01—Abstract
Summary
Summary of the 10-K filed February 15, 2022. Cited figures are marked; the original filing is the authoritative source.
Royalty Pharma plc (RPRX) reported in its Form 10-K for the year ended December 31, 2021 that it is the largest buyer of biopharmaceutical royalties, with royalties on more than 35 commercial products and ten development-stage product candidates.
In 2021 the company generated net cash provided by operating activities of $2.0 billiona, Adjusted Cash Receipts of $2.1 billion and Adjusted Cash Flow of $1.8 billion, and deployed $2.7 billion of cash for royalties and related securities. Total royalty receipts were $2.61 billion, led by the cystic fibrosis franchise ($702 million), Tysabri ($369 million) and Imbruvica ($353 million). The top five product franchises accounted for 67% of royalty receipts.
GAAP results were mixed. Total income and other revenues rose 7.9% to $2.29 billionb, but provision for changes in expected cash flows from financial royalty assets increased to $452.8 million from $230.8 million, and consolidated net income fell 27.1% to $1.24 billion. Net income attributable to the controlling interest was $619.7 million, or $1.49 per diluted Class A share, versus $975.0 million in 2020.
Management states that royalty receipts, not GAAP income from royalties, are its primary operating performance measure, because the effective-interest accounting for financial royalty assets makes reported income volatile. Balance sheet and capital position: long-term debt was $7.1 billionc (senior unsecured notes with par value of $7.3 billion, weighted average coupon of 2.24%), cash and cash equivalents were $1.5 billion, and the $1.5 billion revolving credit facility was undrawn. The company paid $285.2 million in dividends ($0.17 per quarter), and the filing notes the company is externally managed by RP Management, LLC.
02—Key points
Key Highlights
- Largest buyer of biopharmaceutical royalties; 2021 total royalty receipts of $2.61 billion across more than 35 commercial products.
- Cash flow metrics for 2021: operating cash flow $2.0 billion, Adjusted Cash Receipts $2.1 billion, Adjusted Cash Flow $1.8 billion.
- Deployed $2.7 billion in 2021 for royalties and related securities across five separate transactions, including Cabometyx/Cometriq, Oxlumo, Tremfya and seltorexant.
- Top five product franchises accounted for 67% of 2021 royalty receipts; no single therapy exceeded 19% of royalty receipts.
- GAAP net income attributable to controlling interest fell to $619.7 million ($1.49 per diluted share) from $975.0 million, driven by a $452.8 million provision for changes in expected cash flows and lower other income.
- Total debt of $7.3 billion par value at a weighted average coupon of 2.24%, with $1.5 billion undrawn revolver; the company issued $1.3 billion of new senior unsecured notes in July 2021.
- Quarterly dividends of $0.17 per Class A share totaled $285.2 million in 2021.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2021filed February 15, 2022Financial Statements
FY2021 against FY2020
| Line item | FY2021FY2020 | Change |
|---|---|---|
| Revenue | $2.29B$2.12B | +7.9% |
| R&D Expenses | $200.08M$26.29M | +661.1% |
| Operating Expenses | $858.75M$526.95M | +63.0% |
| Operating Income | $1.43B$1.60B | −10.3% |
| Interest Expense | $166.14M$157.06M | +5.8% |
| Net Income | $619.73M$975.04M | −36.4% |
| EPS (Basic) | $1.49$1.32 | +12.9% |
| EPS (Diluted) | $1.49$1.32 | +12.9% |
| Shares Outstanding (Basic) | 414.79M375.44M | +10.5% |
| Shares Outstanding (Diluted) | 414.80M375.45M | +10.5% |
05—Questions
Frequently Asked Questions
Why does reported GAAP income differ so much from cash receipts?
Most royalties are accounted for as financial assets under the effective interest method, so income is recognized as accretion on a forecast of future cash flows. Changes in sell-side consensus sales forecasts create non-cash provision expense or income. The filing states that management uses royalty receipts as its primary operating performance measure, and that investors should not use royalty income as a measure of near-term performance.
How concentrated is the royalty portfolio?
The filing states that no individual therapy accounted for more than 19% of 2021 royalty receipts, no therapeutic area more than 29%, and no marketer more than 27%. The top five product franchises together accounted for 67% of royalty receipts. Vertex, as payor on the cystic fibrosis franchise, was the largest royalty payor at 33% of total income and other revenues.
What drove the increase in the provision for changes in expected cash flows?
The filing reports total provision expense of $452.8 million in 2021, primarily from provision expense for Tazverik, Imbruvica, Emgality and the cystic fibrosis franchise due to declines in sell-side consensus sales forecasts. This was partly offset by provision income for Tysabri. Provision expense for current expected credit losses was offset by a $12.9 million credit.
What is the company's debt profile and liquidity position?
As of December 31, 2021, senior unsecured notes totaled $7.3 billion in principal, with maturities spread from 2023 through 2051 and a weighted average coupon of 2.24%. The company held $1.5 billion in cash and cash equivalents and $581.9 million in marketable securities. The $1.5 billion revolving credit facility was undrawn, and the company stated it was in compliance with its covenants.
What are the main risks to future royalty cash flows?
The filing cites product sales risks from pricing pressure, competition, generic or biosimilar entry, and loss of patent protection; marketer dependence and possible license termination or insolvency; and reimbursement and regulatory changes. It also notes that the Trikafta patent expiry in 2037 may lead to sales declines, and that royalty durations are estimates that may change.
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