Investor Update

Jun 2, 2021

Ladies and gentlemen, thank you for standing by. Welcome to Royalty Pharma's conference call on the MorphoSys transaction. I would now like to turn the call over to George Grafik, SVP, 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's transaction with MorphoSys. You can find the slides of this call on the Investors page of our website at royaltypharma.com. Moving to Slide 3, I'd like to remind you that information presented in this call contain forward looking statements that involve known and unknown risks, Uncertainties and other factors may cause actual results to differ materially. I refer you to our 10 ks on file with the SEC for a description of these risks. And with that, please advance to Slide 4. Our speakers on the call today are Pablo Legarepta, Founder and Chief Executive Officer Chris Hite, EVP, Vice Chairman Marshall Urest, EVP, Co Head of Research and Investments and Terry Coyne, EVP, Chief Financial Officer. Pablo will discuss the key highlights of the transaction, after which Chris will discuss our role in M and A as part of the funding solutions we provide. Marshall will then provide details on the royalties we're acquiring for this transaction before Terry reviews the financial aspects. And after concluding remarks and Pablo, we will hold a Q and A session. And with that, I'd like to turn the call over to Pablo. Thank you, George, and welcome to everyone on the call. Today's $2,000,000,000 strategic funding partnership with MorphoSys is our biggest and boldest transaction since Royalty Pharma went public last year. It is also a great example of the important partnering role we can play in the broader biopharma ecosystem And our ability to advance win win funding solutions for the companies involved as well as for patients. More specifically, our strategic funding partnership with MorphoSys will enable its transformative acquisition of Constellation, which will accelerate Its growth strategy. Through this acquisition, MorphoSys will add promising pipeline candidates, bolster its position In hematology and solid tumors and strengthen its research and technology capabilities. The scale Of upfront capital we're providing to MorphoSys to accomplish this deal is unprecedented for an acquirer of their size and highlights the unique value Of Royalty Pharma as a partner. On Slide 7, I'm delighted to share with you why we believe this transaction is so strategically and financially attractive 1st, for Royalty Pharma, the anchor of this transaction is the royalty we will receive on Terraria, A leading immunology blockbuster in the growing psoriasis market. 2nd, we will add 4 attractive development stage therapies To our royalty pipeline with 2 coming from MorphoSys and 2 from Constellation Pharmaceuticals. Each of these therapies offers significant upside potential to the Action. 3rd, not only does this deal significantly diversified portfolio across therapeutic classes, Products and markers, but it will also add significant significantly enhance our expected long term growth potential as Terry will discuss in more detail. Also by providing development funding bonds as part of the consideration for the transaction, we believe this rounds out The overall risk return profile of the deal by providing a stable long duration cash flow stream with an attractive IRR in multiple. Lastly, our ability to execute such a complex transaction really speaks to the breadth of our funding capabilities and our unique role in M and A. We reserved as one stop shop for MorphoSys to pursue its strategic goals. For us, this is a strong demonstration of our flexible A leading approach to funding life sciences innovation for the benefit of patients globally. On Slide 8, you see a summary of the funding we're providing to MorphoSys. The largest element is an upfront amount of $1,425,000,000 which we will pay upon closing of MorphoSys' acquisition of Constellation Underpinned by a royalty on J and J's Tremfya. On top of this, we will make up to $150,000,000 in payments Related to the achievement of clinical regulatory and commercial milestones. Additionally, in order to advance MorphoSys pipeline, We have agreed to provide up to $350,000,000 in development funding bonds with flexibility to draw over a 1 year period With a minimum draw of $150,000,000 we will receive fixed payments on these bonds for 9 years, with the first payment beginning 9 8 quarters After the first draw, we expect returns likely north of 2x and low teens IRR in this bonds. Lastly, we have agreed to acquire $100,000,000 in MorphoSys Equity, which is expected to be priced using a 5 day Volume weighted average price of MorphoSys common equity at around the time that the acquisition of Constellation closes. All considered this component's total funding of around $2,000,000,000 making it the 3rd largest royalty based funding deal ever in biopharma. Slide 9 provides more detail on the strategic elements of the transaction. In Trevala, we have For our new top royalty within our current portfolio by 2025 based on blockbuster sales from its approved indications but also With the potential for label expansion into other immunological disorders such as ulcerative colitis and Crohn's. From MorphoSys' In house royalty portfolio, we're also acquiring royalties on ganetirumab, which would be marketed by Roche, if approved And notilumab, which will be marketed by GSK if approved. These are 2 attractive Phase III therapies, which could enter potentially large market For Alzheimer's disease and rheumatoid arthritis, respectively. From Constellation's portfolio, we will gain synthetic royalties on 2 earlier Stage therapies, namely pelabrasib, which has demonstrated impressive Phase II results in myelofibrosis and CPI-two zero nine For solid tumors and hematological malignancies. Lastly, the development funding bonds provide a stable long duration cash flow Stream that lowers the overall risk profile of the deal for Royalty Pharma and provides funding flexibility for MorphoSys. Slide 10 sets out how this transaction aligns with all three of our stated strategic pillars. On Sremphyra, it provides Royalty Pharma with royalties on market leading approved therapy with a long duration and significant growth ahead. It also provides royalties on late stage therapies with strong proof of concept data that could be important treatment options in large markets. And overall, it provides a diverse set of royalties acquired through an M and A transaction in which we play an important funding role to enable a partner To achieve its strategic objectives and advance life sciences innovation. Slide 11 shows our clear leadership In summary, Royalty Pharma has transacted on 14 of the 16 royalty deals About $500,000,000 as well as the top 3 largest biopharma royalty deals ever, showing the distinct benefit of our scale, Cost of capital, improving due diligence process that gives us confidence to pursue larger transactions. We have all we also have an overall market Share of nearly 90% in these large deals. This reflects our many years of experience in tailoring flexible win win funding solutions For our partners as well as the exceptional caliber and reputation of our research and investments team. We expect to remain a leader in founding life sciences innovation for many years to come. Let me now hand over to Chris to expand on our unique role in M and A. Thank you, Pablo, and good morning to everyone. Advancing to Slide 13, I want to expand on the 3rd If we take a step back and think about the position of many midcap biopharma companies, there has historically been real funding challenges When considering M and A opportunities, banks and other lenders are just not in a position to lend or provide bridge financing The MidCap Biopharma Companies that do not have a track record of earnings. This has resulted in MidCap Biopharma acquirers Attempting to acquire other companies using just their equity as a form of consideration. Not only has equity And the only viable funding source, it's even more challenging for those acquirers that are pre profitable. Without tangible, predictable cash flows, there has been a natural hesitancy for these companies to use their stock Given different perceptions of value and the dilution concerns, the boards of most targets prefer all or mostly cash with consideration, Which is why over 90% of the deals are all cash. For these reasons, M and A has never been a viable option for many mid cap biotechs. In addition, the universe of MidCap Biopharma Companies has grown fourfold in the past 5 years to around 200 companies, Creating multiple new opportunities for consolidation and growth. So despite the dominance of large cap biopharma companies In M and A, in the past decade, we believe there's a clear opportunity for midcap M and A where Royalty Pharma can provide the capital needed Using the types of flexible, tailored funding solutions you see today in this deal. In addition, the recent comments about Advancing to Slide 14, Royalty Pharma has truly differentiated capabilities that can meet the funding needs for MedCap M and A. Not only do we have the track record and experience providing the tailored win win solution that Pablo mentioned, but we can do so at Scale due to our access to capital, our ability to create unique ways of monetizing non strategic assets, Our ability to create synthetic royalties where no royalties exist and the long term focus of our business. All of these elements came together in this exciting transaction with MorphoSys. By building a close relationship with MorphoSys and understanding its needs, We were able to provide up to approximately $2,000,000,000 in acquisition and pipeline funding, enabling it to acquire Constellation And in so doing, helping MorphoSys to build a focused oncology platform with a significant cash runway. In return, Royalty Pharma will receive 3 royalties that were non strategic for MorphoSys, including those on TREMFYA. Royalty is tied to 2 products from MorphoSys Acquisition Constellation and development funding payments. Across the 6 cash flow streams for Royalty Pharma, we expect to deliver an attractive return for our shareholders. We are confident that this is the first of many M and A deals in the midcap biopharma space, and we look forward to playing a leading role in this space. With that, let me hand to Marshall to tell you more about the royalties we are acquiring. Thank you, Chris, and hello, everyone. Through today's transaction, as you have heard, we are acquiring royalties on 5 products, 1 approved And 4, in the development stage. As Pablo noted, this will further diversify our portfolio in terms of therapeutic areas, products and marketers. Turning to Slide 16. This transaction is largely anchored on the mid single digit royalty we are acquiring on Janssen's Tremfya. Tremfya is a leading anti IL-twenty three antibody used in the treatment of psoriasis and psoriatic arthritis. Tremfya sales exceeded $1,300,000,000 in 2020 With consensus estimates reaching over $5,000,000,000 by 2,030. This is based on category growth and the Based on consensus sales projections, TREMFYA will enhance our long term growth rate and is expected to become one of our top royalty streams by 2025. I should also add The Janssen is a premier marketer with a deep presence in immunology, meeting the key criteria we consider when acquiring royalties. On Slide 17, the other 2 MorphoSys generated royalties will also benefit from strong marketers, Roche for gantenerumab and GlaxoSmithKline for rhotelimab. Gantenerumab is an anti amyloid beta antibody in late stage development by Roche for Alzheimer's disease with Phase 3 data expected in the second half of twenty twenty two. While this royalty certainly sits on the higher end of the risk spectrum Our portfolio, it also offers significant upside potential given the size of the AD market with around 8,000,000 patients in the U. S. And 16,000,000 patients Globally. Roche has taken an intelligent approach to its Phase 3 design based on learnings from previous trials, including a focus on patient selection, higher levels of dosing And long duration of therapy. We also like the potential commercial advantages created by gantenerumab's subcutaneous dosing. Otilumab is an anti GM CSF antibody in Phase 3 for rheumatoid arthritis by GSK. We expect data from 3 ongoing Phase 3 studies in RA in 2022. Each of these 2 attractive Phase 3 medicines has a potentially differentiated clinical profile And each would diversify the TA coverage of our portfolio and maintain its long duration. For gantenerumab, MorphoSys is entitled to tiered royalties between 5.5% 7%, and we are acquiring 60% of those royalties. For motilumab, MorphoSys is entitled to tiered double digit royalties, of which we are acquiring 80%. Additionally, MorphoSys is entitled to royalties from GSK that we are purchasing 100 percent of. Advancing to Slide 18. As part of the transaction with MorphoSys, we are also creating synthetic royalties amounting to 3% of worldwide net sales For palabrasib and CPI-two zero nine. Palabrasib is a BET inhibitor in Phase 3 for myelofibrosis And CPI-two zero nine is an EZH2 inhibitor in Phase 2 for solid tumors and hematological malignancies. These are the key assets underpinning MorphoSys' $1,700,000,000 acquisition of Constellation and both of these development stage therapies offer a unique clinical profile. With that, let me hand the call over to Terry. Thanks, Marshall. Let's move to Slide 20. We are very excited about the shareholder value creation potential of this transaction. In terms of our non GAAP income statement, We expect this transaction to add at least $150,000,000 to adjusted cash receipts by 2025 With a growing contribution in subsequent years. This figure conservatively assumes just the Tremfya royalties And cash payments related to $150,000,000 of development funding bonds. So with multiple shots on goal from development stage therapies With very attractive sales potential, this figure could prove conservative. We also expect to generate an attractive unlevered IRR on transaction with Tremfya and the development funding box for forming a solid base return for the deal With significant upside potential from the development stage therapies. As Marshall said, this will further diversify our portfolio Long duration innovative therapies and provide a compelling mix of growing cash flows and pipeline optionality. In terms of financing, we expect to fund the transaction with existing cash on the balance sheet. As a reminder, We ended the Q1 with $1,800,000,000 of cash on the balance sheet and given our highly efficient operating structure, The business generates significant cash each quarter. This represents the 3rd largest transaction that we have ever done. And in aggregate, we have now announced approximately $4,000,000,000 new transactions since our IPO from balance sheet cash and cash generated by our business. These new royalty transactions and in particular, the transaction with MorphoSys Enhance the scale, diversity and duration of growth of our portfolio. This transaction is expected to be leverage enhancing With our June 30 pro form a debt to EBITDA estimated to be approximately 3.3 times. As a reminder, the way we think about our sources of capital for funding royalty acquisitions is we will first look to cash on the balance sheet, Then look to the debt markets with a clear commitment to maintain our investment grade credit rating. And finally, look to the equity markets. Given the cash generation of the business and pro form a leverage of 3.3 times, we feel very comfortable with our dry powder to acquire attractive new royalties. As a reminder, we've said in the past that we are comfortable taking leverage up to 4 times or even a touch above 4 times When there was a clear path to delevering over the near term. Our $1,500,000,000 undrawn revolver also provides us with significant financial flexibility. In terms of timing, the deal will be effective upon the closing of MorphoSys' acquisition of Constellation, which is expected in the Q3 of Depending on the precise close, we will receive our 1st term flyer royalty receipt in either the 3rd or Q4 of this year. With that, I will hand the call back to Pablo. Thanks, Terry. So in conclusion, This is not only an attractive transaction in its own right for MorphoSys and Royalty Pharma, but one that firmly Establishes us at the forefront of providing tailored win win solutions in mid cap M and A, a market that could grow substantially in the coming years. This, in turn, will help to sustain our unique leadership role in funding the golden age of life sciences innovation. With that, I would like to open up the call to Q and A. Back to you, George. Thank you, Pablo. And we'll now open up the call to your questions. Operator, please take the first question. Our first question comes from Geoff Meacham with Bank of America. Your line is open. Hi, good morning. This is Bill Maughan on for Geoff Meacham. Congrats on the deal. So two questions for me. How do you view the ulcerative colitis and Crohn's indications for TREMFYA in terms of magnitude versus the And then on gantenerumab, how are you thinking about the likelihood of success there? And Do you think that this upcoming PDUFA peraducanumab may affect that one way or the other? Thank you. Sure. Thank you for the question. Marshall, can you please take the question? Sure. Good morning. Thanks for the question. So on TREMFYA, I think we when we looked at the various sources of growth there, I think there are Very meaningful contributions from multiple sources. The first is ongoing volume growth in the current two indications psoriasis and psoriatic arthritis. Those markets have shown remarkable growth over the past few years, even as you've had more competitors. And There is just a secular growth driver there that biologics remain underpenetrated in psoriasis Plus improving profile in terms of efficacy and convenience for the available agents. So we expect Continued significant growth contribution there. On IBD, that is also an important pillar of the growth story. We're starting to see some readouts From others in the class and certainly, we expect TREMFYA to play a significant role in IBD. I think the important thing to mention there is Janssen obviously has very deep experience in that market. And so that will be Important as the TREMFYA data readout and IBD launches. On gantenerumab, I think your question was on the aducanumab PDUFA. So the way we thought about that was this investment in gantenerumab wasn't really premised on one outcome or the other for the aducanumab Obviously, a tremendous amount of focus on that with it coming up this week. But as we thought about it And as we mentioned in the prepared remarks, the gantenerumab Phase 3 program really stands on its own. It's 2 large well controlled studies that incorporates a lot of the learnings over the last few years in how to design these trials, What population to include, how long to dose, what dose to use. So we really came at it from that perspective rather than thinking that Bradikandumab here, just given all the complexities that you guys are very familiar with, would really impact that one way or the other. Okay. Thank you very much. Our next question comes from Gregg Gilbert with Truist Securities, your line is open. Thank you. Good morning. I have 2. First, kind of a nuts and bolts consensus question. Do you think consensus estimates for the assets involved are pretty reasonable? Or would you point to any particular strong differentiated view you have on sort of Revenue potential. And then my other question perhaps for Chris, I was really intrigued by the mid cap M and A comment and where Royalty Pharma Could fit in there. When you're talking about banks and their lack of willingness to sort of fund mid caps that lack Cash flow, is it really a financial question about cash flow? Is it banks' lack of willingness to take an educated view on the NPV Of an unapproved asset and that's where you come in. Maybe put a little more meat on the bones there as to what you're willing to do that banks just don't do or can't do? Thanks. Yes. So maybe Marshall can provide an answer to the first part of the question. I mean, one and Chris should answer for sure the second one. But one comment I would make is that There's just no history, and it's highly, highly unlikely that a bank is going to put capital at risk to fund A transaction where there is significant value that's based on binary outcomes, a trial readout or those kinds of things, That just doesn't happen. Sort of debt funding is not available when You actually are basically relying on something that has a binary outcome. And but we can Because we can take our view on products and we can take our view on trials reading out and we can come in and provide significant capital in those cases. But Marshall, do you want to take the first question? Sure. Thanks, Greg. So just on consensus. So first, I think it's important to keep in mind that For each of the products in this partnership with MorphoSys, we obviously generate Our own internal forecast and look at a number of different scenarios of potential commercial outcomes. So it really is a scenario Based analysis like we've talked to you before. And so when we look at consensus, I don't think we're going to comment specifically on Any one product consensus estimates there except to say we looked at a range of outcomes here and we're comfortable With this investment on that basis and when you look at the development stage products, consensus can be a little complex to look at just because there's Varying levels of risk adjustment and what indications are included, etcetera. So always challenging to know exactly what's In those numbers. But suffice it to say, I think we are optimistic and excited about this group of products that we're investing in. And I'll pass it over to Chris. Yes. Thanks for the question, Greg. I think The data that we pulled and looked at and we actually put on Slide 13 was I think You've been in the industry a long time and I think everybody recognizes the lack of mid cap M and A where the acquirers and mid cap party. But when you actually pull the data and look at it, it's sort of striking, right? Companies under $5,000,000,000 From an acquirer perspective, only makeup 4% of the deal volume. And it's sort of we all know it, But when you see it, it is quite striking. And I think Pablo actually hit the nail on the head, which is banks aren't going to buy These royalty assets or take binary bets on buying the royalty assets, they're really they are lenders, they're looking at cash flow, they're looking at LTM cash flow. And for many companies like MorphoSys that actually have they're in launch mode or late stage development assets That they want to consolidate. Obviously, there are lots of deals out there where it makes sense to consolidate midcap And at biopharma companies, the cash flow is just not there for the banks to lend against. And so We think we can play a role there. We think that there could be a lot more M and A deals like this going forward in the sector. We hope to play a role. And maybe just adding one quick thing to what Chris said here, just to give you a little bit more color. Even situations where a company may have one drug, and it's very difficult for lenders to actually lend against one product. Generally, they want a diversified portfolio. But that's if we can actually provide capital when there's no approved product, Obviously, with one approved product, we can also do that and do it at scale. So that's another thing to keep in mind That I think gives us a great advantage to partner with companies to help them achieve their strategic initiatives. Thank you. Thank you, Greg. Operator, we'll take the next question. Our next question comes from Terence Flynn with Goldman Sachs. Your line is open. Hi, thanks for taking the questions. Maybe 2 for me. First, I was wondering if you could comment on your Targeted IRR for the Tremfya royalty piece in the bonds. I know you commented on the bond piece, but again, if you look at both those together kind of what you're targeting there. And then for Chris, a follow-up to the last question on the midcap to midcap M and A. Have you guys already had Similar conversations with other companies like you've had with MorphoSys as you referenced in your prepared remarks? Or do you think this deal will catch attention and essentially lead to more of those conversations. Just kind of curious about the top of the funnel and what you're seeing already in terms of the mid cap M and A. Thank you. Sure. So maybe to answer the first part of the question, which is the one related to the expected Rates of return. The Tremfya investment is fits very well within Our target returns of high single digit, low double digit for an approved product. This, by the way, is very attractive because it has an Incredibly strong marketer, one of the best marketers in the world in a very attractive space and it's a drug that has very significant Growth potential, I mean, there was a question asked about ulcerative colitis and other indications, and we're excited about those. So it actually, As I said, meets the target expectations we have. And Also the bonds, I think, that kind of financing is very attractive, I think, For companies at this stage because it's very long term, very flexible capital. We can provide money, commit today, Allow a company to draw when they need that capital in a year and then also give them some time for them With no payments, because when we think about these things, these companies need to invest. So it's sort of Silly for us to give them money and then ask them for some for us to start to earn our return very quickly so we can be patient. And in this case, for example, there would be about 2 years of no payments because they can draw a year from now, then there's a year of no payments. And then we collect over a long period of time, 9 years. So it's actually very flexible, very long term. It's scalable. We're committed. They could draw another 200 as needed. And that provides a company like MorphoSys with a very attractive Pipeline it has, the flexibility to fund it and invest in it. So we're very About being able to provide that kind of supplemental capital to our partners to help them achieve their initiatives. I'll turn it over to Chris about sort of a mid cap M and A. One thing I would say is that myself and the team Are actively, very active in having many discussions with big pharma, with MedCap Pharma about M and A, And we're proactive. We actually go to companies and talk about potential transactions, things that we think could be attractive to them. In some cases, it seems that maybe they had not contemplated. And so this is an area where think there's significant potential for royalty pharma. And maybe I'll just finish by adding one thing. MorphoSys is a company that We've known for more than a decade. I think Jim and I went and visited them in Germany more than a decade ago. We have extensive discussions with them about 5, 6 years ago Funding their pipeline, drug that already got approved. And finally, after back and forth dialogue with them of over 10 years, We actually ended up doing this very attractive transaction for them and for us. But that also tells you that these things Don't happen overnight. You plan to see it. You have discussions with management. They get to know you. We get to know them. And eventually, something important happens, And we can be there for them and really help them. But Chris, do you want to add anything else about mid cap M and A? I think you covered it. I think the one thing that sort of strikes me, you heard us during the IPO and since Talk about synthetic royalties. But when you look at the steel announced today, it is sort of like Royalty Pharma 1.0 through 4.0 You know that we talked about on the IPO, which is we're acquiring a marquee approved product royalty with Fromfya. We're Acquiring a high quality development stage royalties with gantenerumab and atilumab and then the creation of synthetic royalties at Constellation and The development notes. So it's sort of its full scale, everything in sort of one transaction. It just really shows that we can be creative and flexible And really take a long term view of our capital. And so we think there's tremendous opportunity Just slot in 1 or any one of those various product offerings in that we've highlighted in this transaction Our next question comes from Chris Schott with JPMorgan. Your line is open. Great. Thanks so much for the questions. I guess just first one on the development staged assets. I know you're not going to comment on specific consensus. But when you think about these, are there any of these assets that really stand out versus others in terms of either your level of excitement or conviction in the products? I'm just trying to get a sense of Yes. How many of these are we're really core to the deal versus kind of nice to have, once you get The anchor asset with Tremfya kind of as part of the transaction. And then the second question was on the development funding bonds. Are these things that you would only really consider as add on to existing deals or partners? Or could we think about royalty looking to do transactions This independent of royalty deals, I think you're highlighting kind of this kind of unmet need in the market, but I'm just trying to sense of like, again, are these usually should we think about these linked to existing transactions or Kind of a new market being created on its own. Thanks so much. I think Chris, thank you for the question and good to hear you. I think regarding the bonds, they we think this kind of capital It's very attractive and could be used like in the case of Biohaven where we invested in their Migraine products and have royalties in the migraine products. We actually supplied similar very long term capital. In that case, it was predicated on the launch. So we view that as launch capital where we're actually Helping the company invest in the launch of nertec, and that makes our royalty more valuable. And it's long term, it's flexible, scalable. And in this case, with MorphoSys, We felt that there was a need to supplement the investment here to help develop the product. So we can actually tailor it to achieve different goals. And it's very unique and it's We believe that there's a huge need for this kind of capital in the industry. And it's always done As part of an overall or a larger transaction, that's how we've done it so far. I mean, we need to be open minded. Could there be other situations Where it's used in different ways, maybe. So we're going to be creative and open minded, but so far, it's been as a part of a larger Transaction. And I'll let Marshall answer the question on the development assets. I think Just from my own perspective, looking at all of them, I think they're all very interesting. There's one that from my perspective stands out As one that has very significant upside. It's risky, but very significant upside, which is ganetirumab, the Alzheimer's product. And it's in the hands of one of the best companies in the world, and it has had one of the best clinical development programs In that space, which has been really tailored, taking into consideration a lot of the lessons learned from many of the failures. So we think That has a decent chance and it's the potential is very, very large. Marshall, do you want to? Sure. Thanks Pablo. Sure. Hey Chris, good morning. Thanks for that question. So just I think to add to what Pablo said, maybe A different frame or different dynamic is that one of the things we liked about this group of development stage assets Development stage products in total is that they're all complementary in the sense that they have different risks Around them, right, different kinds of risks. Pablo mentioned gantenerumab does Carrie, clinical risk, but a much more kind of white space from a commercial point of view. Otilumab in RA, maybe something people Haven't followed us closely, but has pretty strong clinical proof of concepts in Phase II from it And other GM CSF antibodies, but is a commercial marketplace That we all know is formed and there are multiple players in that market. So and then the Constellation assets are And so have their own kind of dynamic around them. So I think one of the things we liked was just how even amongst these development stage Products in the portfolio, there's a lot of diversity and kind of non overlapping Characteristics around each of them, which is something that we thought was pretty cool and attractive to that. Thank you, Chris. Operator, what's next? Our next question Comes from David Risinger with Morgan Stanley. Your line is open. Yes, thanks very much. And I wanted to add my congrats on the transaction and opening people's eyes to the Broader set of potential mid cap M and A opportunities in the future. So most of my questions have been asked. I just wanted to ask one on leverage. So the slide indicates pro form a leverage of approximately 3.3 times. Could you talk about at a high level your target leverage ratio And the opportunity to potential issue equity in the future if there are substantial transactions that are Highly compelling. Terry, you should obviously take that question. Thank you, David. Yes, sure. So, the way we think about leverage is we don't have a specific target. We've always sort of said that we're going to try to operate in a band. And so we think of it sort of in 3 times to 4 times total debt to EBITDA. And sometimes we're going to go A little bit above 4 when we make big acquisitions like we did in 2014, but Obviously, we're very committed to maintaining our investment grade rating. So when we do that, we'll go up to 4 a little bit above. We have to have a clear path to delevering from there. And Sometimes when we're not doing as many deals and products are growing, that will go a little bit below 3. So we think of it like a band. That's how we're always we've actually been operating at very similar way for almost 15 years now and It's sort of proven out to be a pretty good strategy. Equity It's always been an option. It's never we're always going to start with cash. And since the business generates so much cash, That's where we're going to start. That's where we're going to look first and then we'll look to the debt markets, while maintaining that investment grade rating. And then the final source is equity. And obviously, that is a benefit to going public was that we now have access to the deepest Equity markets. I think the way to think about it is we're first going to use cash And sort of leverage capacity. And then depending on how the pipeline plays out over time, it is an option for us. And it's a great option for us to have. Thank you. Our next question comes from Umer Raffat with Evercore ISI. Your line is open. Hi, Umer. Umer, if your telephone is muted, please unmute. This is Mike DeFiori in for Omer. Just out of curiosity, how competitive was this deal, Given the fact that banks can't do this financing and There are other players, not many, but other players in the, I guess, royalty acquisition space. Just want to get some color as to the competitiveness of the deal. Thank you. So it's obviously Hard for us to answer that question because we're on one side of the transaction and not on every side. We're having interactions with obviously the company that has become our partner MorphoSys. We obviously did Here that there were other that they had explored other alternatives, which is very logical. Any good management team would do that. So we obviously there was always a healthy tension of we need to arrive at a deal that makes sense for both Parties, because we have other alternatives. And other alternatives, with a caveat that I mentioned that it's Difficult to actually provide significant capital for something like this. I do believe though that our scale And cost of capital is something that gives us a huge advantage in situations like this Because for us, a transaction like this is not even one that is going to concentrate us At all in either Trefaya or unapproved products. In fact, Trefaya will diversify us To a certain degree, which is great. And the investments that we're making now on the unapproved It's something that we really welcome because as we've as you have heard us talk in the past, we had Historically, had much higher exposure to unapproved. At some point, it was more than $3,000,000,000 of investments in unapproved, and now it's really low. Rebuilding that side of our portfolio is something that we look forward to. But at the end, we Always, always, this is what I tell the team, have to not feel overconfident of things And make sure that we're always being very, very cautious, understand how We need to be competitive. We need to be really flexible, creative so that we are winning as much as we can. Great. Thanks so much. Our next question comes from Steve Scala with Cowen. Your line is I have a few questions. First, are there any significant gating items to the MorphoSys acquisition of The duration that you foresee. 2nd, can you give us some idea of what probability of success is assumed For each of the 4 pipeline assets to get to breakeven. And then lastly, and this question has been asked a few times, so I apologize For asking it again. But whatever that probability of success is, it Seems that your diligence has produced higher probability of success in the pipeline assets than analysts have. It seems that the answer clearly is yes for dantenerumab. Would you disagree with that statement as it relates to all four assets? Thank you. Sure. And maybe I'm going to turn it over to Chris to talk about the Gating items and then Marshall, the rest of the question. But it occurred to me that I just wanted also to provide another perspective on this question about Competition. And it's maybe just for all of you to get a sense of competition in our space versus others. If you think of private equity firms that exist, which are 100 with billions And billions of capital looking for attractive transactions, highly, highly competitive. Or if you think of debt providers In more common, that market's highly competitive, a lot less In biotech, and that's why we have this affiliate that actually is becoming one of the biggest providers of that capital in Biotech. So I think the point I want to make is that if you think of The market we're actually creating because that's what's really happening. We're creating a new market and this transaction is a great example of that. It's one where there's really probably you cannot even count them with one hand, the number of potential Providers of capital at scale for something like this. So that also gives you a sense of the competitive environment. But Chris, do you want to talk about the gating items and Marshall about Yes. Sure. So thanks for the question. The gating items are It's a they're going to launch a MorphoSys will launch a cash tender offer for Constellation shareholders. And the regulatory hurdles or expiration of the HSR waiting period And applicable antitrust laws and just other customary conditions. So it's very straightforward to get to close. Thanks, Chris. And yes, hi, Steve. Thanks for the question on PTRS. So I think we've touched on this in a couple of different ways, but maybe to add some further comments. You asked about specific PTRS on each of the products. And rather than going there, I think I would Go back to what we were talking about before, which is, I think one of the things we really liked about this was the diversity of the different Types of risks and opportunities around each of these products. And so when we looked at it as a package Together, we thought it was pretty attractive and we've touched on how some of those are non overlapping risks. I think one of the Pablo called out gantenerumab. I think that clearly, as Pablo mentioned, as we mentioned in our prepared remarks, Does have higher clinical risk, but I think it also highlights one of the really unique things about our business is just the Scale and the diversity of our current portfolio really shows you how we're uniquely enabled To add something like gantenerumab and that risk and also very considerable upside Opportunity that Pablo mentioned within our portfolio is extremely, extremely manageable. And then 3rd, I think part of your question was about track record versus others. And Pablo said something Important in terms of how we approach all of these is that the bar is high. We have Stay sort of humble, not be overly confident in this. And we always try to do as much diligence as We can and have a culture of being able to say no when that makes sense. And I think that's one of the key points why I don't want to compare us Others who are out there, which is we're very different, right? We have the luxury of And the culture of being able to sort of pick our spots and to say no to things And really wait and be patient for the things that make sense for us. So I think that's kind of gives you some insight into our approach, how we This is how we think about development stage opportunities and honestly some of the same principles apply to commercial opportunities as well. Thank you. We'll take our last question from Andrew Baum with Citi. Your line is open. Thank you. A couple of my questions have been answered, but one remains and apologies if you've already addressed it at the earlier part of the call. Could you outline how much of that $1,425,000,000 upfront is accounted for by TREMFYA? Obviously, it's As you pointed out, the gem of an asset and anchoring is the words you used. But if you could share with us the breakdown in any sense, that would be helpful. Marshall, thanks for the question, and Marshall can provide a perspective here. Just as from a very big picture perspective, the way we look at Transactions when we're buying a portfolio like this with 1 approved and 4 unapproved is that we actually are not really allocating Value to one single thing. We create in a lot of scenarios, almost like Monte Carlo simulation, where we look at The different assets and the revenues that each asset We'll produce and obviously assume for DREMFYA different scenarios With approvals in different indications additional approvals in different indications. And for the Unapproved, we run scenarios where we assume that all of them get approved, that none of them get approved, which is obviously the worst case scenario. And then things in between, maybe 2 or 4 get approved, and obviously, each one has different scenarios. And we look at The returns that we expect to earn on the total amount invested. And we think that When we approach it from that perspective, the diversification is such an attractive aspect here And one that results in very attractive returns on likely scenarios, right? It's We have no idea at the end of the day if all of them are going to get approved and all of them are going to perform As expected, we also think it's highly, highly unlikely that none of them are going to get approved. But if we look at the more likely scenarios And get really comfortable with the return that we're going to earn on the total investment for those much more likely scenarios. But Marshall, maybe you want to add something else. Hi, Andrew. Good morning. Pablo, I think you've covered most of Yes, appreciate the question. We're as you said, we've described it as the anchor of the transaction. And I think Pablo mentioned earlier that it certainly And I think Pablo mentioned earlier that it certainly does meet our return Hurdles that we've talked about for approved products. So I think that should give you kind of a general sense of how we're thinking about it. But I think it's important The point Pablo made about kind of scenario and a scenario approach is more It's closer to how we think about it given all the combinatorial outcomes of what might happen with all these programs. Thank you. There are no further questions. I'd like to turn the call back over to Pablo Legaretta for any closing remarks. Sure. And maybe just one last Comment sort of big picture perspective that I'd like to share as we close is that all of you have heard us talk about The potential for Royalty Pharma to really become the partner of choice of companies In M and A situations in life sciences. And I mean, for us, things that are critical as we look at these things is really Getting to know management teams, understanding their vision, their commitment to the space, their expertise, And then seeing if we can partner with them, and obviously, in the case of MorphoSys, all of that was something We concluded what's there. We had long conversations with him, as I said. But going back to my comment, We've always felt there's a huge potential for Royalty Pharma to do well by becoming the partner of choice of Companies and management teams helping them achieve their strategic initiatives, and this is a great example of that. And I think As we've shared with you in the past, we think that there's just a very attractive set of opportunities for us that are much more Conventional, where we buy royalties from different holders, can be a university, hospital, foundation, could be a biotech We're a big pharma like we did with Glaxo recently on cabo. When They're sort of non core assets, and it's better for the holders to have cash to reinvest. But so those So sort of bread and butter transactions, I think we're extremely well positioned with the cost of capital we have and the relationships To actually continue to do really well there, the thing that is more unpredictable is this M and A kind of Situations and we've said we think there's going to be several of them. If you look at our 3 to 5 year Time frame, this is one. And it really illustrates how we can be very helpful to companies and create this win win situation. So With that, I'd like to thank everyone on the call for your continued interest in Royalty Pharma. And I just would like to say that my team and I look forward to Continuing to share our progress with you. And then if you have any questions, please feel free to reach out to George or Terry. And with that, I'll conclude the transaction and thank you for your time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.