Royalty Pharma Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 12 speakers on the call.

Operator

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

Speaker 1

Good morning and good afternoon to everyone on the call. Thank you for joining us to review Royalty Pharma's Q1 2023 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 ks 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.

Speaker 1

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 is available on our website. And with that, please advance to Slide 4. Our speakers on the call today are Pablo Legaretta, Founder and Chief Executive Officer Marshall Uris, EVP, Head of Research and Investments and Terry Coyne, EVP, Chief Financial Officer. Pablo will discuss the key highlights.

Speaker 1

Marsh will then provide a portfolio update, after which Terry will review the financials. Following concluding remarks from Pablo, we will hold a Q and A session when we will be joined by Chris Heit, EVP, Vice Chairman. With that, I'd like to turn the call over to Pablo.

Speaker 2

Thank you, George, and welcome to everyone on the call. I am delighted to report a strong start to 2023 as we deliver on our strategy as a leading funder of innovation in Life Sciences. Slide 6 summarizes our financial and portfolio achievements in the Q1, which again highlights our strong momentum and the power of our business model. First, we delivered strong performance. Adjusted cash receipts, our top line, grew by 11%.

Speaker 2

Adjusted EBITDA also by 11% and adjusted cash flow grew by 49%. All the strong metrics where prior to the Biohaven related payment, which I will discuss on the next slide. 2nd, on capital allocation, We announced royalty positions of up to $1,600,000,000 including $600,000,000 in upfront payments and the multiyear share repurchase program of up to $1,000,000,000 I also personally intend to acquire Up to an additional $50,000,000 of Royalty Pharma stock given the compelling value I believe the share represents. 3rd, we strengthened our royalty portfolio. We added 3 new therapies, including the SMA blockbuster SPINRAZA and the exciting development stage therapies, pelacarsen and CAR XT, both of which are potential future blockbusters on consensus estimates.

Speaker 2

Additionally, 3 medicines in our portfolio were approved by the FDA and Sandy had a positive Phase III readout for a potential label expansion with the Env Var study. 4th, we are reaffirming Our increased full year guidance for adjusted cash receipts. Our guidance reflects expected underlying growth from our portfolio of between 4% 9% prior to the Biohaven related payments. Consistent with our standard practice, Our guidance is based on our current portfolio and does not include the benefit of any future acquisitions this year. On Slide 7, you can see our financials in more detail.

Speaker 2

We delivered 11% growth in our top line prior to the biochemicals related payments Call. 87% growth if we include these statements. As a reminder, the major non recurring items here The $475,000,000 milestone we received from Pfizer in March 2023, following the approval of sub spread for migraine as well as the $13,000,000 fixed by headwind related payments we received in the same period a year ago. Foreign exchange continued to represent a headwind impacting our top line by around minus 3% to minus 4% in the quarter. Consistent with our top line, we grew our adjusted EBITDA by 11% in the quarter prior to the Biohaven related payments 88% including this payment.

Speaker 2

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 49% in the quarter prior to the Biohaven related payments and 165% Including this payment. The substantial increase in the quarter also reflected the $100,000,000 upfront and milestone development stage payments to Cytokinetics in the prior year. Slide 8 shows our impressive track record of strong top line growth since our IPO in June of 2020, including our double digit growth in the Q1. This reflects our ability to execute and consistently against our strategy.

Speaker 2

Slide 9 provides a deeper dive into our top line performance in the quarter To show the various moving parts, the strong performance of our base business and our acquisition of the Trilogy royalties allow us to deliver 11 percent topline growth before taking into account the impact of the biogeven related payment. Royalty expirations Enfranchising together represented a combined headwind to growth in the 7% to 8% range. The strong underlying dynamics in the quarter once again underscore the unique power of our business model to replenish our portfolio and to drive Compounding Growth. With that, I will hand it over to Marshall to update you on our portfolio.

Speaker 3

Thanks, Pablo. On my next few slides, I want to discuss our recent transactions in schizophrenia and also to provide a broader perspective on our approach to portfolio strategy. Last month, we were delighted to announce the acquisition of PureTech's royalty on KARUNA's CAR XT. This is a novel oral muscarinic agonist with 2 positive Phase III trials in schizophrenia. CAR XT is also in development for the treatment of psychosis in Alzheimer's disease.

Speaker 3

In return for an upfront payment of $100,000,000 $400,000,000 in potential regulatory and sales milestones, We will receive a 3% royalty on annual sales of CarXT up to $2,000,000,000 and approximately 1% above this threshold. To provide some context for modeling the potential outflows for this transaction, the vast majority of the milestones require very strong commercial performance. Our excitement about this development stage medicine is driven by the results of the clinical program, including 2 Phase 3 studies, EMERGN-two and 3, And the significant need for new novel therapies in schizophrenia. Not only did the trials demonstrate early and sustained reductions in the positive and negative symptoms of But importantly, tolerability profile was very encouraging, especially regarding some of those common adverse events typically associated with current medications, including weight gain, somnolence and extrapyramidal symptoms. Based on these strong results, Kurena plans to submit a new drug application to the FDA in the Q3 of The Street has certainly recognized the exciting profile of this compound with consensus sales projections rising to $5,000,000,000 by 2,030.

Speaker 3

Slide 12 expands on the significant unmet need for new treatments in schizophrenia. On the left hand side, you can see that close to a third of patients do not respond to current therapy and only about half have a partial improvement or suffer unacceptable side effects. When taken together with the particular challenges of this disease, this results in approximately 3 quarters of patients discontinuing treatment within 18 months, which underscores the need for new treatment approaches. This is why we are so excited to have invested in 2 novel mechanisms of action Call through CAR XT and MK-eight thousand one hundred and eighty nine. Each potentially offers a differentiated clinical profile from current medications, most notably on tolerability.

Speaker 3

RXT, as I just highlighted, has already reported positive Phase 3 results and will be marketed by Karuna, subject to FDA approval, And MK-eight thousand one hundred and eighty nine is a PDE-tena inhibitor in Phase 2b where a potential royalty arises from a unique collaboration between Royalty Pharma and Merck. So for innovation to transform patient lives. Slide 13 returns to a concept that we showed at our Investor Day last year on selected investment themes of interest. Our investments in the schizophrenia category are consistent with 2 of these themes. The first is to explore the potential of Underinnovated large markets, where there has arguably been less industry focused given the shift towards specialty markets to smaller patient populations and higher price points.

Speaker 3

Schizophrenia is a great example of a large underinnovated market and we believe that CAR XT and MK8189 could bring important benefits to patients in this complex and difficult to treat population. In addition, we believe brain disease has Tremendous scope for innovation with limited effective treatment options. In many cases, schizophrenia sits squarely in this heterogeneous category. Lastly, on Slide 14, I want to provide a long term perspective on our balanced royalty acquisition strategy. This data shows how we have deployed our capital since 2012 between approved and development stage opportunities.

Speaker 3

On the left hand side, you see that since we started investing In development stage therapies in 2012, of the approximately $21,000,000,000 in capital deployed, the majority of the investments have been in approved products. On the right hand side, you can see that the percentage deployed annually has exhibited significant variability on an annual basis, In part, reflecting the opportunistic nature of our business, but in aggregate has also been skewed towards approved products on average at 59% of total capital. So while we do not have target levels of investment between approved and development stage, our therapeutic area agnostic approach to investing And position as the partner of choice in the royalty funding market has allowed us to fund innovation in a balanced way, while maintaining strong returns and long term growth. With that, I'll hand over to Sherry.

Speaker 4

Thanks, Marshall. Let's move to Slide 16. Total royalty receipts grew 72% in the Q1 versus the year ago period. Excluding the Biohaven related payments in each Call. The magnitude of growth reflects the $475,000,000 as prep milestone payment, Together with strong contributions from the cystic fibrosis franchise, Tremfya and the Trelegy royalty, which we acquired last July.

Speaker 4

We also saw growing royalty contributions from EVRISD and CABOMETYX and from other medicines not shown on this slide, Call, particularly Trodelvi and Orlodea. Lastly, we received a $35,000,000 payment related to AstraZeneca's AirSupra. These positive factors were partially offset by the loss of the DPP-four royalties, by weakness in IMBRUVICA and to a lesser extent, Hysabri and by the adverse FX impact. Slide 17 shows how our efficient business model generates substantial cash flow to be redeployed. As you're aware, adjusted cash receipts is a key non GAAP metric for us, which we arrive at after deducting distributions to non controlling interests.

Speaker 4

This amounted to $1,100,000,000 in the quarter or growth of 87% compared with last year's Q1. As Pablo noted earlier, Prior to the impact of Biohaven related payments, growth would have been 11% in the quarter. As we move down the column, Operating and professional costs were approximately 8% of adjusted cash receipts in the quarter. As a consequence, we reported 88% growth And adjusted EBITDA in the quarter relatively consistent with our top line growth. When we think of the cash generated by the business To be redeployed into new value enhancing royalties, we look to adjusted EBITDA less net interest paid.

Speaker 4

Net interest paid in the quarter of $67,000,000 reflected the semiannual timing of the payments on our $7,300,000,000 Call of unsecured notes, which occur in the 1st and third quarters. This figure included $16,000,000 we received in interest Given the strong cash position on our balance sheet, which benefited from higher interest rates. We did not have upfront and milestone payments for development stage funding in the quarter, whereas the prior year period included $100,000,000 payment related to Cytokinetics. As a consequence, adjusted cash flow, our bottom line, grew significantly faster than adjusted cash receipts and adjusted EBITDA and amounted to $973,000,000 or $1.60 per share for the quarter. This resulted in an adjusted cash flow margin of 86%, which once again highlights the efficiency of our business model.

Speaker 4

Let's move now to Slide 18 and our financial position. We continue to maintain significant financial firepower for future royalty acquisitions. In the Q1, we deployed a little over $600,000,000 Capital on royalty acquisitions as well as around $120,000,000 on dividends. This was more than offset by our strong cash flow generation over Call. So that our cash and marketable securities increased to $2,000,000,000 at the end of March.

Speaker 4

Our leverage at the end of the quarter As I have previously highlighted, 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 digit to teens percentage range. In addition, around 60% of our debt matures in 2,030 or beyond. Taken together, we continue to believe that 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. On Slide 19, I want to remind you of our capital allocation strategy and how we expect this to drive shareholder value creation.

Speaker 4

At our Investor Day last May, we outlined that over a 5 year period through a combination of cash generation and our debt capacity, Call. We expect to have access to around $20,000,000,000 of capital. As you can see on this slide, the majority of our capital will be on value enhancing royalty acquisitions with a target of $10,000,000,000 to $12,000,000,000 invested over the period. In fact, As many of you are aware, we are running a bit ahead of this schedule, having announced transactions of up to $5,000,000,000 since 2022. Furthermore, Given the tailwinds in our industry and our powerful market position, our transaction pipeline continues to remain robust and highly active.

Speaker 4

Call. We aim to balance this primary focus on royalty acquisitions with returning capital to shareholders through a combination of dividends and, When appropriate, share repurchases. Recently, the Board authorized a multiyear share buyback program of up to $1,000,000,000 which is a reflection of the compelling value we see in our share price and our focus on efficient capital allocation to drive shareholder returns. By executing against this capital allocation strategy, we are confident we will continue to deliver on our mission of accelerating innovation in life sciences, while generating strong returns and creating significant shareholder value. Slide 20 provides our full year 2023 financial guidance.

Speaker 4

We expect adjusted cash receipts to be in the range $2,850,000,000 to $2,950,000,000 consistent with the raised outlook we provided in March following receipt of the zazapret milestone payment. 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 our operating costs. We expect payments for operating and professional costs to be approximately 8% to 9% of adjusted cash receipts in 2023, in line with previous guidance. We continue to believe that the degree of margin protection Provided by our unique business model is impressive in today's inflationary environment.

Speaker 4

Similarly, Interest paid for full year 2023 is still expected to be around $170,000,000 and to follow the established quarterly pattern with de minimis amounts payable in Q2 and Q4. This does not take into account interest received on our cash balance, which was $16,000,000 in the Q1. You should also note that we expect to make a $50,000,000 milestone payment to Cytokinetics in the second half of 2023 based on the company's guidance of initiating their pivotal trial of afacamten in non obstructive hypertrophic cardiomyopathy. This $50,000,000 expense will be recorded as a development stage funding payment and thus reduce adjusted cash flow this year. Lastly, as many of you are aware, the royalties we receive lag sales by 1 quarter Call.

Speaker 4

Live product sales by 1 quarter. Additionally, several of our largest royalties are tiered, which typically reset at the beginning of the year and have the potential to increase throughout the year. Therefore, there is some seasonality to our business, and the second quarter Tends to be lower than other quarters in the year and the Q1 tends to be higher. Accordingly, we would expect adjusted cash receipts in the Q2 to be slightly higher compared with the same quarter in 2022. My final slide drills down further on our adjusted cash receipts guidance.

Speaker 4

The graphic is illustrative, but sets out the various pushes and pulls behind our outlook for 2023. Starting with the left hand side, we have faced a high base of comparison due to the $509,000,000 of Biohaven related payments, Call, which we received in 2022. Adjusting for these payments brings the underlying base for 2022 adjusted cash receipts to $2,280,000,000 On the right side, if we start from the adjusted cash receipt base prior to Biohaven, We expect underlying growth of 4% to 9% this year, which we anticipate to be driven by the CF franchise, Tremfya and a full year of Trelegy royalties, partially offset by the losses of exclusivity on the DPP-four and IMBRUVICA weakness, Call, which we believe we have conservatively reflected in our guidance. We also expect a modest contribution from 3 quarters of SPINRAZA royalties. As mentioned earlier, this growth does not include the benefit of any future acquisitions.

Speaker 4

Using today's U. S. Dollar exchange rates, FX is expected to represent a relatively modest headwind of minus 1% to minus 2%. Putting this all together, Including the $475,000,000 milestone payment on Zazepret, we are reaffirming our increased top line guidance of 2,850,000,000 to $2,950,000,000 With that, I would like to hand the call back to Pablo for his closing comments.

Speaker 2

Thanks, Carey. Let me close by saying how pleased I am with our excellent start to 2023. This sets us up well to deliver on our guidance for the full year and to continue to execute strongly against our strategy. To finish on Slide 23, I would like to highlight why Royalty Pharma's business model offers a unique way to invest in biopharma. Starting with growth, As we announced at our Investor Day, we expect to deliver a top line CAGR of more than 10% Call.

Speaker 2

Which compares with consensus expectations of 4% for large biopharma. Despite being a relatively small company in terms of headcount, we offer the benefits of scale With exposure to 15 blockbuster medicines as compared with an average of 9 for the large biopharma companies, We have a similar low cost of capital, but our development stage investments tend to be lower risk As we generally do not invest in therapies before clinical proof of concept, thereby avoiding the high failure rates for clinical and early stage clinical compounds. We have consistently delivered an attractive low double digit rate of return On our investments and while we are unable to provide a precise comparison with large biopharma, as you know, The R and D productivity of the industry and returns on acquisitions are open for debate. We also offer a yield of around 2%. And last but not least, our management team is fully aligned with shareholder interest With high ownership of the company, which is significantly higher than the management ownership in Large Biopharma.

Speaker 2

The ownership for named Executive officers of Royalty Pharma is 16%, which compares to less than 1% for our large cap biopharma peers. However, when we consider all employees and the Board, ownership of Royalty Pharma is even higher at around 32%. Taken together, I truly believe Royalty Pharma offers a unique powerful business model with a very attractive growth and return profile Welcome to the Biopharma Industry. With that, we would be happy to take your questions.

Speaker 1

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

Operator

The first question comes from the line of Chris Shibutani from Goldman Sachs. Chris, go ahead.

Speaker 4

Thank you very much. Good morning. Appreciate the updates. You talked about a balance between the development stage and the commercial royalties. Do you feel that that And I asked that question in part, in particular, and I know that these were some of the selected investment themes, but you thought about sort of areas where there Under investment in terms of innovation for large TAMs, neurologic diseases, etcetera, which seem to skew more towards taking some development type risk.

Speaker 4

And then relatedly, can you comment on what your team's thoughts are? We recently in the Alzheimer's disease area Had some incremental news that continues to move forward the beta amyloid hypothesis there. Do you see opportunity neurodegeneration as mentioned, But in particular for Alzheimer's disease where we are, love to get your thoughts on sort of the outlook there and how you view that as a potential realm for opportunity. Thank you.

Speaker 2

Call. Thanks, Chris. This is a question for you, Marshall.

Speaker 3

Okay, great. Hi, Chris. Good morning. I think there were 3 basic questions there. The first was how do we feel About the overall balance of approved versus development stage in our portfolio.

Speaker 3

And overall, As we've highlighted, we feel really confident in our overall strategy here and how our focus continues to be on Finding the therapies that are important to patients, to physicians, to the medical system That makes sense for our portfolio. And I think we're going to continue to focus on those. And as you've seen, as you can see on Slide 14, That has yielded a really comfortable balance of approved and development stage therapy. So I think overall, We feel really comfortable with where we are and we'll continue to prosecute that strategy as we have been. The 2nd question there was do the overall themes that we highlighted suggest That there'll be more of a focus on development stage.

Speaker 3

And overall, I'd say no to that for a couple of reasons. I think One is that, as we've said as I said in the prepared remarks, these investment themes are overall themes of interest, but they aren't necessarily driving day to day how we look at the opportunities in front of us. So these are themes That we think are really interesting, but they are just that themes and we're going to continue to stay really focused Call. On the strategy that I talked about. And yes, there are some examples on here of Call, where we've made investments in approved therapies that would be consistent with these themes, an underinnovated large market.

Speaker 3

Certainly, we felt like When we made the Trelegy investment, this was another area where there had been less investment by large pharma and this was a leading therapy and still a very large Category, so just as an example. The third part of your question was about Alzheimer's disease. It's been great to see all the success There for patients and it looks like we're going to have multiple therapies in that category. We think that is an exciting area and continues To be something that we're monitoring and looking for potential opportunities there as they make sense for us.

Speaker 4

Great. Thank you.

Operator

The next question comes from the line of Chris Schott of JPMorgan. Chris, go ahead.

Speaker 5

Great. Thanks so much for the questions. I guess another one on just the environment. I guess, can you just elaborate a bit on the I guess, the tone of the conversation you're having with Potential partners, I guess specifically have kind of the needs and objectives of some of these partners changed at all given the prolonged challenges in the biotech Funding environment and is that kind of changing the way you're thinking about the type of deals or structures of deals you're doing? And then the second piece of that It's just about the competitive landscape.

Speaker 5

So I guess with on one hand higher interest rates, but maybe on the other hand seemingly more involvement in of the large cap biopharma names Either like partner or acquire assets in some of the verticals that you're targeting as well. Are you seeing kind of a different competitive arena than you might have Thought about kind of 2 or 3 years ago or is that largely kind of the same as what you've experienced? Thank you.

Speaker 2

Thanks, Chris. Call. Chris, thanks. Andres, your question.

Speaker 6

Thanks for your question, Chris. The on the first one on the tone, As we we showed some pretty good slides at our last quarter quarterly call, which talked about just The number how the royalty market is growing and how our initial reviews have gone up, I think, 75% since 2019. So in the backdrop of the royalty markets growing 6 fold since 2015 in the sense of number of deals, 10 fold since 2015 in a number of dollar value transactions. With that as a backdrop, Call. Of course, the capital markets environment is challenging for biopharma right now.

Speaker 6

And I think that's In part what has led to a little bit of the increase in our number of opportunity sets. But keep in mind, In 2020 2021, the capital markets were extraordinarily robust and we still announced lots of transactions. So the tone of the market is 1 in which we see a lot of opportunity, but we're going to continue to be very selective And the deals that we do, so I guess that's how I'd answer the first question. And then the second question, as it relates to competition, Once again, we see some deals are competitive, some deals are not. The nature of the competition hasn't really changed.

Speaker 6

On the backdrop of the overall environment growing, this is a growing marketplace in biopharma Call. We continue to dominate that marketplace with greater than 50% share, especially on the larger transactions. So We certainly see a growing environment. We welcome competition. It's certainly there, but we feel very confident with our competitive Call.

Speaker 6

Advantages, especially around our cost of capital and our access to capital.

Speaker 2

I think our competitive Advantages have even increased since we went public in many ways, but we can talk about that more later if it's

Operator

The next question comes from the line of Steve Scala from Cowen. Steve, please go ahead.

Speaker 7

Thank you. I have two questions. First, GSK seems to be refocusing on respiratory overall after deemphasizing it a 2 years ago entering the chronic cough space is a recent example of that. I assume this could have Call. Is there any stipulations in the contract either Secondly, I think you've been asked this before, but given how quickly the market is developing, I thought it might be worth asking again.

Speaker 7

And that is that Royalty Pharma has no exposure to obesity. I can think of three reasons for this. Number 1, You have not come across opportunities 2, there are opportunities, but you don't like the molecules or terms Call. Or 3, you are not convinced on the size of the market. I'm wondering if you can tell us which of those 3 is the most prominent factor

Speaker 3

So on GSK and Trelegy, thanks for highlighting that. We are Excited to see GSK focusing on something like chronic cough, which is an interesting market and as you point out is Consistent with their focus on respiratory disease and the general medicine category. I don't think there's anything to answer your question, there's nothing specific In the contract with respect to that, although I would just highlight a couple of things. The first is, as part of diligence on that, We did get a sense of and tried diligence, GSK's commitment and investment in Trelegy And that was part of our evaluation process. But overall, taking a little step back, Trelegy is a good example of the types of products that we really get excited about.

Speaker 3

It's large. It's growing into a as highlighted on a previous question, a And underinnovated, unfocused on market and is really attracting investment and it is Call. By GSK and is a really important product over there. And I think when our interests are aligned with a great company like GSK's In a category where they're a real leader, that's the kind of thing that we get really excited about. On obesity, Thanks for bringing that up as well.

Speaker 3

Agree with you, such an exciting space with a lot going Call. It is a category of interest there and without kind of ranking your three factors there, I think we'll continue to apply our same approach there of looking for opportunities that where we can find a win win for us, Call. And we'll continue to apply the same strategy of looking For the right opportunities to get involved at the right time. But thanks for the questions.

Speaker 7

Thank you.

Operator

One moment for your next question. The next question comes from the line of Terence Flynn from Morgan Stanley. Terence, please go ahead.

Speaker 8

Hi, good morning. Thanks for taking the questions. Maybe for me on Tremfya, this is one of your larger potential royalty streams and there have I'd say a growing interest in new oral immunology drugs here. And so as you think about the implications of The entry of the TYK2 inhibitors are potentially an oral IL-twenty three. Maybe Marshall, how do you see this market evolving?

Speaker 8

And then just one follow-up on the kind of deal flow for the year, maybe any more metrics

Speaker 3

Call. Sure. Maybe I can start on the first one and Chris can comment on the second question. So on TREMFYA, Again, a medicine that we are really, really excited to have as a part of the portfolio and Having one of the best marketers in the world in Janssen behind it is some of the same themes that we just Touched on with Trelegy as well as why we're really excited about this. I think both the Putting together the incredible efficacy of Tremfya, the dosing convenience, the strength of the market, their position, Both in terms of physicians' minds, their position commercially, label expansion into I think we're really excited about Tremfya's future.

Speaker 3

We are following the entry of worlds. As we've seen historically, this space has had a really interesting and underestimated capacity to find roles for new products just given the need for patient choice and the unmet need here. And That's our view overall. I think we're still really we're excited about both categories of TREMFYA in the injectables as well as some of the really interesting things that are going on Call on the oral space. So that's our overall view there and Chris can talk about Call.

Speaker 3

Sure.

Speaker 6

Yes. So the as we stated in the past, Deal flow in any given year is hard to predict and can be volatile, which is why we describe our capital deployment targets over a multiyear period. So I would just Call. Encourage you to keep that in the back of your head. But obviously, last year, we executed $3,500,000,000 of announced transaction value and $2,000,000,000 of which was upfront.

Speaker 6

And already this year, we've announced $1,600,000,000 in transaction value, of which $600,000,000 was upfront. Call. We feel we're off to a great year. Last year, we looked at over 3.50 opportunities and less than 3% Of those opportunities, we actually resulted in transactions. So it's a very small percentage that we actually transact upon.

Speaker 6

Excited about our opportunity set and that's why we've raised our guidance and talked about the $10,000,000,000 to 12,000,000,000 Call. It's capital deployment over the next 5 years. We're very comfortable with that. So I think everything is really sort of ticking In the sense of the backdrop of the overall royalty market growing, as I mentioned, tenfold since 2015 and our opportunity set itself, We're really excited about the pipeline.

Operator

The next question comes from the line of Geoff Meacham of Bank of America. Geoff, please go ahead.

Speaker 9

Good morning. This is Susan on for Jeff. First, just a broader question. We've seen a lot of M and A deals this year and the valuations have been relatively high. Have you guys seen an uptick in asset valuations With the M and A environment getting better.

Speaker 9

And then 2, just a question on underinnovated markets. Can you tell us more about what's in the dominant assets in migraine so far.

Speaker 2

Sure. Thanks for the question, Suzanne. Regarding M and A, I think it's important to note that there are sort of different markets, right? When companies Our acquiring other companies, the pricing of those deals is based on different metrics than the metrics we use when we're acquiring royalties Call. And very different.

Speaker 2

And there's obviously, in some respect, the strategic components when Company acquires other company. And in our case, when we are investing in royalties, It's more of a financial driven analysis, where we're looking always at very attractive positive returns. And we've in the past covered what sort of returns we're seeking. But the other thing I would mention is that it's exciting to see all of this M and A activity happening because they do present opportunities for us to acquire royalties once the company has been acquired and the acquirers are more interested in potentially Selling non core strategic assets and there's been many transactions in the past that fall in that category. We're also working with acquirers Call.

Speaker 2

When they're looking at potential acquisitions, for us to partner with them And deploy capital side by side with them to make the acquisitions more efficient. And then maybe I'll turn it over to Marshall for the migraine

Speaker 3

Sure. Great question and a really interesting one. Overall, I think the things In earlier things in migraine are programs that we continue to monitor. But I think the really important theme to keep in mind is Call. The CGRP inhibitors in our mind, are still in the early innings of their rollout and their ability to really impact How migraine is managed.

Speaker 3

So I think it'll be great to watch in the years to come how Pfizer and AbbVie are able to really broaden You know, can continue to penetrate, into the still dominant triptan class and we're excited to see them do that. And also what happens globally as well. So that's I think that's the real focus on in our mind right now and we'll continue to follow What's happening in the earlier development stages.

Operator

Thank you. Your next question comes from the line of Umer Raffat of Evercore ISI. Umer, please go ahead.

Speaker 10

Hi, guys. This is Mike Giuffiore in for Umer. Thanks so much for taking my question. 2 for me. With respect to the IRA, the CMS guidance documents specifically call out the terms active moiety versus active ingredient Call.

Speaker 10

As it respectively pertains to identifying qualifying single source small molecule and biologic drugs, Call, whereby drug products, I. E. Small molecule products with the same active moiety will be considered single source Call. All that said, what are your thoughts on this? And does this influence your willingness to invest in royalties linked to reformulated biologic drugs?

Speaker 10

And then similarly, but separately, your thoughts on how the CMS

Speaker 2

Call. Sure. Marcia, you can take this question.

Speaker 3

Sure. Yes, thanks. Hey, Mike, good morning. So two questions there. I think first On the active ingredient versus active moiety question, that's something that we have talked with The external consultants and advisors that we use to as we continue to all follow IRA, You guys have done some interesting work there as well in terms of defining that issue.

Speaker 3

So something we continue to follow, I think It highlights an important point though, which is our overall Strength of our business model in this IRA era, which is as we learn new things, as about how the IRA will be implemented, Call. As we are and as we work through that, we can implement that in our investment process and are right now in terms of Looking at and it has become, I think, as for all of us, a really core part of how we look at every project, which is What is the potential exposure to IRA? What are the scenarios and work through that and fits really well with our scenario based approach that we've talked about Call. On fixed dose combinations, I think there the world seems a little bit more clear that those are considered Call. That they are considered kind of individual products, which was kind of consistent with our expectation and will have their own kind of Call from an IRA perspective.

Speaker 3

So that's our view. Like I said, we're continuing to follow it and confer with all the Outside advisors who we use to continue to process all the new learnings about IRA.

Speaker 10

Great. Thank you.

Operator

The next question comes from the line of Ash Verma of UBS. Ash, please go ahead.

Speaker 11

Hi, good morning. Thanks for taking my questions. So Just a different angle on the M and A. So as you look at the your deal making environment for royalties with these biotech companies, Do you think the M and A exit route for them directly competes with them trying to monetize the Call. And in your view, like do the strategic acquirers kind of prefer targeting wholly owned assets with Call.

Speaker 11

And so, biotechs might be hesitant to get into royalty agreements before if they want to sell eventually? Thanks.

Speaker 2

Ash, thank you for your question. But on our side, we're all shaking our heads, not really being able to listen to the first part of your question clearly. So So I don't know if maybe you can get closer to the microphone or something, but it was hard

Speaker 11

just to understand, sorry. Yes. No way. So here, Like, do you think when you're making these deals with the biotech companies, do you think that the M and A exit route for them kind of directly competes with I'm trying to monetize the asset wide, the royalty route. What I'm trying to get a sense is like if the strategic acquirers, do they prefer Call.

Speaker 11

Assets with unencumbered royalty, and that's why the biotech companies might be hesitant into getting a royalty arrangement with you if they eventually want Call.

Speaker 2

Chris, why don't you take the question?

Speaker 6

Sure. Thanks Ash for the question. Generally speaking, the pharmaceutical universe, right, I mean, just the history and I think we actually covered this in our Analyst Day last year with the slide showing just the number of partnerships and royalties associated with Products that are getting developed these days because the such a fragmented R and D process that there There's oftentimes royalties associated with every product or partnership profits or however you want to find that. Yes. That's just the nature of the universe that pharmaceuticals that's just the nature of the universe that we live in.

Speaker 6

And so, when pharmaceutical companies are looking at acquiring a company, they are modeling Whatever the economics of that product are and most of the acquisitions come with an encumbered product. So that's just very Regular way for large pharma when they're looking at a target. And they're used to that and so is Call. The companies that we talked to and obviously we had deals with Biohaven and Immunomedics Former person who did a lot of those transactions representing large pharma on the banking side, it's just part of the way they think about It's just the universe that they live in. And so it's not really something that prevents M and A and it's not really something that prevents

Operator

At this time, I'd like to turn it back over to Pablo for further comments.

Speaker 2

Sure. Thank you, operator, And 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. Thank you.

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Earnings Conference Call
Royalty Pharma Q1 2023
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