# Royalty Pharma plc (RPRX) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from Royalty Pharma plc's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1802768/000180276824000012/rprx-20231231.htm Accession: 0001802768-24-000012 Filing date: 2024-02-15 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/RPRX/ All MD&A years: /company/RPRX/mda/ Previous year: /company/RPRX/mda/fy2022/ (FY 2022) Next year: /company/RPRX/mda/fy2024/ (FY 2024) Item 7.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations, cash flows, other changes in financial condition and business performance. MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying notes to our consolidated financial statements included in our Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Special Note Regarding Forward-Looking Statements and the section titled “Risk Factors” in Part I, Item 1A. Royalty Pharma plc is a public limited company that was incorporated under the laws of England and Wales to facilitate our initial public offering (“IPO”) in 2020. “Royalty Pharma,” the “Company,” “we,” “us” and “our” refer to Royalty Pharma plc and its subsidiaries on a consolidated basis. Business Overview We are the largest buyer of biopharmaceutical royalties and a leading funder of innovation across the biopharmaceutical industry. Since our founding in 1996, we have been pioneers in the royalty market, collaborating with innovators from academic institutions, research hospitals and not-for-profits through small and mid-cap biotechnology companies to leading global pharmaceutical companies. We have assembled a portfolio of royalties which entitles us to payments based directly on the top-line sales of many of the industry’s leading therapies, which includes royalties on more than 35 commercial products, including Vertex’s Trikafta, GSK’s Trelegy, Roche’s Evrysdi, Johnson & Johnson’s Tremfya, Biogen’s Tysabri and Spinraza, AbbVie and Johnson & Johnson’s Imbruvica, Astellas and Pfizer’s Xtandi, Novartis’ Promacta, Pfizer’s Nurtec ODT, Gilead’s Trodelvy, among others, and 14 development-stage product candidates. We fund innovation in the biopharmaceutical industry both directly and indirectly - directly when we partner with companies to co-fund late-stage clinical trials and new product launches in exchange for future royalties, and indirectly when we acquire existing royalties from the original innovators. Our industry leading royalty portfolio and capital-efficient business model drives our compounding growth. We have a focused strategy of actively identifying and tracking the development and commercialization of important new therapies, which allows us to move quickly to make acquisitions when opportunities arise. With a deep and experienced team of investment professionals, an exhaustive due diligence process and a focus on high-quality therapies that address significant unmet patient need, we sustain attractive returns above our cost of capital, which in turn propels our compounding growth. Our unique business model enables us to benefit from many of the most attractive characteristics of the biopharmaceutical industry, including long product life cycles, significant barriers to entry and noncyclical revenues, but with substantially reduced exposure to many common industry challenges such as early stage development risk, therapeutic area constraints, high R&D costs, and high fixed manufacturing and marketing costs. We have a highly flexible approach that is agnostic to both therapeutic area and treatment modality, allowing us to acquire royalties on the most attractive therapies across the biopharmaceutical industry. We classify our royalty acquisitions by the approval status of the therapy at the time of acquisition: •Approved Products – We acquire royalties on approved products that generate predictable cash flows and may offer upside potential from unapproved indications. From 2012 through 2023, we deployed $13.8 billion to acquire royalties, milestones and other contractual receipts on approved products. •Development-Stage Product Candidates – We acquire royalties on development-stage product candidates that have demonstrated strong clinical proof of concept. From 2012, when we began acquiring royalties on development-stage product candidates, through 2023, we deployed $8.3 billion to acquire royalties, milestones and other contractual receipts on development-stage product candidates. 46 While we classify our acquisitions in these two broad categories, several of our approved product transactions are driven by the long-term expanded potential of these existing commercial products in indications that are unapproved at the time of acquisition. Similarly, some of our development-stage product candidate transactions are specifically related to indications that are unapproved at the time of acquisition, on products that are already approved and commercialized in other indications. We acquire product royalties in ways that can be tailored to the needs of our partners through a variety of structures: •Third-party Royalties – Existing royalties on approved or late-stage development therapies with high commercial potential. A royalty is the contractual right to a percentage of top-line sales from a licensee’s use of a product, technology or intellectual property. The majority of our current portfolio consists of third-party royalties. •Synthetic Royalties – Newly-created royalties on approved or late-stage development therapies with strong proof of concept and high commercial potential. A synthetic royalty is the contractual right to a percentage of top-line sales by the developer or marketer of a therapy in exchange for funding. A synthetic royalty may also include contingent milestone payments. We also fund ongoing R&D for biopharmaceutical companies in exchange for future royalties and milestones if the product or indication we are funding is approved. •Launch and Development Capital – Tailored supplemental funding solutions, generally included as a component within a transaction, increasing the scale of our capital. Launch and development capital is generally provided in exchange for a long-term stream of fixed payments with a predetermined schedule around the launch of a drug. Launch and development capital may also include a direct investment in the public equity of a company. •Mergers and Acquisitions (“M&A”) Related – We acquire royalties in connection with M&A transactions, often from the buyers of biopharmaceutical companies when they dispose of the non-strategic assets of the target company following the closing of the acquisition. We also seek to partner with companies to acquire other biopharmaceutical companies that own significant royalties. We may also seek to acquire biopharmaceutical companies that have significant royalties or where we can create royalties in subsequent transactions. Additionally, we may identify additional opportunities, platforms or technologies that leverage our capabilities. Background and Format of Presentation We consummated an exchange offer on February 11, 2020 (the “Exchange Offer”) to facilitate our IPO. Through the Exchange Offer, investors which represented 82% of the aggregate limited partnership interests in the various partnerships (the “Legacy Investors Partnerships”) that owned Royalty Pharma Investments, an Irish unit trust (“Old RPI”), exchanged their limited partnership interests in the Legacy Investors Partnerships for limited partnership interests in RPI US Partners 2019, LP, a Delaware limited partnership, or RPI International Holdings 2019, LP, a Cayman Islands exempted limited partnership (together, the “Continuing Investors Partnerships”). We operate and control the business affairs of Royalty Pharma Holdings Ltd (“RP Holdings”). We include RP Holdings and its subsidiaries in our consolidated financial statements. RP Holdings is the sole owner of Royalty Pharma Investments 2019 ICAV (“RPI 2019 ICAV”), which is an Irish collective asset management vehicle and is the successor to Old RPI. Following the Exchange Offer, we became the indirect owner of an 82% economic interest in Old RPI through our subsidiary RPI 2019 Intermediate Finance Trust, a Delaware statutory trust. We are entitled to 82% of the economics of Old RPI’s wholly-owned subsidiary RPI Finance Trust, a Delaware statutory trust (“RPIFT”), and 66% of Royalty Pharma Collection Trust, a Delaware statutory trust (“RPCT”). Prior to December 29, 2023, the remaining 34% of RPCT was owned by the Legacy Investors Partnerships and Royalty Pharma Select Finance Trust, a Delaware statutory trust (“RPSFT”), which was wholly owned by Royalty Pharma Select, an Irish unit trust. In 2022, we became an indirect owner of an 82% economic interest in Royalty Pharma Investments ICAV (“RPI ICAV”), which was previously owned directly by Old RPI. 47 In December 2023, RPI 2019 ICAV acquired the remaining interest in RPCT owned by RPSFT and as such RPSFT no longer holds a non-controlling interest in RPCT. Prior to December 2023, we reported non-controlling interest related to a de minimis interest in RPCT held by RPSFT, which also existed prior to our IPO. Understanding Our Financial Reporting Most of the royalties we acquire are treated as investments in cash flow streams and are classified as financial assets measured under the effective interest method in accordance with GAAP. Under this accounting methodology, we calculate the effective interest rate on each financial royalty asset using a forecast of the expected cash flows to be received over the life of the financial royalty asset relative to the initial acquisition price. The yield, which is calculated at the end of each reporting period and applied prospectively, is then recognized via accretion into our income at the effective rate of return over the expected life of the financial royalty asset. The measurement of income from our financial royalty assets requires significant judgments and estimates, including management’s judgment in forecasting the expected future cash flows of the underlying royalties and the expected duration of the financial royalty asset. Our cash flow forecasts are updated each reporting period primarily using sell-side equity research analysts’ consensus sales estimates for each of the products in which we own royalties. We then calculate our expected royalty receipts by applying our royalty terms to these consensus sales forecasts. As we update our forecasted cash flows on a periodic basis and recalculate the present value of the remaining future cash flows, any shortfall when compared to the carrying value of the financial royalty asset is recorded directly in the income statement as non-cash provision expense. If, in a subsequent period, there is an increase in expected cash flows or if actual cash flows are greater than cash flows previously expected, we reverse the provision expense previously recorded in part or in full by recording a non-cash credit to the provision. As a result of the non-cash charges associated with applying the effective interest method accounting methodology to our financial royalty assets, our consolidated income statement activity can be volatile and unpredictable. Small declines in sell-side equity research analysts’ consensus sales forecasts over a long time horizon can result in an immediate non-cash income statement expense recognition, even though the applicable cash inflows will not be realized for many years into the future. For example, in late 2014 we acquired the cystic fibrosis franchise and shortly after, declines in near-term sales forecasts of sell-side equity research analysts caused us to recognize non-cash provision expense in our consolidated income statements. Over the course of 10 quarters, we continued to recognize non-cash provision expense because of these changes in sales forecasts, ultimately reaching a peak cumulative allowance of $1.30 billion by September 30, 2017. With the approval of the Vertex triple combination therapy, Trikafta, in October 2019, sell-side equity research analysts’ consensus sales forecasts increased to reflect the larger addressable market and the extension of the expected duration of the Trikafta royalty, resulting in the reversal of the remaining $1.10 billion cumulative allowance. The recognition of the associated non-cash provision income of $1.10 billion in 2019 was not tied to royalty receipts, but rather to the increase in sales forecasts. This example illustrates the volatility caused by our accounting model in our consolidated statements of operations. We believe there is no direct correlation between income from financial royalty assets and royalty receipts due to the nature of the accounting methodology applied for financial royalty assets. Further, income from financial royalty assets and the provision for changes in expected cash flows related to these financial royalty assets can be volatile and unpredictable. Our operations have historically been financed primarily with cash flows generated by our royalties. Given the importance of cash flows and their predictability to management’s operation of the business, management uses Portfolio Receipts (as defined below) as a primary measure of our operating performance. See “—Portfolio Overview” for additional discussion regarding Portfolio Receipts. Understanding Our Results of Operations We report non-controlling interests related to the portion of ownership interests of consolidated subsidiaries not owned by us and which are attributable to: 1. The Legacy Investors Partnerships’ ownership of approximately 18% of Old RPI and RPI ICAV. The value of this non-controlling interest will decline over time as the assets in Old RPI and RPI ICAV expire. 2. A de minimis interest in RPCT held by RPSFT. In December 2023, we acquired the remaining interest in RPCT that was held by RPSFT and as such RPSFT no longer holds a non-controlling interest in RPCT. 48 The Legacy Investors Partnership together with RPSFT are referred to as the “legacy non-controlling interests.” The legacy non-controlling interests are the only historical non-controlling interests that existed prior to our IPO. After December 2023, the Legacy Investors’ Partnerships are the only remaining legacy non-controlling interests. Additionally, following the consummation of our IPO, we also report non-controlling interests related to: 3. The Continuing Investors Partnerships’ ownership in RP Holdings through their indirect ownership of RP Holdings Class B Interests was approximately 25% as of December 31, 2023. RP Holdings Class B Interests are exchangeable into Class A ordinary shares. As the Continuing Investors Partnerships conduct exchanges, the Continuing Investors Partnerships’ indirect ownership in RP Holdings decreases and the value of this non-controlling interest decreases. Additionally, RP Holdings began to retire RP Holdings Class A Interests held by us in connection with our repurchase of our Class A ordinary shares. As RP Holdings retires RP Holdings Class A Interests, our ownership in RP Holdings decreases and the value of this non-controlling interest increases. The Continuing Investors Partnerships are referred to as the “continuing non-controlling interests.” 4. RPI EPA Holdings, LP’s (“EPA Holdings”) ownership of RP Holdings’ Class C ordinary share (the “RP Holdings Class C Special Interest”). EPA Holdings is entitled to receive equity distributions through its RP Holdings Class C Special Interest (“Equity Performance Awards”). Equity Performance Awards owed to EPA Holdings will be recognized as an equity transaction when the obligation becomes due and will impact the income allocated to non-controlling interest related to the RP Holdings Class C Special Interest. The Equity Performance Awards will be payable in RP Holdings Class B Interests that will be exchanged upon issuance for Class A ordinary shares. EPA Holdings may also receive a periodic cash advance in respect of the RP Holdings Class C Special Interest to the extent necessary for EPA Holdings or any of its beneficial owners to pay when due any income tax imposed on it or them as a result of holding such RP Holdings Class C Special Interest. We do not currently expect any material Equity Performance Awards to be payable until certain performance conditions are met, which we do not expect to occur until the mid-2020s. Total income and other revenues Total income and other revenues is primarily comprised of interest income from our financial royalty assets, royalty income generally arising from successful commercialization of products developed through R&D funding arrangements, and a declining contribution of royalty revenue from our intangible royalty assets for which patent rights have materially expired. Most of our royalties are classified as financial assets as our ownership rights are generally protective and passive in nature. In instances in which we acquire a royalty that does include more substantial rights or ownership of the underlying intellectual property, we classify such royalties as intangible assets. For 2023 and 2022, the royalty payors that accounted for greater than 10% of our total income and other revenues in any one year are shown in the table below: [[GREPCENT_TABLE]] [["","","","","Years Ended December 31,"],["Royalty Payor","","Royalty","","2023","","2022"],["Vertex","","Cystic fibrosis franchise","","36","%","","36","%"],["AbbVie","","Imbruvica","","*","","14","%"]] [[/GREPCENT_TABLE]] *Represents less than 10%. 49 Income from financial royalty assets Our financial royalty assets represent investments in cash flow streams with yield components that most closely resemble loans measured at amortized cost under the effective interest method. We calculate the effective interest rate using forecasted expected cash flows to be received over the life of the royalty asset relative to the initial acquisition price. Interest income is recognized at the effective rate of return over the expected life of the asset, which is calculated at the end of each reporting period and applied prospectively. As changes in sell-side equity research analysts’ consensus sales estimates are updated on a quarterly basis, the effective rate of return changes. For example, if sell-side equity research analysts’ consensus sales forecasts increase, the yield to derive income on a financial royalty asset will increase and result in higher income for subsequent periods. Variables affecting the recognition of interest income from financial royalty assets under the prospective effective interest method include any one of the following: (1) additional acquisitions, (2) changes in expected cash flows of the underlying pharmaceutical products, derived primarily from sell-side equity research analysts’ consensus sales forecasts, (3) regulatory approval of additional indications which leads to new cash flow streams, (4) changes to the estimated duration of the royalty (e.g., patent expiration date) and (5) changes in amounts and timing of projected royalty receipts and milestone payments. Our financial royalty assets are directly linked to sales of underlying pharmaceutical products whose life cycle typically peaks at a point in time, followed frequently by declining sales trends due to the entry of generic competition, resulting in natural declines in the asset balance and periodic interest income over the life of our royalties. The recognition of interest income from royalties requires management to make estimates and assumptions around many factors, including those impacting the variables noted above. Revenue from intangible royalty assets Revenue from intangible royalty assets is derived from sales of Januvia, Janumet and other DPP-IV products by our licensees. Our royalties on Januvia and Janumet expired in the first quarter of 2022. Our royalties on other DPP-IV products have also substantially ended and we do not expect any material revenue from the other DPP-IV products in future periods. Other royalty income Other royalty income primarily includes income and milestones from financial royalty assets that have been fully amortized and income from synthetic royalties and milestones arising out of R&D funding arrangements. Occasionally, a royalty asset may be amortized on an accelerated basis due to collectability concerns, which, if resolved, may result in future cash collections when no financial royalty asset remains. Similarly, we may continue to collect royalties on a fully amortized financial royalty asset beyond the estimated duration. In each scenario where a financial royalty asset has been fully amortized, income from such royalty is recognized as Other royalty income. Other royalty income also includes income from royalties that are recorded at fair value on our consolidated balance sheets. Provision for changes in expected cash flows from financial royalty assets The Provision for changes in expected future cash flows from financial royalty assets includes the following: •non-cash expense or income related to the current period activity resulting from adjustments to the cumulative allowance for changes in expected cash flows; and •non-cash expense or income related to the provision for current expected credit losses, which reflects the activity for the period, primarily due to new financial royalty assets with limited protective rights and changes to cash flow estimates for financial royalty assets with limited protective rights. As discussed above, income is accreted on our financial royalty assets using the effective interest method. As we update our forecasted cash flows on a periodic basis and recalculate the present value of the remaining future cash flows, any shortfall when compared to the carrying value of the financial royalty asset is recorded directly in the income statement through the line item Provision for changes in expected cash flows from financial royalty assets. If, in a subsequent period, there is an increase in expected cash flows or if actual cash flows are greater than cash flows previously expected, we reverse the provision expense previously recorded in part or in full by recording a credit to the provision. 50 The same variables and management’s estimates affecting the recognition of interest income on our financial royalty assets noted above also directly impact the provision. R&D funding expense R&D funding expense consists of payments that we have made to counterparties to acquire royalties or milestones on product candidates. It includes development-stage funding payments that are made upfront or upon pre-approval milestones, and development-stage funding payments that are made over time as the related product candidates undergo clinical trials with our counterparties. General and administrative expenses General and administrative (“G&A”) expenses include primarily Operating and Personnel Payments (defined below), legal expenses, other expenses for professional services and share-based compensation. The expenses incurred in respect of Operating and Personnel Payments comprise the most significant component of G&A expenses on an ongoing basis. Under the Management Agreement, we pay a quarterly operating and personnel payment to the Manager or its affiliates (“Operating and Personnel Payments”) equal to 6.5% of the cash receipts from Royalty Investments (as defined in the Management Agreement), or Portfolio Receipts for such quarter, and 0.25% of the value of our security investments under GAAP as of the end of such quarter. The operating and personnel payments for Old RPI, an obligation of the Legacy Investors Partnerships and for which the expense is reflected in G&A expenses, are calculated as the greater of $1 million per quarter and 0.3125% of royalties from Royalty Investments (as defined in the limited partnership agreements of the Legacy Investors Partnerships) during the previous twelve calendar months. Equity in losses/(earnings) of equity method investees Equity in losses/(earnings) of equity method investees primarily includes the results of our share of income or loss from the following non-consolidated affiliates: 1.Legacy SLP Interest. In connection with the Exchange Offer, we acquired an equity method investment from the Continuing Investors Partnerships in the form of a special limited partnership interest in the Legacy Investors Partnerships (the “Legacy SLP Interest”) in exchange for issuing shares in our subsidiary. The Legacy SLP Interest entitles us to the equivalent of performance distribution payments that would have been paid to the general partner of the Legacy Investors Partnerships and a performance income allocation on a similar basis. As the Legacy Investors Partnerships no longer participate in investment opportunities, the value of the Legacy SLP Interest is expected to decline over time. 2.The Avillion Entities. The Avillion Entities (as defined below) partner with global biopharmaceutical companies to perform R&D in exchange for success-based milestones or royalties if products are commercialized. Our investments in Avillion Financing I, LP (“Avillion I”) and BAv Financing II, LP (“Avillion II” and together with Avillion I, the “Avillion Entities”) are accounted for using the equity method. Other income, net Other income, net primarily includes the changes in fair market value of our equity securities, derivative instruments and available for sale debt securities, including related forwards and funding commitments, and interest income. 51 Net income attributable to non-controlling interests The net income attributable to non-controlling interests includes income attributable to the legacy non-controlling interests and the continuing non-controlling interests. Following our acquisition of the remaining non-controlling interest in RPCT held by RPSFT in December 2023 and as the Legacy Investors Partnerships no longer participate in investment opportunities, the related net income attributable to the legacy non-controlling interests is expected to decline over time as the assets held by Old RPI and RPI ICAV mature. Net income attributable to the continuing non-controlling interests includes RP Holdings Class B Interests indirectly held by the Continuing Investors Partnerships and will include net income attributable to the RP Holdings Class C Special Interest held by EPA Holdings once certain performance conditions have been met. Future net income attributable to the non-controlling interest related to RP Holdings Class B Interests indirectly held by the Continuing Investors Partnerships will decline over time if the investors who indirectly own RP Holdings Class B Interests conduct exchanges for our Class A ordinary shares. Net income attributable to non-controlling interests above can fluctuate significantly from period to period, primarily driven by volatility in the income statement activity of the respective underlying entity as a result of the non-cash charges associated with applying the effective interest accounting methodology to our financial royalty assets as described in the section titled “Understanding Our Financial Reporting.” Results of Operations In this section, we discuss the results of our operations for 2023 compared to 2022. For a discussion of 2022 compared to 2021, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The comparison of our historical results of operations for 2023 and 2022 is as follows (in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,","","Change"],["","2023","","2022","","$","","%"],["Income and other revenues"],["Income from financial royalty assets","$","2,197,754","","","$","2,125,096","","","$","72,658","","","3.4","%"],["Revenue from intangible royalty assets","835","","","37,484","","","(36,649)","","","(97.8)","%"],["Other royalty income","155,965","","","74,635","","","81,330","","","109.0","%"],["Total income and other revenues","2,354,554","","","2,237,215","","","117,339","","","5.2","%"],["Operating expenses"],["Provision for changes in expected cash flows from financial royalty assets","560,656","","","904,244","","","(343,588)","","","(38.0)","%"],["Research and development funding expense","52,000","","","177,106","","","(125,106)","","","(70.6)","%"],["Amortization of intangible assets","\u2014","","","5,670","","","(5,670)","","","(100.0)","%"],["General and administrative expenses","249,748","","","227,303","","","22,445","","","9.9","%"],["Financial royalty asset impairment","\u2014","","","615,827","","","(615,827)","","","(100.0)","%"],["Total operating expenses, net","862,404","","","1,930,150","","","(1,067,746)","","","(55.3)","%"],["Operating income","1,492,150","","","307,065","","","1,185,085","","","385.9","%"],["Other (income)/expense"],["Equity in (earnings)/losses of equity method investees","(28,882)","","","8,973","","","(37,855)","","","*"],["Interest expense","187,187","","","187,961","","","(774)","","","(0.4)","%"],["Other income, net","(366,243)","","","(119,933)","","","(246,310)","","","205.4","%"],["Total other (income)/expense, net","(207,938)","","","77,001","","","(284,939)","","","*"],["Consolidated net income","1,700,088","","","230,064","","","1,470,024","","","639.0","%"],["Net income attributable to non-controlling interests","565,254","","","187,232","","","378,022","","","201.9","%"],["Net income attributable to Royalty Pharma plc","$","1,134,834","","","$","42,832","","","$","1,092,002","","","*"]] [[/GREPCENT_TABLE]] *Percentage change is not meaningful. 52 Total income and other revenues Income from financial royalty assets Income from financial royalty assets by top products for 2023 and 2022 is as follows, in order of contribution to income in 2023 (in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,","","Change"],["","2023","","2022","","$","","%"],["Cystic fibrosis franchise","$","852,312","","","$","808,947","","","$","43,365","","","5.4","%"],["Imbruvica","173,162","","","310,929","","","(137,767)","","","(44.3)","%"],["Tysabri","167,536","","","207,164","","","(39,628)","","","(19.1)","%"],["Zavzpret","153,649","","","\u2014","","","153,649","","","n/a"],["Tremfya","149,716","","","109,796","","","39,920","","","36.4","%"],["Trelegy","128,051","","","57,931","","","70,120","","","121.0","%"],["Other products","573,328","","","630,329","","","(57,001)","","","(9.0)","%"],["Total income from financial royalty assets","$","2,197,754","","","$","2,125,096","","","$","72,658","","","3.4","%"]] [[/GREPCENT_TABLE]] Income from financial royalty assets increased by $72.7 million, or 3.4%, in 2023 compared to 2022, primarily driven by the FDA approval of Pfizer’s Zavzpret in March 2023. This FDA approval resulted in our receipt of a $475.0 million milestone payment, of which we recognized $153.6 million as interest income in the first quarter of 2023. The difference between the milestone payment and interest income is attributable to the derecognition of the related financial royalty asset and the settlement of the related derivative instrument. Income from recently acquired assets, primarily Trelegy, also contributed to the increase, partially offset by a decline in sell-side equity research analysts’ consensus sales forecasts for Imbruvica. Revenue from intangible royalty assets Revenue from intangible royalty assets decreased by $36.6 million, or 97.8%, in 2023 compared to 2022, primarily driven by the maturity of our royalties on Januvia and Janumet in the first quarter of 2022. Other royalty income Other royalty income increased by $81.3 million, or 109.0%, in 2023 compared to 2022, primarily driven by a one-time $50.0 million receipt from Pfizer related to the oral formulation of zavegepant and income from fully amortized financial royalty assets, which were reflected as Income from financial royalty assets in 2022. Provision for changes in expected cash flows from financial royalty assets Provision activity is a combination of income and expense items. The provision breakdown by royalty asset (exclusive of the provision for current expected credit losses) based on the largest contributors to each year’s provision income or expense (in thousands) is as follows: [[GREPCENT_TABLE]] [["Royalty","","2023","","Royalty","","2022"],["Tysabri","","$","222,285","","","Imbruvica","","$","423,832"],["Imbruvica","","220,127","","","Tysabri","","195,665"],["Tremfya","","120,733","","","Tazverik","","177,850"],["Promacta","","(41,617)","","","Xtandi","","63,524"],["Evrysdi","","(46,077)","","","Evrysdi","","46,077"],["Other","","62,920","","","Other","","191,094"],["Total provision, exclusive of provision for credit losses","","538,371","","","Total provision, exclusive of provision for credit losses","","1,098,042"],["Provision for current expected credit losses","","22,285","","","Provision for current expected credit losses","","(193,798)"],["Total provision","","$","560,656","","","Total provision","","$","904,244"]] [[/GREPCENT_TABLE]] 53 In 2023, we recorded provision expense of $560.7 million, comprised of $538.4 million and $22.3 million in provision expense for changes in expected cash flows and provision expense for current expected credit losses, respectively. We recorded provision expense for changes in expected cash flows for Tysabri, Imbruvica and Tremfya primarily due to declines in sell-side equity research analysts’ consensus sales forecasts. The provision expense for credit losses was primarily driven by the additions of Skytrofa and Adstiladrin to our portfolio. In 2022, we recorded provision expense of $904.2 million, comprised of $1,098.0 million and $193.8 million in provision expense for changes in expected cash flows and provision income for current expected credit losses, respectively. We recorded provision expense for changes in expected cash flows for Imbruvica, Tysabri and Tazverik primarily due to significant declines in sell-side equity research analysts’ consensus sales forecasts. The provision income for credit losses was primarily driven by a significant decrease in current expected credit losses related to Tazverik as a result of the decline in the financial asset value and changes in payors for certain products with stronger credit profiles, which was partially offset by the addition of Trelegy to our portfolio. R&D funding expense R&D funding expense decreased by $125.1 million, or 70.6%, in 2023 compared to 2022. In 2023, we recognized R&D funding expense of $50.0 million related to a clinical milestone payment that was triggered under the agreement with Cytokinetics, Incorporated (“Cytokinetics”). In 2022, we recognized upfront R&D funding expense of $175.0 million in exchange for royalties and milestones on development-stage products from Cytokinetics, Theravance Biopharma, Inc. and MSD International Business GmbH. G&A expenses G&A expenses increased by $22.4 million, or 9.9%, in 2023 compared to 2022, primarily driven by higher Operating and Personnel Payments following the year-over-year increase in Portfolio Receipts. Financial royalty asset impairment We did not recognize any financial royalty impairments in 2023. We recognized financial royalty asset impairments of $615.8 million in 2022, comprised of non-cash impairment charges of $273.6 million, $160.1 million and $182.1 million related to gantenerumab, otilimab and Gavreto, respectively. In November 2022, Roche stated that it would discontinue clinical trials of gantenerumab. In October 2022, GSK announced that it has decided not to progress with regulatory submissions for otilimab. Additionally, during the fourth quarter of 2022, we impaired our financial royalty asset related to Gavreto due to the uncertainty of Gavreto’s commercial outlook. Equity in (earnings)/losses of equity method investees Equity in earnings of equity method investees was $28.9 million in 2023 compared to equity in losses of equity method investees of $9.0 million in 2022, primarily driven by income allocation from the Avillion Entities of $24.6 million in 2023 as compared to a loss allocation of $12.0 million in 2022. The income allocation in 2023 from the Avillion Entities was primarily due to an $80.0 million payment the Avillion Entities received from AstraZeneca’s election to exercise an option to commercialize Airsupra in the United States. Interest expense Interest expense was relatively unchanged in 2023 as compared to 2022. In September 2023, we repaid $1.0 billion of senior unsecured notes. The weighted average coupon rate on our senior unsecured notes outstanding as of December 31, 2023 and 2022 was 2.48% and 2.24%, respectively. Refer to the “Liquidity and Capital Resources” section for additional discussion of the debt financing instruments. 54 Other income, net Other income, net of $366.2 million in 2023 was primarily comprised of $230.8 million of gains on available for sale debt securities, $87.1 million of gains on equity securities and $72.3 million of interest income earned on cash held in banks and money market funds. The gains on available for sale debt securities were primarily driven by the change in fair value of the funded amount of the Development Funding Bonds that were issued to us by MorphoSys. Other income, net of $119.9 million in 2022 was primarily comprised of $96.6 million of gains on derivative financial instruments related to our Milestone Acceleration Option that increased in value with the announcement and subsequent completion of Pfizer’s acquisition of Biohaven in October 2022. In addition, we recorded $78.3 million of interest income, primarily related to the full accelerated redemption of our Series A Biohaven Preferred Shares following Pfizer’s acquisition of Biohaven. The other income was partially offset by net losses on equity securities of $33.4 million. Net income attributable to non-controlling interests Net income attributable to the Legacy Investors Partnerships increased by $14.6 million in 2023 compared to 2022, primarily driven by higher net income attributable to Old RPI. Net income attributable to the Continuing Investors Partnerships increased by $369.0 million in 2023 compared to 2022, primarily driven by non-cash impairment charges and higher provision expense recognized in 2022. This was partially offset by exchanges by investors in the Continuing Investors Partnerships who indirectly own RP Holdings Class B Interests for our Class A ordinary shares, which resulted in a decline in the Continuing Investors Partnerships’ indirect ownership of RP Holdings. Net income attributable to RPSFT decreased by $5.5 million in 2023 compared to 2022 as the assets held by RPCT mature. Portfolio Overview Our business model is different from that of traditional operating companies in the biopharmaceutical industry. Our operating performance is a function of our liquidity as our operations have historically been financed primarily with cash flows generated by our royalties. We use the cash generated by our existing royalties to fund investments in new royalties. We consider a variety of metrics in assessing the performance of our business. Portfolio Receipts is a key performance metric that represents our ability to generate cash from our portfolio investments, the primary source of capital that we can deploy to make new portfolio investments. Portfolio Receipts also enables management to better analyze our liquidity and long-term growth prospects by providing a more granular product-by-product presentation of the underlying cash generation of our royalty investments. Portfolio Receipts is defined as the sum of royalty receipts and milestones and other contractual receipts. Royalty receipts include variable payments based on sales of products, net of contractual payments to the legacy non-controlling interests, that is attributed to us. Milestones and other contractual receipts include sales-based or regulatory milestones payments and other fixed contractual receipts, net of contractual payments to the legacy non-controlling interests, that is attributed to us. Portfolio Receipts does not include proceeds from equity securities or proceeds from purchases and sales of marketable securities, both of which are not central to our fundamental business strategy. Portfolio Receipts is calculated as the sum of the following line items from our GAAP consolidated statements of cash flows: Cash collections from financial royalty assets, Cash collections from intangible royalty assets, Other royalty cash collections, Proceeds from available for sale debt securities and Distributions from equity method investees less Distributions to legacy non-controlling interests - Portfolio Receipts, which represent contractual distributions of royalty receipts, milestones and other contractual receipts to the Legacy Investors Partnerships and RPSFT. 55 Our portfolio consists of royalties on more than 35 marketed therapies and 14 development-stage product candidates. The therapies in our portfolio address therapeutic areas such as rare disease, cancer, neuroscience, infectious disease, hematology and diabetes, and are delivered to patients across both primary and specialty care settings. The table below shows Portfolio Receipts, including royalty receipts by product and milestones and other contractual receipts for 2023 and 2022 (in thousands). [[GREPCENT_TABLE]] [["","","","","","","Years Ended December 31,","","Change"],["Products","","Marketer(s)","","Therapeutic Area","","2023","","2022","","$","","%"],["Cystic fibrosis franchise (1)","","Vertex","","Rare disease","","$","771,201","","","$","690,007","","","$","81,194","","","11.8","%"],["Tysabri","","Biogen","","Neuroscience","","279,431","","","304,794","","","(25,363)","","","(8.3)","%"],["Imbruvica","","AbbVie, Johnson & Johnson","","Cancer","","210,289","","","257,729","","","(47,440)","","","(18.4)","%"],["Trelegy","","GSK","","Respiratory","","203,299","","","89,915","","","113,384","","","126.1","%"],["Promacta","","Novartis","","Hematology","","161,163","","","149,707","","","11,456","","","7.7","%"],["Xtandi","","Pfizer, Astellas","","Cancer","","146,418","","","153,884","","","(7,466)","","","(4.9)","%"],["Tremfya","","Johnson & Johnson","","Immunology","","116,387","","","97,307","","","19,080","","","19.6","%"],["Evrysdi","","Roche","","Rare disease","","66,072","","","40,645","","","25,427","","","62.6","%"],["Cabometyx/Cometriq","","Exelixis, Ipsen, Takeda","","Cancer","","65,778","","","55,426","","","10,352","","","18.7","%"],["Spinraza","","Biogen","","Rare disease","","44,628","","","\u2014","","","44,628","","","n/a"],["Trodelvy","","Gilead","","Cancer","","33,149","","","20,448","","","12,701","","","62.1","%"],["Orladeyo","","BioCryst","","Rare disease","","29,337","","","21,801","","","7,536","","","34.6","%"],["Erleada","","Johnson & Johnson","","Cancer","","27,377","","","17,620","","","9,757","","","55.4","%"],["Nurtec ODT/Zavzpret","","Pfizer","","Neuroscience","","18,376","","","14,984","","","3,392","","","22.6","%"],["Other products (2)","","","","","","276,511","","","354,898","","","(78,387)","","","(22.1)","%"],["Royalty receipts","","","","","","$","2,449,416","","","$","2,269,165","","","$","180,251","","","7.9","%"],["Milestones and other contractual receipts","","599,297","","","520,128","","","79,169","","","15.2","%"],["Portfolio Receipts","","","","","","$","3,048,713","","","$","2,789,293","","","$","259,420","","","9.3","%"]] [[/GREPCENT_TABLE]] (1)The cystic fibrosis franchise includes the following approved products: Kalydeco, Orkambi, Symdeko/Symkevi and Trikafta/Kaftrio. (2)Other products primarily include royalty receipts on the following products: Cimzia, Crysvita, Emgality, Entyvio, Farxiga/Onglyza, IDHIFA, Januvia, Janumet, Other DPP-IVs, Lexiscan, Mircera, Nesina, Prevymis, Soliqua and distributions from the Legacy SLP Interest, which are presented as Distributions from equity method investees on the Statements of Cash Flows. Analysis of Portfolio Receipts Below we discuss the key drivers of Portfolio Receipts: •Cystic fibrosis franchise – Royalty receipts from the cystic fibrosis franchise, which includes Kalydeco, Orkambi, Symdeko/Symkevi and Trikafta/Kaftrio, which are marketed by Vertex for patients with certain mutations causing cystic fibrosis, increased by $81.2 million in 2023 compared to 2022. The increase was primarily driven by the continued strong uptake of Kaftrio outside the United States and the continued performance of Trikafta in the United States, including its uptake in younger age groups. •Tysabri – Royalty receipts from Tysabri, which is marketed by Biogen for the treatment of multiple sclerosis, decreased by $25.4 million in 2023 compared to 2022, primarily attributable to pricing pressure and competition. •Imbruvica – Royalty receipts from Imbruvica, which is marketed by AbbVie and Johnson & Johnson for the treatment of blood cancers and chronic graft versus host disease, decreased by $47.4 million in 2023 compared to 2022. The decrease was largely due to increased competition and the cumulative impact of a suppressed chronic lymphocytic leukemia market. •Trelegy – Royalty receipts from Trelegy, which is marketed by GSK for the maintenance treatment of chronic obstructive pulmonary disease and asthma, increased by $113.4 million in 2023, primarily driven by strong patient demand globally, the growth of the single inhaler triple therapy market and penetration of the class. We acquired the Trelegy royalty in the third quarter of 2022. 56 •Promacta – Royalty receipts from Promacta, which is marketed by Novartis for the treatment of chronic immune thrombocytopenia (ITP) and aplastic anemia, increased by $11.5 million in 2023 compared to 2022. This growth was largely driven by increased use in chronic ITP and further uptake as first-line and/or second-line treatment for severe aplastic anemia. •Xtandi – Royalty receipts from Xtandi, which is marketed by Pfizer and Astellas for the treatment of prostate cancer, decreased by $7.5 million in 2023 compared to 2022, primarily driven by underperformance in the United States and a true-up of royalties received in 2022. This was partially offset by sales performance in established and international markets. •Tremfya – Royalty receipts from Tremfya, which is marketed by Johnson & Johnson for the treatment of plaque psoriasis and active psoriatic arthritis, increased by $19.1 million in 2023 compared to 2022, primarily due to market growth and continued market share gains, which were partially offset by unfavorable patient mix and rebates. •Evrysdi – Royalty receipts from Evrysdi, which is marketed by Roche for the treatment of spinal muscular atrophy, increased by $25.4 million in 2023 compared to 2022, primarily due to strong growth globally, driven by switch and treatment naive patient starts in the United States and share gains in all major markets. We acquired incremental royalties on Evrysdi in the fourth quarter of 2023, which will benefit Portfolio Receipts beginning in the first quarter of 2024. •Cabometyx/Cometriq – Royalty receipts from Cabometyx/Cometriq, which is marketed by Exelixis, Ipsen and Takeda, increased by $10.4 million in 2023 compared to 2022. The increase was primarily due to the uptake of Cabometyx in combination with Opdivo as a first-line treatment for patients with advanced renal cell carcinoma. •Spinraza – Royalty receipts from Spinraza, which is marketed by Biogen for the treatment of spinal muscular atrophy, were $44.6 million in 2023, primarily driven by growth in the United States offset by a decline outside the United States. We acquired the Spinraza royalty in the first quarter of 2023. •Trodelvy – Royalty receipts from Trodelvy, which is marketed by Gilead for the treatment of adult patients with metastatic triple-negative breast cancer and pre-treated hormone receptor (HR)-positive, human epidermal growth factor receptor 2 (HER2)-negative metastatic breast cancer, increased by $12.7 million in 2023 compared to 2022, primarily driven by growing adoption in metastatic triple-negative breast cancer in the United States and Europe and pretreated HR+/HER2- metastatic breast cancer in the United States. •Orladeyo – Royalty receipts from Orladeyo, which is marketed by BioCryst for the treatment of hereditary angioedema, increased by $7.5 million in 2023 compared to 2022, primarily driven by patient growth in the United States and higher sales outside of the United States. •Erleada – Royalty receipts from Erleada, which is marketed by Johnson & Johnson for the treatment of patients with prostate cancer, increased by $9.8 million in 2023 compared to 2022, primarily driven by market share gains, market growth and increased penetration from new launches for Erleada. We acquired incremental royalties on Erleada in the second quarter of 2023. •Nurtec ODT/Zavzpret – Royalty receipts from Nurtec ODT, which is marketed by Pfizer for the acute treatment of migraine, increased by $3.4 million in 2023 compared to 2022, primarily driven by demand growth partially offset by higher rebates. •Other products – Royalty receipts from other products decreased by $78.4 million in 2023 compared to 2022, driven by a decline in royalty receipts from maturing royalties, primarily Januvia, Janumet and other DPP-IVs, and from Lexiscan due to generic competition. •Milestones and other contractual receipts increased by $79.2 million in 2023 compared to 2022. 57 Milestones and other contractual receipts of $599.3 million in 2023 was primarily comprised of a $475.0 million milestone payment received following the FDA’s approval of Zavzpret in March 2023, a one-time $50.0 million payment from Pfizer related to the oral formulation of zavegepant, a $33.0 million commercial milestone payment related to Soliqua and a $28.7 million payment from our joint venture investee, Avillion II, for our pro rata portion of the $80 million fee paid by AstraZeneca to exercise the option to commercialize Airsupra in the United States. Milestones and other contractual receipts of $520.1 million in 2022 was primarily comprised of redemption payments of $51.5 million related to the Series A Biohaven Preferred Shares and the accelerated redemption payments of $457.6 million for all outstanding Series A and Series B Biohaven Preferred Shares following Pfizer’s acquisition of Biohaven in October 2022. Key Developments and Upcoming Events Relating to Our Portfolio Recent key developments related to products in our portfolio are discussed below: Commercial Products •Cystic fibrosis franchise. In April 2023, Vertex announced the FDA approved the expanded use of Trikafta to include children with cystic fibrosis ages two through five years. In May 2023, Vertex announced the FDA approved Kalydeco for use in children with cystic fibrosis ages one month to less than four months old. In July 2023, Vertex announced the European Commission approved the label extension of Orkambi for the treatment of children with cystic fibrosis ages one to less than two years old. In November 2023, Vertex announced that the European Commission granted approval for the label expansion of Kaftrio in in a combination regimen with ivacaftor for the treatment of children with cystic fibrosis ages two through five years old. In February 2024, Vertex announced positive Phase 3 results from its new triple combination therapy for the treatment of cystic fibrosis. Vertex plans to file for approval with global regulators for people with cystic fibrosis ages 6 years and older by mid-2024. •Tysabri. In September 2023, Sandoz announced that the European Commission granted marketing authorization for biosimilar Tyruko for relapsing forms of multiple sclerosis. This follows FDA approval of biosimilar Tyruko in August 2023. •Xtandi. In March 2023, Pfizer and Astellas announced positive topline results from the Phase 3 EMBARK trial evaluating Xtandi in men with non-metastatic hormone-sensitive prostate cancer (nmCSPC) with high-risk biochemical recurrence. The study met its primary endpoint with a statistically significant and clinically meaningful improvement in metastasis-free survival for patients treated with Xtandi plus leuprolide versus placebo plus leuprolide. At the time of the analysis, a positive trend in the key secondary endpoint of overall survival was also observed, but these data were not yet mature. Patients in the trial will be followed for a subsequent final overall survival analysis. In June 2023, Pfizer announced the FDA approved Talzenna in combination with Xtandi for the treatment of adult patients with homologous recombination repair gene-mutated metastatic castration-resistant prostate cancer. In November 2023, Astellas and Pfizer announced that the companies received an approval by the U.S. FDA of a supplemental NDA for Xtandi for the treatment of patients with nmCSPC with biochemical recurrence at high risk for metastasis. 58 •Tremfya. In May 2023, Johnson & Johnson announced positive results from the Phase 3 QUASAR Induction Study evaluating the investigational use of Tremfya in adults with moderately to severely active ulcerative colitis who had an inadequate response or intolerance to conventional and/or advanced therapies. The data showed statistically significant and clinically meaningful improvements across symptomatic and histo-endoscopic outcome measures, as well as a greater proportion of patients treated with Tremfya compared to placebo achieved clinical remission at week 12, the study’s primary endpoint. •Evrysdi. In August 2023, Roche announced that the European Commission approved Evrysdi for babies under two months old with spinal muscular atrophy. •Cabometyx. In March 2023, Exelixis announced that the Phase 3 CONTACT-03 study, evaluating Cabometyx in combination with atezolizumab versus Cabometyx alone in patients with locally advanced or metastatic clear cell or non-clear cell renal cell carcinoma who progressed during or after immune checkpoint inhibitor therapy did not meet its primary endpoint of progression-free survival. In August 2023, Exelixis and Ipsen announced that Cabometyx in combination with atezolizumab compared with a second novel hormonal therapy in patients with metastatic castration-resistant prostate cancer in the Phase 3 CONTACT-02 trial demonstrated a statistically significant improvement in progression-free survival (PFS) at the primary analysis. At a prespecified interim analysis for the primary endpoint of overall survival (OS) that occurred at the same time as the primary analysis of PFS, a trend toward improvement of OS was observed. The trial will continue to the next analysis of OS. •Trodelvy. In February 2023, Gilead announced the U.S. FDA approved Trodelvy for the treatment of adult patients with unresectable locally advanced or metastatic HR+/HER2- breast cancer who have received endocrine-based therapy and at least two additional systemic therapies in the metastatic setting. In July 2023, Gilead announced the European Commission approved Trodelvy as a monotherapy for the treatment of adult patients with unresectable or metastatic hormone receptor (HR)-positive, HER2-negative breast cancer. In January 2024, Gilead announced that the Phase 3 EVOKE-01 study evaluating Trodelvy compared to docetaxel did not meet its primary endpoint of overall survival in patients with previously treated metastatic non-small cell lung cancer. •Zavzpret. In March 2023, Pfizer announced that the FDA approved Zavzpret (zavegepant), a calcitonin gene-related peptide receptor antagonist nasal spray for the acute treatment of migraine with or without aura in adults. Zavzpret is anticipated to be available in July 2023. Following approval of Zavzpret, we received a $475 million milestone payment from Pfizer in the first quarter of 2023. •Airsupra. In January 2023, AstraZeneca announced the U.S. approval of Airsupra for the as-needed treatment or prevention of bronchoconstriction and to reduce the risk of exacerbations in people with asthma aged 18 years and older. We invested in Airsupra through an approximate 44% ownership in Avillion II and its affiliated entities. Following U.S. approval, AstraZeneca notified Avillion II that it elected to pay a fee of $80 million to Avillion II to exercise the option to commercialize Airsupra in the United States. In March 2023, we received our pro rata portion of the exercise fee of $34.8 million. •Prevymis. In June 2023, Merck announced the FDA approved a new indication for Prevymis for prophylaxis of cytomegalovirus disease in adult kidney transplant recipients at high risk following a priority review. •Skytrofa. In December 2023, Ascendis Pharma announced positive topline results from foresiGHt, its Phase 3 trial to compare TransCon hGH with placebo and daily hGH in adults with growth hormone deficiency. Ascendis plans to submit a supplemental Biologics License Application to the FDA in 2024. 59 Development-Stage Product Candidates •Aficamten. In March 2023, Cytokinetics presented positive results from Cohort 4 of REDWOOD-HCM in patients with non-obstructive HCM. At 10 weeks, patients in Cohort 4 experienced significant improvements in NT-proBNP and high-sensitivity troponin I levels also improved significantly proportional to baseline at each study visit. Aficamten was also well tolerated overall, with modest on-target reductions in LVEF in response to aficamten over 10 weeks. In September 2023, Cytokinetics announced the start of ACACIA-HCM, a Phase 3 clinical trial of aficamten in patients with symptomatic non-obstructive hypertrophic cardiomyopathy (nHCM). The initiation of ACACIA-HCM triggered our payment of a $50 million milestone to Cytokinetics in September 2023. In December 2023, Cytokinetics announced positive topline results from SEQUOIA-HCM, the pivotal Phase 3 clinical trial of aficamten in patients with symptomatic obstructive hypertrophic cardiomyopathy. The full results will be presented at an upcoming medical conference. •BCX10013. In January 2023, BioCryst announced that initial data from ongoing Phase 1 single ascending dose and multiple ascending dose trials in healthy volunteers showed rapid and sustained suppression of the alternative pathway of the complement system. BCX10013 was safe and generally well-tolerated at all doses studied to date. BioCryst plans to advance BCX10013 into patient studies, including in patients with paroxysmal nocturnal hemoglobinuria, to evaluate once-daily dosing. •KarXT. In September 2023, Karuna Therapeutics announced the submission of its New Drug Application (NDA) to the FDA for KarXT for the treatment of schizophrenia. In November 2023, Karuna announced that the FDA accepted its NDA for KarXT for the treatment of schizophrenia. The application has been granted a Prescription Drug User Fee Act date of September 26, 2024. In December 2023, Bristol Myers Squibb announced it has agreed to acquire Karuna Therapeutics for $330 per share in cash, for a total equity value of $14.0 billion, or $12.7 billion net of estimated cash acquired. The transaction is expected to close in the first half of 2024. •Pelabresib. In November 2023, MorphoSys announced positive topline results from the Phase 3 MANIFEST-2 study investigating pelabresib in combination with ruxolitinib compared with placebo plus ruxolitinib in JAK inhibitor-naive patients with myelofibrosis. MorphoSys intends to submit an NDA to the FDA and Marketing Authorization Application to the European Medicines Agency in the middle of 2024. In February 2024, Novartis announced that it has entered into an agreement to make a voluntary public takeover offer to acquire MorphoSys at an offer price of €68.00 per share in cash, for a total equity value of €2.7 billion. The closing is expected to take place in the first half of 2024. •Trontinemab. In October 2023, Roche presented interim results of a Phase 1b/2a study for trontinemab, a novel Brainshuttle Aβ antibody for the treatment of Alzheimer’s disease. This study demonstrated that trontinemab rapidly reduces amlyoid plaque reduction in patients with Alzheimer’s disease. 60 Investments Overview Ongoing investment in new royalties is fundamental to the long-term prospects of our business. New investments provide a source of growth for our royalty receipts, supplementing growth within our existing portfolio and offsetting declines for royalties on products that have lost market exclusivity. We evaluate an array of royalty acquisition opportunities on a continuous basis and expect to continue to make acquisitions in the ordinary course of our business. We have established a strong track record of identifying, evaluating and investing in royalties tied to leading products across therapeutic areas and treatment modalities. We invest in approved products and development-stage product candidates that have generated robust proof of concept data. We invest in these therapies through the purchase of royalties, milestones and other contractual receipts by making hybrid investments and by acquiring businesses with significant existing royalty assets or the potential for the creation of such assets. In 2023, we invested $2.2 billion in royalties, milestones and other contractual receipts. While volatility exists in the funding of new acquisitions on a year-to-year basis due to the unpredictable timing of new investment opportunities, we have consistently deployed significant amounts of cash when measured over multi-year periods. Our approach is rooted in a highly disciplined evaluation process that is not dictated by a minimum annual investment threshold. Included below are tables of investment activities over each of the last five years (in thousands). Announced transactions amounts reflect maximum transaction value for transactions entered into over each of the periods presented. Capital Deployment represents the total outflows that will drive future Portfolio Receipts and reflects cash paid at the acquisition date and any subsequent associated milestone investments reflected in the period in which cash was paid. Capital Deployment in approved/marketed royalties versus development-stage royalties is based upon the approval status of the therapy at the time of our upfront investment. [[GREPCENT_TABLE]] [["","Average","","2023","","2022","","2021","","2020","","2019"],["Announced Transactions"],["Upfront payments","$","2,011,200","","","$","2,109,000","","","$","1,963,000","","","$","2,161,000","","","$","2,069,000","","","$","1,754,000"],["Potential payments/milestones","933,600","","","1,850,000","","","1,443,000","","","705,000","","","375,000","","","295,000"],["Total announced transaction value","$","2,944,800","","","$","3,959,000","","","$","3,406,000","","","$","2,866,000","","","$","2,444,000","","","$","2,049,000"],["Capital Deployment"],["Approved/marketed royalties","$","1,746,738","","","$","1,875,232","","","$","1,920,958","","","$","1,684,769","","","$","1,404,222","","","$","1,848,509"],["Development-stage royalties (1)","568,286","","","316,689","","","507,399","","","823,374","","","835,986","","","357,981"],["Total Capital Deployment (2)","$","2,315,024","","","$","2,191,921","","","$","2,428,357","","","$","2,508,143","","","$","2,240,208","","","$","2,206,490"]] [[/GREPCENT_TABLE]] (1)Development-stage royalties include: direct R&D funding arrangements and funding arrangements executed through our joint venture partnership with the Avillion Entities, investments in development-stage product candidates and investments in debt securities primarily made in connection with acquisitions of royalties on development-stage products from the seller. (2)Capital Deployment is calculated as the summation of the following line items from our GAAP consolidated statements of cash flows: Investments in equity method investees, Purchases of available for sale debt securities, Acquisitions of financial royalty assets, Acquisitions of other financial assets, Milestone payments, Development-stage funding payments - ongoing, Development-stage funding payments - upfront and milestone less Contributions from legacy non-controlling interests - R&D. Summary of Royalty Acquisition Activities •In January 2024, we acquired a royalty interest in ecopipam for an upfront payment of $49 million and up to $44 million in milestone payments contingent on the achievement of certain regulatory milestones. Ecopipam is in Phase 3 development by Emalex Biosciences for the treatment of Tourette Syndrome. •In November 2023, we acquired a royalty interest in long-acting injectable olanzapine (TEV-’749) from Teva Pharmaceuticals International GmbH, a subsidiary of Teva Pharmaceutical Industries Ltd. (“Teva”) for up to $125 million to support the development of TEV-’749, a Phase 3 development-staged product for the treatment of schizophrenia. 61 •In October 2023, we acquired additional royalties on Roche’s Evrysdi, an approved product for the treatment of spinal muscular atrophy, from PTC Therapeutics, Inc. (“PTC”) for an upfront payment of $1 billion. Until December 31, 2025, PTC has an option to sell its remaining royalties for $500 million less royalties received in respect of its retained royalties in five equal tranches. If PTC exercises its options for fewer than three tranches, we have an option to acquire half of PTC’s remaining royalties as of the date of our transaction for $250 million less royalties received in respect of its retained royalties until March 31, 2026. •In September 2023, we acquired a royalty interest in Skytrofa from Ascendis Pharma A/S for an upfront payment of $150 million. Skytrofa is approved for the treatment of pediatric patients with growth failure due to inadequate secretion of endogenous growth hormone. •In August 2023, we acquired a royalty interest in Adstiladrin from Ferring Pharmaceuticals for an upfront payment of $300 million and a $200 million additional milestone payment contingent on certain manufacturing goals. Adstiladrin is approved for the treatment of adult patients with high-risk Bacillus Calmette-Guérin unresponsive non-muscle invasive bladder cancer with carcinoma in situ with or without papillary tumors. •In June 2023, we acquired an incremental royalty interest in Erleada from the Regents of the University of California for an upfront payment of $59 million. Erleada is approved for the treatment of prostate cancer and is marketed by Johnson & Johnson. •In March 2023, we acquired a royalty interest in KarXT from PureTech Health plc for an upfront payment of $100 million and up to $400 million in milestone payments contingent on the achievement of certain regulatory and commercial milestones. KarXT is in Phase 3 development by Karuna Therapeutics for the treatment of psychiatric and neurological conditions, including schizophrenia as a monotherapy and adjunctive therapy and psychosis in Alzheimer’s disease. •In January 2023, we acquired royalty interests in Spinraza and pelacarsen from Ionis Pharmaceuticals, Inc. for an upfront payment of $500 million and committed up to $625 million in additional payments contingent upon the achievement of certain pelacarsen milestones. Spinraza is approved for the treatment of spinal muscular atrophy and pelacarsen is in Phase 3 development by Novartis for the treatment of cardiovascular disease. Liquidity and Capital Resources Overview Our primary source of liquidity is cash provided by operations. For 2023 and 2022, we generated $3.0 billion and $2.1 billion, respectively, in Net cash provided by operating activities. We believe that our existing capital resources, cash provided by operating activities and access to our Revolving Credit Facility (defined below) will continue to allow us to meet our operating and working capital requirements, to fund planned strategic acquisitions and R&D funding arrangements, and to meet our debt service obligations for the foreseeable future. We have historically operated at a low level of fixed operating costs. Our primary cash operating expenses, other than R&D funding commitments, include interest expense, our Operating and Personnel Payments, and legal and professional fees. We have access to substantial sources of funds in the capital markets and we may, from time to time, seek additional capital through a combination of additional debt or equity financings. In September 2023, we repaid $1.0 billion of our senior unsecured notes upon maturity. As of December 31, 2023, the par value of our total outstanding senior unsecured notes was $6.3 billion. Additionally, we have up to $1.8 billion of available revolving commitments under our Revolving Credit Facility. A summary of our borrowing activities, balances and compliance with certain debt covenants under various financing arrangements is included in Note 10–Borrowings within the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. 62 We have historically funded our investments through operating cash flows, equity contributions and debt. Our low operating costs coupled with a lack of capital expenditures and low taxes have contributed to our strong financial profile, resulting in high operating leverage and high cash flow conversion. We expect to continue funding our current and planned operating costs (excluding acquisitions) principally through our cash flow from operations and investments through cash flow and issuances of equity and debt. We have supplemented our available cash and cash equivalents on hand with attractive debt capital to fund certain strategic acquisitions. Our ability to satisfy our working capital needs, debt service and other obligations, and to comply with the financial covenants under our financing agreements depends on our future operating performance and cash flow, which are in turn subject to prevailing economic conditions and other factors, many of which are beyond our control. Cash Flows The following table and analysis of cash flow changes present a summary of our cash flow activities for 2023 compared to 2022 (in thousands). For a discussion of cash flow activities for 2022 compared to 2021, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2023","","2022","","Change"],["Cash provided by (used in):"],["Operating activities","$","2,987,802","","","$","2,143,980","","","$","843,822"],["Investing activities","(2,072,789)","","","(1,029,421)","","","(1,043,368)"],["Financing activities","(2,148,754)","","","(944,856)","","","(1,203,898)"]] [[/GREPCENT_TABLE]] Analysis of Cash Flow Changes Operating Activities Cash provided by operating activities increased by $843.8 million in 2023 compared to 2022, primarily driven by an increase in cash collections from financial royalty assets of $694.2 million, including a $475.0 million milestone related to Zavzpret, and lower development-stage funding payments in 2023. The increase was partially offset by lower cash collections from intangible assets of $71.6 million, as our royalty receipts on Januvia, Janumet and other DPP-IVs substantially ended in the second quarter of 2022. Investing Activities Cash used in investing activities increased by $1.0 billion in 2023 compared to 2022, primarily driven by a $373.9 million increase in cash used for acquisitions of financial royalty assets and lower net cash provided by proceeds from marketable securities of $533.1 million. Financing Activities Cash used in financing activities increased by $1.2 billion in 2023 compared to 2022, primarily driven by $1.0 billion in debt repayments and $304.8 million in repurchases of our Class A ordinary shares. The increase was partially offset by lower distributions of Portfolio Receipts to legacy non-controlling interests as royalties jointly owned by the Legacy Investors Partnerships and RPSFT are maturing. 63 Sources of Capital As of December 31, 2023, our cash and cash equivalents totaled $477.0 million. We did not hold any marketable securities as of December 31, 2023. As of December 31, 2022, our cash and cash equivalents and marketable securities totaled $1.7 billion and $24.4 million, respectively. We intend to fund short-term and long-term financial obligations as they mature through cash and cash equivalents, sales of marketable securities, future cash flows from operations or the issuance of additional debt. Our ability to generate cash flows from operations, issue debt or enter into financing arrangements on acceptable terms could be adversely affected if there is a material decline in the sales of the underlying pharmaceutical products in which we hold royalties, deterioration in our key financial ratios or credit ratings, or other material unfavorable changes in business conditions. Currently, we believe that we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives. Borrowings Our borrowings as of December 31, 2023 and 2022 consisted of the following (in thousands): [[GREPCENT_TABLE]] [["","Date of Issuance","","Maturity","","As of December 31, 2023","","As of December 31, 2022"],["Senior Unsecured Notes:"],["$1,000,000, 0.75% (issued at 99.322% of par)","9/2020","","9/2023","","$","\u2014","","","$","1,000,000"],["$1,000,000, 1.20% (issued at 98.875% of par)","9/2020","","9/2025","","1,000,000","","","1,000,000"],["$1,000,000, 1.75% (issued at 98.284% of par)","9/2020","","9/2027","","1,000,000","","","1,000,000"],["$1,000,000, 2.20% (issued at 97.760% of par)","9/2020","","9/2030","","1,000,000","","","1,000,000"],["$600,000, 2.15% (issued at 98.263% of par)","7/2021","","9/2031","","600,000","","","600,000"],["$1,000,000, 3.30% (issued at 95.556% of par)","9/2020","","9/2040","","1,000,000","","","1,000,000"],["$1,000,000, 3.55% (issued at 95.306% of par)","9/2020","","9/2050","","1,000,000","","","1,000,000"],["$700,000, 3.35% (issued at 97.565% of par)","7/2021","","9/2051","","700,000","","","700,000"],["Total senior unsecured debt","","","","","6,300,000","","","7,300,000"],["Unamortized debt discount and issuance costs","","","","","(164,715)","","","(183,678)"],["Total long-term debt, including current portion","","","","","6,135,285","","","7,116,322"],["Less: Current portion of long-term debt","","","","","\u2014","","","(997,512)"],["Total long-term debt","","","","","$","6,135,285","","","$","6,118,810"]] [[/GREPCENT_TABLE]] Senior Unsecured Notes On July 26, 2021, we issued $1.3 billion of senior unsecured notes (the “2021 Notes”) with a weighted average coupon rate of 2.80%. On September 2, 2020, we issued $6.0 billion of senior unsecured notes (the “2020 Notes”) with a weighted average coupon rate of 2.13%. We refer to the 2020 Notes and 2021 Notes, collectively, as the “Notes.” The Notes require semi-annual interest payments. Indentures governing the Notes contain certain covenants with which we were in compliance as of December 31, 2023. Senior Unsecured Revolving Credit Facility Our subsidiary, RP Holdings, as borrower, initially entered into the Amended and Restated Credit Agreement (the “Credit Agreement”) on September 15, 2021, which provides for an unsecured revolving credit facility (the “Revolving Credit Facility”). Amendment No. 3 to the Credit Agreement, which was entered into on December 22, 2023, increased the borrowing capacity to $1.8 billion for general corporate purposes with $1.69 billion of the revolving commitments maturing on December 22, 2028 and the remaining $110.0 million of revolving commitments maturing on October 31, 2027. On January 24, 2024, we entered into Amendment No. 4 to the Credit Agreement to make certain technical modifications. As of December 31, 2023, we have a borrowing capacity of $1.8 billion under the Revolving Credit Facility. 64 The Credit Agreement that governs the Revolving Credit Facility contains certain customary covenants, that among other things, require us to maintain (i) a consolidated leverage ratio at or below 4.00 to 1.00 (or at or below 4.50 to 1.00 following a qualifying material acquisition) of consolidated funded debt to Adjusted EBITDA, each as defined and calculated with the ratio level calculated with further adjustments as set forth in the Credit Agreement, (ii) a consolidated coverage ratio at or above 2.50 to 1.00 of Adjusted EBITDA to consolidated interest expense, each as defined and calculated with further adjustments as set forth in the Credit Agreement and (iii) a consolidated Portfolio Cash Flow Ratio at or below 5.00 to 1.00 (or at or below 5.50 to 1.00 following a qualifying material acquisition) of consolidated funded debt to Portfolio Cash Flow, each as defined and calculated with the ratio level calculated with further adjustments as set forth in the Credit Agreement. We were in compliance with the financial covenants as of December 31, 2023. Adjusted EBITDA and Portfolio Cash Flow are non-GAAP liquidity measures that are key components of certain material covenants contained within the Credit Agreement. Noncompliance with the financial covenants under the Credit Agreement could result in our lenders requiring us to immediately repay all amounts borrowed. If we cannot satisfy these financial covenants, we would be prohibited under our Credit Agreement from engaging in certain activities, such as incurring additional indebtedness, paying dividends, making certain payments and acquiring and disposing of assets. The table below presents Adjusted EBITDA and Portfolio Cash Flow for 2023 and 2022, each as calculated according to their respective definition in our Credit Agreement (in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2023","","2022"],["Portfolio Receipts","$","3,048,713","","","$","2,789,293"],["Payments for operating and professional costs","(243,012)","","","(222,969)"],["Adjusted EBITDA (non-GAAP)","$","2,805,701","","","$","2,566,324"],["Interest paid, net","(97,564)","","","(145,157)"],["Portfolio Cash Flow (non-GAAP)","$","2,708,137","","","$","2,421,167"]] [[/GREPCENT_TABLE]] Adjusted EBITDA and Portfolio Cash Flow are non-GAAP liquidity measures that exclude the impact of certain items and therefore have not been calculated in accordance with GAAP. We caution readers that amounts presented in accordance with our definitions of Adjusted EBITDA and Portfolio Cash Flow may not be the same as similar measures used by other companies or analysts. A reconciliation of Adjusted EBITDA and Portfolio Cash Flow to Net cash provided by operating activities, the closest GAAP measure, is presented below (in thousands): [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2023","","2022"],["Net cash provided by operating activities (GAAP)","$","2,987,802","","","$","2,143,980"],["Adjustments:"],["Proceeds from available for sale debt securities (1), (2)","1,440","","","542,044"],["Distributions from equity method investees (2)","43,882","","","\u2014"],["Interest paid, net (2)","97,564","","","145,157"],["Development-stage funding payments - ongoing","2,000","","","2,106"],["Development-stage funding payments - upfront and milestone","50,000","","","175,000"],["Distributions to legacy non-controlling interests - Portfolio Receipts (2)","(376,987)","","","(441,963)"],["Adjusted EBITDA (non-GAAP)","$","2,805,701","","","$","2,566,324"],["Interest paid, net (2)","(97,564)","","","(145,157)"],["Portfolio Cash Flow (non-GAAP)","$","2,708,137","","","$","2,421,167"]] [[/GREPCENT_TABLE]] 65 (1)In the fourth quarter of 2023, we began receiving quarterly payments on the return of the first tranche of the Cytokinetics Commercial Launch Funding (presented as Proceeds from available for sale debt securities on the statement of cash flows). In 2022, amount relates to the quarterly redemptions of the Series A Biohaven Preferred Shares and the accelerated redemption payments of all outstanding Series A and Series B Preferred Shares following Pfizer’s acquisition of Biohaven in October 2022 (presented as Proceeds from available for sale debt securities on the statement of cash flows). (2)The table below shows the line item for each adjustment and the direct location for such line item on the statements of cash flows. [[GREPCENT_TABLE]] [["Reconciling Adjustment","Statements of Cash Flows Classification"],["Interest paid, net","Operating activities (Interest paid less Interest received)"],["Distributions from equity method investees","Investing activities"],["Proceeds from available for sale debt securities","Investing activities"],["Distributions to legacy non-controlling interests - Portfolio Receipts","Financing activities"]] [[/GREPCENT_TABLE]] Uses of Capital Acquisitions of Royalties We acquire product royalties in ways that can be tailored to the needs of our partners through a variety of structures: •Third-party Royalties – Existing royalties on approved or late-stage development therapies with high commercial potential. A royalty is the contractual right to a percentage of top-line sales from a licensee’s use of a product, technology or intellectual property. The majority of our current portfolio consists of third-party royalties.. •Synthetic Royalties – Newly-created royalties on approved or late-stage development therapies with strong proof of concept and high commercial potential. A synthetic royalty is the contractual right to a percentage of top-line sales by the developer or marketer of a therapy in exchange for funding. A synthetic royalty may also include contingent milestone payments. We also fund ongoing R&D for biopharmaceutical companies in exchange for future royalties and milestones if the product or indication we are funding is approved. •Launch and Development Capital – Tailored supplemental funding solutions, generally included as a component within a transaction, increasing the scale of our capital. Launch and development capital is generally provided in exchange for a long-term stream of fixed payments with a predetermined schedule around the launch of a drug. Launch and development capital may also include a direct investment in the public equity of a company. •Mergers and Acquisitions (“M&A”) Related – We acquire royalties in connection with M&A transactions, often from the buyers of biopharmaceutical companies when they dispose of the non-strategic assets of the target company following the closing of the acquisition. We also seek to partner with companies to acquire other biopharmaceutical companies that own significant royalties. We may also seek to acquire biopharmaceutical companies that have significant royalties or where we can create royalties in subsequent transactions. Additionally, we may identify additional opportunities, platforms or technologies that leverage our capabilities. Distributions to Shareholders We paid dividends to holders of our Class A ordinary shares of $358.3 million and $333.3 million in 2023 and 2022, respectively. We do not have a legal obligation to pay a quarterly dividend or dividends at any specified rate or at all. Class A Ordinary Share Repurchases In March 2023, our board of directors authorized a share repurchase program under which we may repurchase up to $1.0 billion of our Class A ordinary shares. The authorization for the share repurchase program expires on June 23, 2027. Share repurchases may be made in the open market or in privately negotiated transactions. In 2023, we repurchased 9,846 thousand shares at a cost of approximately $304.8 million. 66 Other Funding Arrangements In January 2022, we entered into a long-term funding agreement, which was amended later in the same year, with Cytokinetics. We agreed to provide funding of up to $300 million (“Cytokinetics Commercial Launch Funding”) in five tranches. The initial tranche of $50 million was funded upon closing. Cytokinetics is required to draw $50 million if a certain contingency is met and has the option to draw the remaining $200 million upon the occurrence of certain regulatory and clinical development milestones (“Cytokinetics Funding Commitments”). Because the regulatory milestones for the second and third tranches were not met, $75 million of the optional funding is no longer available. As of December 31, 2023, $125 million of the optional $200 million remains available under the Cytokinetics Funding Commitments and Cytokinetics is required to draw $50 million if a certain contingency is met. In November 2023, we entered into a funding agreement with Teva to provide up to $100 million to fund the ongoing development of olanzapine LAI (TEV-’749). We have an option with Teva upon mutual agreement to increase the total funding amount to $125 million. Funding is expected to begin in the first quarter of 2024. We may have other funding arrangements where we are contractually obligated to fund R&D activities performed by our development partners. We also have funding arrangements related to our equity method investments in the Avillion Entities. As our committed capital requirements are based on phases of development, the completion of which is highly uncertain, only the capital required to fund the current stage of development under such funding arrangements is considered committed capital, which approximates $27.3 million as of December 31, 2023. We also have certain milestone payable to our counterparties that are contingent on the successful achievement of certain development, regulatory approval or commercial milestones. These contingent milestone payments are not considered contractual obligations. In 2023, we paid a $12.4 million sales-based milestone related to Erleada and a $50.0 million milestone payment to Cytokinetics which was triggered following the initiation of the first pivotal clinical trial in nHCM. In 2022, we made a $50 million milestone payment to Cytokinetics which was triggered following the initiation of the first pivotal clinical trial in oHCM. Debt Service In September 2023, we repaid $1.0 billion of senior unsecured notes upon maturity. As of December 31, 2023, the future principal and interest payments under our Notes over the next five years and thereafter are as follows (in thousands): [[GREPCENT_TABLE]] [["Year","","Principal Payments","","Interest Payments"],["2024","","$","\u2014","","","$","156,350"],["2025","","1,000,000","","","156,350"],["2026","","\u2014","","","144,350"],["2027","","1,000,000","","","144,350"],["2028","","\u2014","","","126,850"],["Thereafter","","4,300,000","","","1,799,050"],["Total (1)","","$","6,300,000","","","$","2,527,300"]] [[/GREPCENT_TABLE]] (1)Excludes unamortized debt discount and issuance costs of $164.7 million as of December 31, 2023, which are amortized through interest expense over the remaining life of the underlying debt obligations. Operating and Personnel Payments Under the Management Agreement, we pay quarterly Operating and Personnel Payments equal to 6.5% of the cash receipts from Royalty Investments, or Portfolio Receipts, for such quarter and 0.25% of our security investments under GAAP as of the end of each quarter. Because the Operating and Personnel Payments are determined based on Portfolio Receipts, the amounts are variable. The payment for our Operating and Personnel Payment is the most significant component of Payments for operating and professional costs presented on the statements of cash flows. Additionally, the expenses incurred in respect of Operating and Personnel Payments are expected to comprise the most significant component of G&A expenses on an ongoing basis. 67 Guarantor Financial Information Our obligations under the Notes are fully and unconditionally guaranteed by RP Holdings, a non-wholly owned subsidiary (the “Guarantor Subsidiary”). Our remaining subsidiaries (the “Non-Guarantor Subsidiaries”) do not guarantee the Notes. Under the terms of the indenture governing the Notes, Royalty Pharma plc and the Guarantor Subsidiary each fully and unconditionally, jointly and severally, guarantee the payment of interest, principal and premium, if any, on the Notes. As of December 31, 2023, the par value and carrying value of the total outstanding and guaranteed Notes was $6.3 billion and $6.1 billion, respectively. The following financial information presents summarized combined balance sheet information as of December 31, 2023, and summarized combined statement of operations information for 2023 for Royalty Pharma plc and RP Holdings. All intercompany balances and transactions between Royalty Pharma plc and RP Holdings are eliminated in the presentation of the combined financial statements. RP Holdings’ most significant asset is its investment in operating subsidiaries, which has been eliminated in the table below to exclude investments in Non-Guarantor Subsidiaries. Our operating subsidiaries hold the majority of our cash and cash equivalents, marketable securities and financial royalty assets. As a result, our ability to make required payments on the Notes depends on the performance of our operating subsidiaries and their ability to distribute funds to us. There are no material restrictions on distributions from the operating subsidiaries. Amounts presented below do not represent our total consolidated amounts as of or for the year ended December 31, 2023 (in thousands): [[GREPCENT_TABLE]] [["Summarized Combined Balance Sheet"],["","As of December 31, 2023"],["Current assets","$","42,474"],["Current interest receivable on intercompany notes due from Non-Guarantor Subsidiaries","13,086"],["Non-current assets","4,107"],["Non-current intercompany notes receivable due from Non-Guarantor Subsidiaries","1,921,576"],["Current liabilities","53,390"],["Current interest payable on intercompany notes due to Non-Guarantor Subsidiaries","13,086"],["Non-current liabilities","6,134,383"],["Non-current intercompany notes payable due to Non-Guarantor Subsidiaries","1,550,204"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Summarized Combined Statement of Operations"],["","Year Ended December 31, 2023"],["Interest income on intercompany notes receivable from Non-Guarantor Subsidiaries","$","85,263"],["Other income","7,542"],["Operating expenses","207,790"],["Interest expense on intercompany notes payable with Non-Guarantor Subsidiaries","45,852"],["Net loss","160,837"]] [[/GREPCENT_TABLE]] Critical Accounting Policies and Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses. Certain of these policies are considered critical as they have the most significant impact on our financial condition and results of operations and require the most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain. On an ongoing basis, we evaluate our estimates that are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of income and expenses that are not readily apparent from other sources. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. 68 Our most critical accounting policies relate to our financial royalty assets and the full descriptions can be found in Note 2–Summary of Significant Accounting Policies to our consolidated financial statements. Similarly, the most significant judgments and estimates applied by management are associated with the measurement of our financial royalty assets at amortized cost using the prospective effective interest method. The application of the prospective approach to calculate interest income from our financial royalty assets requires management’s judgment in forecasting the expected future cash flows of the underlying royalties. These estimates and judgments arise because of the inherent uncertainty in predicting future events. We evaluate financial royalty assets for impairment on an individual basis by comparing the effective interest rate at each reporting date to that of the prior period. If the effective interest rate for the current period is lower than the prior period and if the gross cash flows have declined (expected and collected), management records a provision for the change in expected cash flows. The provision is measured as the difference between the financial royalty asset’s amortized cost basis and the net present value of the expected future cash flows, calculated based on the prior period’s effective interest rate. The amount recognized as provision expense increases the financial royalty asset’s cumulative allowance, which reduces the net carrying value of the financial royalty asset. Factors Impacting Expected Future Cash Flows The amounts and timing of forecasted expected future cash flows are largely influenced by sell-side equity research analyst coverage, commercial performance of the product and the royalty duration. •Analyst coverage. Forecasts of expected future cash flows are developed from sales projections of the underlying biopharmaceutical products as published in sell-side equity research analyst reports. In projecting future cash flows, our policy is to rely on sell-side research analysts’ consensus sales forecasts to derive annual sales projections for each financial royalty asset over the periods for which we are entitled to royalties or milestones. These forecasts are based on market research that analyzes factors such as growth in global economies, industry trends and product life cycles. We generally utilize statistical curves to project future sales for a portion of the royalty duration when sell-side equity research coverage ends or when estimates are not available for the duration of the royalty. The statistical curves are modelled from a combination of historical trends and available sell-side equity research analyst consensus sales estimates. Based on the level of detail in sell-side equity research analyst models, management can also be required to apply assumptions to the sales forecasts to estimate the quarterly and geographical allocation from annual sales projections and, for franchised products, to estimate the product mix and pricing mix, or to exclude from projections sales forecasts for unapproved products. Our contractual royalty terms, rates, and any milestones are then applied to the adjusted sales projections to calculate the expected royalty or milestone payments over the term of the financial royalty asset’s life, forming the basis for our forecast of expected future cash flows used to calculate and measure interest income. •Commercial performance. The approval of a product for use in new indications can extend the date through which we are entitled to royalties or milestones on that product. For certain financial royalty assets, such as the cystic fibrosis franchise, we are entitled to royalties on approved combination products and may be entitled to royalties on future combination products, which, once approved, create new cash flow streams which were not initially contemplated and for which sales were previously not reflected in expected future cash flows. We generally do not recognize income from, or forecast sales for, unapproved products. If a product is removed from all or a portion of a market, subsequent sell-side equity research analysts’ consensus sales forecasts will reflect the expected drop in sales. Both the new cash flow streams and the cessation of cash flow streams related to a product’s performance in the market over the royalty term can materially affect our forecast of expected future cash flows. 69 •Royalty duration. The duration of a royalty can be based on a variety of factors, such as regulatory and marketing approval dates, patent expiration dates, the number of years from first commercial sale, the first date of manufacture of the patent-protected product, the entry of generics or a contractual date arising from litigation, which are all impacted by the point in time in the product’s life cycle at which we acquire the royalty. Royalty durations vary by geography as the United States, European Union and other jurisdictions may be subject to different country-specific patent protection terms or exclusivity based on contractual terms. Products may be covered by a number of patents and, for products whose royalty term is linked to the existence of valid patents, management is required to make judgments about the patent providing the strongest protection to align the period over which management forecasts expected future cash flows to the royalty term. It is common for the latest expiring patent in effect at the date we acquire a financial royalty asset to be extended, adjusted or replaced with newer dated patents subsequent to our acquisition of a royalty due to new information, resulting in changes to the royalty duration in later periods. Patents may expire earlier than expected at the time of the acquisition due to the loss of patent protection, loss of data exclusivity on intellectual property, contractual licensing terms limiting royalty payments based on time from product launch, due to recent legal developments or litigation. Macroeconomic factors, such as changes in economies or the competitive landscape, including the unexpected loss of exclusivity to the products underlying our portfolio of royalties, changes in government legislation, product life cycles, industry consolidations and other changes beyond our control could result in a positive or negative impact on our forecast of expected future cash flows. Significant Assumptions Applied in Developing Forecasted Expected Future Cash Flows As part of the preparation of the forecasted expected future cash flows, which relies on the sources and variables discussed above, management is required to make assumptions around the following forecast inputs: (1) estimates of the duration of the royalty, which includes consideration of the strength of patent protection and anticipated entry of generics, (2) product growth rates and sales trends in outer years, generally projected through statistical curves, (3) the product and pricing mix for franchised products, (4) the geographical allocation of annual sales data from sell-side equity research analysts’ models, and (5) the portion of sales that are subject to royalty which is referred to as royalty bearing sales. The most significant assumptions used in forecasting the expected future cash flows for our royalties and requiring management’s judgement include (1) estimates of the duration of the royalty and (2) sales trends and product growth rates in outer years of the royalty term, which are primarily derived from statistical models. The royalty duration is important for purposes of accurately measuring interest income over the life of a financial royalty asset. In making assumptions around the royalty duration for terms that are not contractually fixed, management considers the strength of existing patent protection, timing for expected entry of generics, geographical exclusivity periods and potential patent term extensions tied to the underlying product. It is common for royalty durations to expire earlier or later than anticipated due to unforeseen developments over time, including with respect to the granting of patents and patent term extensions, the invalidation of patents, litigation between the party controlling the patents and third party challengers of the patents, the ability of third parties to design around or circumvent valid patents, the granting of regulatory exclusivity periods or extensions, timing for the arrival of generic or biosimilar competitor products, changes to legal or regulatory regimes affecting intellectual property rights or the regulation of pharmaceutical products, product life cycles, and industry consolidations. When royalty-bearing pharmaceutical products have limited or no coverage by sell-side equity research analysts, or where sell-side equity research analyst estimates are not available for the full term of our royalty, particularly for the later years in a product’s life, we generally incorporate a statistical curve developed using historical sales data and available consensus sales projections to forecast product sales over the remaining life of the product. 70 Even though we believe interest income from financial royalty assets and the associated non-cash provision for changes in future cash flows are not indicative of our near-term financial performance and should not be used as a source for predicting future income or growth trends, changes in the aforementioned assumptions could result in a material impact to our financial statements. A shortened royalty term can result in a reduction in interest income, significant reductions in total royalty payments over time compared to expectations or a permanent impairment. If the effective interest rate is lower for the current period than the prior period and if the gross cash flows have declined (expected and collected), this would result in the immediate recognition of non-cash provision expense even though the applicable cash inflows will not be realized for many years into the future. Small declines in sell-side equity research analysts’ consensus sales forecasts over a long time horizon can result in an immediate non-cash income statement expense recognition, even though the applicable cash inflows will not be realized for many years into the future. Below is a summary of the sensitivity of our current year results in relation to the royalty duration for our top three financial royalty assets for which we did not increase our investment during 2023 based on net carrying value as of December 31, 2023. Because these are long-dated financial royalty assets, we have assumed a change of two years in the estimated duration to sensitize the financial statement impact. The effect of a change in estimated duration is the factor that would have the most significant impact on our consolidated statement of operations. There have not been any significant changes to the estimated duration of expected future cash flows for our top three financial royalty assets during 2023, 2022 and 2021. If the duration of these financial royalty assets were extended two years by assuming the statistically projected growth trends continue and all other royalty terms and assumptions remain unchanged, any impact to interest income would be recognized prospectively over the remaining expected life of the financial asset. As there would be no current impact to interest income, the sensitivity is not disclosed below. However, an extended duration for a financial royalty asset could result in the reduction of any existing cumulative allowance for changes in expected future cash flows, which would be recognized in the current period as provision income and is reflected in the table below for these top three financial royalty assets. If the duration for these financial royalty assets were reduced by two years by eliminating the corresponding forecasted expected future cash flows in that two year period while keeping all other royalty terms and assumptions unchanged, we would recognize immediate incremental provision expense in the current period as a result of applying the prospective method of the effective interest rate methodology. The extension and reduction in royalty terms are modelled in isolation for purposes of the sensitivity disclosures below and do not include any consideration of the related allowance for current expected credit losses. The measurement of interest income from our financial royalty assets is recalculated each reporting period, which requires updates to various inputs and assumptions, including estimated royalty duration. Therefore, any actual impact to recognition of provision income or expense would be different than the sensitivity disclosure below. The impact of these sensitivity assumptions is summarized as follows (in thousands): [[GREPCENT_TABLE]] [["","","","","","","Year Ended December 31, 2023","","","","Year Ended December 31, 2023"],["","","Estimated Royalty Duration (1)","","Change in Duration Assumption Applied","","Provision Income for Changes in Expected Cash Flows","","Change in Duration Assumption Applied","","Provision Expense for Changes in Expected Cash Flows"],["Cystic fibrosis franchise","","2037 (2)","","+ 2 years","","$","(2,539)","","","- 2 years","","$","295,974"],["Trelegy","","2029-2030","","+ 2 years","","(4)","","- 2 years","","$","269,333"],["Tysabri","","(3)","","+ 2 years","","$","(60,312)","","","- 2 years","","$","97,797"]] [[/GREPCENT_TABLE]] (1)Durations shown represent our estimates as of the current reporting date of when a royalty will substantially end, which may vary by geography and may depend on clinical trial results, regulatory approvals, contractual terms, commercial developments, estimates of regulatory exclusivity and patent expiration dates (which may include estimated patent term extensions) or other factors. There can be no assurances that our royalties will expire when expected. (2)Royalty is perpetual; year shown represents Trikafta’s expected patent expiration and potential sales decline based on timing of potential generic entry. (3)RPIFT acquired a perpetual royalty on net sales of Tysabri. We have applied an end date of 2031 for purposes of accreting income over the royalty term, which is periodically reviewed. (4)No provision income resulted from the extended duration as there was no existing cumulative allowance for changes in expected future cash flows as of December 31, 2023. Recent Accounting Pronouncements See Note 2–Summary of Significant Accounting Policies to our consolidated financial statements for additional information on recently issued accounting standards. 71