BofA Annual Healthcare Conference. My name's Jason Gerberry. I cover biotech and pharma, and I am pleased to be introducing Royalty Pharma. We've got Terrance Coyne, EVP and CFO, and Marshall Urist is gonna be joining us in a minute, EVP, Head of Research and Investments. Terrance, thanks for joining us.
Thanks, Jason. Thanks for having us.
Maybe I'll kick things off if. Hey.
Jason's here.
Continue. Kick things off, just state of the landscape in the royalty financing business, which you guys are in. You know, we are seeing some changes in the competitive landscape. I thought it would just be your overall view on market share, competitive moat, and a lot of the efficiencies that you provide for partners. How are you seeing those dynamics play out in the royalty financing market?
Sure. I can start on that. I'm sure we both have perspective on that. I think, you know, the simple message is that we feel, you know, really, really confident about both our broader marketplace and our role in it and where we stand from a competitive point of view. I mean, you look at the transactions we've announced this year, right? We've done three really exciting transactions. You know, most recently, a really, you know, exciting and, I think, innovative phase III financing deal, I'm sure we'll talk about that, broader market with J&J. We bought a sort of traditional royalty from Zymeworks on a Jazz oncology product and then did another phase III financing deal with Teva.
you know, when I think about our kind of competitive advantages and where we sit, you know, we've talked a lot about this, but, you know, simply, I think Royalty Pharma has been built and, you know, we talk about this concept of optimized as our structure to, you know, be the biggest and strongest and most competitive buyer and originator of royalties on drugs in the world. I think, you know, we feel like the wind is at our back. you know, our market continues to grow. you know, the demand for our type of financing is only increasing and, you know, we highlighted on our last earnings call, you know, that there's been a kind of a whole new source of demand from large pharma companies in terms of helping us-
Yeah
partner in funding R&D. You know, from that perspective, I think our market is only expanding. We're excited about China as a new geography to originate royalties. You know, we feel really good about where we are, and, you know, certainly any market that attractive is going to attract other competitors who wanna be in it. I'd say just two quick things on that, which is, one, you know, competition in our case, I think has only served to expand the market, right? It's been, no question, it's been a positive to have multiple people out there talking about royalties, convincing sellers that this is a robust market. You know, second is we feel really good about our ability to compete, right? There's no change on that front.
That's kinda our take on where things stand today.
We cover all those companies that you just mentioned that you did deals with, and they're not companies that I typically think of as resource constrained. I Typically, a lot of the synthetic royalties that you do, the SMID- Cap Biotech companies you think of as more traditionally resource constrained. When I think about those deals, those are assets with multi-indication potential. You know, we had a meeting with Teva yesterday and they framed the deal as, like, giving us speed, the ability to move faster, to go after more and risk share.
you know, as pharma crowds into certain categories with these, like, multi-indicated drugs and they've gotta interrogate assets, and probably take on risk, is that sort of the wind at your sails for these sort of larger pharma deals that are now opening up for you? You mentioned the Teva, the J&J type deals.
Yeah, no, I think that's part of it. Certainly there's just sort of a They need to do more quicker. You need to be able to pull in a lot of resources to do that. We know that companies have, you know, they have only so much that they can spend on R&D. As their pipelines grow richer and richer and they need to accelerate more, they need to be thoughtful about where they're allocating resources, and that's where we can come in and play a big role, where we can, for a fairly low overall royalty, contribute a significant portion of the funding and, you know, in a lot of cases it's half or even-
even more than half of the total funding of a phase III trial. There's a risk sharing component, there's a speed component. It also enhances the returns that they generate on those programs because they're spending less and, but they're still keeping a lot of, you know, the vast majority of the economics. It allows them to kind of expand their R&D capacity. Overall, we think that this is actually an area that could see a lot of growth. We announced, you know, obviously the J&J deal, Teva deal. Last year we did a deal with Biogen. We feel like we're still at just the sort of tip of the iceberg here.
Yeah.
Prior to last year, it was a very small part of our overall business, and we've been deploying a lot of capital year in and year out without this. We're very excited about this because we think it could pretty dramatically expand our total addressable market.
Yeah. You've talked about a lot of different mechanisms even involving China and innovation coming out of there. How would you frame, you know, the two or three biggest growth sources as you see in like the next three years for your, you know, where your deal flow could get allocated to at least?
Yeah, I can start on that one. You know, you mention a lot of them, right? Which is, you know, look, I think fundamentally our core market is still growing, right? You know, the world of biopharma even in, you know, even if you exclude the large global players, you know, their need for capital is only increasing, where obviously we're seeing a lot of M&A, yes, but we're also seeing a lot of companies that want to build and become, you know, and become, you know, the next Vertex is like with, you know, with RevMed or like an Insmed recently of companies that are really scaling into the future. That's creating, you know, a lot of demand, a lot of demand for capital across the space.
We talked about, you know, we talked about pharma R&D. You know, I also think we, you know, we talked about China as well as like three kind of big pillars of that.
Yeah.
The other thing I think is important for Royalty Pharma as a growth driver is, you know, we're coming into a period where, you know, a lot of the seeds that we've planted in our pipeline, our unapproved pipeline are starting to read out. We've, you know, had some really good successes so far this year. I think as we think growth for Royalty Pharma, I think certainly that's another source of growth that's gonna become more and more visible.
Okay
to the market and to our shareholders.
How do you need to scale the human resource side of the equation to keep up with this growth and all these deals that you're analyzing? I imagine it is growing a bit like a mushroom.
We are scaling. We've scaled a lot over the last five years. We've probably tripled our head count since our IPO. We're still gonna grow. I think it's probably a bit gonna be a bit more surgical at this point. Marshall's team is gonna continue to grow because the deal flow is growing, and we need people, great people to analyze these things. We've been growing on the data side.
We hired a new head of AI, which we're really excited about, because in a way, that's also gonna enhance the ability of Marshall's team to do great research and identify great drugs and structure and diligence investments, so it, you know, ultimately help increases our probability of success and increases the returns on our invested capital. Overall, you know, it's not gonna be huge numbers. It took us a while that we're hovering around 100 people for the last almost two years.
We finally cracked 100, and I don't know if we'll go to 110 or 120, but it's not gonna.
Okay
it's not gonna be dramatic, and it'll mostly be fairly junior people on the, on the research team because we like to really develop people internally. We did have a really exciting hire, Greg Butts, who was actually, ironically head of healthcare banking at Bank of America. But he's gonna be a great addition to the team and work with Christopher Hite on, and Marshall obviously, on sort of the relationship side and, you know, bringing deal flow and, you know, helping us to, you know, drive the business.
Great. Great. You did mention your unique tax status versus competition. Can you talk about how that's a competitive advantage just to the operational structure?
I don't know that tax is actually the key advantage. I think it's more, more the way that we're structured as kind of an ongoing business rather than tax. I think that most of our competition is probably pretty tax efficient as well.
Where we're unique is that we because of our structure in that we're not set up like a fund one, fund two, fund three. Every asset contributes to the overall portfolio, and it lowers our cost of capital in a huge way. That's I think where we see our structure as most differentiating, is that we are able to borrow in the investment grade debt market. We're investment grade rated, have been for a very long time, have access to significant capital and it's, you know, pretty attractive cost of capital. That, you know, I think is drives down our overall cost of capital, allows us to win more deals, but also allows us to generate really attractive equity returns to our, you know, shareholders.
Okay. You know, there's always gonna be something to talk about on the policy front as it pertains to the landscape, and there's always gonna be changing dynamics. Marty Makary's out. There are IRA permutations that haven't been codified. Some people don't know if they'll actually be have teeth to them, the Globe and the Guard pilot programs. Outside of the large pharma that have struck deals with the Trump administration, I guess there's I don't have the best clarity on how this is gonna affect the biotech ecosystem that has not struck these deals. Maybe just a word on the policy front and what, as you have discussions with prospective partners, if any of this is coming into the discussion at all and how you kind of think about pricing things.
Yeah, no, it's a great question, and I think us, like everyone else, doesn't really have all the answers or many of the answers here. We are in a time where I think a lot of this is uncertain about where it's gonna play out. Our approach to that, you know, has been several-fold. I think number one is we do make sure that from kind of a policy and, you know, D.C. intelligence perspective, we have good, you know, we have good resources around the table to help us. Of course, in this environment, I think we all acknowledge that only takes you so far.
You know, we have always taken a very kind of scenario-based approach to sort of ask ourselves, based on a variety of outcomes that could happen with MFN, with, from a policy perspective, you know, to get comfortable that we can, you know, generate attractive returns for our shareholders across, you know, a range of outcomes. I'd say a couple things, competitive advantages we have in this space is, you know, number one, when we work directly with companies, you know, we are on the inside a lot of times. You know, we do have a lot of really good insight into what are the specifics of the regulatory process. You know, you referenced the FDA.
We see a lot of the details that allow us to build kind of a good view of the likelihood of approval, more importantly, what's the label gonna say, how broad is it, et cetera. We certainly have, you know, we have that advantage in the way we invest. Then the other thing is, I think royalties have a natural advantage in that, you know, we are aligned with our partners, right? You know, they are aligned to They are incentivized to maximize sales, and in turn that, you know, is what we wanna see too to maximize the value of the royalty. We do live in times where a lot of these are questions and, you know, we're certainly going into it eyes open.
You know, certainly this is certainly something we think we can navigate.
Okay. Maybe you've got 2030 target for portfolio receipts. I think it implies 9% growth CAGR off 2025. Consensus isn't there yet. Can you frame maybe the building blocks to getting there from your perspective? How much of that is gonna come from, like, the existing royalty base versus, you know, future deal flow?
Yeah. What I can say is that at the time of our investor day in the fall, we said that around half of that, the growth was gonna come from things that were already in the portfolio, and half was gonna come from new deals. A lot of time has passed since then, and we've done a lot since then. Now, you know, a big chunk of it can already be sort of allocated or it can already be accounted for by things that we've already done, that are already in the portfolio. Obviously we still need to continue to invest and create new royalties, and we're gonna try our best to do that. Overall we feel really good about being on track there.
I think, you know, hopefully we can do even better, but we feel really good about that target at this point.
Okay. You deployed about $2.5 billion last year. Thinking ahead to you know, upcoming years, what do you think that you can push even higher, to even closer to the $3 billion number?
Taking a step back, we are always gonna maintain a really high bar to make investments. Putting targets out there is always tough because then you kind of We wouldn't wanna make investments that we weren't excited about. We're really confident that we'll continue to deliver that kind of $2 billion-$2.5 billion under a lot of scenarios, including scenarios where the market doesn't grow as like we think it would. I think in the end, what we describe that guidance is kind of more of a conservative modeling assumption.
There's a lot of reasons to believe that it could be a lot higher. You know, especially as we're adding pharma, these pharma R&D deals, as the synthetic royalties continue to grow, as China starts to become a factor. We're not planning and we're not raising our target. We're going to see what happens.
Yep
Kinda take it as it comes. Could it be three? Could it be four ? Absolutely. I think we're just gonna be, you know, we're gonna just make sure that we're investing in the right products and, you know, if whatever happens from there, we think will benefit our shareholders.
Remind me the leverage guardrails that you'd operate within if you found the right transaction?
Right now we're at 2.9x total debt to EBITDA, and we've said that we can go up to around four , maybe a little bit more, maintain our rating, particularly, you know, as long as we have a clear path to delever from there. We have a lot of dry powder. At our Investor Day, we said that, if we just do $2 billion-$2.5 billion and we pay, and we continue to grow the dividend as we've committed to do, and we finish the rest of our share buyback program, we would allocate about $20 billion on those things. We said we have capacity to do about $30 billion, and that's assuming that the portfolio doesn't outperform, and it's been performing really well.
We have an extra $10 billion of capacity to, you know, to add new royalties over that period if the right things come along.
Yep. How would you address the question, you know, with more competition, has that compressed, you know, deal terms, royalty rates, things like that? I imagine the answer is somewhat complicated, right? 'Cause there's different types of deals that are in the mix now as well, different risk profiles tied to that. Any way that you could maybe quantify, you know, last one to two years versus, say, a historical benchmark. We don't see a lot of deals with, like, maybe a Vertex-like royalty now, so I just wonder if that's more of a relic of maybe the past that's harder to get deal terms like that.
Yeah. The way it might help you help everyone think about that is, you know, just a simple, sort of a simple observation, which is we've been public for five years, right? We have maintained our return targets, the exact same return targets for both approved and unapproved royalties the whole time. Even sitting here today, I think we feel very confident about, you know, about our ability to continue to generate, you know, those kinds of really attractive returns for our shareholders. I think the thing that competition question, you know, overlooks sometimes and, you know, we referenced this earlier is, you know, the biggest effect of competition has been to make the pie bigger, to grow the market, right?
Which is, you know, this is such a big market, there is such need. There is, I think, plenty of opportunity for us to continue to be really successful and compete for the royalties that we want as part of our portfolio, delivering those with the returns that we've promised to our shareholders. That's why we really feel like, you know, competition, you know, has been a real positive because it has just grown the market.
Okay. Maybe we'll shift to the development stage pipeline catalysts. You know, as we look ahead, I think you, the development stage portfolio is, like, roughly 20 assets with $40 billion or so of combined peak sales potential. As we look to 2026, 2027, are there three or four , you know, individual catalyst events that you'd point to that are most exciting and maybe give a little bit of clarity on what maybe success looks like for those?
Sure. I mean, first of all, just to remind everyone, we've already had a couple of really nice ones from that portfolio to start the year, you know, with Revolution Medicines and daraxonrasib and Rasib, right? We now have a, you know, a $500 million investment in that with the potential for that to grow much larger, you know, for everyone, to remind everyone. You know, we committed $2 billion to RevMed last summer. A billion and a quarter of that is synthetic royalty, and then there's a senior debt facility as part of that. You know, obviously very nice data, very high-profile data. Just had one very recently with our Cytokinetics partnership for aficamten, you know, a nice label expansion there.
I think we're really excited to, you know, to start the year, to have some really nice check marks there. Going forward, there's several, right? The next one coming up is we made a couple investments in the Lp(a) class over the last few years. We're gonna have the CVOT for the 1st one of those, I think, sometime in the 2nd half of this year. We're really excited to see that. That could be a very large class of cardiovascular drugs, and we have investments in two of them. We're really excited to see that. That could be a very meaningful contributor to our top line in the years to come. That's another one this year. Terry, what else would you have add?
I think I'd probably point to maybe next year we have data for frexalimab and multiple sclerosis. That's a product that's in development by Sanofi. We have a $525 million investment there. It's a big royalty.
We think that there's MS is kind of a market that's been overlooked a couple of times in the past and we think that there's still really big unmet need there and a lot of opportunity for a new, for a new sort of modality. That's why we're really excited about that one.
The I feel like the market's a little bit torn on Lp(a) as a, as a modality. Arguably there just hasn't been a, an outcomes trial run with this approach, although the genetic data is pretty interesting. I don't know. Do you have a sense of It does seem like the street's very focused on a more profound hazard ratio benefit, whereas companies would communicate, like, as long as it's stat sig or even, like, a 15% risk reduction, this could be a big class of drug.
You know, we're getting close to the event here, I think everyone's sort of sharpening their pencils as we get closer, which, you know, is We've all seen this play out before. You know, look, I think This is a whole new target of a whole new profile of patient where their cardiovascular risk is genetic in terms of their level of Lp(a). You know, we are really excited to see the CVOT turn over. You know, I think Novartis has been pretty clear about to your, as you just outlined, about, you know, how they see this playing out.
We are, you know, we're really excited to see it and, you know, it's gonna be, it's likely to be a sort of multi-layered sort of debate about what is the overall data. Are there subgroups, you know, based on your baseline Lp where you see certain levels of benefit? I think we're really excited, you know, to see this. You know, we also, as a reminder, we have an investment, another sizable royalty in Amgen's program, which is the next one up, after this. We're excited to see how this class comes together.
I mean, obviously a lot of attention on Revolution just given the, The Wall Street Journal articles and some big numbers that we've never seen for a phase II asset. If those numbers are real or they could be CVR dollars, we don't know. Ultimately, I think we get more pancreatic data this year. Just curious, you know, What moves the needle there in terms of your view on this as a really big mega blockbuster drug?
Yeah. You know, RevMed, I think, is doing an incredible job moving as fast as they possibly can to, you know, bring this medicine and this target to as many patients and indications as possible. You know, we've only seen the first CVOT turnover, which is in second-line, second-line pancreatic cancer. I think it was not lost on anyone that the performance in second-line pancreatic cancer is, you know, better in terms of survival than what's been seen historically in first-line pancreatic cancer, which is pretty amazing. You know, we're excited to see it move earlier into lines of therapy, into earlier lines of therapy for pancreatic.
They're looking at it in lung cancer as well, and I think you're gonna see a very sort of extensive development program, and they've been kinda executing at the speed of light over there. You know, I think there's definitely more to come on that, and we're excited to see it play out.
Okay. Then maybe just in the approved portfolio, maybe the, some of the netting dynamics of growth versus LOE drags in the numbers this year, how you see that evolving and does that Do the drags carry out into 2027 plus?
The headwind this year is Promacta, we still grew 10% in the first quarter despite a 3% headwind from Promacta. That's something that we think is really important for investors to understand about our business. Not a lot of companies can have an LOE of a top five product and still grow double digits, but we've kinda shown that we can do that, and that's a unique element of our business. It's driven by our diversification, it's driven by constantly reinvesting at high rates of return and in exciting growing products and replenishing the portfolio. I think we're differentiated versus other pharma companies in our ability to do that, certainly in a value-enhancing way. The headwinds, and this isn't new to us.
We had headwinds in 2021, when we lost Gilead's HIV, the royalties on Gilead's HIV franchise. That was a top four product at the time, and we still grew great that year. In 2022 with Januvia, and ex-Merck's DPP-4, again, another top five product at the time, it still grew really nicely. We're not really concerned about headwinds from LOEs. These things are gonna happen. They're gonna happen in this sector, but for us, we feel like we're better equipped than anyone to kinda grow through that, and we've shown it over time.
Okay. The last 30 second, just how would you frame exposure at this stage around Vertex and Vertex arbitration outcomes, just given what we've seen with conversion?
Yeah. I think what we updated at our Investor Day is probably still holds, that we said that, under a downside case, if we lose the arbitration and our royalty on ALYFTREK is only 4%, that we still think that the CF franchise will generate a portfolio or royalty receipts to Royalty Pharma of around $800 million. The upside, if we're correct, and, you know, succeed in the arbitration as we hope we will, that would be north of $1 billion. It's kind of the bookends are about, you know, $800 million to over $1 billion.
Great.
Either way, it's gonna be a very important product for us over the long term.
Understood. Great. We're out of time. Gentlemen, thanks very much for joining us.
Thanks. Thank you.
Yeah. Thanks for having us.