Q4 2022 Royalty Pharma PLC Earnings Call
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
Ladies and gentlemen, thank you for standing by welcome to the royalty pharma fourth quarter earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
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Now like to turn the call over to George graphics, Senior Vice President.
The 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 in the fourth quarter and full year 2022 results.
You can find the press release with our earnings results and slides for this 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, Chris tight Edp, Vice Chairman Marshall Europe , EVP head of research and investment in.
And Terry Cohen, EVP, Chief Financial Officer.
Pablo I'll discuss the key highlights and Chris will discuss trends in our transaction pipeline. Marcia will then provide a portfolio update after which Terry will review the financials.
Following concluding remarks, and Pablo we will hold a Q&A session and with that I'd like to turn the call over to Pablo.
Thank you Jordan and welcome to everyone on the call I am delighted to report another year of strong execution on our strategy as a leading funder of innovation in life Sciences.
Slide six summarizes our financial and portfolio achievements in 2022, which underscore our strong momentum and the power of our business model.
First we delivered a strong financial performance.
The cash receipts, our top line grew by 10% adjusted EBITDA by 10% and adjusted cash flow by 15%.
Which are all prior to an accelerated by having a redemption payments were received in the quarter.
Which I will discuss on the next slide our reported growth of course were significantly higher as a result of this <unk> payment.
Second we strengthened our royalty portfolio.
Added six new therapies, including the blockbuster trilogy, and we expanded our development stage pipeline through the acquisition of several attractive therapies, such as Hydrokinetics after Camden and Amgen's O class, Iran.
We also entered into a novel R&D funding collaboration with Merck, which could form the blueprint for future deals with large biopharma.
Meanwhile, Pfizer's acquisition of bio Haven resulted in accelerated value creation to royalty pharma.
Third we had another strong year of capital deployment.
Turning off of the momentum since our IPO we have.
I was up to $3 5 billion in transactions, maintaining our leading share of the royalty funding market.
And given the rapid expanding opportunity set at our Investor Day last May we raised our capital appointment go to $10 billion 12 billion over the next five years.
On slide seven you can see our financials in a little more detail.
We received an accelerated by a habit of redemption payment, resulting from Pfizer's acquisition of bio Haven, which benefited adjusted cash receipts by 458 million.
Prior to this space this payment.
Just mentioned, we delivered 12% growth in our top line in the quarter and 10% for the full year Foreign exchange continued to represent a headwind impacting our top line by around 5% in the quarter and 3% to 4% for the full year, including the buyers haven't payment our topline nearly doubled in the quarter.
Consistent with our top line, we grew our adjusted EBITDA by 13% in the quarter and by 10% for the full year prior to the <unk> payment.
Adjusted EBITDA is an important metric for us which is arrived at by deducting payments were operating and operating and professional costs from our topline.
Lastly, our adjusted cash flow, our Bottomline grew by 35% in the quarter and by 15% for the full year prior to the <unk> payment.
Substantial increase in our fourth quarter, partially reflected lower upfront development stage payments when compared to the prior period.
Slide eight shows our impressive track record of strong topline growth since our IPO in June 2020. This reflects our ability to execute successfully against our strategy.
Slide nine digs deeper into our top line performance in 2020 to show the various moving parts royalty.
Royalty Expiries and foreign exchange represented a significant headwind to our growth in 2022, despite the strong performance of our base business and the acquisition of trilogy royalties allowed us to deliver approximately 10% top line growth before taking into account the accelerated by having payments.
We have absorbed significant losses of exclusivity over the past two years and still delivered top line growth in the double digits. This speaks to the unique power of our business model to replenish the portfolio and to drive compounding growth.
My final slides expense of this critical points.
Slide 10 shows that since 2020, we have announced approximately $10 billion in transactions across close to 20 deals and acquired royalty interest and some of the most transformative therapies in the industry.
Roughly 70% of our capital deployed since 2020 has been an approved therapies and 30% on development stage products.
New royalties already account for around 10% of our adjusted cash receipt by 2025, they are expected to add around $1 billion to our top line.
Put simply we have replenished.
A significant portion of our business over a five year period and at the same time sustained double digit growth very few companies in the life Sciences industry have the ability to do this.
With that I will hand, it over to Chris to update you on our transaction pipeline.
Thanks, Pablo let's move to slide 12.
The strong momentum in our business is underpinned by encouraging trends in the royalty market as well as the fact that royalties are becoming a mainstream tool to fund innovation.
Between 2015, and 2022, the number of royalty funding transactions increased more than six fold to 27 deals while the dollar value of transactions rose tenfold to $6 2 billion.
Over that period royalty pharma has maintained the leading share of the royalty market.
In 2022, we accounted for more than half the dollar value of transactions over one quarter of transaction volume and we remain the clear leader in larger transactions.
Slide 13 details the funnel of opportunities we saw in 2022.
We reviewed more than 350 potential transactions.
<unk> and 106 confidentiality agreements signed 70 in depth reviews, and 38 proposal submitted.
Our disciplined and highly selective approach resulted in us executing nine transactions across six new therapies were just 3% of our initial reviews.
This is consistent with our historical average in the low single digit percentage range and reflects the exceptionally high bar, we apply to royalty funding opportunities.
Slide 14 shows the growth in our pipeline opportunity set.
<unk> 2019, and 2022, we saw a 75% increase in initial reviews and in depth reviews.
And the value of the transactions, we executed on increased by 58%.
Clearly the difficult equity market for biotech in 2022 helped us however.
However, we have seen positive market trends for a number of years as royalty fund funding has become an increasingly mainstream funding modality.
This supports our confidence in meeting our raised five year capital deployment target that Pablo mentioned.
And with that I will hand, it over to Marshalls.
Thanks, Chris My next few slides I wanted to discuss two recent transactions that brought us two exciting opportunities in the Elk LIFO protein, a or LP little a class of cardiovascular medicine.
Last month, we were pleased to announce a win win partnership with ion is we acquired royalties on spin rather a blockbuster for spinal muscular atrophy and pellet Carson and exciting development stage LP little a therapy for cardiovascular disease.
Through this collaboration we deployed $500 million upfront and committed up to $625 million in potential milestones.
The unique deal structure provides an attractive risk reward for royalty pharma our interest in spin rather a blockbuster medicine approved in more than 60 countries with 2022 sales of $1 8 billion supports.
<unk> supports the investment with a lower risk royalty.
However, the really exciting part of the deal is the significant upside potential from pellet Carson, which novartis is projected to have greater than $3 billion in peak sales potential pellekar submit the most advanced of the two leading clinical stage compounds in the LP Little a class with phase III cardiovascular outcomes data expected in 2025.
On slide 17, I want to highlight that we also acquired royalties.
The other exciting investigational therapy in the LP Little a class Amgen's old Paas, Iran. We acquired this royalty from Arrowhead Pharmaceuticals in November 2022, and exchange for a $250 million upfront payment and potential milestones of up to $160 million.
The phase II clinical data on <unk> is very encouraging and as with pellet Carson a phase III outcome study is underway. In this study is expected to complete in late 2026 consistent consensus expectations are that this new class of cardiovascular therapies will generate more than $4 billion of sales by the early part of the next decade and there are many reasons to believe that these estimates.
Could prove conservative.
Slide 18 returns to our concept from our Investor Day last may from a strategic perspective, the L. P. Little a class exhibits two of our key investment themes. The first one is the idea of under innovated large markets the shift towards specialty markets over the last decade with smaller patient population and higher price points has meant that some of the incredible innovation that we've seen.
<unk> has not been applied to the same extent in some of the larger markets that are higher volume, but still had significant unmet patient need.
Cardiology is a great example of this and the LP Little a class has transformative potential.
In addition, we have seen that targeted therapies can drive significant patient benefit in cancer. However, theres been comparatively less development of targeted therapies and therapeutic areas outside of oncology. So this is another theme that we're excited about we think there is significant potential for patients to benefit from targeted therapies in areas such as cardiology, given the increased understanding of.
Mechanistic drivers of disease are cytogenetics partnership is a good example, as well.
So why does royalty if I'm I believe in the transformative potential and in the multi blockbuster opportunity for this class.
First LP little a is an independent cardiovascular risk factors supported by extensive data from genetic studies among other sources of evidence.
Second there's huge unmet need over 8 million people worldwide have elevated LP little a and cardiovascular disease and these people say, it's a more than twofold increase rates of cardiovascular events importantly, L. P. Little a cannot be addressed by dietary modification or approved lipid lowering drugs.
Third both telecom and <unk> have been shown in phase II studies to produce robust reductions in LP little a with encouraging safety profile and lastly.
There are two well designed to outcome studies enrolling within 14000 people, which are expected to read out around the middle of the decade supported by two of the strongest cardiovascular medicine companies and Amgen and Novartis.
Taken together, we believe that L. P. Little a reduction could represent one of the next major frontiers in the treatment of cardiovascular disease and be a potentially important growth driver for royalty pharma towards the end of this decade and beyond 2030.
On the next side I want to highlight royalty from his unique ability to invest in multiple product in a given therapeutic area.
We have historically demonstrated this in multiple sclerosis, prostate cancer migraine and in the anti TNF category.
As a result of our Arrowhead and <unk> deals. We now have royalties on two important medicines for spinal muscular atrophy as well as two leading investigational LP little a therapy.
This unique ability to invest in multiple products and the most innovative therapeutic classes is clearly a differentiating feature of our business model.
Moving to slide 21, Astrazeneca to <unk>, formerly <unk> seven was just approved by the FDA last month for the treatment of asthma.
First in class fixed dose combination therapy that treats both the symptoms and underlying inflammation of asthma.
This is another example of how our development stage portfolio can make important contributions to our business, we're entitled to a low single digit tiered royalty on annual U S. Net sales success based milestones and other potential payment the market size is significant and the U S alone there are more than $25 million asthma patients and 71 million rescue inhalers used annually to concern.
<unk> currently projected <unk> to about $1 billion in sales by 2030.
On slide 22, if we look at the early performance of our transactions since 2020. The picture is encouraging for the approved therapies. We recently acquired the majority of the increases to street consensus sales forecast since the acquisition date with several increasing by more than 40%, although we of course invest based on internal forecasts.
And we do not necessarily need products to outperform the consensus in order to achieve our return targets. Nevertheless, this way of assessing the recent additions to our approved product portfolio is a directionally useful indicator to show that our bar for quality remains high one disappointment within our approved product investments has been <unk> therapy, which we and Roche fully impaired.
Based on the updated commercial outlook for the product.
For the development stage therapies, we have seen some important progress such as the approvals of <unk> and if a risky and positive data readouts for the vet, Japan from fire. However, <unk> against an area map development has been discontinued although we remain enthusiastic about the overall morphosis transaction given the significant outperformance range from via <unk>.
Lastly, we're excited for several important upcoming events in 2023 from these recent deals including the potential approval of intranasal divert Japan phase II data from oral is about Japan in migraine prevention Abbvie campaign in obstructive hypertrophic cardiomyopathy, and shrimp <unk> in ulcerative colitis, and Crohn's disease with that I'll hand, it over to Terry.
Thanks, Marshall, let's move to slide 24.
Total royalty receipts grew 79% in the fourth quarter and 24% for full year 2022 versus the respective year ago periods.
Excluding the accelerated bioherm payment royalty receipts grew 7% for Q4 and 5% for full year.
Negative growth in the fourth quarter reflects the accelerated violate the repayment together with strong contributions from cystic fibrosis franchise.
Sandy from fire and metrology royalty, which we acquired in July .
We also saw growing royalty contributions from <unk> and from several medicines not shown on this slide, particularly at <unk> to LTE in order of the day.
These positive factors were partially offset by the loss of the DPP four royalties.
By weakness in <unk> and to a lesser extent tysabri and by the adverse FX impact.
Full year growth was also partially offset by a decline in royalty royalty receipts from the HIV franchise, which reached the end of its royalty term in 2021.
Slide 25 shows how our efficient business model generates substantial cash flow to be redeployed.
As Youre aware adjusted cash receipts as a key non-GAAP <unk> non-GAAP metrics for us, which we arrive at after deducting distributions to noncontrolling interests.
This amounted to $1 1 billion in the quarter or growth of 96% compared with last year's fourth quarter.
For the full year adjusted cash receipts were up $2 8 billion.
$2 8 billion up 31%.
Tableau noted earlier prior to the impact of the accelerated payment.
Growth would've been approximately 12% in the quarter and 10% for the full year.
As we move down the Com operating and professional costs were approximately 8% of adjusted cash receipts in the fourth quarter and for the full year.
As a consequence, we reported 99% growth in adjusted EBITDA in the quarter and 32% for the full year consistent with our topline growth.
When we think of the cash generated by the business to be that to then be redeployed into value enhancing royalties, we look to adjusted EBITDA less net interest paid.
Net interest received in the quarter of $14 million reflected the semiannual timing of the payments on our seven $3 billion of.
Of unsecured notes, which occurred in the first and third quarters and a strong cash position on our balance sheet, which benefited from higher interest rates.
For the full year net interest paid of $145 million included interest received a $25 million on our cash position.
After the $50 million upfront payment for development stage funding of MK 80, 189, we generated adjusted cash flow, our bottom line of $946 million or $1 56 per share for the fourth quarter.
This resulted in an adjusted cash flow margin of 89%, which once again highlights the efficiency of our business model.
For the full year adjusted cash flow was $2 2 billion or.
Or $3 68 per share and our adjusted cash flow margin was 80%.
Let's move now to slide 26, and our financial position.
We continue to maintain significant financial firepower for future royalty acquisitions.
In 2022, we deployed $2 $5 billion of capital on royalty acquisition as well as $461 million on dividends.
This more than offset our strong cash flow generation over the year, so that our cash and marketable securities stood at $1 7 billion at the end of December .
In the beginning of 2023, we deployed an additional $500 million on the iOS transaction that Marshall described.
If we adjust for this post year post year end outflow, our leverage on a pro forma basis would have been two seven times net debt to EBITDA and $2 three times total debt to EBITDA.
As a reminder, the <unk>.
Fixed rate average coupon on our debt is slightly above 2%, which compares to our target returns on royalty acquisitions in the high single digits teens percentage range.
I would also note that around 60% of our debt matures in 2030 or beyond.
Taken together.
We believe 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.
Slide 27 provides our full year 2023 financial guidance.
We expect adjusted cash receipts to be in the range of $2 $3 75 billion to $2 $4 $75 billion.
This outlook does not include the $475 million milestone, which we expect to receive from Pfizer if the FDA approves that.
That Japan for migraine, which has a <unk> date in the first quarter.
However, if <unk> is approved and the $475 million milestone is included in our guidance. It would imply an adjusted range at $2 85 to $2 95 billion.
I will explain the other key considerations underlying our topline guidance in a moment.
However, importantly, and consistent with our standard practice. This guidance is based on our portfolio as of today. It does not take into account any future royalty acquisitions.
Turning to our operating cost we expect payments for operating the professional cost to be approximately 8% to 9% of adjusted cash receipts in 2023 slightly above the 2022 level.
We continue to believe that the degree of margin protection provided by our unique business model is impressive and today's inflationary environment.
Interest paid for full year 2023 is expected to be around $170 million and to follow the established quarterly pattern with de Minimis amounts payable in Q2 and Q4.
This does not take into account any interest received on our cash balance, which is particularly particularly attractive at today's rates.
Finally.
We expect to make a $50 million milestone payment to settle kinetics in the second half of 2023 based on the company's guidance of initiating the pivotal trial.
<unk> and non obstructive hypertrophic cardiomyopathy.
My final slide shows down further on our adjusted cash receipts guidance.
The graphic is illustrative that sets out the various pushes and pulls behind our outlook for 2023.
Starting with the left hand side.
<unk> faced a high base of comparison from the $458 million accelerated biohazard payment, which we received in the fourth quarter of 2022.
Since the preferred shares were redeemed we will also no longer receive the quarterly series, a fixed payments, which is another $52 million annual headwind.
This brings the underlying base for 2022, adjusted cash receipts to 228 billion.
On the right side.
If we start from the adjusted cash receipt dates prior to biotech.
We expect underlying growth of between 4% to 9% this year.
Which is expected to be largely driven by the CF franchise <unk> and <unk>.
Partially offset by the losses of exclusivity on the TV for DPP fours and lexicon, lesser scan as well as improve at the weakness.
We also expect a modest contribution from three quarters of spin roset royalties.
Given the recent moderation of the U S dollar strength.
<unk> is expected to represent a relatively modest headwind of minus one to minus 2% using today's rates.
That I would like to hand, the call back to Pablo for his closing comments.
Thanks, Terry let me close by saying how pleased I am with our strong performance in 2022, not only do we enter our 2023 with solid momentum, but our prospects have never looked better.
To finish on slide 30, I would like to take a moment to remind you our royalty pharma business model offers a unique way to invest in biopharma maximizing our exposure to many positive industry trends, while minimizing exposure to many of its common challenges.
We offer attractive diversification on the topline and bottom lines, we offer a stronger exposure to transformative therapies.
Adding 15 therapies with more than 1 billion in end market sales and many well known brands in the industry our portfolio benefits from an average expected duration of approximately 13 years exceeding many big pharma and large biotech from a financial return perspective, we have a track record of delivering consistent.
And predictable double digit unlevered returns on deployed capital.
When we think about industry challenges with an uptake on significant early stage development risks, which clearly differentiates us from Biopharma also which have no therapeutic area by us and minimal exposure to binary risks.
Differentiated reward profile.
With our strong financial position and powerful business model is what makes royalty pharma are unique and I believe highly attractive investment proposition.
With that we would be happy to take your questions.
We will now open up the call for your questions. Operator, please take the first question.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Okay.
<unk>.
Our first question comes from Chris <unk> with Goldman Sachs. Your line is now open.
Thank you very much good morning, two questions. If I may one in general about your funnel and certain characteristics of that interesting and another on your comment from Marshall on targeted therapy on the funnel. We appreciate the updates and the historical trend starts with over 300 I think it was $3 50, and then you go through various levels of <unk>.
<unk> before you finally conclude on closing something thats in the low single digits as you think about the mix.
Of what's entering the funnel in terms of commercial versus various developmental stages and how you go further down are you seeing in that remained consistent or is there a bias or a shift in particular as you noticed the recent years and then on the comment on the targeted therapy for cardiovascular and LTA appreciated that from Marshall I think it's interesting to us.
See how that is evolving across other therapeutic areas immunology and particular Marshall would love to hear your thoughts on how youre viewing how that could shape up large areas. We're seeing increased vocabulary around targeted therapy development. There. Thank you.
Thanks for your question, Chris and I'm going to.
Chris.
Chris Hi to answer your question on the funnel, but if you recall is one of the comments I made in my remarks is that over the last.
Three years since our IPO, where we have deployed about $10 billion. The ratio has been 70% approve them, 30% unapproved now if you look over a longer period of time it tends to be closer to 50, 50 or 50, $545 55 approved 45.
But Chris go ahead.
Yes, Thanks for your question Chris the.
Answer to your question is things Havent really changed we actually provided a great level of detail to answer that question at our analyst day last year, which looked at the the reviews and in depth reviews.
I approved an and preapproved products and by preexisting royalties versus synthetic.
And that really that mix Hasnt hasnt changed.
But in general.
The initial reviews are basically about 80% pre approval in 20% approved drugs and the in depth reviews sort of is about 50, 50, or 55% preapproved and 45% approved and on the synthetic side on the in depth reviews at 60% synthetic 40% preexisting that was in.
<unk> 2021, and the mix didn't really change in 2022.
And then I.
Good morning on your second question on targeted therapies outside of oncology.
Absolutely I mean this is why at the analyst day, we highlighted this as an interesting theme.
That we think is going to create is going to create some interesting new opportunities in the future. We mentioned cardiology is there is a good example, but would agree with you.
In immunology, we are starting to see good examples of that.
Neurology is another area, where I think we'll see more and more of those so definitely interesting something to watch although I would just take the opportunity to remind everyone. When we talk about themes.
Those are not necessarily.
Themes that we're seeing we're going out and actively looking for those opportunities. Today. We think those are really interesting thematic Lee that guide our thinking over the long term, but I think our core strategy of staying focused on exciting opportunities that offer a meaningful benefit to patients physicians to the system and what we're seeing and getting.
Access to those things overall is going to be the most important driver of our strategy.
Great. Thanks for the insights.
Please standby for next question.
Our next question comes from Chris Schott with Jpmorgan. Your line is now open.
Hi, Good morning. This is <unk> in for Chris Schott. Thank you for taking our questions. The first one is.
Just generally wondering your thoughts on the current deal environment.
Sure. Thank you.
Yes.
For Marshalls.
Fuel appropriate to add to my comments, but I think.
We have definitely seen a very significant increase in.
Our funnel as you see from prior years, which reflects the challenging funding environment today than in life Sciences.
And I think consistent.
Consistent with that we have deployed significantly more capital.
We had in the past if you look at sort of the average deployment.
Maybe at the time of our IPO, we were talking about something like one five.
<unk> 5 billion, we guided to $1 5 billion 7 billion over five years and obviously the increased activity.
Enabled us to increase our guidance to more like 10 to 12 million deployments over the next five years.
$2 5 billion guidance now.
We reported today that we really deployed something like $3 5 billion last year. So it does reflect a lot more activity and significantly more capital deployed an hour.
On our side.
And I.
I think the key thing for us and we've been very.
Clear about this with investors.
And analysts is that.
What really is critical as the quality of the underlying product and while we have seen many many more opportunities discussions at the end of the day will remain very disciplined with our capital deployment and that.
Obviously results in the.
The deals were excited about where we see significant.
Upsides and Marshalls. This morning talked about <unk>, which we think is going to be a very significant class and we have two royalties now on the two really the two drugs that are being developed for that cloud versus maybe a few others. Much earlier, what's interesting also is that.
We ended up having a much larger royalties than we had historically and those two products, but anyway.
Yes.
The only thing I would add to that is I actually think the royalty market.
It's been really robust I mean last year with a record year in 2022.
As I said in my prepared remarks in the slide 12 highlights the number of transactions has grown sixfold since 2015 and the dollar value of those transactions is up tenfold since 2015 and last year was a record year for the market as a whole so.
The level of activity is.
Really strong.
We think there is real and we think that growth is going to continue actually.
Thank you. Thank you.
Please standby for our next question.
Our next question comes from Terence Flynn with Morgan Stanley . Your line is now open.
Good morning, Thanks for taking my questions. Two from me I was wondering maybe either for Pablo or Chris. If you think the IRA is going to impact your analysis of royalty opportunities as you think about.
How to look at returns under this.
This new law and then maybe for Marshall.
Again I appreciate all the background on LP Little a just wondering how you think about market creation here versus the PCF canine drugs.
Obviously those have been less.
Less robust than people initially anticipated. So how do you think LP little a plays out relative to PCF canines. Thank you.
Sure so regarding the <unk> question Chris.
I'll take that question and then Marshalls.
Provide the other answers, but I think one very top level comment regarding.
Changes that are occurring in our in our sector is that.
As you know we have been incredibly creative in helping people address challenges issues problems and that just is a really good.
Our framework for us to to try to.
Work with companies to help them achieve their goals and obviously the challenges posed by a rate IRA not only I mean.
He ended up also creating opportunities for us but go ahead Chris.
Yes. Thanks for your question I would just comment that.
<unk>.
We've obviously seen some of it being implemented in the part D. Redesigns of implementing going to be implemented now the price negotiation, we will have to wait and see how that is implemented and if theres any changes enacted specifically around the nine year.
Class, but we actually feel I think what what Pablo is highlighting is we feel.
We're uniquely positioned around these types of.
Significant changes in the industry given the fact that we.
We can really sort of quickly adapt changes in laws and price changes in how we make future investments and I think thats really the key around.
The uniqueness of our business model is.
We're constantly deploying capital as you've seen in and making new investments and we can adapt quite quickly to the changes in the laws.
Marshall Great.
So on your second question, yes. Thanks.
On LP little a so a few comments there I think first and foremost the most important thing in terms of <unk>.
Creating that market is what the outcome studies show US I think if we show if those studies as we certainly hope that they will.
Show a significant cardiovascular event benefit I think that's going to be a very strong driver.
Of market of market formation. There second important thing is we have.
Delighted this in the script is that as opposed to the Pcs canine therapies, where there are lots of ways to manage LDL.
Here are really the only option for meaningfully lowering our LP little a are going to be these agents. So I think that does put them in a different category and then lastly is there will be some market development around testing for LP little a that isn't.
Except I think in some academic centers today are standard, but there I think the technology for the test is pretty straightforward. So once you check all the boxes in terms of having approved agents that show clinically compelling profile I think they need to help these patients from physicians and patients and their families is going to be a powered.
The driver of that market coming together and we have.
Two great companies in cardiovascular disease between Novartis and Amgen to make all that happen.
Thanks Darren.
Please.
Please standby for our next question.
Our next question comes from Geoff Meacham with Bank of America. Your line is now open.
Hi, Good morning. This is Susan on for Jeff.
My question is how will interest rate changes affect the company's net interest expense income and related to that what are the company's underlying assumptions for our 2023 changes in interest rates. Thank you for taking my questions.
Sure. Thank you for the question Terry you should take that one.
So.
As we mentioned in the prepared remarks, we are in a.
Very fortunate position, where 60% of our debt matures in 2030 and beyond.
And we're currently borrowing at very low rates.
So we feel we feel very fortunate there our guidance does not imply any any additional debt. It just it's just the $7 $3 billion, we have outstanding and our current coupon of around 2.25%.
As we look longer term, we do have an $8 billion of maturity.
Towards the end of this year.
And we are in a nice position there because we have a lot of cash flow coming in particularly with the bio Haven acquisition.
So we have some flexibility depending on how the pipeline plays out over the year, we could repay that debt we could refinance we could also use our revolver. If the rate environment is not particularly attractive at that time, because the revolvers pre payable. So I think we feel like we're in a very good position we have plenty of.
Access to capital, we have a nice cash flow generation and a strong balance sheet to be opportunistic.
And to deploy capital in great new royalties so we.
We feel very good.
Thank you Susan Operator next question. Please please standby for our next question.
Okay.
Okay.
Our next question comes from Newmar, Ross <unk> with Evercore. Your line is now open.
Hi, guys. This is Mike <unk> in for Omar. Thanks, So much for taking my question I just wanted to ask.
And on the recent deal regarding your.
Acquiring a share of Iona spin razo royalties what are your views on the long term prospects I'll spin Raza, especially given the fact that U S sales have struggled.
Although bid does note a possible ex U S resiliency and how much meaningful contribution do you envision for high dose been rise as well as the adult SMA opportunity. Thank you.
Sure Marshall.
Yes, thanks for the question Mike.
I think overall.
SMA is a market.
We've followed for years and I think looked at all of the major.
A major medicines, there, it's been rather being being first in class.
First in disease has.
A very important role in the treatment paradigm for patients their families for physicians and when we were doing diligence for Aon as we took a fresh perspective.
We took a fresh perspective, there and definitely see a meaningful role for <unk> into the future on it.
And the management of SMA are around the world. So that was really our underlying view that support ABB that supported the eye on it that's been around as a portion of the on its investment in <unk>.
Given the unmet need for these patients these patients do need options and Thats why we are really happy to be to participate in <unk> as well as as well it's been rather on the other two on the on the hydro spin rise as well.
As well as adults.
Whenever we make an investment we think about all of the scenarios.
And the high dose data and.
Continued expansion into into adults and we could see more competition.
Competition from Janssen that the gene therapy in adults as well in the future and I think those were all things we contemplated although I would just remind you our royalty.
Our royalty position.
Our royalty is only on sales up to one 5 billion every year. So some of these in some of these things high dose et cetera.
Might have less of an impact on the portion of sales that we participate in because of the way that it's structured but regardless, we always take a very scenario based approach and think about how all of these could impact or could impact our investment and we feel very happy to be to have its been rather as part of the portfolio.
But maybe just to add.
If you look at the total capital deployed.
No.
Just internally on how we allocate it.
500 million.
Sure.
Very comfortable with different scenarios.
We're realizing on spin Raza delivering.
Our target returns for our print products, which are high single digit low double digit.
So.
Obviously, a very important.
Aspects of this transaction and then.
If you look at the capital that we allocated to.
The really exciting LP literally a component of the transaction.
<unk>.
It should provide a very significant upside.
For us.
On the new class. So again, we approach this.
<unk> with.
A lot of discipline and really making sure that each investment on its own was going to.
Deliver attractive.
Returns on Levered return. So obviously, it's been rather also has this characteristic that we can lever that with our very low cost of debt, which enhances dramatically the returns for us.
Great. Thanks, so much.
Please standby for our next question.
Our next question comes from <unk> <unk> with UBS. Your line is now open.
Hi, good morning, Thanks for taking our questions I have two.
The first one non.
<unk> franchise, so vanda to plague the phase III Skyline studies that are expected to complete by the end of this year.
Like what are your thoughts on how the world filed can stack up against I think though and it is possible that the arbitration process for the royalty on the tip. It could get started with the phase III top line or is that something that can only begin with the product launches.
Second question so it's.
Sure.
After a little bit of a wild that'd be biotech market has started to open up a little bit.
We started the year.
Just curious if you think that is going to impact their deal activity. This year.
Sure Terry do you want to take the first part of the question and maybe Chris the second one sure. So.
With regard to the new vertex Triple I think I would just reiterate what we've said previously that try CAFTA.
A very high bar.
And we expect that <unk> will continue to be a very.
Portland contributor to royalty pharma over the long term.
We saw the same phase Iia data that everyone else saw and.
I think at this point.
It was it would be challenging to say that they are clearly that the new triple is clearly differentiated.
But we will we will need to see the full phase III data, including the long term safety as well to really understand that.
In terms of your question around legal strategies, we just havent elaborated at this point and.
I think we'll continue to evaluate the situation and update.
Investors at the appropriate time.
And with regard to your second question on.
The equity markets came back strong and open up for the biotech sector would that impact your deal activity.
I think.
What I would say is just going back to that slide 12, we had in our presentation just shows the growth of the market generally speaking.
And.
The it's really been a change of mindset I believe in the biopharmaceutical sector broadly speaking between large pharma mid.
Mid cap pharma biotech we're.
Considering royal.
Royalty monetization or synthetic royalties as a piece of your capital structure is an evolution that's happening right now in the sector and so whether the markets are really strong or not so strong we think the.
The mindset has been sort of evolving.
So we don't really see that impacting our deal activity.
It's been a.
The evolution of the growth of this market is potentially.
Peace of the capital structure.
If you actually looked at.
With a bit more perspective over the last 10 15 years.
We went through some incredibly strong equity capital market for biotech.
Sure.
Huge amounts of capital were raised by the industry and we feel that incredibly well in those years deploying multiple billions of dollars of capital every year and really exciting products. So I think the.
Comment that Chris made is really key here because.
If the equity markets.
To be more favorable again in the near term.
The underlying real important shift.
In the way companies are funding themselves, which now includes royalties.
Really strong.
No.
Tailwind we have four for our industry and then in addition to that the other area, where we're very excited about.
We see a lot of potential.
Interesting transactions and potentially.
But the product is with big pharma.
And that is.
An example of that is the transaction with Merck at the edge.
End of the year.
And.
We're very encouraged by that because we're having discussions with many companies about potentially funding attractive product.
It's a question also adjust.
Again continuing to.
Have discussions with management teams explained how funding with royalties is beneficial to them.
That's a really important.
Underlying trends.
But thank you for your question.
Thanks.
Please standby for our last question.
Our last question comes from Stephen Scala with Cowen. Your line is now open thank.
Thank you very much I have two questions.
The current trajectory of Ibrutinib is increasingly concerning I am wondering if you believe abbvie guidance adequately captures all risks and how are the challenges similar to or different from what you expected three years ago. The.
The second question is a little bit bigger picture for Apollo Pablo.
It is clear that royalty pharmacy business has great momentum a bright future and is very consistent.
But many quarters, including this one you get.
Questioned about potential risks.
Such as IRA and our competition with you were asked about.
The situation with vertex, which you were asked about other quarters, you get asked about competition and sometimes even adverse tax legislation. Now. These are these are real risks, but theyre just manageable from your perspective, and therefore your answers tend to be kind of high level.
But since they are risks I am wondering if you would be willing to rank them by your perception of the challenge they represent to the company over over the over the long term.
And to provide a reference point.
Please allow me to speculate on the order.
So I think probably CFO at the top.
Competition too.
IRA and innovation number three and adverse tax legislation has left thank you.
Sure.
So I guess Terry will take your first question.
And then I can come back and provide some perspective on on those.
Bigger strategic.
Question.
Hi, Steve.
On <unk>.
We.
Certainly have been.
Disappointed by the recent commercial performance of that product and <unk>.
Like many people.
<unk> had expected it to be more resilient in the face of competition.
You take that take the recent trends on board.
And we continue to.
To make sure we understand what's going on in that market.
And I think that our guidance.
I don't want to really get into or have an opinion on what abbvie has said, but I can speak to.
What we include in our guidance and we have taken what we think is an appropriately conservative approach to our guidance.
Including all of the recent trends.
And we obviously look at a range of scenarios, but certainly for this asset.
That range of scenarios based on recent trends has been more focused on the downside.
So that's probably all I can say and on <unk> specifically at this point.
Yes.
Also just a reminder.
You look at that.
<unk> investment in <unk>, when we made it.
So.
Price.
Royalty interest.
And the expectations, we had at the time, which were a couple of billion dollars.
For the drug.
<unk> exceeded sales.
Sales expectations.
No.
I mean, even the sales that are maybe likely in the future.
Asset continues to decline.
Meaningfully above what we had forecasted so from a return perspective that investment for us.
It has been a.
Really a big winner.
But I think I was talking about.
How I think about long term.
Our strategic.
Opportunities and risks for royalty pharma.
I think.
The biggest.
The thing that always.
Okay.
As.
The most important thing we focus on the things that we worry about the most honestly as product selection.
The number one thing for us.
More than anything.
And in mitigating potential risks.
As we make investments.
Is really driven by really understanding.
<unk>.
It's a differentiated product or not what value it brings to patients.
And the competitive landscape.
Not over the next two or three years, but over the next 510 15 years.
And.
And then <unk>.
Innovation, but obviously balancing that with.
Like the significant upside that.
Kevin.
Derived from.
Investing in blockbuster incentive you see historically.
Our track record, what's been really consistent is our ability to find.
Sorry, I predict glasses that are going to become really important drug that are government come really import them and then make several bets on on many of this new therapeutic classes that are that are going to change People's lives.
Specifically mentioned other things WCS risks like CF and I think we've been very clear about CF, but from our perspective first of all we think we can have a very solid position, there and defensible position and we've really looked at the IP situation. There when we made our investment in 2014, and then again when we acquired it.
Residual interest of the cystic fibrosis Foundation had and at that point realize that we have a lot more knowledge about.
The IP situation.
When we made those less investment much more recently and again, we were very comfortable with our position and Thats why we spend another $600 million Theyre now Terry has done a great job of explaining that the potential variance there too.
Revenues, which are about $800 million currently and growing from that franchise.
There are a couple of hundred million voters in the business.
This is sort of at the later part of this decade in a business that should have.
<unk>.
Much higher revenues than we have currently.
The other thing is competition.
I think our position of strength increases as time goes by for many reasons.
The team that we have which is excellent our cost of capital.
And the scale of our business, which gives us a huge advantage. So I think I feel much better today.
Regarding our competitive position.
Then even a couple of years ago 234 years ago, when some of the new entrants came to market, where there are very strong businesses.
Some of those private equity firms with access to a lot of capital and potential good teams, but as we've now been competing with them over the last two or three or four years honestly I think we feel very very strong about.
Our market position, so I think you know.
Yes, there are risks, but one thing to just remember is that.
The royalty pharma compared to many many other businesses in life Sciences has hopefully which is really really unique that I think is not a lot I appreciate it well.
Well by many investors are sort of underappreciated, which is the fact that.
We come in and make this investment with a very very attractive risk reward profile, because we're coming in with.
First of all with the approved product.
The risk is obviously very low at that point, if there is some risk obviously, but much lower.
We have based on our structure and.
Our ability to make very attractive investments in our pro products that when we add the leverage end up returning very high returns and then with the unapproved.
The approach of having a portfolio im having many investments.
Got.
Have very very significant upside potential and when you look at our business in a nutshell. It provides us the ability to invest in this great industry.
And some of the most attractive therapies that are being developed on a diversified basis and with very very low.
Additional costs infrastructure costs right.
Very low overhead.
Not a lot of the sort of challenges that.
Other companies face in terms of our very high operating expenses manufacturing expenses and other things So I think.
Overall, I think the risk reward is very attractive and tilted towards high returns and also towards consistent sort of double digit topline and bottomline growth, which is very unique in life sciences, and it's predictable and it's.
Hi, Cai.
High growth.
So that's my answer to your question.
Thank you.
I would now like to turn the conference back to Pablo <unk> for closing remarks.
Sure. Thank you operator, and thanks to everyone on the call for your continued interest and royalty pharma. If you have any follow up questions. Please feel free to reach out to <unk>. Thank you everyone.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
[music].
Yes.
Okay.