Royalty Pharma Q1 2026 Earnings Call - Double-Digit Growth and R&D Co-Funding Surge

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Royalty Pharma First Quarter 2026 earnings conference call. I would like now to turn the conference over to George Grofik, Senior Vice President, Head of Investor Relations and Communications. Please go ahead, sir.

George Grofik, Senior Vice President, Head of Investor Relations and Communications, Royalty Pharma: Good morning and good afternoon to everyone on the call. Thank you for joining us to review Royalty Pharma’s first quarter results. You can find the press release with our earnings results and slides to this call on the investor’s page of our website at royaltypharma.com. On slide 2, I’d like to remind you that information presented in this call contains forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from these statements. We refer you to our most recent 10-K on file with the SEC for a description of these risks. All forward-looking statements are based on information currently available to Royalty Pharma. We assume no obligation to update any such forward-looking statements.

Non-GAAP liquidity measures will be used to help you understand our financial results and the reconciliation of these measures to our GAAP financials is provided in the earnings press release available on our website. With that, please advance to slide 3. Our speakers on the call today are Pablo Legorreta, Chief Executive Officer and Chairman of the Board, Chris Hite, Chairman, Partnering and Investments, Marshall Urist, EVP, Head of Research and Investments, and Terrance Coyne, EVP, Chief Financial Officer. Pablo will discuss the key highlights, after which Chris will discuss the growing opportunity for R&D co-funding. Marshall will then provide a portfolio update, and Terrance will review the financials. Following concluding remarks from Pablo, we will hold the Q&A session. With that, I’d like to turn the call over to Pablo.

Pablo Legorreta, Chief Executive Officer and Chairman of the Board, Royalty Pharma: Thank you, George, welcome to everyone on the call. I am happy to report a strong start to 2026 as we execute towards our goal to be the premier capital allocator in life sciences with consistent compounding growth. Slide 5 summarizes our strong business momentum in the first quarter. Starting with the financials, we delivered 10% growth in portfolio receipts, our top line, and 13% growth in royalty receipts, which are our recurring cash flows. This sustained double-digit momentum was driven by strength of our diversified portfolio. We also maintained strong returns in our business with returns on invested capital of around 14% and returns on invested equity of around 20%. By combining strong growth and attractive returns, we’re confident that we have a clear path to drive shareholder value creation.

Turning to capital allocation, we had a busy quarter with $1.25 billion of announced transactions on three attractive therapies, while capital deployed was in excess of half a billion dollars. We also repurchased 1 million shares for $50 million in the quarter and increased our dividend by 7%. Moving to our portfolio, we’re thrilled to see a number of positive clinical and regulatory updates, including the extraordinary phase III results for Revolution Medicines’ daraxonrasib in pancreatic cancer and FDA approval of Denali’s Avlayah in Hunter syndrome. We also expanded our portfolio through R&D co-funding agreements with Teva, which we discussed on our previous earnings call, and recently with J&J for their autoimmune therapy JNJ-4804. Chris will highlight the growing market opportunity for R&D co-funding with Global Biopharma.

Lastly, we were pleased to acquire a royalty on Ziihera, an approved cancer therapy with blockbuster potential. Looking ahead, we’re increasing our 2026 full year guidance based on the strong business momentum I just highlighted. Slide 6 is one that I keep coming back to each quarter as it demonstrates our consistent double-digit growth on average since our IPO. We have delivered this impressive record year in, year out, regardless of the market backdrop. This speaks to the quality of our investment selection and our unique business model. In the first quarter, we also took major steps to strengthen our global platform and capabilities in partnering the Asia-Pacific region and artificial intelligence. We have brought in exceptional new leaders to our team with Greg Butz, Ken Sun, and Lucas Glass.

Their expertise will support our long-term growth ambitions and help to strengthen our competitive moats as the undisputed leader in the biopharma royalty market. Chris Hite, who has served as our vice chairman throughout our journey as a public company, has moved into a new role as Chairman, Partnering and Investments. In this role, we will continue to expand our global relationship network and play a central role in transactions. Chris has been an incredible partner, and I am delighted that he will continue to provide strong leadership and leverage his relationships in this role. With that, I will hand it over to Chris.

Chris Hite, Chairman, Partnering and Investments, Royalty Pharma: Thanks, Pablo. I’m genuinely excited about the new capabilities we’re building and the opportunity to forge even stronger, more meaningful relationships across the biopharma ecosystem. For my section today, I want to focus on the major opportunity we see for R&D co-funding with Global Biopharma. Beginning on slide 9, we see R&D co-funding as a win-win solution for Global Biopharma and for Royalty Pharma. This market has enormous potential with over $1 trillion of cumulative projected R&D spend by Global Biopharma in the next five years. Co-funding arrangements allow biopharma to share risk at scale, to enhance program return on investment, to expand R&D capacity, and to diversify pipelines. From Royalty Pharma’s perspective, we see multiple potential benefits.

These include unlocking a new market opportunity, gaining access to high-priority clinical programs, leveraging our partners’ global development and commercialization expertise, and the ability to conduct deep diligence to drive high conviction in our investments. Slide 10 illustrates the strong momentum for this funding modality. The demand by biopharma was impacted by accounting uncertainty last decade, but over the last several years, more clarity around contract R&D accounting treatment has resulted in a surge for co-funding deals. As an example, in the first quarter alone, we signed deals with J&J and Teva totaling $1 billion in announced value. On the right-hand side of this slide, you can see that the number of global biopharma companies that have utilized this funding modality has doubled since 2020, which underscores the growing acceptance of this form of funding.

Slide 11 shows our capital deployment mix by funding modality and how this has changed over time and where we see it heading in the future. At the start of the 2000s, we were a business focused almost exclusively on acquiring existing royalties. Today, existing royalties remain a stable and important component of our capital deployment. We have evolved into a more diversified with a growing emphasis on providing capital through innovative funding structures, most notably synthetic royalties with emerging biopharma companies, which has been a key growth driver. R&D co-funding with large biopharma companies has historically represented a smaller share of our activity. We see a clear opportunity to scale this significantly in response to increasing demand. Importantly, this shift creates meaningful upside potential.

In addition, potential business from acquiring existing royalties that have originated in China, where we are actively building a platform, represents another avenue for future growth that could drive the existing royalty market significantly. Slide 12 highlights a number of the R&D co-funding agreements that we have entered into since 2022. Together, these five highlighted deals at the time of announcement had the potential to provide up to $1.8 billion in capital to our partners, including up to $1 billion alone in the Teva and J&J transactions that we announced in the first quarter this year, as I previously noted. As you can see, these deals check the core elements of our investment framework. Specifically, each transaction involves a biopharma with deep clinical expertise and global commercial infrastructure and provides Royalty Pharma with royalty rights to a potentially transformative therapy covering a diverse range of indications.

On slide 13, I want to close by highlighting why we are so confident that Royalty Pharma is well-positioned to scale R&D co-funding. Remember that we have been partnering with biopharma for approximately 30 years as we pioneered the royalty market. When we think about the depth of our relationships, our brand reputation, our responsiveness, and our flexibility in structuring, Royalty Pharma is the clear leader. In addition, we take a long-term view with royalties and milestones paid over many years, and we have a cost of capital similar to pharma, so we can offer competitive pricing and win more deals. For these reasons, we expect to be able to capitalize strongly on this tremendous growth opportunity in the coming years. With that, let me hand it over to Marshall.

Marshall Urist, EVP, Head of Research and Investments, Royalty Pharma: Thanks, Chris. I want to focus today on several exciting updates to our portfolio. First, our recent royalty deal for Ziihera, an approved cancer therapy. Second, the incredible phase III data that was recently disclosed by our partner, Revolution Medicines, for daraxonrasib in pancreatic cancer. Third, a look forward to important upcoming events across our broad development stage portfolio. Beginning on slide 15, we entered into a strategic funding agreement in March with Zymeworks, where we provided $250 million upfront in return for 30% of their royalty on Jazz and B1 Ziihera, which translates to a low-to-mid single-digit royalty for Royalty Pharma. For those less familiar, Ziihera is a HER2-targeted bispecific antibody which is FDA-approved for a rare tumor, metastatic biliary tract cancer.

From a patient and commercial perspective, the real excitement here is that Ziihera was recently submitted for approval in gastric cancer, which represents a particularly high unmet need with a 5-year survival rate of less than 10%. The pivotal study in this indication demonstrated an impressive 5- to 7-month or nearly 40% overall survival advantage over currently available therapies. In our view, this positions Ziihera to become the standard of care in this very tough-to-treat indication, supporting blockbuster potential. Consensus models include peak sales of Ziihera of greater than $2 billion. Based on this outlook, we expect the transaction to deliver attractive returns with an unlevered IRR in the low double digits. Moving to daraxonrasib on slide 16. Revolution Medicines recently reported unprecedented results from the RASolute Phase III trial in second-line pancreatic cancer.

On our last earnings call, I said that daraxonrasib has the potential to revolutionize this devastating disease. These phase III results certainly support this. The key headline is that daraxonrasib nearly doubled overall survival from just under 7 months with chemotherapy to over 13 months. These are truly remarkable outcomes for patients in a disease that has seen no true innovation for decades. The next step for Revolution Medicines is to submit for approval by global regulatory agencies, including the FDA under the commissioner’s national priority voucher that has the potential to speed the time to approval. In terms of the implications for Royalty Pharma, as a reminder, we agreed in 2025 to provide up to $2 billion in long-term funding to Revolution Medicines to help the company aggressively pursue clinical development and commercialization of daraxonrasib.

With the positive data, Royalty Pharma has now invested a total of $500 million for a synthetic royalty that begins at 4.55% on sales up to $2 billion and then tiers down from there. Based on consensus peak annual sales of greater than $10 billion, we expect peak potential annual royalties to be in the range of approximately $180 million based on the currently funded amount, and up to $340 million if they draw the additional $750 million of synthetic royalty funding. We are excited to see what the future holds for this incredible medicine backed by a phenomenal team. I’ll turn to our development stage pipeline and upcoming events. We’re exceptionally well-positioned for our next wave of value creation with a deep and innovative pipeline.

Slide 17 shows that in addition to daraxonrasib, our portfolio has delivered a number of successful clinical readouts and regulatory approvals already in 2026. Just yesterday, we were thrilled to see the positive top-line results for MYQORZO in its pivotal trial in non-obstructive hypertrophic cardiomyopathy. Other highlights include positive clinical trial results for Zenas’ obexelimab in IgG4-related disease, positive phase II results for Biogen’s litifilimab in cutaneous lupus, FDA approval of Denali’s Avlayah in Hunter syndrome, and the filing of Nuvalent neladalkib in ALK-positive non-small cell lung cancer. As you can see, there are plenty more events anticipated this year, and we expect these to lead to several new royalty-generating launches in 2026 and 2027.

To highlight positive news on one of our pipeline products, last week, Teva announced the acquisition of MLX for up to $900 million, with regulatory submission planned for MLX’s ecopipam for Tourette’s in the second half of the year. As a reminder, Royalty Pharma is entitled to royalties of 6% on ecopipam sales up to $400 million and 10% on sales of $400 million or greater. We are excited to see ecopipam in the hands of Teva, a marketer with deep commercial expertise in neuroscience. Expanding on this theme, slide 18 shows that there is much more to come from our development stage pipeline, with multiple major pivotal readouts expected over 2026 and 2027. Over the remainder of 2026, we’ll see the results for the outcomes trial for Novartis’ pelacarsen.

We continue to believe that the Lp(a) class could be the next major class of drugs in cardiovascular disease. We’re perfectly positioned with the two lead pipeline products in pelacarsen and Amgen’s repasaran. We’ll also see phase III data for litifilimab in systemic lupus. In 2027, we expect pivotal data from Sanofi’s frexalimab in multiple sclerosis and from J&J’s seltorexant in major depressive disorder. We also expect phase III results from daraxonrasib in non-small cell lung cancer and litifilimab in cutaneous lupus. Each of these potentially transformative therapies would add significant royalties to our top line. To close, we see tremendous potential for our pipeline to unlock substantial value in the near term. With that, I’d like to hand it over to Terrance Coyne.

Geoff Meacham, Analyst, Citi1: Thanks, Marshall. Let’s move to slide 20. This slide shows how our efficient business model generates substantial cash flow to be reinvested. Royalty receipts grew by 13% in the 1st quarter, reflecting the strength of our diversified portfolio. Portfolio receipts, our top line, grew 10% in the quarter, which was strong performance considering a sizable year-over-year decline in milestones and other contractual receipts. As we move down the column, operating and professional costs were 3.9% of portfolio receipts in the 1st quarter. This is a clear reflection of the benefit of the cash savings we are delivering from the internalization transaction, which we completed last May. Net interest paid was $167 million in the quarter. This reflects the semi-annual timing of our interest payment schedule, with payments primarily in the 1st and 3rd quarters.

Moving further down the column, we have consistently stated that when we think of the cash generated by the business to then be redeployed into value-enhancing royalties, we look to portfolio cash flow, which is adjusted EBITDA less net interest paid. This amounted to $722 million for the quarter. Our net margin of around 78% again demonstrates the high underlying level of cash conversion and efficiency in the business. Capital deployment in the quarter of $528 million mainly reflected upfront payments for the Ziihera and Avlayah transactions and a milestone payment related to TRELEGY. Lastly, our weighted average share count declined by approximately 4% in the quarter versus the prior year period, reflecting the impact of our share buyback program. Slide 21 provides more detail on the evolution of our top line in the first quarter.

Royalty receipts, which we consider our recurring cash inflows, grew by 13%. Key drivers were the strong performances of Tremfya, Vornego, and Evrysdi. In the case of Evrysdi, on top of the underlying growth, we benefited from the additional royalties we acquired in December. I should also note that we were able to absorb a 3% headwind to royalty receipts due to the loss of exclusivity of Promacta and still deliver double-digit growth. To portfolio receipts, these grew by 10%, reflecting the lower one-time milestones and other contractual receipts. Slide 22 updates our portfolio return metrics for the quarter. Return on invested capital was 14.1% for the last 12 months, ending in the 1st quarter of 2026.

Return on invested equity, which shows the impact of conservative leverage on our equity returns, was 19.7% for the last 12 months, ending in the first quarter. As I previously stated, we are in the returns business, and these metrics show that we are continuing to invest at attractive returns that will drive long-term value for our shareholders. Slide 23 shows that we continue to maintain the financial flexibility to execute our strategy and return capital to shareholders. At the end of March 2026, we had cash and equivalents of $586 million. In terms of borrowings, we have investment-grade debt outstanding of $9.2 billion and the weighted average duration is around 12 years. Importantly, Fitch recently upgraded our credit rating to triple B from triple B minus.

Our leverage now stands at 2.9 times total debt to adjusted EBITDA, or 2.7 times on a net basis. We also have access to our $1.8 billion revolver, which is undrawn. Taken together, we have access to approximately $4 billion of financial flexibility through cash on our balance sheet, the cash our business generates, and access to the debt markets. Turning to our capital allocation framework, we deployed $528 million of capital on attractive royalty deals in the quarter. At the same time, we returned approximately $186 million to our shareholders, including share repurchases of $50 million and our growing dividend. On Slide 24, we are raising our full year 2026 financial guidance.

We now expect portfolio receipts to be in the range of $3.325 billion to $3.45 billion, up from $3.275 billion to $3.425 billion previously. This assumes growth in royalty receipts of around 4%-8%, which reflects the strong underlying momentum of our diversified portfolio. Our guidance takes into account the loss of exclusivity for Promacta, as well as the launch of biosimilar TYSABRI in the U.S. and the potential impact of IRA. It also reflects an expected decrease in milestones and other contractual receipts from $128 million in 2025 to approximately $60 million in 2026.

Importantly, consistent with our standard practice, this guidance is based on our portfolio as of today and does not take into account the benefit of any future royalty acquisitions. For modeling purposes, we would remind you that several of our largest royalties, such as the CF franchise, TRELEGY, Evrysdi, and others, are upward-tiering royalties, which means they reset to a lower rate in the first quarter. As our royalty receipts lag reported sales by the marketers by 1 quarter, this has the effect of decreasing royalties sequentially in the second quarter. Given these dynamics, we are providing guidance for the second quarter portfolio receipts, which we expect to be between $740 million and $760 million.

Turning to expenses, payments for operating and professional costs are still expected to be in the range of approximately 5.5%-6.5% of portfolio receipts in 2026, reflecting cost savings from the internalization of the manager. Interest paid is still expected to be around $350 million-$360 million in 2026. Based on our semiannual payment cycle, we anticipate interest paid to be around $175 million in the third quarter, with de minimis amounts payable in Q2 and Q4. This guidance does not take into account interest received on our cash balance, which was $6 million in the first quarter. To close, we have had a great start to the year.

We have again raised our guidance, and we expect to deliver another full year of strong financial performance in 2026. Now, before I hand it over to Pablo, I want to provide a brief update on the timing of the arbitration with Vertex. Based on the arbitration panel’s final schedule, we now expect the dispute to be resolved by around the middle of 2027. With that, I would like to hand the call back to Pablo.

Pablo Legorreta, Chief Executive Officer and Chairman of the Board, Royalty Pharma: Thanks, Terry. To conclude, I am delighted with our strong start to 2026. We have again delivered strong growth and returns. We’ve continued to diversify our portfolio of attractive biopharma royalties. We have strengthened our leadership team and capabilities. I want to close on slide 26 with a reminder of why we believe we’re well-positioned to drive strong value creation. First, we’re the clear leader in the rapidly expanding biopharma royalty market with strong fundamental tailwinds, reflecting the huge demand for funding life sciences innovation. Second, we have a best-in-class platform for investing in the most transformative and innovative products marketed by premier biopharma companies. We expect to remain the undefeated leader. I am confident that the expansion of our global platform and capabilities that I talked about today will further strengthen our position at the forefront of our industry.

Third, we expect to deliver strong low volatility, top and bottom line growth through 2030 and beyond. Lastly, we have an incredible track record of delivering consistent and attractive returns, including an IRR and return on invested capital in the mid-teens and return on invested equity in the 20% plus range. With that, we will be happy to take your questions.

Operator: Thank you, Tas.

George Grofik, Senior Vice President, Head of Investor Relations and Communications, Royalty Pharma: We’ll now welcome your calls and questions. Operator, please take the first question.

Operator: Thank you. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. The first question comes from Christopher Schott with J.P. Morgan. Your line is open.

Hardik Parekh, Analyst, J.P. Morgan: Hi, this is Hardik Parekh in for Christopher Schott. Thank you for taking our questions. I think you set like a portfolio receive target for 2030 of approaching $5 billion. I was just wondering now with these recent updates you’ve had in your development pipeline, can you talk about how much of that 2030 target is de-risked and how much do you think it comes from investors that are already commercial? Thank you.

Pablo Legorreta, Chief Executive Officer and Chairman of the Board, Royalty Pharma: Terry, that’s a question for you if you can please take it.

Geoff Meacham, Analyst, Citi1: Yeah. Hardik, yeah, we feel like we’re really on track to, you know, meet or exceed that target. The portfolio is doing really well. We’ve had a lot of positive developments. We’ve executed some great deals. You know, we haven’t gotten into specifics on that at this point, but feel like we’re very much on track, feel very confident in, you know, in meeting or exceeding that long-term guidance.

George Grofik, Senior Vice President, Head of Investor Relations and Communications, Royalty Pharma: Operator, next question, please.

Operator: Thank you. The next question’s gonna come from Mike Nedelcovic with TD Cowen. Your line’s open.

Mike Nedelcovic, Analyst, TD Cowen: Hi. Thanks so much for the questions. I have three, if you allow me. My first is on the arbitration update you just provided. Can you provide any insight into the reason for the pushout? My second question is on MYQORZO. How much of an advantage do you think approval in the non-obstructive HCM setting could be relative to CAMZYOS? Did you assume success of the Acadia trial in your internal valuation? My third question is on frexalimab. The multiple sclerosis category is evolving somewhat rapidly, especially with the prospect of oral BTK inhibitors gaining approval. Has anything changed relative to your initial assumptions around frexalimab’s competitive positioning, assuming it succeeds in the clinic? Thank you.

Pablo Legorreta, Chief Executive Officer and Chairman of the Board, Royalty Pharma: Sure. Thanks for the question, Mike. I guess, Terry, you can take the question on arbitration, and then Marshall will take the question on MYQORZO and frexalimab.

Geoff Meacham, Analyst, Citi1: Sure. On the timing of the arbitration, it’s just simply based on the availability of the arbitration panel.

Marshall Urist, EVP, Head of Research and Investments, Royalty Pharma: Hi, Mike. Good morning. On your other 2 questions, first, thanks for the question on MYQORZO. There were, I think multiple parts to it, but just to give you our thoughts, we were really excited to see the data yesterday, and I think it’s clear evidence that by the strength of the team in a well-designed trial and a really good medicine in aficamten. Multiple parts to your question. I think the first one was, did we assume that in our base in our base thesis when we, when we made the investment? The answer to that is no. The base investment was really premised on the obstructive or the currently approved indication and its potential there.

I think the early evidence that we saw from the early launch with Cytokinetics yesterday, you know, is evidence of that, you know, that the team is doing a great job launching into that market, and we’re really excited to see where that goes. The adding non-obstructive to the label, you know, can only be helpful, right? It gives a broader label. It provides another patient population for doctors to use the medicine in. You know, overall, will certainly be helpful in the launch and certainly upside to our original estimates when we made that partnership with Cytokinetics. Your third question was on frexalimab and on the multiple sclerosis market in general.

No real change. I think if you go back in our view, despite some of the changes that are going on with oral medicines there, what we said at the time of that investment was what really excited us and what we saw as an unmet need and what continues to be an unmet need in that market is novel mechanisms that aren’t solely focused on B cells. I think that opportunity in the market very clearly still exists, and we’re really excited about frexalimab and seeing those data next year.

Mike Nedelcovic, Analyst, TD Cowen: Thanks so much.

Operator: Thank you. The next question comes from Geoff Meacham with Citi. Your line’s open.

Geoff Meacham, Analyst, Citi: Great. Morning, guys. Thanks for the question. Just had a couple. The first one maybe for Terry. You know, you guys had a higher level of capital deployment this quarter or last quarter. Looking forward, are you at the upper end of the range leverage-wise, or is there a capacity constraint or just, you know, status quo? Then the second one, I guess maybe for Marshall. In deals like RevMed or Servier where, you know, the royalties could really ramp pretty quickly based on the strong launch, you know, are there considerations on some of these types of products where you could add additional royalty investments depending on the pace of the launch?

I think You know, I don’t know if that’s been under consideration before, but that, you know, seems like you’d want to add capital to drugs that are launching pretty quickly. Thank you.

Pablo Legorreta, Chief Executive Officer and Chairman of the Board, Royalty Pharma: Terry and Marshall, do you wanna go ahead?

Geoff Meacham, Analyst, Citi1: Yeah. Geoff, on your leverage question, we’re actually, you know, we have quite low leverage right now, 2.9 times total debt to adjusted EBITDA. We have a lot of financial flexibility. If deal flow increases, we feel like we absolutely will be, you know, prepared to, you know, invest if the right opportunities come along. I think we laid out in our slides that we have $4 billion of financial capacity, that grows every quarter, as you can imagine. We feel like the balance sheet has never been stronger. We’re in a really great position there.

Marshall Urist, EVP, Head of Research and Investments, Royalty Pharma: Geoff, good morning on your other two questions. On launching products and opportunities to deploy additional capital. You know, nothing specific with respect to the ramp, but I would say that, you know, the Vornego launch, as you pointed out, has gone incredibly well, and we’re so excited to have that as part of the portfolio. As a reminder, there is a, there is a sharing component to that one. You know, we do share a portion of the royalty above $1 billion with back to Agios. Then second, RevMed, we are as we talked about in the prepared remarks, we are really excited about this data. Agree with you that the unmet need is so great that this could be a really rapid launch.

As a reminder, the RevMed deal, we’ve done $500 million of the $1.25 billion of synthetic royalty. There are additional opportunities that will come at FDA approval, which we expect to see this year. With a certain sales milestone, and then there’s a label expansion later on. There are other opportunities. However, the future tranches are all at the option of Revolution Medicines. You know, and it was one of the really, I think, attractive and exciting parts of our partnership with them, that it gave our partner lots of flexibility in terms of access to capital going forward. There certainly is that potential, and we will see and we will see what happens in the months and years to come.

Geoff Meacham, Analyst, Citi3: Thank you.

Operator: Thank you. Our next question is gonna come from Jason Gerberry with Bank of America. Your line’s open.

Jason Gerberry, Analyst, Bank of America: Hey. Good morning, guys. Thanks for taking my questions. First is the policy question. I’m just curious how you guys are thinking about forecasting underwriting value for OUS launches around MFN risk, just given that we haven’t really seen how pharma companies’ launch behaviors and pricing strategies are mirroring in those select OUS markets. In the absence of that concrete information, I’m just kind of curious how you guys navigate that risk. Then on the R&D co-funding deals flagged in the slides, the 2 recent deals, can you help us understand, do the IRR expectations meaningfully differ at all for the co-funding structure versus a traditional royalty acquisition? If those 2 deals have a, like, royalty payment capping mechanism embedded in them? Thanks.

Geoff Meacham, Analyst, Citi1: Sure, Jason. Marshall, I think both questions are for you, the one on the ex-US launches and also on co-funding.

Marshall Urist, EVP, Head of Research and Investments, Royalty Pharma: Sure, Jason. Thanks for those two questions. On your first policy question on MFN, it’s certainly something that we, I think like the rest of the industry, is thinking through. Agree with you, there isn’t a lot of precedent. We’ve taken the approach that we always have, which is to think through a lot of different scenarios and make sure that given the wide range of possibilities in the future, that we’re still comfortable with the investment. I think certainly something that we are taking into account and making sure that we structure and, you know, protect us and all of our shareholders appropriately when we think about all the ways this could play out in the future.

It is still very new, so I think we’re in the same boat with everyone else trying to think this through. Your second question on R&D co-funding. The first part of your question was on IRR expectations. I think as Chris outlined, the answer to your question is no. You know, we have said that our return expectations for products that are not approved are kind of greater than the low double digits. You know, we certainly see returns in the IRR co-funding as very consistent with what we’ve communicated publicly in terms of return expectations. You know, that’s one of the reasons that we’re really excited about that opportunity.

In terms of capping at it, you asked about some of the structural features. You know, we haven’t disclosed all of the structural features for these, so it’s a little hard to comment generally. I think our philosophy when we put these together is, you know, we’re investing in a phase III program, and we certainly wanna have every opportunity to explore and benefit from the full potential of these products, both in the near term as the indications that are certainly being pursued right now play out, then in the long term as there’s potential for label expansion, geographic expansion and, you know, and general market expansion of what we invest in.

You know, our philosophy and our discipline in terms of how we structure these, and how we make sure that we’re getting appropriate risk-adjusted returns for us and for our shareholders are very much consistent with how we’ve been operating.

Jason Gerberry, Analyst, Bank of America: Great. Thanks, guys.

Operator: Thank you. The next question will come from Ashwani Verma with UBS. Your line’s open.

Geoff Meacham, Analyst, Citi4: Hi, good morning. This is the asking question on behalf of Ash. Congrats on the quarter. I have two questions. The first one, can you update us on your view on thoughts about like potential royalty stream from MYQORZO? I guess with the positive result now on non-obstructive, do you believe there’s a halo effect on their ongoing launch in the obstructive side? My second question is, what are your thoughts on the consolidation among the smaller royalty players like Ligand and XOMA Royalty recently? Does this scale up in any way increase the competition for you in the smaller royalty transaction space? Thanks.

Pablo Legorreta, Chief Executive Officer and Chairman of the Board, Royalty Pharma: Sure. Maybe I’ll take briefly your question on competition, and then I’ll turn it back to Marshall, you know, to talk about the MYQORZO launch. In terms of competition, we follow it all the time and, you know, it’s not news to us. In fact, that consolidation, you know, might even reduce competition when you have, you know, Ligand acquire XOMA. There’ll be less competition, one entity, you know, consolidating two companies. The reality is that, if you just think of those two players in the market, you know, we have very significant advantages versus companies that are in the royalty space. Obviously, we’ve talked of many of these advantages in the past. Scale is one.

Also another issue that, you know, companies that are, you know, interested in acquiring royalties have is that they’re taxpayers. As you know, we have a very efficient, you know, tax structure. Then other things like access to capital. In our case, it’s, you know, significantly lower cost of capital and access to, you know, a lot more capital than, you know, the smaller players. It’s no real big change in competition. At the end, as we said in the past many times, we think competition is a good thing. We welcome it because it just expands the market. It makes a lot of the potential partners that we do business with, have, you know, many alternatives, and it just gives them comfort to know that it’s a, you know, very dynamic market.

I’ll turn it back to Marshall now for the question on MYQORZO.

Marshall Urist, EVP, Head of Research and Investments, Royalty Pharma: Yep. On MYQORZO, you know, certainly, yes, we believe that the positive data yesterday, you know, provide an advantage to aficamten in the marketplace. Having a broader label, you know, having experience in a broader selection of patients, you know, can really only help the medicine as Cytokinetics launches it. We’re excited about the way Cytokinetics is gonna execute in the current indication of obstructive disease, and then certainly the broader label and the non-obstructive data is only a tailwind to that.

Geoff Meacham, Analyst, Citi4: Awesome. Thank you.

Operator: Thank you. The next question will come from Nicholas Jennings with Goldman Sachs. Your line is open.

Nicholas Jennings, Analyst, Goldman Sachs: Thanks. Hi, it’s Nick on for Asad and the Goldman Sachs team. We have 2 questions. First, Chris, congratulations on the new focus with global biopharma R&D co-funding. Our question’s on the implications of this as a growing part of the portfolio. Should we expect the complexion of the overall portfolio to shift over time as more of these partnerships are done with global biopharma companies? Second, how’s the China market progressing? Any update on what types of assets you’re looking at there, and when do you think we’ll see the first deal? Thank you.

Pablo Legorreta, Chief Executive Officer and Chairman of the Board, Royalty Pharma: Sure. Chris, why don’t you take both questions?

Chris Hite, Chairman, Partnering and Investments, Royalty Pharma: Okay, great. Thanks for the question. In terms of the first one around the R&D co-funding, you know, we have been investing in development stage products since 2012 and for us, it’s really just expanding the opportunity when we’re now seeing more opportunity to co-fund R&D at the large pharma stage. You know, if you look at our capital at work slide, I think it’s in the appendix, you can see that roughly 85% of our capital work is in approved products today, and roughly 10% is in development stage, and roughly 3% of those in development stage has already had positive pivotal results. That’s exciting for us. I mean, it’s a huge opportunity. These companies need a lot of money to fund their R&D.

We certainly are excited about the opportunity, you know, that certainly could lead to a greater percentage of capital work, but we’re going to be very disciplined in how we approach that. In terms of China, I’d just remind you know, Bone obviously, we did the transaction with them last year, that from Endeltra, which is roughly $900 million. Obviously, that caught the attention of a lot of companies in China that look at Bone as a great company originally coming out of China. We hired Kenneth Sun. He starts actually next week. He was the former head of Asia at Morgan Stanley. Super excited to have him on board. He will hit the ground running.

We’ve obviously been to China a lot, the existing teams here at Royalty Pharma. We are monitoring all of the out licensing that’s ongoing from China to Western multinationals.

Very aggressively. I think the B one transaction evidences to those companies in China what, you know, what a great opportunity it is to potentially monetize those royalties they’ve created over the last five years or so. We’re super excited about China. Ken coming on board really catalyzed that effort.

Operator: Thank you. Our next question is going to come from Terence Flynn with Morgan Stanley. Your line is open.

Geoff Meacham, Analyst, Citi0: Hi. Thanks for taking the questions. I guess two for me. Maybe first for Marshall, you could just provide your perspective on the J&J DUET data, and what this ultimately might mean for the Tremfya tail, given the co-formulation approach there. On the use of AI, I think many investors view the company as a beneficiary here. Are you able to provide any kind of case studies of how you’re implementing AI across your enterprise and in terms of your processes and what that means in terms of, you know, number of deals or efficiencies that you can comment on? Thanks so much.

Pablo Legorreta, Chief Executive Officer and Chairman of the Board, Royalty Pharma: Sure. I’ll take the first question or the second question on AI, then I’ll let Marshall take the other one. Data is extremely important for our business and for this whole ecosystem. You know, everything is based on data, as you know. Royalty Pharma has been making significant investments in data for many years, decades. We had, in our investor day, a slide that actually provided a perspective on what we really mean by, you know, investing in data. We have about 200 million people, claims data for 200 million Americans. We have relationships with great data providers that are feeding us, you know, this data continuously. We have electronic medical records for 44 million Americans and about 9 years of longitudinal data.

The way we use this is for our own internal purposes to, you know, make better investments, understand better what’s going on with the products and how we forecast them. One of the very exciting things for Royalty Pharma is to actually use data with our partners and share insights that we gain as we do our analysis and as we follow the ecosystem. We think that is a differentiating aspect that, you know, is important to us because, you know, we don’t see ourselves like others as purely capital providers, but we see ourselves as partners with the companies that we’re partnering with, where we can provide, we add value by sharing data and insights with them, and they appreciate that.

In some cases that’s, that has led to, you know, to better terms on transactions. We do have case studies. Actually, I’ll refer you to our investor day deck, a couple of them, where we have through claims data and other source of information, have been able to identify asymmetries of information where, you know, we see drugs that we believe could have much stronger launches or peak sales than what others see based on data. One of those is, for example, Vornego, where we realized when we made that investment that in that form of cancer, there were about 1,500 patients, you know, being diagnosed each year.

You know, on the sidelines, about 15,000 patients that were not recurring to treatment because the options were not attractive drugs that were, you know, toxic, safety issues and not that effective. Obviously, when Vornego came to market, it gave patients the opportunity to be treated with a drug that was very safe and very efficacious, and it brought into the market this work housing of patients that existed. That, as a result of that, we were able to forecast a much stronger launch for Vornego than I think anybody was seeing and then, you know, higher peak sales. That’s a case study.

I’ll finish just by saying that, we’re very fortunate, recently to have hired Lucas Glass as Head of AI for Royalty Pharma, and he’s going to be responsible for developing and implementing AI capabilities across our business, including, you know, automating all of our, you know, diligence processes, and, you know, strengthening how we evaluate and invest in royalties and also support our partners. Lucas comes from IQVIA, where he was the Head of AI for this, you know, huge company that serves our ecosystem. As you know, it’s the biggest CRO with Quintiles and also IMS Health. That part of the business was, you know, one of the biggest data providers in life sciences.

We’re very excited about where we can take the business now with Lucas and the team that we’re building, in addition to the team that we already had. I’ll turn it now to Marshall for the other question.

Marshall Urist, EVP, Head of Research and Investments, Royalty Pharma: Hey, Terence. Thanks for the question on the J&J deal. Maybe just a general comment. A general comment. I think this is a great example of exactly what Chris was talking about, right? That we get the opportunity to participate at scale in a first-in-class biologic combinations blockbuster market that’s backed by, you know, the world-class, one of the premier marketers in that space. You know, those are exactly the kind of opportunities that, you know, we’re so excited about the biopharma partnerships creating for us. Specifically on the data, obviously that was something during diligence that we spent a good amount of time with. I think our view is, you know, we’re excited about the biologics combination opportunity broadly.

JNJ-4804 is the first of those, I think you’d see the potential in what was a very refractory patient population who had been heavily pre-treated, which, when we look to continue Pablo’s comments, when we look into our claims data, is a really rapidly growing part of this market, is patients who have been treated through multiple lines. I think we see that growing and certainly by the time JNJ-4804 makes it to market, is a really substantial opportunity that we’re excited about.

We think there will be other, certainly other biologic combinations to come that will look at other patient populations and other combinations, excited to see how that continues to expand the market. We’re excited to be partners with J&J there. The last part of your question on the tail, I think for our base Tremfya royalty, just a reminder there that our royalty there is based on a separate set of IP that we acquired from MorphoSys. We’ve communicated that that IP will expire in the early 2030s, 2031, 2032 timeframe.

You know, given the likely timelines for JNJ-4804, probably won’t have a significant benefit to the Tremfya royalty, but I think we’ve created a whole new royalty on this product and will continue to be able to participate in it through JNJ-4804. Thanks for the question.

Operator: Thank you. The next question will come from Umer Raffat with Evercore. Your line’s open.

Geoff Meacham, Analyst, Citi2: Hi, guys. Thanks for taking my question. I feel like there’s been a good amount of discussion today on a lot of the effort Chris Hite has been leading on R&D funding side. I guess, a question I have maybe first for you, Pablo Legorreta, how are you thinking about the split going forward for your capital deployment between R&D co-funding versus the traditional royalty investments? To what extent is that driven by your heavier emphasis on doing larger checks? Maybe a quick follow-up to that also. My understanding or at least the feedback I’ve heard from some of the big pharmas on their late-stage pipeline programs is that when they go into these R&D co-funding conversations, they’re really talking high single-digit IRRs type of thing. Could you maybe speak to your experience working on the J&J JNJ-4804?

I don’t wanna comp the Teva vitiligo in there ’cause it’s much earlier stage, so I think the 4804 is a good example of the type of IRR you guys got, and maybe you can expand on that. Thank you.

Pablo Legorreta, Chief Executive Officer and Chairman of the Board, Royalty Pharma: Umer, thanks for the question on allocation of capital. In reality, the way we approach things is with, you know, a significant amount of flexibility because, you know, our business, you know, has the capacity to invest a huge amount of money. I think, again, during our investor day, we actually had a slide, interesting slide that showed that from now until 2030, we have the capability of investing something like $30 billion, of which $12 billion or so is what we’ve guided to, you know, the $2 billion-$2.5 billion per year. When you add to that, you know, the share repurchases and dividends, you know, it takes us to a higher level.

There is an additional sort of $10 billion of capacity that the business has, that we might, you know, if the opportunities are there, just increase the investments every year. It gives us, you know, as I said, a capability of deploying more like $20 billion over the next 5 years in royalty acquisitions. I think at the end of the day, as we’ve said in the past, the critical thing for us is the product. You know, that’s really what drives our excitement for investments.

If we find really attractive differentiated products, that we think are gonna do really well in the long term, whether we end up making the investment because it’s a royalty that, you know, sort of already exists, there’s a license and a royalty holder, and we just acquire that royalty, like in the case of Endeltra with V one, or whether we create the royalty, by, you know, funding a clinical trial, for us it doesn’t matter really, where it comes from. I would point out, just to finish, that when we put together our guidance and our business plan, there were several things that were really not included in a major way in our sort of, you know, $10 billion-$12 billion capital deployment guidance. Those things are China.

It was not in our minds, and we didn’t see that as a, as an important driver of capital deployment and growth, and that is definitely now a real market and one that we’re very excited about. The second one is deals with big pharma. Again, we were super conservative and didn’t really include in our, in our forecast, our business plan, our guidance, you know, much of any capital deployment with big pharma. That is definitely becoming a big opportunity for us and one that we’re very, very excited. I think as more deals like this get done, and you talked about the J&J one, and also Teva and there’s others, we did a deal with Merck several years ago, it actually is really starting to open that market.

We have noticed very significant excitement from many big pharmas that are now really looking at funding their trials with structures that we’ve developed, R&D funding structures. Also what’s helped there is the fact that we’ve been, you know, for years working with, you know, the accounting firms to make sure that we have the right accounting treatment for those transactions, that they can be accounted for as contra R&D. We have been proactive. There was a bad, you know, decision made years ago with one company going to the SEC and, you know, with an accounting firm that actually set back, you know, the field.

You know, because it’s important to us, we decided to hire an expert on accounting, and with him we have completely turned the tide. Now, it is something that is when you look at the accounting, it’s accounted for correctly. I’ll stop there. The reality, Umer, is that we’re super excited about the opportunity, the universe of opportunities, which is clearly expanding.

Geoff Meacham, Analyst, Citi2: Thank you.

Operator: Thank you. There are no further questions in the queue. I will now turn the call back over to Pablo for closing remarks.

Pablo Legorreta, Chief Executive Officer and Chairman of the Board, Royalty Pharma: Thank you, operator, thanks to everyone on the call. I’ll just remind you that if there’s any further questions or discussions you want to have, you should reach out to George Grofik and Dana, our IR team, and then we can get involved if it’s appropriate. Thank you, everyone.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.