Q1 2024 Royalty Pharma PLC Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by welcome to royalty pharma first quarter 'twenty 'twenty four earnings conference call I would like now to turn the conference over to George Carter Senior Vice President 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 first quarter 2024 results you can find the press release with our earnings results on slides for this call on the investors page of our website at royalty pharma dotcom.
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.
I refer you to our 10-K on file with 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 liquidity measures will be used to help you understand our financial performance. The reconciliation of these measures to our GAAP financials 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 Pablo like our retina founder and Chief Executive Officer, Mark for Europe, EVP head of research and investment, Chris <unk>, Vice Chairman and Terry Cohen, EVP Chief Financial Officer.
Pablo will discuss key highlights after which Marshall will give a portfolio update.
Chris will discuss our government this portfolio afterwards, Karen will review the financials.
Following concluding remarks from Pablo we will hold a Q&A session.
I would like to turn the call over to Bob.
Thank you George and welcome to everyone on the call.
Delighted to report a successful start to 2024 as we execute against our vision to be the leading partner funding innovation in the life Sciences.
In terms of the financials, we delivered 14% growth in royalty receipts. This would present a recurring cash flows.
And the shrunk performance in a quarter. It reflects the quality of our diversified portfolio of more than 35 commercial products.
Milestones and other contractual payments are received.
Which are more variable declined reflecting the high base.
In fact of the year ago quarter from a nonrecurring by having related payment as a result portfolio receipts. Our top line declined to 717 million, which was in line with our expectations.
Turning to capital allocation today, we're announcing an exciting transaction, which is expected to take our capital appointment to approximately $670 million.
Marshall will take you through the details but in summary, we have agreed to acquire royalties and milestones on Sanofi is frac sand them up for approximately 525 million, including estimated transaction costs. This is an exciting development stage therapy with multi blockbuster potential.
Multiple sclerosis, and other immune indications.
Following the 5% increase in our dividend in the first quarter I'm also delighted to announce today, a new commitment to grow our dividend by mid single digit percentage on an annual basis.
Looking at our portfolio, we will have 50 development stage therapies, which we estimate have the combined potential to generate significant significantly greater than 1 billion in peak royalties. Most of these therapies have blockbuster sales potential and are in development by Premier Global <unk>.
We believe our development stage portfolio is highly attractive and underappreciated by the market and.
And Chris will expand on the multiple potential event.
Expect over the next year.
Lastly, I am pleased to reconfirm.
Our 2020 for full year guidance, we continue to expect portfolio receipts to be between $2 6 billion and $2 7 billion.
Based on unexpected growth in royalty receipts of around $5 two 9%.
Consistent with our Thunder practice, our guidance is based on our current portfolio. Our current portfolio and does not include the benefit of any future transactions.
Slide seven.
Shows our impressive track record of strong growth since our IPO.
As I noted earlier, we delivered 14% growth in royalty receipts in our first quarter. This is the highest quarter growth rates. We have achieved since the first quarter of 2022 and sets us up well to deliver our full year guidance.
The slide also illustrates the variable contribution from milestones and other contractual received when we look at the overall trend in portfolio receipts.
Overall, the track record of strong growth speaks to our ability to execute successfully and consistently against our strategy and the growing market for biopharma royalties.
With that I will hand, it over to Marshall to update you on our portfolio.
Thanks, Pablo I wanted to focus today on the exciting transaction, we just announced for Santa Feedstocks Allomap.
Slide nine summarizes the details of the transaction and the scale of the opportunity.
We have agreed to purchase a royalty interest in flex allomap from <unk>, a privately held biotech and expect to pay approximately $525 million, including estimated transaction costs in return, we will be entitled to receive a royalty ranging from high single to low double digits on worldwide sales also will share a minority of the royalty with the former.
<unk> shareholders on sales about $2 billion.
Importantly, the royalty is long duration running to 2041, which is central when we think about the returns.
In addition to royalties, we will be entitled to receive significant potential milestones.
In terms of the commercial opportunity Santa Fe stated that <unk> has the potential to achieve non risk adjusted peak sales of over 5 billion euros across multiple indications in our view the multiple sclerosis opportunity alone has the potential to generate over $3 billion in peak sales based on its differentiated profile.
<unk> Allomap generate $5 billion in peak sales. This would suggest peak annual royalty receipts to royalty pharma of over $400 million.
<unk> is a first in class antibody with a novel mechanism of action targeting CD 40 ligand.
This pathway are thought to be involved in the development and progression of multiple sclerosis, and may play a critical role in other immune diseases.
San <unk> Phase II data was recently published in New England Journal of Medicine, and highlights the clear potential of bricks allomap as a high efficacy non lymphocyte depleting therapy for multiple sclerosis, flex allomap significantly reduce disease activity as measured by MRI and the clinical relapse rate was close to zero at 48 weeks importantly, the treatment with <unk>.
Well tolerated with no notable safety signals based.
Based on this compelling profile Santa Fe has initiated phase III clinical development in multiple sclerosis with results and regulatory submissions anticipated for 2027 phase.
Phase III studies are also underway in type one diabetes in lupus two immune diseases in which a role for the CD 40 pathway has also been implicated.
Slide 11 provides an overview of the fundamental drivers of our excitement in the exceptional opportunity offered by fax Allomap and.
On top of the compelling phase II efficacy the differentiated mechanism of action may provide a potential safety differentiator versus existing high efficacy multiple sclerosis therapies.
We would also note that strong phase II data and MFS has historically been highly predictive of success in the phase III setting. Furthermore, our statistical analyses confirm the Santa Fe studies are well designed and powered for success.
Commercially.
Our proprietary U S claims analysis suggests that nearly 100000 patients who have discontinued anti CD 20 therapy by the time <unk> launches in 2028, a large addressable market that alone supports blockbuster potential perfect solid map, although we anticipate use in a broader set of MS patients if approved moving to slide 12.
<unk> checks all the boxes for us clearly aligning with our product selection framework. It's a potential first in class therapy with strong scientific rationale and a clear commercial position. It has various supported phase II clinical data and it will be marketed by a leading global immunology company breaks Allomap is as Dan if he described it a pipeline and a product.
Several immunology indications and importantly has the potential to contribute significantly to our growth in our royalty receipts within attractive returns profile and long duration.
And with that I'll hand, it over to Chris.
Thanks, Marshall I want to expand on the flex Allomap transaction and highlight the broader potential of our growing development stage pipeline, which we think is underappreciated by the market.
Chris: A strong pipeline and central to our strategy.
Instead of focusing on any one project in detail, we want to provide an overview of our current development stage portfolio.
Chris: Slide 14 summarizes the key take home messages and short since our IPO. We have assembled a portfolio that consists of 15 development stage therapies, which we believe have the potential to contribute greater than $1 billion combined peak annual royalties.
Most of these therapies in development are potential blockbusters in our in the hands of powerful marketers.
We've carefully manage the risk profile of this portfolio by selecting therapies, which meet our product framework and that are primarily in late stage development.
We've also built in risk mitigating deal structures where possible.
Lastly, we see the potential to begin unlocking the value of this exciting portfolio through multiple clinical and regulatory events, which we expect over the next 12 months to 18 months.
These include the FDA action date for <unk>.
FDA filings for epic Hampton and <unk>.
In pivotal study results for <unk> in terms of 749 interim fire in Crohn's.
And in 2025, we expect the outcomes data for pellet Carson, which has the potential to be a very significant royalty for our portfolio.
Slide 15 highlights that we have deployed capital of close to $23 billion since 2012 with a healthy balance between approved and development stage therapies.
Over the period the majority of our capital has been deployed to acquire royalties on approved products.
And even with the expansion of our development stage pipeline I just referenced this weighting towards approved products has remained the case since our IPO.
However, when we look on an annual basis. There is consider considerable variability in this mix, which reflects the opportunistic nature of our business.
Chris: Slide 16 shows that our development stage pipeline has grown fivefold since our June 2020 IPO.
The graphic on the right hand side illustrates that our pipeline is nicely diversified by therapeutic area, including neurology psychiatry, cardiology cancer rare disease and immunology.
Chris: When it comes to investing in development stage therapies, we have a strong track record.
On Slide 17, you can see that we have invested around $9 billion in this category and that our success rate has been high.
Approximately 70% of our development stage investments have gone on to receive regulatory approval around.
Around 20% are still in development and only 10% have not reached the market.
This record reflects our diligence process, including the product selection framework Marshall spoke to.
Our ability to identify therapies with unmet and underserved patient needs and our large opportunity set.
The balance of higher inherent risk versus approved products, we target returns in the teens for development stage investments.
Expanding on my previous point on Slide 18, we believe we have a unique and powerful approach to development stage investing.
In terms of product selection, and addition of requiring strong proof of concept data.
We often partner directly with the innovators. So that we have access to additional insights into the clinical program and sales potential.
Once we have made the product selection. We typically then structure. The transaction to include a risk mitigation strategies and also ensure we are strongly aligned with the interest of our partner.
Chris: These strategies can include investing in post pivotal study therapies.
Chris: Our deep due diligence supported by patient level data and regulate regulatory correspondence.
And receiving a portion of return through milestones and staged investing to name a few.
You can see here a number of examples that illustrate our unique approach, including our investments in car T at Canton, <unk>, Allomap and Merck 80 189.
Slide 19 is my final slide shows our late stage development pipeline by potential peak sales and the associated royalty.
We could receive expect to receive importantly, these all these all have first or best in class potential and are supported by World class marketers.
Chris: The majority have multi blockbuster potential.
And in aggregate, we estimate their combined peak sales at over 25 billion on a non risk adjusted basis.
So on the respective royalty rates this could potentially translate to over one and a quarter billion in annual peak royalty to royalty pharma with Forex allomap in El Paso, and potentially the largest individual contributors.
I would also add that we are pleased with the positive news announced by Teva that Teva 749 on long acting injectable version of the antipsychotic Olanzapine achieved its primary efficacy endpoint in its phase III study and continues to have an encouraging safety profile.
We look forward to additional updates in the second half of the year.
As a reminder, in the fall of 2023 royalty pharma partnered with Teva to provide up to $125 million in R&D funding for the Teva 749 Phase III program.
Chris: We will receive a milestone payment on FDA approval as well as low to mid single digit royalties on net sales.
Given its emerging differentiated safety profile in a market with significant unmet need.
Decided about the commercial potential for <unk> 749.
This once again highlights our unique ability to identify attractive products across the biopharma industry and partner with innovators to accelerate development.
As these products become commercial they will contribute to our attractive compounding growth in the years ahead.
To close we have an exciting development stage portfolio with multiple expected upcoming events. So you can see why we expect to continue to deliver attractive compounding growth in the years ahead.
With that I would like to hand, it over to Terry.
Thanks, Chris let's move to slide 21.
Royalty receipts grew by 14% in the first quarter, reflecting the strength of our diversified portfolio.
The key drivers of growth were the strong performance of our base business, notably our cystic fibrosis franchise and strategy as well as the acquisition of incremental adversity of royalties.
Chris: Portfolio receipts, our top line declined by 37%, reflecting the impact of nonrecurring items in milestones and other contractual receipts in the year ago quarter.
Specifically in the first quarter of 2023, we received a $475 million milestone payment following the FDA approval of Pfizer SaaS at Pratt.
As a result of this nonrecurring item milestones and other contractual receipts declined to $12 million in the quarter.
This decline was entirely consistent with expectations and fully reflected in our full year 2020 for guidance.
Slide 22 slide 22.
Shows how our efficient business model generates substantial cash flow to be reinvested.
Chris: Portfolio receipts amounted to $717 million in the first quarter.
As we move down the column operating and professional costs equated to eight 4% of portfolio.
Net interest paid a $73 million reflected the semiannual timing of our interest payment schedule with payments falling due in the first and third quarters.
Chris: Moving further down the comp we have consistently stated that when we think of the cash generated by the business to then be redeployed into value enhancing royalties.
We look to adjusted EBITDA less net interest paid or as we call it portfolio cash flow.
This amounted to $584 million in the quarter equivalent to a margin of around 81%.
High level of cash conversion once again highlights the efficiency of our business model.
Chris: Capital deployment in the first quarter was a little under $100 million, but will be approximately $670 million. After we acquire the <unk> royalty.
Slide 23 shows that we continue to maintain significant financial capacity for future royalty acquisitions.
In total we have over $3 $5 billion available through a combination of cash on our balance sheet, the cash our business generates and access to the debt markets.
Chris: At the end of the first quarter, we had cash and equivalents of $843 million.
Following the approximately $525 million of cash payments related to the <unk> transaction. This.
Chris: This will take our cash and equivalents to approximately $320 million on a pro forma basis.
Chris: When we turn to our borrowing position.
Chris: On top of our $6 $3 billion of investment grade bonds, we maintained significant leverage capacity, which could can take up to four times at the right opportunity arose.
Furthermore, we have additional undrawn financial capacity from the $1 8 billion revolver.
Taken together with our strong cash generation, we feel good about our ability to continue to execute transactions and create shareholder value.
Slide 24 sets out our unchanged full year 2024 financial guidance.
We expect portfolio receipts to be in the range of $2 6 billion to $2 7 billion.
Let me walk you through our assumptions.
First within our overall top line guidance, we expect to deliver continued attractive growth in royalty receipts of around 5% to 9%.
We anticipate the strength of our diversified diversified portfolio will more than offset improved <unk> and tysabri headwinds.
Chris: Second we faced a high base of comparison in 2023 as a result of the $525 million of bio Haven related payments, we received last year.
As you have seen today.
Largest element to $475 million out of the.
Chris: Milestone was received in the first quarter of 2023.
Milestones and other contractual receipts are therefore expected to decline from around $600 million in 2023 to approximately $30 million in 2024.
Lastly, our guidance assumes a negligible foreign exchange impact.
Importantly, and consistent with our standard practice. This guidance is based on our portfolio as of today.
Does not take into account the benefit of any future royalty acquisitions.
For the second quarter, we also anticipate portfolio receipts to grow in the high single digits compared to last year's second quarter.
Turning to operating costs.
Payments for operating and professional costs are expected to be approximately 8% to 9% of portfolio receipts in 2024.
We continue to believe that the degree of margin protection provided by our unique business model is impressive.
Chris: Interest paid for full year 2024 is expected to be around $160 million with de minimis amounts to be paid in Q2 and Q4.
This does not take into account any interest received on our cash balance which was $6 million in the first quarter.
With that I would like to hand, the call back to Pablo for his closing comments.
Thanks, Barry let me begin by my concluding remarks by saying how delighted.
With our start to 2024, we delivered double digit growth in royalty receipts, we strengthen our exciting development stage pipeline and we have announced a strong new commitments on our dividend growth on my final slide I want to highlight our incredible track record of consistently identifying.
Adding waves of Biopharma innovation, and finding ways to participate from Rituxan. The first monoclonal antibody for cancer to Gilead HIV HIV franchise through Humira were reinvested in 2006, and later became the industry's biggest selling product to more recent life changing.
Therapies like trade catheter for cystic fibrosis, and the Brexit for spinal muscular atrophy.
And when we look ahead, we expect to see a number of the exciting development stage therapies. We've talked about today joins that joined this list transforming the lives of patients with multiple sclerosis, cardiovascular disease and schizophrenia among others.
Chris: The ability to identify new waves of innovation and to constantly replenish our portfolio with life changing therapies is our DNA and we're confident that it can continue.
Chris: With our simple, but powerful business model, our deep access to capital. We're confident that we can continue to deliver attractive compounding growth over the remainder in the remainder of this decade and beyond with that we would be happy to take your questions.
Good morning.
First of all.
Chris: And our first question comes from Chris <unk> with Goldman Sachs. Your line is open.
Thank you very much good morning, congratulations on the deal with the Forex Allomap.
The opportunity that is at the forefront clearly in MFS, but theyre also in advanced clinical.
Marshall can you help us how you risk of SaaS and thinking about the potential in the other indications I think theres <unk> as well as type one diabetes and lupus the latter two in particular.
Quite challenging.
Marshall: Yeah, Hey, Chris Good morning, absolutely, we are really excited to be adding <unk> to the portfolio and as you correctly observed.
The core of our thesis and our view was really based on MFS, where there's a very can fit consistent and compelling set of phase II data.
As we mentioned incentive fee is going is going forward in other indications type one diabetes and lupus.
Both are both are interesting I think certainly.
We'll wait to see how the phase II data there works out there's not a lot of precedent data for CD 40 in those areas, but I think they would definitely add potential sources of sources of upside to the transaction and then just as a reminder, sand. If he has said that in sjogren stay actually.
Arent going forward there.
In phase II, but I think but as we said based on MFS was really the base of this investment and we're really excited to have this as part of the portfolio.
Speaker Change: Thank you.
Speaker Change: One moment for the next question.
Our next question comes from Geoff Meacham with Bank of America Securities. Your line is open.
Hey, guys. Thanks, so much for the question.
Just have a couple the first maybe for Marshall another one on Forex Allomap, just walk us through kind of the idea here.
EMS market be kind of avoid.
Avoid to fill with respect to Tysabri is there a thought that maybe you had to ultimately replace the economics from Tysabri and the longer term, obviously, the EMS market can be a little challenged when it comes to.
To generics today and then the second question, maybe for Terry or Pablo on capital deployment, and when you think about that.
The share buybacks you guys didn't do a lot share buybacks when that was first announced just wanted another context for for the commitment.
Now to a dividend versus versus buyback you guys generate a lot of cash and so I wanted to kind of get that perspective from you guys. Thank you.
Thanks for the question, Jeff and I think Marshall can definitely take the question on Forex out of it and then I think Teri will talk about capital deployment and our commitment to dividend growth.
Absolutely So hey, Jeff Good morning, So just quickly on Fracs allomap so no.
Marshall: The rationale behind <unk> Allomap was not.
Was not to fill and you sort of wait around to celebrate was the outcome of this strategy and our approach to building the portfolio that we've talked about that we talked about with everyone, which is looking for really exciting quality products that have that checks all the boxes in our product selection framework that we talked about.
That we talked about at the beginning at the beginning of the call and I think that was really that was really the core of it in our approach and we are really excited to have it as part of the portfolio and specifically on the commercial opportunity the way we thought about it was.
Marshall: There are certainly.
The dominance of the CD 20 class today is is is really compelling and it's been really important for patients, but what we see is as this market develops that theres going to be a need for high efficacy alternative mechanisms of action and that's exactly what <unk> offers and so that was really the core of our thesis and why we think this is going to be.
An exciting product for patients and for royalty pharma.
One thing just to quickly add to what Marshall said is there is no question that royalty pharma has had great success investing in diseases like multiple sclerosis, with Tysabri and also.
You may remember that we had a royalty architecture there so.
Total I think.
Marshall: Had invested $3 $4 billion.
Marshall: MFS with great results and now with this.
No.
$500 million or so so.
So it's an area, we like where we see huge potential for improvement in current therapies.
Marshall: And then Jeff on your question on capital allocation.
Marshall: As we said in the past our number one priority.
Is buying new royalties and we think that's how we can drive the most long term value.
We have been paying a dividend since our IPO and actually the 20 years prior to our IPO and been growing consistently every year.
Since the IPO, we've grown at mid single digits or better and so and it was fully our plan to continue to grow at mid single digits. So I think that the.
Marshall: <unk> commitment today is simply sort of a reflection of what our current.
Marshall: Our plants had already been we thought it was important to sort of put that out there. So investors understood that aspect of our capital allocation.
Marshall: And then in terms of the share buyback, it's certainly something that as.
Marshall: As we've said before it's a tool that we really like having.
Marshall: I think when we think about the buyback we also think about.
Marshall: In the context of some of the opportunities that we're seeing out there as well and I would say that the.
Marshall: The team is extremely busy we're really excited about.
Marshall: About the overall opportunity set we never know when transactions are going to happen but.
Marshall: That I think is it is it is a factor when we think about deploying capital because as I mentioned, our number one use of capital that we think is buying new royalties.
Speaker Change: One great. Thanks for.
Speaker Change: The next question.
Speaker Change: Our next question comes from Chris Scott with Jpmorgan. Your line is open.
Speaker Change: Hi, This is Ethan on for Chris Schott. Thanks for taking our question I just had two quick ones. So first off with the 15 development stage assets that you noted how do you think about the balance of royalties portfolio at this point and maybe more specifically as the company becomes larger and more diversified.
Ethan: Going forward is there an ability or desire to use capital deployment more towards the development stage, where you might get greater potential return and then the second question is just how you think about the 2025.
Ethan: Medicare part D redesign any estimate on the impact to your portfolio at this point thanks for the question.
Speaker Change: Sure, So I'm going to ask Marshall and Chris to talk about.
Ethan: The.
Ethan: Medicare and other questions, but just to be very top level.
Ethan: The business has been incredibly successful over many decades by and actually really over a decade, when we started to invest in an approved.
Ethan: We think that this balance.
Ethan: That has been fixed.
Ethan: 40 of approved and unapproved.
Ethan: As a good.
Ethan: <unk> way to continue to grow our business could it be 50% sure, but what really happens in our business.
Ethan: That.
Ethan: Measurement of $6 40 is.
Ethan: Sort of the cumulative capital.
Ethan: <unk> deployed and approved and unapproved, but in reality, what happens with our business is that.
Ethan: The $9 billion or so that we've invested in unapproved. So many of those got approved.
Ethan: So on slide 70, or so percent I think we also have really good data on several others that are not yet approved.
Ethan: Card fee.
Ethan: After captain filled correct sense, but.
Ethan: Those we view.
Ethan: Very high probability of approval.
Ethan: The point is that.
Ethan: This is sort of a moving average.
Ethan: Because of the.
Ethan: 9 billion reflects the cumulative then what happens is that several of those get approved and it gives us the capacity the opportunity to actually continue to invest.
Ethan: Significant non approved.
Ethan: And as the business grows I think.
Ethan: Maintaining that balance of.
Ethan: <unk> have been approved and have an unapproved is probably a good target for us but Marshall.
Greg: Back to you Greg.
Greg: Yes, good morning, and then Europe.
Greg: Last part of your question was on the 2025, Medicare part D redesign and so I think like a lot of the world.
Greg: The specifics of that on a product by product basis or something that we're that we're still that we're still thinking through but just to remind everyone.
Greg: Royalty pharma portfolio.
Greg: It doesn't have at a high level a lot of exposure to Medicare part D and we've highlighted three products in the context of certainly the potential for IRA negotiation.
Greg: <unk> and <unk> and trilogy.
Greg: That are significant products in our portfolio, but I think specifically, but the same conclusion I think holds for the Medicare part D redesign which is.
Greg: Which is that.
Greg: Which is that we don't think theres going to be a significant impact on our portfolio and certainly we have a balance there are products that are higher priced and something like trilogy, which which is lower priced and obviously, we will see very different dynamics.
Greg: And puts and takes with within the Medicare part D redesign, but I think the important thing is.
Greg: There isn't a lot of exposure right now and as we as we continue to invest and build the portfolio with products like <unk>, we will continue to add more and more diversity to the portfolio.
Speaker Change: One moment for the next question.
Speaker Change: The next question comes from Peter <unk> with Citi. Your line is open.
Peter: Yes. Thank you that's helpful.
Peter: Just a few questions. Please.
Peter: All of which fixed element.
Speaker Change: As I said not so much to do.
Peter: Just to be clear Moshe is this deal is it.
Peter: <unk> valued in structured around EMS or have you put in any sort of placeholder value.
Peter: Lupus in Taiwan question number one.
Peter: Number two is lots of good stuff going on in terms of the debate on pipeline, but there have been some should we say recent setback. So it will be interesting to hear.
Peter: How youre thinking about the risk profile around Brazil.
Peter: The emerging safety concerns.
Peter: I would just say right now and then lastly module just a clarification so it's been <unk>.
Peter: When I look at the <unk> press release, stating the break fix sales.
Peter: Exceed $2 billion.
Peter: The royalty guys, probably all the royalties to a minority shares I just want to make sure does that still is your comment.
Peter: Earlier in the presentation about getting 400 million royalty of $5 billion does that does that shine with what is in the press release. Thank you.
Peter: Hey, Pete welcome to the call. So just to make sure I hit all of those so first on Fracs allomap.
Pete: The core of our thesis was definitely centered on MFS. So our kind of base view is a EMS driven one certainly we one thing we really like about the transaction is the potential for further indications to come.
Pete: <unk> come along firsthand at fee invest in notes, which would which would drive further which would drive further sales as well so not not part of the base case, but we definitely like investments like this where there are there is optionality on indication expansion.
Peter: The second question was on <unk>, so not much to say beyond what's in the public domain. We're following the same thing you guys are but I would just recommend I would just remind everyone that to think about <unk> in the broader context of the more focused investment so.
Peter: <unk> say, but was ace which is an interesting product.
Peter: We're excited to see what happens with it but it was a small overall overall part of that transaction, which was really focused on.
Peter: Great royalty entre via debt that we acquired there.
Peter: And then your third question was the royalty structure. So no. So the way. It works is we always have a majority of the royalty a significant majority of the royalty.
Peter: <unk> sales exceed 2 billion there is some sharing with the former shareholders of EMEA next but no. We still maintain the majority of the royalty which is this structure that that sort of sharing in that structure is something we've used in the past.
Peter: In other transactions.
Speaker Change: Alright, Thanks, Bob.
Speaker Change: One moment for the next question.
Speaker Change: Our next question comes from EMEA, Ross <unk> with Evercore. Your line is open.
Speaker Change: Hey, guys. This is Mike Fury in for Omar Thanks for taking my question and congrats on the deal.
Michael Gennaro DiFiore: A few for me on for example on that and then one follow up.
Speaker Change: <unk>.
Michael Gennaro DiFiore: Would you be able to quantify the minority share of royalties like what percentage you get above $2 billion and also the total amount of milestone payments and the cadence of them and also on slide 11 regarding the unmet need it implies that there is significant opportunity after patients discontinue anti CD <unk>.
Michael Gennaro DiFiore: Which also implies that either patients are still not too far along in their disease. After they could discontinue.
Michael Gennaro DiFiore: Or they had entered the non relapsing spm's phase in that for example that it can be efficacious in this setting.
Speaker Change: What gives you confidence that this may be the case and I have a follow up thank you.
Speaker Change: Sure. So just to make sure I hit all of those so.
Speaker Change: Mike we haven't quantified.
Speaker Change: What we haven't quantified the amount of sharing but I think just to reiterate.
Speaker Change: The answer is the answer to Pete's question is that we maintain a majority of the royalty above above $2 billion and then.
Speaker Change: On the milestones we haven't given a law.
Speaker Change: Lot of detail there.
Speaker Change: Mike We did say, though.
Speaker Change: The pressure of this debt just to give you some context.
Speaker Change: That sorry, we said it in the slides that nearly half of the purchase price could potentially be returned in what we view as higher probability milestone. So that gives you a little bit of a context of the scale.
Speaker Change: Got it okay. Okay, great and then I hope that helps and then the last piece was on the unmet need.
Speaker Change: So what we were what we were trying to say was not.
Speaker Change: And your question is a good one was not that.
Speaker Change: We're taking a view on secondary progressive Ms. At this point, but that when we look into our claims data closely what we see is that patients are on <unk> for a for a very long time, theyre, great drugs, but but we do see that patients do come off over time and that population is at least one.
Speaker Change: That will be pretty significant by the time <unk> allomap by the time <unk> launches and if you do the at the EMS at MFS conferences in neurology conferences, we are starting to see Kols and others talk about some of the long term side effects of chronic b cell depletion over the long term and so when.
Speaker Change: We put that together I think that's one potential interesting and attractive and large market for Fracs allomap that being said, we think theres use well beyond well beyond that population as well. We were we were really trying to focus on.
Speaker Change: That there is an unmet unmet need here a need for new mechanisms and we think <unk> allomap is well positioned to be a part of the solution there.
Speaker Change: Got it.
Speaker Change: And then my follow up is just on the pace of deals can we expect the deal pace to pick up in the back half of the year recognizing that today's deal was phenomenal.
Speaker Change: And how might be higher for longer outlook on interest rates.
Speaker Change: Factored into the types of deals that royalty pharma is considering thank you.
Speaker Change: Yes, Chris can take the question on deal flow and what to expect and I think maybe Terry can talk about interest rates.
Terry: Thanks, Mike for the question.
Speaker Change: We continue to see a very robust environment.
Chris: When we look at potential investments.
Speaker Change: And we're super excited about the opportunity set in front of US as you know it's hard to predict.
Chris: When when the deals will actually happen, but we're very encouraged with what we're seeing from a funnel perspective and the opportunity set in front of us.
Speaker Change: And then on rates Mike.
Michael Gennaro DiFiore: I think what we've tried to reiterate.
Speaker Change: Is that our business is really sort of agnostic to the rate environment.
Speaker Change: And we've been sort of highlighting this with the deals that we've done I think even including the deal today, which we think is going to generate really attractive returns.
Speaker Change: Longer term.
Speaker Change: But I think the key for US is that we feel like we're able to continue to maintain the same spreads above our cost of capital on new investments.
Speaker Change: Regardless of the rate environment, and so you see you will see that as rates are sort of as they drifted higher.
Speaker Change: Sure.
Speaker Change: Targeting slightly higher returns.
Speaker Change: And I think that that that really shows how our business really is agnostic to the rate environment.
Speaker Change: Super helpful. Thanks again.
Speaker Change: One moment for the next question.
Speaker Change: Next question comes from Steve Scala with TD Cowen. Your line is open Oh. Thank you so much.
Steve Scala: Just to be clear on <unk>, it sounds as though type one diabetes and lupus are not part of the initial deal maybe you can confirm that but is sub Q part of the initial deal and what aspects of the molecule where the toughest for you to become comfortable so that's the first question.
Steve Scala: Second question, Chris You mentioned milestones for this year apologies if I missed it but did you mentioned the PDE 10, a inhibitor phase II data from Merck, which is expected and if not why why didn't you mentioned it and then the last question is you've gotten the obesity question I think every quarter.
Steve Scala: For a while now and every quarter you say youre always looking.
Steve Scala: But within obesity does <unk> have a preference for oral versus sub Q muscle sparing versus not muscle sparing and degree of weight loss. So in other words is more the better always the case or is it not necessary for the masses, so you're not necessarily pursuing that thank you.
Speaker Change: Yeah. Thanks, Thanks for the questions.
Speaker Change: Just to clarify I think.
Speaker Change: For whatever reason.
Steve Scala: The.
Steve Scala: The terms of the FERC settlement.
Steve Scala: There might be a bit of confusion to several of you but.
Steve Scala: The license that underlies our transaction.
Steve Scala: And they are entitled to receive royalties.
Steve Scala: On all potential indications for the product.
Steve Scala: Theyre all included.
Steve Scala: All we were saying is that.
Steve Scala: For us to get comfortable with a really attractive investment with really attractive returns.
Steve Scala: We have to get comfortable that this.
Steve Scala: Product was going to achieve.
Steve Scala: A good level of sales.
Steve Scala: <unk>.
Steve Scala: MMS.
Steve Scala: We think that in MFS were very comfortable with getting to the $3 billion plus range and then we see us upside.
Steve Scala: Other indications.
Steve Scala: Obviously, the two that are interesting and sort of being looked at.
Steve Scala: Type one diabetes and.
Steve Scala: In lupus.
Steve Scala: And the terms of the transaction are such that we would be entitled to receive royalties on those.
Steve Scala: And there is infrastructure.
Steve Scala: In addition to the $525 million upfront payment from.
Steve Scala: Some sharing.
Steve Scala: With the shareholders are in the next.
Steve Scala: Above $2 billion of sales, but as we have said.
Steve Scala: The sharing.
Steve Scala: <unk>.
Steve Scala: Sort of percentage that is less than 50%. In fact, we've just said that we're going to retain a significant majority of all of the royalties above $2 billion and also regarding the milestones.
Steve Scala: When we looked at the total milestones that the license or <unk>.
Steve Scala: Reduces which was north of $400 million, we've identified about half of those 240 or so of high probability milestones that are tied to things like filing.
Steve Scala: And those <unk> and other indications phase III trials and things like that which we think is highly likely to happen.
Speaker Change: We saw that as an attractive part of the transaction, but let me turn it over to.
Speaker Change: Marshall can talk about Merck and then obesity.
Marshall: Sure so on Merck.
Marshall: Steve nothing to interpret their I think much of Chris most of Chris's comments, we're really focused on the later stage.
Marshall: The later stage programs within our pipeline.
Marshall: As a reminder, 80 189 had the phase <unk> trial that that reads out relatively soon and so we.
Speaker Change: And so that that was maybe why it wasn't.
Speaker Change: It was not sort of discussed as prominently as some of the others, but we remain excited about the potential there and look forward to.
Speaker Change: And look forward to learning more.
Speaker Change: <unk> in obesity.
Speaker Change: No I think youre going to hear a similar.
Speaker Change: A similar answer in our approach there, but I think part of your but implicit in your question I think is the key thing which is there a lot of different approaches to what is obviously, a very very large and attractive market and we're continuing to look at our opportunities within all of it.
Speaker Change: Those different dynamics.
Speaker Change: In terms of form of delivery.
Speaker Change: Biology, et cetera, and our view at a high level is that there is going to be opportunities for multiple types of products for different for different patients at different times in the management of their obesity and that's going to create opportunity and we will continue to take the same opportunistic approach of looking for the right thing.
Speaker Change: At the right time that makes sense for us and our partner.
Speaker Change: Thank you.
Speaker Change: One moment for the next question.
Speaker Change: The next question comes from Terence Flynn with Morgan Stanley. Your line is open.
Speaker Change: Hi, This is Dan on for Terence. Thanks for taking my question I was just wondering on from fire and Crohns disease. At this point kind of how youre thinking about market share capture in the indication and views on the competitive profile versus Sky Ritchie. Thank you.
Speaker Change: Sure. Thanks for the question on chunk. So that's one that we remain really excited about so.
Speaker Change: I think with the recent updates from Janssen.
Speaker Change: We were as part of our thesis when we added that to the portfolio and continue to be excited about the potential in IBD.
Speaker Change: Data so far that we've seen.
Speaker Change: <unk> looks very compelling and competitive and just as important in this space.
Speaker Change: As data is the is the strength of the strength of the market or in the scale of their platform behind it and so we're really happy to have this product in the hands of J&J who is.
Speaker Change: One of the biggest marketers in this space and we think we'll be able to maximize the value of <unk> and IBD in the IL 23 class, which is attractive and growing really nicely.
Speaker Change: Please standby for the next question.
UBS: The next question comes from <unk> with UBS. Your line is open.
Speaker Change: Yeah.
UBS: Hi, Good morning. This is D on behalf of Ash, Thanks for taking our question.
UBS: I have one for al if I got it Matt.
Speaker Change: CD <unk>.
Speaker Change: With the history with the molecule.
Speaker Change: Thank you Ben.
Speaker Change: I understand from your perspective like Flex I may now have to you soon.
Speaker Change: <unk> provided you any data.
Speaker Change: The phase two that can feel like conviction.
Speaker Change: Yes. Thanks.
Ben: Sure Marshall one of your previous question no. Good question on the history of these.
Marshall: These of these antibody so.
Marshall: As you might imagine that history was something we looked at closely in the diligence and the team did a really good job.
Marshall: In terms of the diligence process, where we are.
Marshall: Also had the luxury and the benefit of working with of working with the immune X team, who did a lot of the work to generate fracs allomap with all the learnings from the.
Marshall: From the first generation antibodies, which as you mentioned did have a.
Marshall: I did have a safety issue but.
Marshall: What got us comfortable I think with two things I'd mentioned, which is one.
Marshall: The engineering and the design of the antibody was designed with.
Marshall: Shareholders, an analyst is that we.
Marshall: We actually had this great deal announced today that is again a demonstration of a royalty department has been able to connect.
Marshall: Consistently identify really attractive potential blockbusters marketed by Super strong companies.
Marshall: And we have the slide that really shows have we been able to.
Marshall: Consistently make investments and the most exciting new drugs.
Marshall: Sort of every wave of innovation and the other thing that we've done today is really spend time talking about this incredible pipeline that we have an unapproved products that we've <unk>, we've sort of assembled over sort of a decade or so or five years of investing.
Marshall: And really try to highlight the very significant potential that royalty from my house.
Marshall: In all of this unapproved products that will over the next two or three years.
Marshall: You know progress and Ah Ah resolved and attractive.
Marshall: Events as as data, we have data Readouts and then approvals.
Marshall: And I think as I said, it's sort of an under appreciated.
Marshall: Of royalty farmer that we're very very excited about.
Speaker Change: So with that.
Speaker Change: I'd like to thank everyone on the call for your continued interest in royalty farmer and again, if you have any follow up questions. Please.
Speaker Change: Please feel free to reach out to George grow grow up again his team, but thanks to everyone.
Speaker Change: Yeah.
Speaker Change: Thank you for your purchase.
Speaker Change: <unk>.
Speaker Change: Okay.
Speaker Change: Mmm.
Speaker Change: [music].