01—Abstract
Summary
Summary of the 10-K filed February 24, 2021. Cited figures are marked; the original filing is the authoritative source.
Royalty Pharma plc (RPRX) reports its 2020 results on Form 10-K, filed February 24, 2021, as the largest buyer of biopharmaceutical royalties.
The company holds royalties on more than 45 commercial products and five development-stage product candidates. In 2020 it generated net cash provided by operating activities of $2.03 billiona, Adjusted Cash Receipts of $1.80 billion, Adjusted EBITDA of $1.62 billion and Adjusted Cash Flow of $1.48 billion, and deployed $2.3 billion for royalties and related assets across nine new investments. Royalty receipts from growth products rose to $2.28 billion from $1.85 billion in 2019, led by the cystic fibrosis franchise, which generated $551.3 million in receipts, and Imbruvica, which generated $322.1 million.
Net income attributable to the controlling interest was $975.0 millionb in 2020, down from $2.35 billion in 2019, largely because 2019 included a $1.0 billion provision credit tied to the cystic fibrosis franchise. Following the June 2020 IPO, which raised net proceeds of approximately $1.9 billion, the company reorganized into a holding company structure, with non-controlling interests now representing 51% of total ownership.
The company funds operations through $6.0 billionc of senior unsecured notes with a weighted average coupon of 2.125%, and a $1.5 billion revolving credit facility that was undrawn at year end. Investors should note the accounting-driven volatility in income from financial royalty assets, the reliance on the top five therapies for 61% of royalty receipts, and the externally managed structure under RP Management, LLC.
02—Key points
Key Highlights
- Net cash provided by operating activities of $2.03 billion in 2020, up from $1.67 billion in 2019; Adjusted Cash Flow of $1.48 billion, down from $1.64 billion
- Growth product royalty receipts rose to $2.28 billion in 2020 from $1.85 billion in 2019, driven by the cystic fibrosis franchise ($551.3 million) and Imbruvica ($322.1 million)
- Net income attributable to controlling interest was $975.0 million in 2020 versus $2.35 billion in 2019, reflecting the prior-year $1.1 billion provision credit for the cystic fibrosis franchise
- IPO completed June 2020 with net proceeds of approximately $1.9 billion; the Class A ordinary shares trade on Nasdaq under RPRX
- Total debt of $6.0 billion in senior unsecured notes at a 2.125% weighted average coupon, plus an undrawn $1.5 billion revolving credit facility
- The top five therapies accounted for 61% of 2020 royalty receipts, and no single therapy exceeded 15% of royalty receipts
- Adjusted Cash Receipts declined to $1.80 billion from $2.11 billion, mainly due to $543.95 million in distributions to non-controlling interest
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 24, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $2.12B$1.81B | +17.0% |
| R&D Expenses | $26.29M$83.04M | −68.3% |
| Operating Expenses | $526.95M-$808.92M | +165.1% |
| Operating Income | $1.60B$2.62B | −39.2% |
| Interest Expense | $157.06M$268.57M | −41.5% |
| Net Income | $975.04M$2.35B | −58.5% |
| EPS (Basic) | $1.32— | — |
| EPS (Diluted) | $1.32— | — |
| Shares Outstanding (Basic) | 375.44M— | — |
| Shares Outstanding (Diluted) | 375.45M— | — |
05—Questions
Frequently Asked Questions
What drove the decline in net income attributable to the controlling interest in 2020?
Net income attributable to controlling interest fell to $975.0 million in 2020 from $2.35 billion in 2019. The filing attributes the 2019 result partly to a $1.10 billion credit to the provision for changes in expected cash flows tied to the cystic fibrosis franchise, which had no equivalent in 2020. In 2020, the company recorded $230.8 million of provision expense, including $156.2 million of current expected credit losses, and $65.1 million in impairment for omecamtiv.
How is the company's debt structured after the 2020 refinancing?
As of December 31, 2020, the company had $6.0 billion of senior unsecured notes issued in September 2020 with a weighted average coupon of 2.125%, maturing between 2023 and 2050. The notes replaced senior secured term loans that were fully repaid. The company also has a $1.5 billion five-year revolving credit facility, which was undrawn at year end. Total long-term debt carrying value was $5.82 billion.
What is the company's exposure to individual products and marketers?
The top five therapies accounted for 61% of 2020 royalty receipts, and no individual therapy accounted for more than 15%. Vertex was the largest royalty payor, accounting for 29% of total income and other revenues in 2020, followed by AbbVie at 19% and Gilead at 14%. The filing notes that the cystic fibrosis franchise's Trikafta patent is expected to provide exclusivity through 2037.
Why can reported income differ significantly from royalty cash receipts?
Most royalties are classified as financial royalty assets measured at amortized cost using the effective interest method. Income is based on forecasts of expected cash flows, largely derived from sell-side analyst consensus estimates, so changes in those forecasts can create non-cash provision charges or credits. The filing states that management believes investors should not look to income from royalties or the associated provision as a measure of near-term financial performance, and instead uses royalty receipts as the primary operating measure.
How is the company managed and what does it cost shareholders?
The company is externally managed by RP Management, LLC under a management agreement. Under the New Management Agreement, Operating and Personnel Payments are 6.5% of Adjusted Cash Receipts each quarter plus 0.25% of the GAAP value of security investments. Operating and Personnel Payments incurred in 2020 totaled $112.5 million. The Manager also has rights to Equity Performance Awards equal to 20% of Net Economic Profit on a portfolio basis, which the company does not currently expect to become material until the mid to late 2020s.
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