Royalty Pharma. We've got Terence Coyne, Executive VP and CFO, and Marshall Urist, EVP, Head of Research and Investments. My name is Jason Gerberry. I cover Biotech and Specialty Pharma at BofA. Gentlemen, pleased to be joined by both of you. It's interesting times in the therapeutics landscape, as we were talking about before this webcast started. I'm just kind of curious, coming out of Q1, you've now closed the RP internalization transaction, right? I believe.
We had the shareholder vote.
Oh, the vote. Okay.
On Monday.
All right.
Yeah.
Progressively voted down.
99.9% of shareholders voted to approve the internalization transaction, which was really, I think, a great outcome for us.
Right. So I guess coming out of the quarter, a beat-and-raise quarter, you've got share buybacks remain an area of focus. Maybe what would you kind of, in terms of setting expectations for investors heading into this year, what are some of the key objectives? I know that sort of there's a balanced approach to share buybacks and BD is important, right, in terms of getting more royalty deals under your belt. So maybe kind of level set going into the year what the objectives are.
Yeah. Thanks, Jason, for having us here. We're really excited how the year started. We had really strong performance in the first quarter, grew our top line by 17%. Group royalty receipts, which is the sort of more steady part of our top line, by 12%, and have been seeing very consistent royalty receipt growth every single quarter since our IPO. I think that that's something we're really proud of and think that it's something that we're going to focus on continuing to deliver over the long term. You mentioned sort of priorities for capital allocation. When we announced the internalization transaction, we had a call and we laid out what we view as our capital allocation framework, to give investors a sense of how we're thinking about it. It puts things in four quadrants.
We look at both the share price relative to intrinsic value and the attractiveness of royalty opportunities. Right now, we feel like we're operating in an environment where our share price is attractive and is a really good investment. There's also really attractive royalty opportunities. I think with some of the turmoil that's going on in the biopharma markets right now, this could certainly create some additional really attractive royalty opportunities for us. We're going to take a balanced approach. We repurchased around $725 million worth of shares in the first quarter, and we're happy with the price that we were able to buy back the stock for that repurchase.
I think going forward, we're going to continue to kind of assess the sort of relative attractiveness of each of those two things and try to be disciplined and smart allocators of capital and put that capital to use where we think we can generate the highest returns.
Yeah. Maybe when you think about the deal pipeline and kind of how you conduct day-to-day business, this business that we're in, especially when the current administration's in office, lends itself to periods of uncertainty. When there are periods of uncertainty, I know that as the dynamics change, right, future deal structures can change, valuations change, right, and you can flex up and down depending upon that. When you're in this period of uncertainty, how hard is it to do deals? Do you feel like it's a, let's wait and see what comes of tariffs, what comes of MFN through the executive order, or do you feel like you can still get deals done in an environment where you have so much uncertainty?
Yeah, I think we can definitely, it's a great question. I think we can definitely still get deals done. Certainly, I think one of the advantages we have is our flexibility to be able to react to and try to incorporate the best information that we have out there. As you said it, this announcement on Monday and sort of things we will hear from here create uncertainty, but we're going to continue to look for opportunities where we still see really important medicines that bring a lot of value to patients. We will certainly be cognizant of these newer risks that are out there. Certainly, there might be things where we see something, but the current environment kind of creates too much long-term uncertainty. That's something we don't, that's probably something we won't do.
I think we have the advantage of, one, we have such a strong business today. We do not have to do any given deal. We are going to continue to stay patient and disciplined as you have seen us in the past.
Not to get too cute here with this question, but do you feel like there's, when there are elements of uncertainty when it comes to just company acquisitions, oftentimes mechanisms like CVRs are put in place, right, to sort of toggle risk factors. Do you look at different exotic mechanisms to factor into deals that, like, hey, you guys need capital. We want to be there. And maybe there's something that you can structure a deal so that it's fluid depending upon how some things may play out in the macro landscape.
Yeah. We definitely think that this environment is going to create a lot of opportunities for us. I think something, if you followed us over time, we've been really creative and forward-thinking in how we structure our deals. I do not know that I would use the word exotic necessarily, but certainly we will find the right structure that works for us, works for our partners. I do think that flexibility in structuring, especially in environments like this, can really help to get deals done.
Yeah. Maybe there's a laundry list here of macro newsflow items between tariffs, tax reform, drug pricing, FDA disruption, right, in terms of what do you guys see as the real theoretical risks of the model that could fundamentally change the space as we know it today?
Sure. I do not know, Terry, you want to start maybe on some of that?
Yeah. I mean, I can start on tariffs and then turn it over to Marshall.
Yeah. Yeah.
It is actually easier for Royalty Pharma because we do not think we really have any exposure. It is just a function of how the supply chain works. Where we receive our royalties, the royalty-bearing sale is not typically going to be a tariff-bearing sale. The way that the supply chain typically works is XUS affiliate sells into the U.S. to a U.S. affiliate. That transfer into the U.S. is the point where there will be a tariff. Where we receive our royalties is the sale from the U.S. affiliate to a third party. There is no expectation that there will really be tariffs on that sale.
That's sort of a boilerplated thing you put in all your agreements, I imagine?
Yeah. The definition of net sales is always going to be the sales from the manufacturer to a third party. That is very consistent throughout those documents. Yeah, we're in the fortunate situation where we really do not think we have much exposure to tariffs at this point. How that impacts the rest of the pharma ecosystem, it's tough to say from where we are now.
Sure. Sure.
You mentioned a couple of other things. I think on FDA, it is still early. We'll probably be hearing that from a lot of people on stage at this conference. On the FDA, I think we tend to take the view that drugs with great data that really show that they help patients, are advancing the field, are going to get approved regardless of how the administration may change at FDA. We've always taken, I think, a little bit more of a cautious view on opportunities that required, what's the term, regulatory flexibility, right? We've wanted to have a pretty clear path from a regulatory perspective when we evaluate investments. From that perspective, I think we feel comfortable that ultimately great drugs are still going to get approved. That's where we want to kind of focus the portfolio and our time.
MFN and pricing, anyone's guess at this point. I think we're still living in a world where the breadth of outcomes is pretty wide right now. I think we're going to, we will be cautious, certainly respectful of what could happen out there, but we're going to take a little bit of a wait-and-see approach right now.
Yep. Okay. It sounds like as long as share price is where it is, maybe a more balanced approach with buybacks and BD going forward.
Yeah. It also depends on deal flow too. I think that we announced one deal in the first quarter, and there are quarters where we will announce five deals. It is tough to say. That is the nice thing about our business, we can be flexible.
And if.
We're well capitalized. If deals come along or the shares are really attractive, we have plenty of capital to pursue one or both of those.
Right. Talk about that a little bit. If a really compelling deal came along or multiple, how much dry powder do you have in the balance sheet right now?
We have a lot of leverage capacity. We're at three times total debt to EBITDA. We had over $1 billion of cash. We feel like it would be hard to imagine that a deal would come along where we couldn't easily fund it with a combination of cash on the balance sheet and debt. We've never really had a difficult time funding ourselves over time. We're much stronger. We're much more well capitalized now than we ever were in the past.
Is there a certain ceiling you don't want to lever the company beyond?
Yeah. So what we've said is that we are sort of targeting operating in the three to four times range. We've been closer to three for a while now. As the business continues to scale, it's harder to imagine that we would get to four, but we would for the right deal. We would kind of de-lever from there. We just had a very positive development. We were upgraded by Moody's to Baa2, which was a great development. Now sort of solidly in that mid BBB territory. Again, that speaks to the strength of the portfolio and the strength of the balance sheet.
Yeah. Okay. Maybe Marshall, are there certain areas of the biopharma ecosystem that you're more attracted to in terms of channel mix, disease, and TA specifically, or is that something where you don't typically want to tip your hand to your competitors as it pertains to what you really like?
Yeah, it's a good question. It's not that we don't want to tip our hand, but it's more about how we have approached business development, how we have approached finding new investments, which is to take a really open, flexible approach and say, what are the most kind of exciting, most important new medicines and opportunities that we're seeing at any given time? The advantage of that is that we don't go out and take sort of a top-down perspective and say, this year, I have to go out and find something in oncology, something approved in cardiovascular, and sort of kind of curate the portfolio. That way, it's more, let's have a team and a structure that allows us to go after anything that we see out there that's exciting that we want to add to the portfolio.
That, when you look back, has generated the highly diversified portfolio of really great products that we have today. No change in the business that way. I think we'll continue to approach it the same way.
Yep. Okay. Maybe shifting gears to your largest royalty from Vertex, just curious either of you, just the early adoption of the new triplet product, how that's going relative to early expectations.
Yeah, I think so. We've obviously been tracking that closely. We're one quarter in. It's still really early days. I think what we're seeing is that the launch is going to be gradual. At least it is gradual so far. I think that reflects the strength of Trikafta, the amazing impact that that product has had on patients living with CF. It has totally transformed the disease. We've said that we think that Trikafta will continue to be a very important product over the long term and still feel that way today. As far as Alyftuca goes, where it gets to, it's just tough to say at this point. I think that Trikafta will continue to play a big role in CF treatment.
As you're probably wondering around any potential dispute around the royalty rate, just for everyone's background, we feel really strongly that the deuterated form of Ivacaftor, which is a component of Alyftuca, is the same as Ivacaftor, and we should get the same royalty rate. That is something that we feel really strongly in our position, and we are going to, we will certainly, over time, we will see how that ultimately plays out, but we feel good about our legal position.
Yeah, mindful, I know on your recent earnings call, not much you can say on that front. Maybe a broader question, generally speaking, when you strike royalty agreements with parties, does it typically contemplate lifecycle management into existing APIs and things like that that sort of underpins your confidence that the follow-on product would be encompassed within the deal, the original terms of the deal?
Every deal is different. But certainly, in this case, we feel really strongly that deuterated Ivacaftor is the same as Ivacaftor and should have the same royalty rate. But yeah, I mean, every transaction is different. The reality is a lot of times the deals have already been done between another party, and we're buying that contract. We do not really get to negotiate the specifics there. In this case, we feel strongly about our position.
Stepping back beyond Vertex, any trends that you'd highlight in the royalty space, broadly speaking, your competitive positioning versus others, imagine market share is holding firm, any trends in deal terms that maybe are shifting, or you feel like it's business as usual kind of holding your market share or even growing your market share in the royalty garnering space?
Yeah. I mean, I think the biggest trend is that the market is just getting bigger and growing, right? The role in the use and the number of opportunities that are being created out there is growing a lot, right? That is exciting. We've been talking about that a lot, that we think royalties will have a bigger and bigger role in funding of our ecosystem over time. We're certainly starting to see that. Beyond that, I don't know that there's any big trends. I know we continue to feel very confident in our strategy, competitive positioning, our ability to win the deals that we really want to, that we really want to lean into. I think the sort of secular story of the growth of royalties is very much alive and well. We are really excited about what's in front of us.
How much of that do you think that trend is independent or dependent on the drying up of the capital markets for IPOs and secondaries for biotechs, right, which is your feeder of these deals most frequently, right?
Yeah. There are kind of two answers to that. I think one is if you look historically, it is not related to the background environment. You look since we went public in 2020, you just take that period to now. We have seen some pretty robust capital availability cycles in biotech and biopharma, and we thrived and did great deals and grew the portfolio during those periods. The same thing has been true when the markets have tightened, when capital availability has tightened. I think it is unrelated. I think why that is, is in our view, for a long time, you have had more companies being created, more innovation, more need for capital, but there has not been a lot of innovation on the type of capital that is available.
I think one thing we offer is a really unique type of capital to fund a given project on a sort of project-by-project or drug-by-drug basis, right? That is kind of what royalties are in a way. It is like equity in a single product. That is an option for building capital structure that was not available historically. I think the reason why it is growing is not simply because of the waxing and waning in the cycle, but because I think we offer something and our kind of part of the world of funding biopharma offers something that kind of the market needed.
Yeah. Okay. Maybe we'll jump to some portfolio-specific questions. First, maybe starting off with the Terence asset that you guys highlighted on your most recent earnings call. How did that deal come about? What attracted you to the asset? I know it's sort of a pretty substantial royalty if revenues exceed $400 million on that asset. It seems like it's a pretty underserved population and not many options to go to.
Yeah. That is a great story to kind of understand one of the things that Royalty Pharma does well because we had that opportunity come to us, and we had all of the kind of resources internally in terms of the data resources to be able to understand a market where there really were no approved drugs, right? There was no precedent you could look to. There were no big companies talking about the epidemiology, right? We could sort of build our conviction in the size of the market, which we highlighted, over 100,000 patients out there, and there has not been a new drug approved in over 10 years. I think that really shows our ability to build and identify opportunities that might be overlooked because they just have not been paid a lot of attention to. We were excited to have that.
It is funded by a team that's done this before, right? It kind of brought together a lot of positive attributes.
How important is speed of your operation to getting deals done versus either competition or even other forms of financing coming into these companies that might be, I guess, an indirect form of competition, right? If they go to do a secondary offering, there is no need necessarily for royalty financing. Maybe can you speak to the organization, how it is right-sized to do these types of deals, to do them in an expeditious manner? I imagine time is of the essence.
Yeah. No, it's a great question. It's something several years ago that we as a team kind of identified strategically as somewhere we needed to invest, which was, I think it would grow our market and create more opportunities if we could move a little bit faster. We're never going to be able to move as fast as an overnight equity offering, but we've built the team and invested in resources around the team to be able to move faster. By growing the team, the other thing we were able to do is do work ahead of time on areas and opportunities that we think are interesting because if you put that sort of, kind of, you do the groundwork ahead of time, when the opportunity is actionable, you can move much more quickly.
We've definitely been able to, we've definitely been able to speed up. I think it's been important to be able to be responsive to our partners.
Yeah. Maybe shifting to the Cytokinetics partnership. I guess some of the recent updates, it looks like CAMZYOS gets a little potential loosening of its label around echoes and aficamten with the delay and request for REMS. These kind of two factors, as you think about sort of the opportunity and how that maybe shifts any competitive balance, was this all maybe in line with how you kind of saw this kind of netting out in this space, or does this come as a surprise in any way?
Yeah, I think maybe take a step back from that just to help everyone because it helps everyone understand how we look at the world because I think this is a good kind of case study that way. The thing is we think about our investments and our partnerships in 10-, 15-, 20-year kind of frames, right? I think that's really powerful because our partners, the companies, that's exactly the way they see the world, right? Sometimes the equity investment world is kind of a little bit more focused on the near term, let's say, about that. I think we're still very excited about that opportunity because what we're really thinking, what we're really focused on are the kind of big picture things, which are this is a big market. Aficamten in this case is a great drug.
We think the team at Cytokinetics is doing a great job. It was not necessarily determinative for us that the Bristol Myers product has a certain kind of limitations on its use right now. We sort of could take the, we had to take the view that in the fullness of time was that always going to be true or whatever it might be. We think about the world in such a long-term way that some of these changes do not really necessarily impact our thesis.
Okay. And then COBENFY, this is a, I used to cover Karuna back in the day. So I know this space well. I guess our thesis was always the low-hanging fruit was going to be, I think like a third of the market uses combination D2s, right? To swap something in with a novel mechanism of action, kind of create a built-in market opportunity for COBENFY. Now, the Urige trial having a negative outcome, I guess we can interpret that one of two ways. Does it impact the adjunctive utilization, which we saw as kind of this logical market slot for COBENFY, or if in the end, doctors are still going to trial two combination agents because they were doing it with two D2s anyways in the absence of real good evidence that that even worked?
Yeah. Look, I think what I'd remind everyone on COBENFY was we couldn't be more thrilled with what's happened since we made that investment. To your point, we made an investment in that product, and it was in the hands of a small independent company that's subsequently been bought by Bristol Myers Squibb, and their major competitor is now delayed, right? By or maybe forever delayed, right? When we make investments in those kind of products, this is a great outcome for us, right? To answer your question specifically, no, we weren't dependent on the combination therapy. We were thinking it would be Karuna marketing it in the monotherapy market. Where it sits today, I think we are thrilled with where it is. Our fundamental view is that people are going to experiment with combination therapy because that's what these psychiatrists do.
I don't think the outcome of that trial really is going to impact that.
Was part of the thesis around this asset Alzheimer's psychosis, because I know there's differing views on the clinical risk profile of that trial, right, between the old xanomeline data that was generated. It's imperfect in a lot of ways. Then commercially, a lot of these people are in nursing homes, right? There are some challenging kind of payer constructs as we understand them. I don't know. Was more of the sort of valuation predicated around schizophrenia and the more near-to-market opportunity?
Yeah. Schizophrenia was really the focus. If there's anything beyond that, I think we'll be very happy with that. It was really just schizophrenia that we were focused on.
Okay. Lp(a) next year should be the year, hopefully.
Big year.
Lp(a), I think both.
Big year of Lp(a), yeah.
Both interims are now out of the way with pelacarsen. We caught up with Ionis this morning. Yeah, I guess, do you just kind of see this as let's play both horses and we win either way in terms of funding both Amgen and?
No, we actually not we win either way. We think we'll win both ways, right, was we sort of made was our view was to our discussion before about how we approach it with the first one with the Ionis pelacarsen, first-in-class drug, going to be the first card turnover to prove the value of Lp(a) in the hands of one of the best-resourced cardiovascular marketers out there, right? We actually bought it in a really nice sort of risk-reward protective structure. Second was we also had the opportunity for olpasiran, which is the Amgen, which is the Amgen program, that also another huge scaled marketer that I think they're both going to be kind of synergistic in making this market bigger. It is dosed quarterly, right? That is a great profile as well.
I think that's something unique about our business that's worth just touching on, which is we uniquely can own multiple products in the same class, right?
Can you remind me, are the royalties similar on the two?
No, actually, we are, the pelacarsen is mid-single digits. Olpasiran, I think we've said is high single, low double. Definitely a SharePoint to Amgen is worth more to us than to Novartis. I think the cool thing is, right, something super unique about our business that you've seen us do is, yeah, we can own two Lp(a) products. Who knows, one day if we had an opportunity to do another one, we would certainly consider that as well.
Okay. Last one on the portfolio side, one that we're excited about is olanzapine LAI.
Are we?
When we think about who needs an LAI, it's usually somebody that's very sick, very difficult, struggling with compliance with their therapy. And olanzapine is the heavy hitter of antipsychotic therapies. And so it seems, I think the MedinCell consensus on this product is $2 billion-$3 billion. It's much higher than the Teva consensus. But nonetheless, I guess, do you see this as something that could be potentially as large as Invega from a peak sales perspective? Invega has been kind of the gold standard in the LAI space, had the broadest suite of offerings, and maybe they were there at the right timing and struck lightning in a bottle, so to speak. But nonetheless, we are seeing pretty good traction with Teva launching Uzedy, and that may sort of portend good things with olanzapine.
Yeah. I think the last thing you mentioned is important. I think Teva has done a phenomenal job competing in that market, in the risperidone LAI market. We are certainly super excited to be partnered with them and have this product in their hands. I guess the way I think about the peak sales is we certainly do not need it to be as big, as you mentioned, for this to be a successful investment. I totally agree with you. The olanzapine market needs this. I think you do not have to talk to many physicians to get that feedback that there is a lot of unmet need for this product. We are excited to see a launch.
All right. We are at time, gentlemen. Thanks so much for joining us at the conference.
Yeah, thank you, Nicola. Appreciate it.