Royalty Pharma plc (RPRX) September 2026 Conference Transcript

Good morning. My name is Richard Wagner. I work with Jason Gerberi covering U.S. large-cap pharma based in London. On his behalf, I'm pleased to welcome Terry Coyne, CFO of Royalty Pharma, and Greg Butts in managing and partnering for a 40-minute fireside chat. So thank you both. Thanks for having us. My pleasure.

So if we could start with pharma policy, what are you paying close attention to ahead of the midterm elections that would be impactful biopharma ecosystem yeah so it's a great question I think you know there's a lot of moving pieces on the policy front and I wouldn't point to anything any one thing in particular obviously MFA continues to come up but I think you know we're paying attention to sort of the broad better coming out of bc um it kind of comes in waves it seems and uh do you have any strong views one way or one way or another on how this all shakes out but we're definitely paying close attention um you mentioned uh in the end this question is from the OUS impact.

So there was a publication in Lancet that argued that biopharmers are under pressure to increase U.S. launch prices but potentially forego commercialization in certain EU countries. So in the past royalty frame, the OUS impacts from MFN is TBD. Are these dynamics becoming clearer, one? And then second, are they factored into your deal?

So I would still say it's largely TBD. I don't think we have full clarity. There's going to be some important launches coming up over the next year or so. I think we'll help inform that a bit more. But as far as the deal models go, we absolutely are factoring this in. i don't think we have i don't think we know exactly how it's going to shake out but when we think about pricing as a as a as an important lever and obviously geography as an important lever of both sales we've thought of we're we try to take kind of a scenario-based approach look at a lot of different scenarios do they launch do they not launch do they do that does the price you know is the price a fraction of the u.s price what does that do to the u.s price and so we try to kind of look at it in a lot of different ways um i think for the most part you know we're pretty aligned with the marketers they they obviously want they want to sort of maximize the sales of these drugs and so i think that there is strong alignment there right But yeah, I don't think we have a crystal ball to know exactly how it all plays out. And that's the safest thing is to kind of look at a lot of different scenarios and get comfortable that if it plays out to the downside, we're still okay with the investment that Thank you. So you said on AI that it would deepen and accelerate diligence rather than simply increasing the deal count. so it's not throughput that's the constraint where would the benefits show up would it be win rate would it be pricing discipline lower loss rate partner access yeah i think so i think it's it a number of things i mean the enhancing the quality of the diligence that we can do uh can obviously lead to you know better forecast better investments higher probabilities of success although i think we're already pretty high on you know our ability to pick things that are going to do well um i think speed of speed of for the ability to process multiple deals at the same time you know for example if there's a when we're working directly with a pharma or biotech company there's a lot of data that they that they can give us access to and the extent that we can use ai to help process that data can allow us to get through it more quickly more rapidly catch things uh you know earlier um so i think that all those things are you know things that can really enhance the process i think longer term it's something so we have made big investments in ai we hired somebody uh to run our ai effort uh earlier this year uh he came from a cubia where he was running ai at QV is obviously a huge data firm, and we're really happy to have him joining us to lead that effort. And I think we see it initially being something that enhances the diligence process internally, but longer term, we think that it can also be a tool that we provide to our partners as well and so um to help them with you know clinical trial design for example um things like that so i i think we're we're still right in the earlier stages but it's a it's a big focus of ours that would be within the context of a partnership around it yeah yeah i think the way we we you know we see an opportunity to differentiate ourselves we want to be viewed We don't want to be viewed as purely financial partner. We want to be viewed as sort of a strategic partner to help our partners grow. And to the extent that we can bring resources to the table to help them make their products bigger, make their products launch better, help them design clinical trials that have increased the probability of success, that occurs to them and it occurs to us. And it makes us very different than just a capital provider, which anyone can do. And I think that's part of the reason why you see such consistent sort of repeat partners. We have a track record of repeat business with the same people. And I think that that speaks to us bringing more to the table than just capital, but bringing in sort of a true partnership mentality.

Yeah, that's a point that Roche often speaks about when it works with smaller companies is that from the perspective of the smaller company, they're looking at who's going to be the best partner. So would that be, again, the proper way to think about the profile that would be a pre-launch biotech company rather than a large pharma? Well, you're also doing R&D funding. Yeah, yeah, and that's a separate thing.

I mean, I think the reality is a large, a big pharma probably doesn't need our advice uh they they're usually pretty qualified to to run these trials uh i mean on the margins but uh but i think that in general that you know they want they they're looking for something different but we're for a smaller biotech company that has less resources i think we can bring a lot of our resources to the table to help and then for our For AI, you mentioned analyzing a massive amount of data.

So it seems like those R&D funding deals that you're doing with pharma would be a great case study to look at.

Yeah, absolutely. We're having to talk more about that pharma R&D co-funding as well. It is an area where we see a lot of growth.

So we could focus on China. So, you've done a transaction around M-Deltra with Biogene. You're building out your Asia presence. I guess the question, what do you think is the pace at which China can become a repeatable source of transactions?

Sure. Yeah, I'll start. So, first off, you made a point around teams. So, we're investing a team. we hired Ken's son he's building a team there much like large pharma we think having local presence is very important just like Ken's there in Hong Kong so the investment team point to the investment in education on royalty financing as an alternative for companies as they think about how to monetize this growing pool of of passive royalties um so it's educating the market in china about what we can do um obviously our competitors doing the same thing as well um and educating them on on who we are um again i think very analogous to how we built out in western markets over the last 25 years and then i think from a focus perspective it's on the passive royalties that have been created over the last five, six years through just an explosion between Chinese companies and Western multinationals that have gone there to source innovation. And so the pool of passive royalties has grown immensely, as everyone here has seen. We think that will continue, and you're probably hearing that from a lot of the multinationals that are here today. And, you know, that will be our focus is on that passive set of real deals that are owned by the Chinese companies against products that will be developed and ultimately commercialized in Western markets. Again, those are the same partners, large biopharmers and large scale set and developing commercialized things. You know, that ultimately is exposure that we want to have. So we think it's going to take some time to make those investments, the team, the education, again, it comes to a growing opportunity set. It's why we don't include China contribution in that two to two and a half billion in capital employment that we've spoken about.

But I think you should hear from us the excitement and the opportunity, the team, the education that's going on, and that in time will contribute to it. so you had mentioned the essentially the the historic deal structure would be there would be retained royalty for the china company that could be monetized by the chinese company so that's that's the landscape as it exists um but as you continue to create this uh market segment Is that the best risk-adjusted entry point for royalty pharma, buying the retained royalty? Could you also consider funding the Western licensee or structuring with both of them?

I think for us now, it's passive royalty opportunity set in terms of funding the Western development. I think that's analogous to the co-funding that Terry just spoke about. And, again, we see that as a growth opportunity for us in the U.S. But I think for our team now, it's focusing on education on royalties in that market and the passive royalties that exist. And, again, what is going to happen is those royalties will all mature, meaning those are products that are going to continue through development, ultimately become approved, and that's, I think, where we see the intersection between the risk profile, the investment returns, and then our voted transact in that market.

So the out-licensing royalties for China can be structurally higher than traditional academic royalties. So how much of that yield is compensation for the earlier stage risk or contract complexity? Is it true excess return, or is it simple? It can be explained by those other facts.

Yeah, I think it's really case by case. I don't think there's necessarily a reason those royalties are structurally high or lower other than just when those deals were struck with the Western marketing partner. So we'll look at each deal on its own merits. From the risk profile, the partner is the forecast that we have conviction in, and then is the return attractive? our standpoint. So each, you know, like we do with our other investments on a case-by-case basis, and so in the same criteria that we apply from return profile for passes in Western markets are not applicable to how we think about the Chinese opportunity.

And when you think about sort of the typical academic loyalty, those are, they're usually, there's a, there's probably a drug but it's probably not in the clinic yet it's probably not you know in patients so they kind of at that stage they're getting low to mid single digit royalties as you move into the clinic and you have proof of concept and you have a sort of a maybe a validated target you're able to get higher royalties so that i think that that's why you know with a lot of the the chinese royalties that are just a little further along. And so, well, it's a bit of a little bit higher. Compensation for the investment. Yeah, exactly. And there have been a level of de-risking along the way.

So, as we know, there's a lot of debate around U.S.-China policy, specifically with regard to these partnerships. So, how do you underwrite the possibility that there can be changes in policies that would have impact on your deals during the royalty lifetime. I know at second quarter, you mentioned domiciling the IP outside of China could mitigate this.

Yeah, I think, honestly, if you think about what we're buying, it's no different than what we do every day. These are products that are in the hands of western companies uh the royalties the royalties generally sit outside of china structurally so there isn't like a direct transaction with china and so um but i think the the question is more does deal activity slow like do because there's already this pool of royalties that I think that are there and still a little early. They're not quite much yet. I don't think there's really any products yet that have come to market from this crop of royalties, but they're coming. So in the next couple of years, there's going to be some things that come to market. And as we see data, this will be very transactable for us. It's hard to imagine policy getting in the way of those types of deals. um longer term does policy uh you know slow down the pace of uh in licensing by you know western multinationals of chinese assets it's possible it hasn't happened yet and so i think it's just a little a little way to say but there's clearly a big pool of things that already exists that we see an opportunity so transitioning to the newer newer deal structures so revmed for

example potential new model for funding late stage development without in this case revmed going to a pharma for a partnership how scalable are these types of opportunities first question and could you see additional transactions of similar size over the next 12 days sure so um First off, we're very excited about that transaction.

And now, like all of us, we're going to watch the early stages of the launch. And I think you can imagine on the back of that structure and the data now, we've gotten a lot of inbound interest from others that saw a lot of the attributes of that transaction and thought that they were applicable to their situation. late-stage development capital, capital to pursue an independent commercialization. And so we view that as a structure, as, yes, repeatable. From a scale perspective, we have the financial means to pursue multiple of those types of deals. But again, just like in China, we'll look at it on a case-by-case basis and make sure that the risk and the return profile matches is consistent with our hurdle rates. And as you think about then, just the reproducibility, this trend will continue in terms of helping companies fund products stay independent longer, really pursue that path to value creation that they can do on their own. and market betters, maybe this is an opportunity that is meaningful along with very much the co-funding deals that we can have some time talking about.

I mean, it's unique. It's the first time that you've seen a true scaled alternative to pharma, right? Historically, companies raise equity along the way And then if you really, really need capital at scale, partner with pharma. A lot of times you sell yourselves to pharma. But now, you know, we're able to come in and say, we can step in the shoes of that pharma partnership. I mean, equity is available and equity would have been available to RevMed. But at a certain point, you want to supplement that with additional sources of capital. And the reality is royalties are lower cost than equity. They certainly were for RevMed. um and so uh you know adding royalties to the mix and and sort of pushing off that that decision point of of you know pharma so you've turned that card over and uh or you're into your launch and you're showing that you can do this on your own that their tremendous value can accrue to the equity of those companies when they do that and so we're excited about the potential it's not it doesn't doesn't fit every company um and there's some companies that simply can't go it alone and they kind of know that um but for the companies that really can or can go further alone uh this

is we think it would be a very powerful tool so you had mentioned that the royalties have made a comparison to the cost of equity. So that's a significant share of the announced deal value. Is there a natural upper bound to how large synthetic royalties can become within your portfolio? And does broader adoption risk, does it make terms less favorable over time? So it's tough.

I mean, at this point, we don't see an upper bound. It's not obvious. It's not like, oh, we're feeling we're saturated with the market. We've got 5% share of the market. Synthetic royalties for small mid-cap biotech companies are 5% share. It's nothing. So there's a lot of room to go from that perspective. In terms of competition, I think the reality is the market's growing a lot faster than the competition is growing. And we have a lot of competitive differentiators. It's still risky. You can't forget that. And so, you know, you have to be prepared to, you know, to lose. You're going to have some things, you're going to have some misses. And so, from our perspective, we obviously hate when things don't work, but it's not going to change our business one way or another. We have huge scale, huge diversified cash flows that's kind of, that's reproducing every We know that we're going to be able to, over time, generate really attractive returns across the entire portfolio and so you can if you invest a couple hundred million dollars a billion dollars two billion dollars in development stage investments it's not going to change it's not going to change the overall outlook of loyalty farming but it's going to open up a whole new pool of of opportunities that we may not have otherwise seen so i i don't think i don't think this is to be for everyone but but there will certainly be some competition at this level it's just it's

it's complicated and rich i think that the competition is as much from you know other capital allocators as it is from alternate forms of capital you know terry mentioned equity there's convertible debt um there's licensing dollars um and we view that that pool of all of alternatives um you know to be as much competition to our dollars um we want to be viewed as a strategic partner so we're replacing the capital that you otherwise would come to a company through a licensing transaction um and then you know i think we can successfully make the cost of capital argument um next to uh common equity or or convertible debt um and again compliment. There's always going to be a case where we're truly substituting, but as a compliment, to help companies scale their capital base, I think is the way we see it.

Yeah, it's totally right. It's not one or the other, but it should be a piece of the puzzle. For every successful, really successful biopharma company, I think we see a future where royalties are just part of the mix not the whole thing but you know a healthy part of the mix supplementing that with that equity and once they get to the later stage is death but and we've seen it with seen it with revolution medicines we saw it with cytokinex we saw it immunometics we saw it with um by the original biohaven um probably a couple others that i'm not thinking of, but where royalties were, 20, 30% of the total capital that they raised, and I think that's a roadmap for the industry. Now, going back to the Redmond transaction, so the contingent payments payouts, so to confirm that future tranches under that kind of an agreement do apply against the guided two to two and a half billion of target deal flow uh yeah so when we say two to two and a half billion that's capital that we that's straight from our cash flow statement capital that we deploy every year and so there are going to be years where where it's a mix of deals we signed up in prior years and deals that we you know announced that year um and so that that is there is an element of, like, for example, the Johnson & Johnson deal we announced earlier this year is a $500 million commitment to co-fund the clinical trials. That will be a portion of that will hit our capital deployment this year. A portion of it will hit next year. And I'm not sure exactly how long that goes, but, you know, definitely next year.

And so the annual run rate at $2 to $2.5 billion. So that's, should investors understand it as a conservative proxy that royalty can suppress if the right deals come along? I guess the question is really, is there an incentive to guide higher because that would convince yourself to higher a deal? That's exactly it.

I mean, we're going to take the opportunities as they come. We feel like $2 to $2.5 billion is kind of, we don't need to do a lot to achieve that each year um so we've described that as more conservative modeling assumptions there's a lot of reasons to believe that the number could be could be much higher but we're if it's not you know it's because we're patient and we're waiting for the right opportunities we're not we don't want to ever feel forced to deploy capital Well, that's a very bad situation to be in. It would impact returns. It would impact probabilities of success. We're just not in that business. We want to be making investments in the right products. And I think if you look at where we've invested, take last year, we had a funnel of 480 opportunities that we looked at at the top of the funnel. And we did eight transactions. And you look at those products that we invested in there, they're going to be amazing, almost across the board, amazing products. And so the bar is high. It was a 2% rate that we invested of the total amount of deals we looked at. So the bar is going to stay that high. That sort of pull-through rate is going to stay probably very low.

So your total debt, just say EBDA, your leverage is about 2.8. You have significant liquidity. Is there a hard leverage ceiling? Would you move, for example, to 3.5 for a particularly compelling transaction? Absolutely. Yeah.

I mean, we wouldn't go above 4. It would have to be really, really compelling to go above 4, but we would need to know that we're going to de-leverd pretty quickly from there um we're now triple b rated across all you know by all three uh agencies something we're really happy about um it's been a long time coming but i think it just speaks to the quality of the predictability of the portfolio but look we want to always have the right things come along we've been really clear with our lenders and our equity investors that we would take leverage up, but it's critical to maintain that investment grade and credit rating.

On buybacks, I understand that you apply your capital to deals and to buybacks. So internally, when considering when to engage in buybacks, what are you comparing? Is it the internal rate of return on new deals versus the implied rate of return on repurchasing your own shares, implying that there might be a stock price or valuation where buybacks, again, become repurchase? Yeah, so it's dynamic.

I think we're looking at the relative value of our equity and comparing that directly against the relative attractiveness of loyalty opportunities. And so I think 2025 is a really good example of how we think about it. So first half of that year, particularly in the first quarter, our stock was, we thought, very depressed. um deal flow was a little bit slower for whatever reason um and so we dialed up we dialed up uh buybacks and in the first half of the year we bought back a billion dollars of stock um and then as we got into the second half of the year year deal flow picked up in a huge way we did the rev med deal we bought the adulterer royalty that you mentioned earlier from b1 um and uh and we were just seeing a lot of opportunities and so we dialed down five acts and dialed up investments and i think as we've continued from second half of 2025 into 2026 we're just continuing to see really really interesting hit flow and so that's that's where our focus has been we're still we're still doing five acts but it's it's definitely been you know it's not been at the same scale as it was in the first half of 25 but look if we see a pullback yield flow slows down we'll allow that back up again and that's a really kind of nice tool to have i think and you look at i think we've been pretty good about where we bought all back we probably bought back two billion dollars of stock uh and it's been in 30s so it's 30 per share uh the stock is close to $60 now. So I think we've been pretty disciplined about that. I think our investors have been ready to help the policy has worked.

So you've guided a 2030 cash flow target of $7.50 per share. That implies a certain level of return, 11% CAGR. Highlighted conservatism around your deployment assumptions, and you're also planning for downside on the vertex royalty resolution with AFP-TREC. If either factor or to be more favorable for royalties, so either faster deployment of capital or positive arbitration outcome in the first half of 27, would there be potential upside in how should investors think about it?

So just to sort of clarify that, We're not planning the downside for tax, but for that arbitration, we just are comfortable that we can hit that target regardless of what happens with that. So if the downside case helps, we're still comfortable. I mean, we've seen that. But I think that we feel really good about it. We've been deploying capital in really great deals. The portfolio is performing really well. It's just amazing performance from things like Trimfaya and Boronigo and Trilogy. We're both very excited to see this launch of Dirac's on RASIV. So I think that we feel like we're in a really good position. The flow continues to be strong as well. So, you know, it's still, it's been a year since we gave that guidance. So we're, you know, feel like we're in a very nice spot right now.

So you mentioned some of the top five products that contributed to meeting the share of the receipts.

So does your late stage pipeline portfolio reduce that concentration quickly enough? uh or conversely those who become skewed to a few binary uh assets like uh old pastoral yeah so it's not driven going to be driven by any one asset that's the amazing thing about our business is that right now the top three products account for around 45 percent of our top line compare that to pharma it's around 55 percent so we're a little better than pharma but as we get so towards the end of this decade we think the top three products are going to be around 30 percent the farm is probably going to stay about the same at like around 50 percent so we feel like we're confident that that's going to happen um under a range of scenarios just sort of naturally as we have a lot of products that are that are ramping significantly um making new investments every day or not every day but you know every quarter every year and uh and we feel like we feel really confident that that that the diversification is going to look you know it's going to improve pretty significantly by the end of this decade and then as you get into the following decade it's going to continue to improve um and the other thing that i i think it's worth pointing out is that when you look at our diversification on the top line it's the exact same on the bottom line versus a pharma company where everyone knows that their biggest products are such outside contributors on the bottom line for their profits we don't have that issue so there's a lot more predictability and safety in our earnings as well from that diversification which i think is something that all the times gets a little bit um you mentioned your pipeline what are the three to four most important readouts in the next 18 months. So one that we're looking forward to later this year is Lidofilumab, a biogen product. We're going to have a readout cutaneous lupus by the end of the year getting into 2027 uh you'll see a systemic lupus um and then the other big ones that focused on um which is very interesting and then uh frexelumab and multiple sclerosis um and we're also we're also going to be looking forward to seeing the full data for pellet carson and that doesn't have you know we know what happened to pellet carson that's that's that was a disappointing outcome but we'll see the data and i think it will probably have some read through to i'll pass around which is another it's a little bit longer i think that's 2028 um i could be mistaken but it's a little further out there but it's it's obviously something that we think it could be could still be a different drug so are there any questions in the room um so if i could continue so that when an asset's acquired by major pharma this is a common exit probiotic how do you how does royalty think about those takeouts and package future value.

So you can imagine settings like migraine or positive for the asset value to have a large form of marketing support as opposed to a targeted specialty market where the takeout might be.

So every investment we make is done on the premise that the marketing partner that we half the time of the investment is the one that will be commercializing the drug and doing so independently. So when an acquisition occurs as common in biopharma and marketing partner then becomes a large pharma, large biotech that has in most cases a positive impact on on expectations on the forecast being achieved and the timeframe that we model it. So that's an upside driver in our investments, but that's not something that we can predict the if or the when. And so I think that's why we have to have conviction in the marketing part of the time of the deal. They have the right team, they have the right plan. Do we have conviction in the product? Do they have enough capital? to see their way through a successful commercialization. Those are the attributes that we have to have conviction in. Okay.

Going back to the 26th or 27th, so you mentioned with the film app, is one or the other indication more important to the value for the transaction?

So the other thing, and then later system. I, it's tough for me to say right now. I think CLE is certainly differentiated because there's no approved therapies for CLE, but SLE is also very large market. So I think we're excited about both.

Any pushes and pulls in the portfolio in 2027 before considering the new deals? So LOE headwinds, I think mostly for 26.

Yeah, so in 26 and 25, We have been from Acton, you know, amazingly, you know, and I think, again, it speaks to the strength of the business. We're growing through that just fine. We've seen it before. I actually think that this proving out has been something that's very helpful for our investors to understand. We're different. We have an easier time managing. bottom line managing through the bottom line impact for sure but also on top i'm managing through allergies so in 2021 uh we lost our fourth largest loyalty stream it was hiv franchise 22 we lost maybe our fifth largest that was uh merck's genuvia and then over that period we also had some headwinds from look it was under was underperforming and we did we grew i think our CAGR from 2020 to 2025 was like 13% right through that sailed right through it. And now in 2025, we saw, we saw Macta going, uh, going generic and that had an impact in the second half of 25 and even more in 2026. And again, continuing to grow through that. So I think it's an amazing strength of the business is our ability to grow through LOEs, something that would be much harder for a pharma to to achieve um when we look at 27 as you get towards the end of the year i don't think it's really going to have much of an impact but um standee coach generic in the u.s in like late summer um so it could have kind of a little bit of an impact in the fourth quarter but then it feels pretty we're pretty pretty clean seven that just sort of normal front of the mill stuff through the end of the decades I have no questions, but thank you very much for coming to our engagement.

It was special. Thank you.