This product is also a competitor to Trodelvy, where we have a Royalty; we funded the Phase III. So we're very familiar with the space. And regarding the deal specifically, what I would say is that it's just great to see how this idea of using royalties to fund trials, not only with biotech companies, but also with big pharma, is really becoming mainstream, which speaks to the big opportunity that we have in front of us. And I think this is going to just continue to grow, and it's a really big opportunity if you think of the scale of capital needed required by these companies. So we're very optimistic about these transactions continuing to happen. And I think with respect to the transaction specifically, as I said, we actually looked at it, but decided at the end that it was not for us, and continue to be very active with many big pharma to talk about this kind of funding.

And the next question will come from Geoff Meacham with Citi.

I guess, Terry or maybe Pablo, on the IRR, I'm assuming that that's likely to tick up. And by the way, thanks for presenting that data. It's likely to tick up as you hit a tipping point of new launches. I guess the bigger picture is, does that change royalty's willingness to look to maybe moderately earlier programs, or maybe just take bigger risks? I know you're not obviously going to materially change the model, but the question is more of a tilt going forward on the risk side.

Sure. Why don't you take that question, Terry? But I think just one very top-level comment about it. You can imagine that we've been actually tracking this for three decades. And it really doesn't change much our behavior. If we see an attractive transaction in an approved product or an attractive transaction in a product that is in development, we will do it. And the fact that this calculation, these returns are going to move up and down a little bit, will not really impact our behavior in terms of us looking at transactions and deploying capital. But go ahead, Terry.

Yes. Pablo, that's exactly the point. And I would say on the specifics on the return on invested capital and return on invested equity metrics that we started to highlight, I think the thing that we're most proud of really is the stability and the consistency. And so as we've continued to scale our investments, it's remained remarkably stable. And we think that it's going to bounce around a little bit, quarter in and quarter out, but it should remain for return on invested capital in that mid-teens range for the foreseeable future, which we think really speaks to the value creation of our business model.

And our next question will come from Umer Raffat with Evercore.

This is Mike DiFiore in for Umer. I have two questions. First, I want to dive deeper into the Amvuttra deal. You mentioned that there is significant competition from nucresiran. Can you elaborate on the different scenarios considering this competition? Specifically, if nucresiran is approved and launches in 2030, how quickly do you expect Amvuttra to experience erosion? Secondly, do you have any updates on the market for synthetic royalties in the obesity sector?

Sure. Mike, thanks for the question. So specifically, on how we thought about Amvuttra over its whole product life cycle. As we highlighted at the beginning of the call, we are really excited about this product. It's completely consistent with the kind of products that we've invested in, in the past. And I think the strong launch in Alnylam's strong execution behind it are all examples of that. Specifically to your question, as we always do, we looked at a pretty broad range of scenarios for both timing and the slope of how nucresiran might enter the market. We obviously have a case study, a very recent case study of the Onpattro to Amvuttra transition to sort of help us and guide us as one scenario. But we certainly looked at a lot of sensitivities around that as well, with the message being and why we talked about that, that we're confident in an IRR of low double digits or better when we look across that range of scenarios, even baking in that range of nucresiran scenarios. Second, on the obesity market. So it continues to be, I think, message very consistently with what we said in the past, certainly on our radar looking for the right opportunities there. We don't just want to have a royalty on an obesity product for the sake of it; we want it to be an important product that differentiates itself in this space, and we'll be disciplined in waiting to find the right thing that creates value for our shareholders.

And the next question will come from Terence Flynn with Morgan Stanley.

Two for me. First, congrats on the Amvuttra deal. I think Blackstone originally signed a deal with Alnylam back in 2020. And Pablo, given your comments that you guys look at everything, I'm assuming you had a look at it back then. So I'm just wondering what's different now versus that 2020 deal? And then on the LP(a) front, probably a question for Marshall. Amgen, as I'm sure you guys heard last night talked about the olpasiran Phase III event rate tracking slower than expected. Just any thoughts there on your views on implications for probability of success here for this study?

Sure. Marshall will address the second part of the question, but to provide some insight on the first part regarding Amvuttra, it is associated with a larger deal from 2020, which amounted to approximately $1 billion. This primarily pertained to nucresiran, with the 1% royalty on Amvuttra being a minor addition worth around $70 million within the overall transaction. We evaluated the entire deal at that time but ultimately determined it was not suitable for us. Additionally, I want to mention that this sheds light on a question we've encountered since going public five years ago concerning competition. Regarding the reasons for Blackstone's sale, it's best to direct that question to them; they have held this investment for five years and have achieved an attractive return on their investment. One key point we emphasized during our Investor Day is the uniqueness of our company's structure compared to many of our competitors, who are often organized as close-in funds with shorter investment horizons. In contrast, royalties tend to have much longer durations, typically spanning 10 to 15 years. Royalty Pharma is uniquely structured to invest in assets with lengthy cash flow periods, allowing us to hold them until maturity. This highlights the differences in our business models, as we are positioned to manage royalties that will generate returns over a decade or more. Lastly, this transaction underscores another unique aspect of Royalty Pharma; our thorough diligence process, refined over many years, has enabled us to form a distinct perspective on the sales trajectory and the longevity of the Amvuttra royalties, which may differ from the views held by others. This drives our belief that this is a compelling investment that will yield significant returns for us. Now, let's move on to your next question, Marshall.

Sure. Thanks for the question on LP(a). Amgen mentioned a slower event rate in their study last night, which shouldn't be surprising, especially in light of similar findings from Novartis, in which we also have an investment in their LP(a) product. When we conducted our initial research, we recognized the uncertainty regarding the timing and exact event rate in a first-in-class outcome study with little precedent in the target population. However, this doesn't alter our belief in the probability of success. We're still very enthusiastic about having two royalties in the top therapies within this class, which we believe could become a significant multibillion-dollar market in the future, and we're excited to be involved in it.

I show no further questions in the queue at this time. I would now like to turn the call back over to Pablo for closing remarks.

Thank you, operator, and thanks 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. Thanks.

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