Q3 2022 Royalty Pharma PLC Earnings Call

November 8, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

The conference will begin shortly.

Raise your hand during Q&A, you can dial star one one.

[music].

Yeah.

Ladies and gentlemen, thank you for standing by welcome to the royalty pharma in third quarter earnings Conference call I would now like to turn the call over to George graphic SVP 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 as of third quarter of 2022 results you can find the press release with our earnings results.

Call on the investors page of our website at royalty pharma in Dot com.

Moving to slide three 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.

For you to our 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 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 available on our website.

And with that please advance to slide four.

Our speakers on the call today are <unk> founder and Chief Executive Officer, Marshall Your EVP head of research investment and Terry Cohen, EVP Chief Financial Officer.

Pablo will discuss the key highlights after which Marshall will provide a portfolio update and Terry will review the financials.

Following concluding remarks from Pablo we will hold the Q&A session, Chris Pitre, Vice Chairman will also join 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 quarter of strong execution on our strategy as a leading funder of innovation in life Sciences.

Slide six summarizes our financial and portfolio achievements in the third quarter, which again underscore our strong momentum and the power of our business model.

First we delivered solid financial performance, despite significant headwinds from foreign exchange and a one time benefit from a solid milestone in the third quarter of last year.

Adjusted cash receipts, our topline grew by 2% adjusted EBITDA by 3% and adjusted cash flow our bottom line by 26%.

Second we have announced transactions of $3 billion year to date, including our innovative R&D funding collaboration with Merck.

This is an exciting model for future potential partnerships with large biopharma and Marshall will expand on this later.

More broadly our overall rate of capital deployment that reflects the strong demand for innovative royalty based funding solutions.

Third.

We saw positive progress across our portfolio Pfizer close this acquisition or by a haven, which has resulted in accelerated value creation to royalty pharma.

We have a deep development stage portfolio with 13, new molecular entities and approximately 40 projects in late stage development <unk>.

Impressive figures, which drive of many large biotech companies.

Lastly, we're raising our full year guidance for adjusted cash receipts.

Terry will take you through the details later, but we now expect growth of 29% to 32%.

Baird with 7% to 10%.

At the time of our Q2 results.

This increase largely reflects the acceleration of our commercial launch capital payments, resulting pro Pfizer's acquisition of Bai Haven.

Which has been one of our most successful partnerships since our IPO.

In addition, our overall portfolio of royalties continued to perform exceptionally well.

I'll also remind you that our guidance excludes the potential benefit of any investments that we may make over the remainder of the year.

On slide seven you can see our financials in a little more detail.

In the third quarter, we delivered 2% growth in our top line.

We estimate that foreign exchange had an approximately 4% negative impact on the quarter.

Furthermore, we had a headwind of $37 million relating to a one time milestones on <unk>.

In the prior period.

Without the impact of these two factors, we would have delivered another quarter of strong double digit top line operational growth.

Consistent with our top line, we grew our adjusted EBITDA by 3%.

Adjusted EBITDA is unimportant non-GAAP measure for US, which is arrived at by deducting operating in professional expenses from our topline.

Lastly, our adjusted cash flow our bottom line.

Grew by 26%.

This significant increase primarily reflect the differences in the size of the upfront development stage payments in the third quarter compared to last year's third quarter.

Slide eight shows our track record of strong topline growth since our IPO in June of 2020.

We delivered an impressive 9% growth of adjusted cash receipts year to date, despite headwinds, which particularly impacted the third quarter, including two of our top royalties ending HIV and DPP four.

This speaks to the power of our business model and our ability to continue to replenish our portfolio with market, leading therapies through value enhancing deals.

Few of our peers in Biopharma could lose two other top products and still demonstrate such impressive growth.

Yes.

As I mentioned earlier Pfizer's acquisition of Bio Haven, which closed in October accelerated value creation to royalty pharma shareholders.

On slide nine from a bigger picture perspective.

I wanted to expand on our Biohacking experience and talk more broadly about how we have become a critical funding partner for successful biotechs.

When we look across immunomedics bio Haven, cytogenetics, and Biocryst and all this cases are partnerships have resulted in royalty pharma, providing a critical portion of their funding needs.

Alongside more traditional equity and debt funding.

And this instances our approach was highly customized to each partner's needs and we used a variety of funding tools, such as royalties commercial launch capital and equity purchases.

For royalty pharma, our investments will generally be validated by the successful development and commercialization of the ferret therapies on which we have royalties.

And in certain cases, such as immunomedics and bio Haven by the accelerated returns we achieve for our shareholders, resulting from their acquisitions by larger Biopharma companies.

The biotech funding model using a variety of sources of capital includes royalties has proven to be successful for our partners and we believe should represent the new funding model.

Most successful biotechs use in the future.

With that I will hand over to Marshall to update you on our portfolio.

Thanks, Pablo and let's move to slide 11.

We're delighted to announce our recent R&D funding collaboration with Merck revitalizing R&D funding partnerships has been an important initiative at royalty pharma and we think this collaboration structural will serve as a model for future transactions between royalty pharma and large biopharma companies, we see plenty of opportunity here to protected scale of large biopharma.

R&D spend one trillion dollars cumulatively over the next five years should create opportunities for royalty pharma at a fund exciting late stage programs across the industry.

The advantages we can offer to large biopharma are clear we are a true partner for Biopharma.

We're able to participate in clinical development as well as the full trajectory of commercialization around the world.

In addition to risk sharing we can provide capital at scale, allowing our partner to optimize their R&D spend across the broadest opportunity set.

In addition, our rigorous diligence process provides independent validation of the opportunity and as we have consistently demonstrated we can be flexible and creative in our structure.

Lastly, we are long term partners and have built enduring relationships that reflect our unique role in the life Sciences funding ecosystem.

Slide 12 provides the details of our collaboration with Merck.

Summary, royalty pharma has agreed to provide up to $425 million to co fund the clinical development of NK 81 to 89, an oral PD <unk> inhibitor in phase III development for schizophrenia.

Our excitement about this pipeline therapy comes from our view that MK 80, 189 has the potential to demonstrate efficacy similar to the standard of care with a differentiated safety profile <unk>.

The structure of this deal highlights our uniquely flexible approach to alignment with our partners.

Our investment can be scaled following program Derisking and royalty pharma will make an independent decision to co fund a phase III program.

We agreed to pay $50 million upfront to support the ongoing phase III program pending the results of this large randomized controlled study we have an option to provide $375 million and additional funding if Merck decides to proceed to phase III development.

In return for our co funding royalty pharma will be entitled to a royalty on annual worldwide sales of MK 80, 189, as well as milestone payments with U S branded schizophrenia sales of around $5 6 billion. This could represent an important royalty stream as we look towards the back half of this decade and beyond.

On slide 13, I want to expand on the breadth and depth of our portfolio. We now have the potential to receive royalties on approximately 40 projects in late stage development.

The size and diversity of our development stage pipeline, we think compares well with many of the largest biotech companies as you can see Andrew side, we have considerable therapeutic area of diversity in our pipeline, although oncology currently accounts for around half of these projects.

We anticipate our pipeline will continue to grow as we invest in both approved and development stage medicines in the years to come.

Moving now to slide 14, and the expected clinical and regulatory events for our portfolio over the next year.

We have a significant clinical news expected over the remainder of 2022. The recent phase III results for <unk> were disappointing. However, we anticipate phase III readouts for several potentially transformative therapies over the remainder of the year, including results from Cabo medics in combination with immunotherapy and of course get to narrow mab in Alzheimer's.

In 2023, we anticipate readouts from up to seven important phase II programs, including <unk> in major depressive disorder <unk> in non metastatic prostate cancer Appy campaign in obstructive hypertrophic cardiomyopathy and oral <unk> in migraine prevention.

On the regulatory front, we expect an FDA decision on PTO two seven announcement in the coming months and in 2023, we anticipate FDA approval decisions untreated Lv and third line hormone receptor positive <unk> negative breast cancer, an intranasal divert Japan in migraine and <unk> <unk> in heart failure.

Many of these milestones present, the opportunity to deliver on our mission of accelerating innovation in life science to transform patient lives with that I'll hand, it over to Terry.

Thanks, Marshall, let's move to slide 16.

Total royalty receipts were broadly stable in the third quarter versus the year ago period.

Growth drivers in the quarter included the cystic fibrosis franchise, Andy Chien fire and the <unk> royalty, which we acquired in July .

We also saw solid growth contributions from cosmetics Promacta, our biohacking partnership and they are not shown on this slide for mid risky trade Lv and northern data.

These positive factors were partially offset by the end of the royalty term for the DPP four inhibitors to sleep a milestone receipt in the prior period and prove up the weakness and the unfavorable FX impact.

Slide 17 shows how our efficient business model generates substantial cash flow to be redeployed.

As you are aware adjusted cash receipt to the key non-GAAP metric for us, which we arrive at after deducting distributions to noncontrolling interests.

This amounted to $597 million in the quarter growth of 2% compared with last year's third quarter.

Without the impact of the <unk> milestone payment growth would've been 9% while growth would have been low double digits. If we adjust for the estimated foreign exchange impact.

As we move down the column operating professional costs were approximately 8% of adjusted cash receipts.

On a year over year basis, operating and professional cost cost declined by 9%.

As a consequence, we've reported 3% growth in adjusted EBITDA in the quarter.

With the growth in our top line.

As Paolo noted adjusted EBITDA is an important non-GAAP financial measure for us and one of the three key non-GAAP metrics by which we measure our business performance.

When we think of the cash generated by the business to then be redeployed into new value enhancing royalties, we look to adjusted EBITDA less net interest paid.

Net interest paid in the quarter of $75 million reflected the semiannual timing of the payments on our $7 3 billion of unsecured notes, which occurred in the first and third quarter and offset by the interest received on our cash which has been approximately $11 million year to date.

After the $25 million upfront payment for development stage funding of Amp velocity and other items, we generated adjusted cash flow our bottom line of $441 million or <unk> 73 per share for the third quarter.

This resulted in an adjusted cash flow margin of 74%.

Once again highlight the efficiency of our business model.

Let's now move to slide 18, and our financial position.

We continue to maintain significant financial firepower for future royalty acquisitions.

Year to date year to date, we have generated adjusted EBITDA less net interest paid of $1 $4 2 billion.

Again this is the cash the business generates to reinvest or return to shareholders.

We have deployed $2 1 billion of capital on royalty acquisition, as well as $362 million on dividends and distributions bringing.

Bringing our cash and marketable securities to $1 1 billion at the end of September .

Shortly after the quarter end, we received $508 million net cash related to Pfizer's acquisition of <unk>, which would bring our pro forma cash and marketable securities to 164 billion.

Yes.

Excluding this pro forma balance sheet adjustment our leverage stands at two eight times net debt to EBITDA and three four times total debt to EBITDA.

As a reminder, the fixed rate average coupon on our debt is slightly above 2%, which compares with our target returns on royalty acquisition in the high single digit to teens percentage range.

I would also note that around 60% of our debt matures in 2030 or beyond.

Given our financial strength and efficient business model, we feel well positioned to execute on our business plan and create value for shareholders.

On slide 19, we are raising our full year 2022 financial guidance.

We now expect adjusted cash receipts to be in the range of $2 75 to $2 8 billion.

An increase of between 29 and 32% over two over the $2 1 billion, we delivered in 2021.

This substantial raising guidance largely reflects the accelerated biohazard payment of $458 million we received in October .

The other payments underlying our topline guidance are essentially unchanged from those we described at the end of our Q2 earnings.

And consistent with our standard practice. This guidance is based on our portfolio as of today and does not take into account any future royalty acquisitions.

Turning to our operating costs, we expect payments for operating and professional costs to be approximately 8% to eight 5% of adjusted cash receipts in 2022.

Which is lower versus our guidance from August .

Our operating cost guidance reflects both the higher expected adjusted cash receipts are relatively low fixed cost base.

The degree of margin protection provided by our unique business model as we think especially impressive in today's inflationary environment.

Finally.

Interest paid for full year 2022 is still expected to be around $170 million.

Unchanged from our prior expectation.

On slide 20, I wanted to drill down further on our adjusted cash receipts guidance.

Graphic is illustrative I'll provide the various pushes and pulls behind our raised top line outlook for 2022.

Starting with the left hand side, we continue to expect strong performance from our diversified royalty portfolio.

And the addition of trilogy of the trilogy royalties in the second half further enhances this growth.

The end of our HIV and DPP four royalty streams and improved performance are expected to partially offset the strong growth in our portfolio.

As I have noted.

<unk> strength of the U S dollar against key currencies is expected to adversely impact growth by around 3% to 4%.

$65 million to $85 million for full year 2022, compared to full year 2021.

As a reminder, we estimate that approximately 40% of our adjusted cash receipts to regions outside the United States.

With the euro representing the most significant portion of our ex U S exposure.

If you exclude the <unk> payments, we are tightening the range relative to our previous guidance, maintaining the higher end and increasing the low end.

To deliver high single digits low double digit topline growth is we think a tremendous achievement with the loss of two of our prior top royalty streams as well as significant FX headwinds.

We believe this speaks to the strength of our unique business model and our diversified royalty portfolio.

And on the right hand side, you can see after layering in the accelerated by our Hayden payments, we are guiding to full year top line growth of between 29% and 32%.

To close I want to highlight a few factors on 2023 to help with your modeling.

First foreign exchange is expected to adversely impact growth by approximately 3% to 4% for full year 2023 compared to 2022, assuming today's rates remain constant next year.

And second.

While we are optimistic heading into pfizer's producer for intranasal advent, Japan in the first quarter of 2023, which would result in an accelerated $475 million payment to royalty pharma if approved.

We do not plan to include that milestone in our 2023 guidance before approval.

We plan to provide full year 2023 guidance when we report fourth quarter 2022 earnings early next year.

Consistent with our standard practices guidance.

Exclude contributions from any future investments.

With that I would like to hand, the call back to Pablo for his closing comments.

Thanks Terry.

So another.

One quarter of strong business momentum and we're on track to deliver excellent results in 2022.

My final slide shows that we are executing well against the updated capital deployment plan, we set out in May.

So far this year.

Brought many important new medicines into our portfolio.

<unk> from development stage therapies to unapproved category, leading blockbuster with significant remaining growth potential and.

And including some of the highest caliber marketers in the industry.

The $3 billion announced value of this transaction puts us well on track to achieving our five year capital deployment target of 10% to $12 billion and to deliver the attractive compounding growth profile that we described in detail at our Investor day.

Lastly, while our development stage pipeline has grown very nicely over the past couple of years around two thirds of the capital. We deployed this year has been for approved therapies given the size of the trilogy to deal with.

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.

If you'd like to ask a question. Please press star one one.

Our first question comes from Geoff Meacham with Bank of America. Your line is open.

Good morning, guys. Thanks for the question.

I had a couple of quick ones.

<unk> I know, it's not in your guidance, but if.

If successful the royalties could be pretty impactful over time. So how do you think about this from a cash planning.

Planning context.

Question is from a policy perspective, how does the IRA informed.

At all of our royalties are investing and you look at smart <unk> final.

Biologics.

Same question for launch longer term the potential risk of heavy discounting it. Thank you.

Thanks, Jeff So Terry is going to answer the first question.

And then Marshall will answer the question on the IRA.

Yes, hi, Geoff so.

<unk>.

Yes.

All very eager to see against an air map data later this month.

But as you know we've taken a pretty conservative approach we.

Did not include <unk> in any of our long term guidance figures.

Do recognizing that it is higher risk.

But if it were to work I think theres a lot of reasons to be pretty optimistic that it could be a pretty nice selling drug and so.

Think.

At that point, we would we would look to obviously, we want to see the data.

But I think.

If it if it is it looks like it could be a big selling drugs and I think that that's something that we would look to incorporate into our guidance.

Over time.

And thanks, Jeff for your question on the IRR, So three points I'd make there on how we're thinking about it. The first is as we've highlighted previously that I think that our ability to respond to this in immediately and begin to pivot and think about.

And our new investments immediately kind of highlights.

The flexible nature of our business model, So we feel really good.

Our ability to continue to execute even in the era of the IRI.

Is that there is probably still chapters to be told in terms of exactly how this law will evolve how it will exactly be implemented so we're watching and learning with with our consultants and alongside everyone else too as that plays out and then finally, all that being said, we certainly have already started to implement.

IRI scenario planning in our new investments and thinking through the implications as you said for things that are.

Things that are small molecules versus versus large molecule and how that impacts our thesis and looking at different scenarios that being said I think our focus on really wanting to add high quality innovation to our portfolio remains the driver of our strategy.

Thanks Scott.

Operator next question please.

Our next question comes from Chris <unk> with Goldman Sachs. Your line is open.

Yes.

Good morning interested to get your thoughts on the Merck partnership in particular are there certain therapeutic.

Categories that do you sense that the large cap on those might be more willing to engage noting that this one is in the CNS space.

And then secondly, it does seem as if that it is a little bit earlier in terms of stage of development phase to be that this partnership has an initial point of intersection can you comment about that thank you.

Sure, Hi, Chris and Bob Marshall and Chris will actually answer your question.

How about Chris I'll answer the second part of your question and then EMEA, Chris can comment on your first about therapeutic areas and or not that people are interested in I think in terms of the fact that MK 8089 is a little earlier in development I think is a good. It's a good question and I think highlights one of the great things about the structure.

Which is that it is earlier in development, but the way that we have structured. This is that we have made a small contribution to the phase <unk> development and then once we see the data completely understand the product profile.

Its efficacy its safety.

And the <unk>.

Development landscape at the time, we can then make an investment at that point, which would be at a stage, where we would typically where we typically made their development stage investments in the past. So we think that they are really interesting and novel part of the structure and is really matched kind of matching to the program and trying to solve problems with our partners.

But I'll pass it to Chris for your first question.

Chris on the therapeutic area question and I referenced back to Marshall Slide and the prepared remarks, we've invested across a number of different therapeutic areas and so we.

Our agnostic the therapeutic areas as it relates to the pharmaceutical companies what I would say is what we're really striving for when we partner with them is we want to partner with them on what they perceive to be and what we perceive to be their most important therapeutic programs.

And I think in that regard that's what we've done here with Merck in the way we structured the deal as Marshall just went through they.

They actually.

Need to decide whether to advance it or not in phase III and only then we get to decide whether to opt in to contribute to that funding in phase III, which we think aligns our interests quite well.

Operator next question please.

Okay.

Our next question comes from Chris Scott with Jpmorgan. Your line is open.

Hi, this is <unk> filling.

Selling in for Chris Schott I appreciate you taking our questions.

And as a follow on to Jeff Great question.

So while the industry is still looking for clarity on the IRI. How do you think that kind of impacts your focus on oncology versus other therapeutic area.

Sure Marshall what have you picked up question sure. Thanks for the question. So I would say at a high level.

Nothing about our approach.

Our focus on various therapeutic areas has really changed in this early period since the IRA I think we are certainly as I mentioned.

In earlier question thinking through the implications for various programs and I think we have to be comfortable.

With the Iras scenarios that we've worked through but I think we're still as I said before really focused on trying to identify exciting innovation and products that we really want to add to the portfolio and that will remain our focus.

Okay. Thank you and then the second question is in the higher interest rate environment, Yes, Hollywood deal terms time change to reflect the higher cost of capital.

One of them.

Yes sure.

It's dynamic, but I think certainly.

I think there's a couple of ways to answer that question first is the opportunity set I think that we feel like we're seeing a lot of lot of different things that we're able to look at and as you know we're super selective.

When we actually do decide to invest.

But I think the top of the funnel certainly is seeing the benefits of that.

The broader macro environment.

And then in terms of.

The terms certainly there is some upward sort of.

Pressure driven by higher rates that sort of natural as that.

In a higher rate environment that we would expect that our returns would would tick up a little bit as well.

Thank you appreciate it.

Operator next question please.

Our next question comes from Stephen Scouten with Cowen Your line is open.

Thank you and congratulations on the good quarter I have two questions regarding the collaboration with Merck for MK 80, 189 in phase II schizophrenia. This product was in phase III at Merck in 2017, and perhaps earlier so at least five years why has the product.

Been in development, so long and what does this remaining patent life.

It seem that Merck has really nothing more than modest interest in this product.

Secondly, the <unk> graduate trials are large and complex and will be presented in 2002 days between now and then the two studies need to be analyzed.

Take the pooled presentation prepared are you surprised that the data has not been press released yet and has the data have been shared with RP Rx.

All things considered one might conclude that the data is not leading to a definitive result.

And honestly the fact that you gave at only passing mentioned in the prepared remarks doesn't build confidence. Thank you.

Sure Marshall.

Both questions sure. Thanks, Steve So on 81 to 89.

During our.

Our diligence process and working with Merck, we spent a lot of time understanding how they think about this product what the strategy is what the questions are being asked about the product in this next phase <unk> program and got comfortable that we were aligned on what the product profile needed to look like as we.

Heading into the next stage and that would be and that would constitute an interesting and.

Potentially interesting product for both of Us and I think that was the basis of our.

Our agreement and why we structured this the way that we did like I mentioned with a relatively small upfront and then something much larger when we can both really understand this products ultimate commercial potential.

You asked about patent life as you might imagine IP diligence is really core to royalty pharma and important part of what we do so you can assume that we were comfortable.

There is.

Sufficient runway for in terms of patent life for for this to be a successful product commercially and two of them are to continue to invest in it post approval before it before you go to <unk> I mean, maybe it's just a very.

Top level comment to make here is that.

As you know drug development to sort of modest straight line exercise.

Things change over time, and obviously the the history of the past matters, but what is really important is what's going to happen in the future and Thats why we pay most attention to we obviously look at what's happened historically, the data and all of that but anyway I just wanted to interject that it but go ahead Marshall with other seriously.

And the second part of your question on Gan to narrow map.

So first to be clear, we haven't seen anything more than you. All had so we are eagerly awaiting the data as well.

I don't think we interpret the fact pattern necessarily the way you describe it Roche we trust in Roche to put the data together a process the data and do it in the right way and put it out there in the data is going to be what it's going to be and we're excited to see it I think.

The way we've talked about it in terms of the fact that there is risk there the way carriers talked about it in the context of our long term projections has been I think very consistent so I think no change on our call here that we are excited we're excited about this product it would be a really nice addition to our to a nice addition of our portfolio.

But even without it we are really excited about about our business and our prospects for growth.

Thank you.

Thanks, operator.

Operator next question please.

Our next question comes from Terence Flynn with Morgan Stanley . Your line is open.

Alright, gentlemen, Phillips all pretense thank.

Thank you for taking my questions and congrats on the quarter. So just one for me.

<unk> is hosting an AD contracts Seneca PTO 2007 today Annie.

Any perspective, you can share on your view of the likely outcome and remind us of the commercial opportunity.

Sure Marshall another question for you yet excellent thanks for asking about <unk>. So.

Meet with the AD Com. This morning, I think we feel good about really good about the about the data and the prospects for approval on.

On that one as a reminder for everyone. This is a first in class novel combination of steroid in a short acting beta agonist, so using a steroid in the on demand setting our win asthma patients feel shortness of breath is there is a really interesting idea and one that we are.

And one that we're excited about the commercial opportunity is really exciting I think when you put together the size of the asthma market, which we all know is one of the largest.

One of the largest commercial markets out there astrazeneca.

Long and enduring infrastructure in this setting and the fact that consensus for <unk> seven is nearly $1 billion by 2030 is that we are really excited about.

Really excited about the commercial opportunity so the AD comm today, we've all seen that phase III data. The trial showed a very convincing benefit on asthma exacerbation. So we feel really good about the efficacy and safety profile, they're in and we're excited to see <unk> play out.

Okay.

Yes.

Thank you operator next question please.

Next question comes from Andrew Baum with Citi. Your line is open.

Thank you couple of questions.

First one in relation to the <unk> I think this is the first synthetic royalty deal you've done with large pharma since the palace <unk> scale, which obviously you didn't have the outcome.

Arguably you would.

Wanted.

I guess the concern is that large well capitalized pharma company just doesn't have the same capital constraints with midcap and therefore, the assets that are willing to offer up are going to be the <unk> heavily belief in less.

No youll structure in.

In terms of the phase II addressed in fact derisked that.

But you're still going to be investing up to $312 million for the phase III sorry, just when you think about the equivalent opportunities does that figure into your thinking at all.

Sir Robert motivations touches assets in non core areas, which could make talbots hands full for royalty. So that's the first question. The second question is.

Again for the Mark asset.

In terms of allocating that $300 million.

Do you have a say in exactly where and which indications you opt into and do you have any input to the design of the trials given youre going to be investing potentially a substantial part of the phase III costs. Thank you.

Yes so.

A few comments and then I'll pass it onto Chris, but I think.

We tend to be passive.

This.

Kinds of collaborations.

And we often do share our views with the.

The companies.

Sort of up to them.

Whether they want to.

Take our comments were not it has happened in the past that they have actually.

Taking our comments.

Or views perspectives.

Use that.

And their own clinical development, how they think about clinical development. The other comment the way your startup.

The comment was by making reference to.

<unk>.

Hi restaurant section, we did which was quite some time ago and I think.

From a very big picture perspective.

This kind of financing are quite novel, we're being very creative here. So one thing to say is that it takes time for us to actually change the mentality among those big companies.

And how they behave.

And it's obviously an effort that we're very excited about.

Because we see huge potential in collaborating with big pharma, but it takes time, we have to go in we have to talk to senior management and tried to explain the benefits of a transaction like the one with with Merck.

You mentioned that.

They were cash rich or something to that extent that they had a lot of cash which is totally threw a lot of these companies have a lot of cash on their balance sheet. So it's not.

The decision to actually collaborate with us is not driven by by there.

Lack of cash or excess of cash it's actually driven by several other things that are quite important to them one is risk mitigation.

That deal for example.

If you look at the amount of capital Thats required to.

To bring this drug to market, it's about $1 1 billion and we're going to contribute about 425 million in total which is very very significant for a small share of the economics and then just.

Do the math, there and realize that.

It's a very significant risk mitigation exercise on their part for a small portion of the economics and then the other.

Jennifer they've got is that by us.

Investing close to 40%.

Hi, <unk> percentage of the capital required in this asset.

<unk>.

And the development of this asset.

Essentially frees up capital that they can redeploy.

And invest in other assets are very excited about.

And so.

So it sort of gives them a greater P&L bandwidth and they are able to have more shots on goal now one key thing here is that when we go and talk to these companies.

They're very very important thing, we say to them is we really want to be collaborating on your top.

Projects.

Top three top five top 10, among the bottom of the list and what we often say to them is.

For us to be working with you five or 10 years from now we have to sort of win here when with your partner.

So we need to be working on the top.

Your top programs and then.

Partner partner with you on those.

Not the ones that sort of going to make the cut so and we go through.

<unk>.

So understanding a lot of different things that really led us to conclude that this is one of the programs of this company and Thats, what we often do with others, but Chris maybe you want to talk about therapeutic areas or other aspects of the question sure. Thanks Pablo just.

To add onto what Paolo said.

Andrew and thanks for the question just on the question of allocation do we have a say.

Which is I think your second question we.

We're obviously going to see the phase III data.

And have access to their plans around phase III and their decision to proceed with phase III before we have to opt in and I think that gives us a lot of comfort and understanding what their program is once we opt in we do not we don't have a final say on how they're going to allocate the dollars for <unk>.

The freenet or other.

Actual indications so thats your answer to your second question as it relates to just to add on the first part of your question that you asked.

Pharma as we've talked about at our analyst day profitable pharma is going to spend over one six trillion dollars in R&D over the next 10 years.

And as you've seen there's a lot of large farmers that.

Partner to launch drugs.

And so they want to risk share and we are happy to risk share on their most important programs and we can do it in a way that we think is very competitive with risk sharing with other large farmers, we have lower cost of capital the most global.

Global pharmaceutical companies out there. We're also passive importantly, so we're not going to demand 50, 50 commercialization rights in the United States our seats on their GTC as I explained in the second part of your question. So we think there's a lot of advantages to large pharma thinking about us as a potential partner to the most important programs.

Rather than partnering up with another pharma, where they have to.

Sit on GTC committees are GSE committees and share commercialization rights and the most important markets in the world.

Thank you Andrew Operator, we'll take next question. Please.

Okay.

Our next question comes from <unk> <unk> with Evercore ISI. Your line is open.

Hi, guys. This is might be fury and for warmer and thanks. So much for taking my question and congrats on the quarter two for me one again.

A question on the Merck deal.

I understand that again.

Royalty pharma is upfront financing gives him and ask him to provide bigger financing later for a product that's well aligned with its interest but again. The fact that Merck is asking $50 million for this early stage funding. It doesn't suggest at least now high confidence in this product.

Especially since it's been in phase II limbo for some time now.

Any any color to be added here on their confidence in the product.

And aside from better safety, how competitive could this.

<unk> <unk>.

B in terms of efficacy. So that's my first question.

Second question is that just given the nearly $3 billion of capital deployed year to date.

And the fact that your forecast one trillion dollars in cumulative industry spending through 2027, okay.

Any thoughts as to when the long term average annual capital deployment calls of $4 5 billion that were previewed at your Investor Day May kick may kick in where are they.

Is it more more of a near term thing that we should expect this level of spending or.

Or more towards the latter end of the decade. Thank you.

Sure I think.

Thus.

Sort of the smaller size of the investments.

Initially for US is more a reflection of the fact that the cost of of the first route.

Is not as big of the later stage trials right. So so it's.

It's commensurate with the overall cost of the initial trial.

The place to be.

And Marshall.

More things to that but then regarding the question about capital deployment.

<unk>.

And the fact that the.

Requires.

Huge amounts of capital, whether you look at biotech or big pharma.

If you look at five or 10 years, but it's in the many several trillions of dollars.

As I've explained in the past, we see our business with a core.

More predictable more stable.

Capital deployment.

From a.

A lot of the deals that we're doing with biotechs hybrid.

And synthetic royalties.

And we feel confident that those deals on a yearly basis.

No.

Allow us to deploy.

Close to $2 billion somewhere between 1 billion and a half from $2 billion and then if you add to that one off transactions that are.

<unk>.

Larger and you saw this year one that's quite large.

With trilogy, or you saw last year. Another one that was quite large.

Morphoses 2 billion orders.

Those one offs.

Will.

The overall capital deployment meaningfully.

So getting from the two to two and a half that we have guided through to them.

Sort of <unk>, two 5 billion.

Should happen overtime and will also be a function of us having those larger one off transactions included.

Over the next three to five years and I think it's likely that we will account for those larger transactions I don't know.

If every year, but but certainly over a three to five year period, there will be several of those but Marshall one of you maybe if you want to add anything on the.

Merck transaction Merck collaboration question and then Chris if you want to add anything on the customer. Please go ahead.

Sure Mike. Thanks for thanks for the question. So I think in terms of the structure and the amounts involved it's important to remind everyone. This is a very novel deal structure. This has never been done before in this way. So I think we landed in a really great place in terms of the upfront and then the scale of our commitment to co.

Fund.

Shoulder to shoulder with Merck.

The phase III program. So I don't know that I would read a lot into relative confidence about the product in terms of the structure. It's more once this product goes to phase III, what's the right deal structure and the right way to to fund this program in to co fund this program together.

Second I would also mentioned in terms of this program.

The trial is a very large.

MK 81 to $89 excuse me is in a very large phase III program so that.

Is going to give us some really interesting and clear data and we're really going to know I think what this product is at that point finally, you asked about.

<unk> differentiated can it be I think in schizophrenia alone. We all know that there is still unmet need even with the number of drugs out there patients cycle on and off therapy.

Over time, and so there is certainly need for options, but I wouldn't lose sight of the fact that there obviously is a very broad potential development program beyond that that could go that could go much further and that was certainly on our mind as we're thinking about the potential the potential profile of 80 189, I don't know Chris.

Would you add.

I guess, the only thing I'd add on capital deployment as I think we feel really good about how we're deploying capital week. The IPO, we said seven greater than $7 billion at over five years, we upped that to 10% to 12 at the analyst day and we've deployed.

Around 8 billion since our since 2020, so we feel like we're tracking really well and our opportunity set is only expanding so we're super excited about the opportunity to deploy capital.

Got it thanks, so much thank you.

Operator next question please.

Yes.

Our next question comes from Greg Fraser with tourists. Your line is open.

Good morning, Thanks for taking the questions.

Curious if youre seeing any changes in the competitive landscape for royalty transactions at the higher end of the spectrum in terms of deal size.

And then to the extent that you have to access the debt markets to help fund future deal how should we think about the potential cost of that thank you.

Okay.

Chris you want to take the question on competition and then maybe Perry of the second question.

Sure.

No we really we haven't really seen a whole big change in the competitive landscape I think we we are the largest player in the space. We are investment grade rated company, we have tremendous access to capital and the capital markets and our own balance sheet, and our and our free cash flow we generate.

So we are we're quite comfortable in the environment of competing in the largest.

For the largest deals in.

And as I think we mentioned before we welcome actually.

Competition coming into the field in the sense of continuing to raise the awareness of <unk>.

Synthetic royalties in R&D funding and just a different sort of way that biopharma can access capital.

Rather than just the equity or convertible bond market. So we're really.

Happy where we stand within the competitive landscape I think I'll add also Chris.

We decided to take growth from a public cloud.

And in 'twenty.

It was sort of.

Unknown.

For US we were very excited about doing and thought it was going to provide us with a lot of benefit going from 24 years of operating as a private company.

And.

We dividend 2020, we have been operating now as a public company for a little bit more than two years and I think at least from my perspective, I see royalty pharma as a much much stronger business today.

Then we were maybe three or five years ago.

In many many ways and our cost of capital has declined significantly and just on the debt side I think it's probably gone down by 50% or so.

Now we have access to the deep capital markets in the world.

<unk>.

Scale has as Chris mentioned is obviously.

A really really important.

Strategic advantages we have.

Being public has given us greater scale and also.

Now as a public company I think.

Many.

Company's management teams.

Can see who we are.

It's made us more.

More visible.

Here in the market in one.

There is many more companies today that want to do business with us because they can see who we are and how we behave and how we can be really good partners to them. So I think the businesses in a really strong position today vis vis competition.

The team most of the things that we have been able to assemble since we went public which has grown.

Really really strong and all of those things I think.

Bode really well for.

Very strong performance over the next several years, but sorry.

Maybe.

Yes.

On the cost of debt.

Certainly.

We continue to view that as an important tool that we will use to fund our business every time, we're in a fortunate position that 60% of our debt matures.

In 2030 and beyond.

And we're borrowing at very low costs.

But over time, we would continue to look to to the debt markets.

As a tool to <unk>.

And acquisitions and to grow the business I think the great thing is that we have a lot of financial flexibility.

Our business generates a lot of cash.

We finished after you add in the Biohazard payment, we had we had around $1 6 billion.

Cash at the end of the quarter, so that that gives us a lot of firepower.

But we do have we do continue to have nice leverage capacity, where we can where we can access the debt markets and we have a revolver.

Which is which is pre payable and it's a $1 $5 million revolver. So we have a lot of flexibility I think that.

But we do very much value the access to the investment grade bond market.

We would expect that over time, we will continue to.

Be in that market.

It's all kind of deal dependent and when we're looking at acquisitions. We're also looking at it in the context of the cost of capital.

For the business at that moment.

Thanks.

Thank you.

Operator, we have time for one last question.

Our last question comes from as pharma with UBS. Your line is open.

Hey, guys. Good morning, Thanks, putting a question.

So on the Camden, the cargo there'd be a headed into an AD com next one.

Do you guys view on what kind of label this drug could get from the safety and efficacy standpoint.

He has to be a widening outcome on the efficacy side, but it gets like a heart failure. The ejection fraction is Nathan Tony if it includes additional quantify like a refractory population of leasing to be hospitalized and what are you assuming it would be quite a PK guided building and all.

All of that can you.

On the web.

<unk> commercial opportunity for the drug.

Sure. Thanks for the question Marshall.

Absolutely. Thanks for the question on <unk> so.

A lot of those questions on.

On the AD com and the label and where it might go or probably great questions before Saito kinetics, we've had a really great partnership with EDA kinetics over the years in terms of our initial deal in Oklahoma Camp, David and then our synthetic royalty transaction.

On Abbvie campaign.

Earlier this year. So we really believe in this hydrokinetics team they've been executing really well, we'll look out for what happens at the AD Com and then ultimately next year on.

On the Paducah date, but I think big picture.

We think this.

This product does have the potential to help patients who have severe heart failure and look forward to watching what happens in the months to come.

Thanks.

There are no further questions I'd like to turn the call over to Pablo <unk> for closing remarks.

Thank you operator.

Thank you to everyone on the call for your continuing interest in royalty pharma.

If you have any follow up questions. Please feel free to reach out to George <unk> and his team.

This concludes the program you may now disconnect everyone have a great day.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Ladies and gentlemen, thank you for standing by welcome to the royalty pharma third quarter earnings Conference call I would now like to turn the call over to George graphics, SVP 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 farmers in the third quarter of 2022 results.

You can find the press release with our earnings results implies the call on the investors page of our website at royalty pharma Dot com.

Moving to slide three 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 the statements I refer you to our 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 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 available on our website.

And with that please advance to slide four.

Our speakers on the call today are <unk>, founder and Chief Executive Officer, Mark <unk> EVP head of research investment and Terry Cohen, EVP Chief Financial Officer.

<unk> will discuss the key highlights after which Marshall will provide a portfolio update and Terry will review the financials.

Following concluding remarks from Pablo we will hold the Q&A session, Chris tight our Vice Chairman will also join 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 quarter of strong execution on our strategy as a leading funder of innovation in life Sciences.

Slide six summarizes our financial and portfolio achievements in the third quarter, which again underscore our strong momentum and the power of our business model.

First we delivered solid financial performance, despite significant headwinds from foreign exchange and a one time benefit from a solid.

Milestone in the third quarter of last year.

Adjusted cash receipts, our top line grew by 2% adjusted EBITDA by 3% and adjusted cash flow our bottom line by 26%.

Second we have announced transactions of $3 billion year to date.

<unk>, our innovative R&D farm in collaboration with Merck.

This is an exciting model for future potential partnerships with large biopharma and Marshall will expand on this later.

More broadly our overall rate of capital deployment that reflects the strong demand for innovative royalty based funding solutions.

Third.

We saw positive progress across our portfolio Pfizer close its acquisition of our Haven, which has resulted in accelerated value creation to royalty pharma.

We have a deep development stage portfolio with third through new molecular entities and approximately 40 projects in late stage development.

Impressive figures with driver many large biotech companies.

Lastly, we're raising our full year guidance for adjusted cash receipts.

Terry will take you through the details later, but we now expect growth of 29% to 32% compared with 7% to 10%.

Time of our Q2 results.

This increase largely reflects the acceleration of our commercial launch capital payments, resulting from Pfizer's acquisition of bio <unk>.

Which has been one of our most successful partnerships since our IPO.

In addition, our overall portfolio of royalties continued to perform exceptionally well.

I'll also remind you that our guidance excludes the potential benefit of any investments that we may make over the remainder of the year.

On slide seven you can see our financials in a little more detail.

In the third quarter, we delivered 2% growth in our top line.

We estimate that foreign exchange had an approximately 4% negative impact on the quarter.

Furthermore, we had a headwind of $37 million relating to a onetime milestones on <unk>.

In the prior period.

Without the impact of these two factors, we would have delivered another quarter of strong double digit top line operational growth.

Consistent with our top line, we grew our adjusted EBITDA by 3%.

Adjusted EBITDA is unimportant non-GAAP measure for us.

Which is arrived at by deducting operating in professional expenses from our top line.

Lastly, our adjusted cash flow, our Bottomline grew by 26%.

This significant increase primarily reflect the differences in the size of the upfront development stage payments in the third quarter compared to last year's third quarter.

Slide eight shows our track record of strong topline growth since our IPO in June of 2020.

This speaks to the power of our business model and our ability to continue to replenish our portfolio with market, leading therapies through value enhancing yields.

Few of our peers and Biopharma could lose two other top products and still demonstrate such impressive growth.

As I mentioned earlier Pfizer's acquisition of Bio Haven, which closed in October accelerated value creation to royalty pharma shareholders.

On slide nine from a bigger picture perspective.

I wanted to expand on our bio having experience and talk more broadly about how we have become a critical funding partner for successful biotechs.

When we look across immunomedics, Bioherm cytogenetics, and Biocryst and all of these cases, our partnerships have resulted in royalty pharma, providing a critical portion of their funding needs.

Alongside more traditional equity and debt funding.

Instances, our approach was highly customized to each partner's needs and we used a variety of funding tools, such as royalties commercial launch capital and equity purchases.

For royalty pharma, our investments will generally be validated by the successful development and commercialization of the <unk> therapies.

Therapies on which we have royalties.

And in certain cases.

Immunomedics and bio Haven by the accelerated returns we achieve for our shareholders, resulting from their acquisitions by larger Biopharma companies.

The biotech funding model using a variety of sources of capital includes royalties has proven to be successful for our partners and we believe should represent the new funding model. The most successful biotechs use in the future.

With that I will hand over to Marshall to update you on our portfolio.

Thanks, Pablo and let's move to slide 11.

We're delighted to announce our recent R&D funding collaboration with Merck revitalizing R&D funding partnerships has been an important initiative that royalty pharma and we think this collaboration structural will serve as a model for future transactions between royalty pharma and large biopharma companies, we see plenty of opportunity here to protected scale of large biopharma.

R&D spend one trillion dollars cumulatively over the next five years should create opportunities for royalty pharma at a fund exciting late stage programs across the industry.

The advantages we can offer to large biopharma are clear we are a true partner for Biopharma.

Able to participate in clinical development as well as the full trajectory of commercialization around the world.

In addition to risk sharing we can provide capital at scale, allowing our partner to optimize their R&D spend across the broadest opportunity set.

In addition, our rigorous diligence process provides independent validation of the opportunity and as we have consistently demonstrated we can be flexible and creative in our structure.

Lastly, we are long term partners and have built enduring relationships that reflect our unique role in the life Sciences funding ecosystem.

Slide 12 provides the details of our collaboration with Merck.

In summary, royalty pharma has agreed to provide up to $425 million to co fund the clinical development of NK 81 to 89, an oral PD <unk> inhibitor in phase III development for schizophrenia, our excitement about this pipeline therapy comes from our view that MK $81 89 has the potential to demonstrate efficacy.

<unk> to the standard of care with a differentiated safety profile.

The structure of this deal highlights our uniquely flexible approach to alignment with our partners.

Our investment can be scaled following program Derisking and royalty pharma will make an independent decision to co fund the phase III program.

In return for our co funding royalty pharma will be entitled to a royalty on annual worldwide sales of MK 8189, as well as milestone payments with U S branded schizophrenia sales of around $5 6 billion. This could represent an important royalty stream as we look towards the back half of this decade and beyond.

On slide 13, I want to expand on the breadth and depth of our portfolio. We now have the potential to receive royalties on approximately 40 projects in late stage development.

The size and diversity of our development stage pipeline, we think compares well with many of the largest biotech companies as you can see Andrew slide we have considerable therapeutic area of diversity in our pipeline, although oncology currently accounts for around half of these projects.

We anticipate our pipeline will continue to grow as we invest in both approved and development stage medicines in the years to come.

Moving now to slide 14, and the expected clinical and regulatory events for our portfolio over the next year.

In 2023, we anticipate readouts from up to seven important phase III programs, including <unk> in major depressive disorder <unk> in non metastatic prostate cancer at the campaign and obstructive hypertrophic cardiomyopathy and oral so that Japan in migraine prevention.

On the regulatory front, we expect an FDA decision on <unk> in asthma in the coming months and in 2023, we anticipate FDA approval decisions on <unk> in third line hormone receptor positive hurts you negative breast cancer, an intranasal divert Japan in migraine and <unk> given heart failure.

Many of these milestones present, the opportunity to deliver on our mission of accelerating innovation in life science to transform patient lives with that I'll hand, it over to Terry.

Thanks, Marshall, let's move to slide 16.

Total royalty receipts were broadly stable in the third quarter versus the year ago period.

Growth drivers in the quarter included the cystic fibrosis franchise, Sandy shrunk fire and the <unk> royalty, which we acquired in July .

We also saw solid growth contributions from cosmetics promacta.

Bohemian partnership and though not shown on this slide for mid risky <unk> LD in order of the day.

These positive factors were partially offset by the end of the royalty term for the DPP four inhibitors to sleep a milestone receipt in the prior period and <unk> weakness and the unfavorable FX impact.

Slide 17 shows how our efficient business model generates substantial cash flow to be redeployed.

As you are aware adjusted cash receipt to the key non-GAAP metric for us, which we arrive at after deducting distributions to noncontrolling interests.

This amounted to $597 million in the quarter growth of 2% compared with last year's third quarter.

Without the impact of the <unk> milestone payment growth would've been 9% while growth would've been low double digits. If we adjust for the estimated foreign exchange impact.

As we move down the column operating and professional costs were approximately 8% of adjusted cash receipts on.

On a year over year basis, operating and professional cost cost declined by 9%.

As a consequence, we reported 3% growth in adjusted EBITDA in the quarter consistent with the growth in our top line.

As Paolo noted adjusted EBITDA is an important non-GAAP financial measure for us and one of the three key non-GAAP metrics by which we measure our business performance.

When we think of the cash generated by the business to then be redeployed into new value enhancing royalties, we look to adjusted EBITDA less net interest paid.

Net interest paid in the quarter of $75 million reflected the semiannual timing of the payments on our seven $3 billion of unsecured notes.

Occurs in the first and third quarter.

And offset by the interest received on our cash which has been approximately $11 million year to date.

After the $25 million upfront payment for development stage funding of <unk> and other items, we generated adjusted cash flow, our bottom line of $441 million or <unk> 73 per share.

For the third quarter.

This resulted in an adjusted cash flow margin of 74%.

Once again highlight the efficiency of our business model.

Let's now move to slide 18, and our financial position.

We continue to maintain significant financial firepower for future royalty acquisition.

Year to date year to date, we have generated adjusted EBITDA less net interest paid of 142 billion.

Again this is the cash the business generates to reinvest or return to shareholders.

We have deployed $2 $1 billion of capital on royalty acquisitions, as well as $362 million on dividends and distributions.

Bringing our cash and marketable securities to $1 1 billion at the end of September .

Shortly after the quarter end, we received $508 million net cash related to Pfizer's acquisition of Biohazard.

It would bring our pro forma cash and marketable securities to 164 billion.