Royalty Pharma plc - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-39329

Royalty Pharma plc

(Exact name of registrant as specified in its charter)


England and Wales									98-1535773
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)

110 East 59th Street
New York, New York 10022

(Address of principal executive offices and zip code)

(212) 883-0200

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Class A ordinary shares, par value $0.0001	RPRX	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of November 4, 2022, Royalty Pharma plc had 441,104,204 Class A ordinary shares outstanding and 166,117,591 Class B ordinary shares outstanding.

ROYALTY PHARMA PLC

INDEX


PART I.	FINANCIAL INFORMATION		1

	Item 1.	Condensed Consolidated Financial Statements	1

		Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (unaudited)	1

		Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	2

		Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	3

		Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	4

		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)	6

		Notes to Condensed Consolidated Financial Statements (unaudited)	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64

	Item 4.	Controls and Procedures	64

PART II.	OTHER INFORMATION		64

	Item 1.	Legal Proceedings	64

	Item 1A.	Risk Factors	64

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

	Item 3.	Defaults Upon Senior Securities	65

	Item 4.	Mine Safety Disclosures	65

	Item 5.	Other Information	65

	Item 6.	Exhibits	65

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective assets, our industry, our beliefs and our assumptions. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of the numerous risks outlined in Part I under Item 1A. under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

These risks and uncertainties include factors related to:

•sales risks of biopharmaceutical products on which we receive royalties;

•our ability to locate suitable assets to acquire;

•uncertainties related to the acquisition of interests in development-stage biopharmaceutical product candidates and our strategy to add development-stage product candidates to our product portfolio;

•the assumptions underlying our business model;

•our ability to successfully execute our royalty acquisition strategy;

•our ability to leverage our competitive strengths;

•actual and potential conflicts of interest with the Manager and its affiliates;

•the ability of RP Management, LLC (the “Manager”) to attract and retain highly talented professionals;

•the effect of changes to tax legislation and our tax position; and

•the risks, uncertainties and other factors we identify elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the U.S. Securities and Exchange Commission.

Although we believe the expectations reflected in the forward-looking statements are reasonable, any of those expectations could prove to be inaccurate, and as a result, the forward-looking statements based on those expectations also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and business objectives will be achieved. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q to conform our prior statements to actual results or revised expectations.

PART 1. FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ROYALTY PHARMA PLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)


	As of September 30,		As of December 31,
	2022		2021
Assets
Current assets
Cash and cash equivalents	$	991,628	$	1,541,048

Marketable securities	139,926		581,872
Financial royalty assets	675,857		614,351
Accrued royalty receivable	15,712		53,286

Available for sale debt securities	409,347		66,000

Other royalty income receivable	19,131		15,023
Other current assets	90,515		6,631
Total current assets	2,342,116		2,878,211

Financial royalty assets, net	14,287,399		13,718,245
Intangible royalty assets, net	—		5,670
Equity securities	262,820		269,800
Available for sale debt securities	339,800		204,400

Equity method investments	409,857		435,394
Other assets	30,613		4,145

Total assets	$	17,672,605	$	17,515,865

Liabilities and shareholders’ equity
Current liabilities
Distributions payable to non-controlling interests	$	105,731	$	107,934
Accounts payable and accrued expenses	16,112		5,620
Interest payable	13,199		57,696


Current portion of long-term debt	996,583		—


Total current liabilities	1,131,625		171,250

Long-term debt	6,114,677		7,096,070

Other liabilities	9,900		—

Total liabilities	7,256,202		7,267,320

Commitments and contingencies
Shareholders’ equity

Class A ordinary shares, $0.0001 par value; 441,104 and 432,963 issued and outstanding, respectively	44		43
Class B ordinary shares, $0.000001 par value; 166,118 and 174,213 issued and outstanding, respectively	—		—
Class R redeemable shares, £1 par value; 50 and 50 issued and outstanding, respectively	63		63
Deferred shares, $0.000001 par value; 369,265 and 361,170 issued and outstanding, respectively	—		—

Additional paid-in capital	3,632,903		3,507,533
Retained earnings	2,504,974		2,255,179
Non-controlling interests	4,264,303		4,471,951
Accumulated other comprehensive income	16,904		16,491
Treasury interests	(2,788)		(2,715)

Total shareholders’ equity	10,416,403		10,248,545

Total liabilities and shareholders’ equity	$	17,672,605	$	17,515,865

See accompanying notes to these unaudited condensed consolidated financial statements.

ROYALTY PHARMA PLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Income and other revenues:
Income from financial royalty assets	$	551,682	$	505,832	$	1,578,555	$	1,538,871
Revenue from intangible royalty assets	1,073		63,406		37,196		139,594
Other royalty income	20,708		16,535		55,716		35,298
Total income and other revenues	573,463		585,773		1,671,467		1,713,763

Operating expenses

Provision for changes in expected cash flows from financial royalty assets	305,061		137,837		595,396		186,337
Research and development funding expense	25,500		90,500		126,606		96,263
Amortization of intangible assets	—		5,796		5,670		17,200
General and administrative expenses	50,692		48,588		154,075		136,665

Total operating expenses, net	381,253		282,721		881,747		436,465

Operating income	192,210		303,052		789,720		1,277,298

Other expense/(income)
Equity in losses/(earnings) of equity method investees	3,251		(2,749)		2,117		(18,532)
Interest expense	46,977		44,327		141,006		119,168

(Gains)/losses on derivative financial instruments	(25,785)		16,972		(97,590)		21,436
(Gains)/losses on equity securities	(5,168)		19,289		22,970		17,980

(Gains)/losses on available for sale debt securities	(44,243)		14,885		(97,985)		(8,246)
Interest income	(14,034)		(12,261)		(34,482)		(42,896)
Other non-operating expense, net	10,798		793		13,590		858
Total other (income)/expenses, net	(28,204)		81,256		(50,374)		89,768
Consolidated net income before tax	220,414		221,796		840,094		1,187,530
Income tax expense	—		—		—		—
Consolidated net income	220,414		221,796		840,094		1,187,530

Net income attributable to non-controlling interests	77,763		119,867		341,178		575,706

Net income attributable to Royalty Pharma plc	$	142,651	$	101,929	$	498,916	$	611,824

Earnings per Class A ordinary share:
Basic	$	0.32	$	0.24	$	1.14	$	1.49
Diluted	$	0.32	$	0.24	$	1.14	$	1.49
Weighted average Class A ordinary shares outstanding:
Basic	439,293		428,230		436,542		409,253
Diluted	607,226		607,174		607,209		607,152

See accompanying notes to these unaudited condensed consolidated financial statements.

ROYALTY PHARMA PLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Consolidated net income	$	220,414	$	221,796	$	840,094	$	1,187,530
Changes in other comprehensive income/(loss):

Unrealized gains/(losses) on available for sale debt securities	13,050		(2,575)		24,000		8,574
Reclassification of unrealized gains on available for sale debt securities	(7,111)		(11,756)		(24,053)		(40,545)
Other comprehensive income/(loss)	$	5,939	$	(14,331)	$	(53)	$	(31,971)
Comprehensive income	$	226,353	$	207,465	$	840,041	$	1,155,559
Comprehensive income attributable to non-controlling interests	80,161		113,867		341,109		561,594
Comprehensive income attributable to Royalty Pharma plc	$	146,192	$	93,598	$	498,932	$	593,965

See accompanying notes to these unaudited condensed consolidated financial statements.

ROYALTY PHARMA PLC

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except per share amounts)

(Unaudited)


	Class A Ordinary Shares			Class B Ordinary Shares			Class R Redeemable Shares			Deferred Shares			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Non-Controlling Interests		Treasury Interests		Total Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Balance at June 30, 2022	437,139	$	44	170,081	$	—	50	$	63	365,302	$	—	$	3,570,585	$	2,446,132	$	13,177	$	4,380,938	$	(2,752)	$	10,408,187
Contributions	—	—		—	—		—	—		—	—		—		—		—		2,970		—		2,970
Distributions	—	—		—	—		—	—		—	—		—		—		—		(137,880)		—		(137,880)
Dividends ($0.19 per Class A ordinary share)	—	—		—	—		—	—		—	—		—		(83,809)		—		—		—		(83,809)
Other exchanges	3,963	—		(3,963)	—		—	—		3,963	—		61,736		—		186		(61,886)		(36)		—
Share-based compensation and related issuances of Class A ordinary shares	2	—		—	—		—	—		—	—		582		—		—		—		—		582
Net income	—	—		—	—		—	—		—	—		—		142,651		—		77,763		—		220,414
Other comprehensive income/(loss):
Unrealized gains on available for sale debt securities	—	—		—	—		—	—		—	—		—		—		7,781		5,269		—		13,050
Reclassification of unrealized gains on available for sale debt securities	—	—		—	—		—	—		—	—		—		—		(4,240)		(2,871)		—		(7,111)

Balance at September 30, 2022	441,104	$	44	166,118	$	—	50	$	63	369,265	$	—	$	3,632,903	$	2,504,974	$	16,904	$	4,264,303	$	(2,788)	$	10,416,403


	Class A Ordinary Shares			Class B Ordinary Shares			Class R Redeemable Shares			Deferred Shares			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Non-Controlling Interests		Treasury Interests		Total Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Balance at June 30, 2021	427,006	$	42	180,166	$	—	50	$	63	355,217	$	—	$	3,415,598	$	2,291,966	$	28,672	$	4,671,686	$	(2,662)	$	10,405,365
Contributions	—	—		—	—		—	—		—	—		—		—		—		6,030		—		6,030
Distributions	—	—		—	—		—	—		—	—		—		—		—		(159,714)		—		(159,714)
Dividends ($0.17 per Class A ordinary share)	—	—		—	—		—	—		—	—		—		(73,017)		—		—		—		(73,017)
Other exchanges	2,503	1		(2,503)	—		—	—		2,503	—		38,115		—		212		(38,305)		(23)		—
Share-based compensation and related issuances of Class A ordinary shares	2	—		—	—		—	—		—	—		505		—		—		—		—		505
Net income	—	—		—	—		—	—		—	—		—		101,929		—		119,867		—		221,796
Other comprehensive loss:
Unrealized losses on available for sale debt securities	—	—		—	—		—	—		—	—		—		—		(1,497)		(1,078)		—		(2,575)
Reclassification of unrealized gains on available for sale debt securities	—	—		—	—		—	—		—	—		—		—		(6,834)		(4,922)		—		(11,756)

Balance at September 30, 2021	429,511	$	43	177,663	$	—	50	$	63	357,720	$	—	$	3,454,218	$	2,320,878	$	20,553	$	4,593,564	$	(2,685)	$	10,386,634

See accompanying notes to these unaudited condensed consolidated financial statements.

ROYALTY PHARMA PLC

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except per share amounts)

(Unaudited)


	Class A Ordinary Shares			Class B Ordinary Shares			Class R Redeemable Shares			Deferred Shares			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Non-Controlling Interests		Treasury Interests		Total Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Balance at December 31, 2021	432,963	$	43	174,213	$	—	50	$	63	361,170	$	—	$	3,507,533	$	2,255,179	$	16,491	$	4,471,951	$	(2,715)	$	10,248,545
Contributions	—	—		—	—		—	—		—	—		—		—		—		9,173		—		9,173
Distributions	—	—		—	—		—	—		—	—		—		—		—		(433,822)		—		(433,822)
Dividends ($0.57 per Class A ordinary share)	—	—		—	—		—	—		—	—		—		(249,121)		—		—		—		(249,121)
Other exchanges	8,095	1		(8,095)	—		—	—		8,095	—		123,783		—		397		(124,108)		(73)		—
Share based compensation and related issuances of Class A ordinary shares	46	—		—	—		—	—		—	—		1,587		—		—		—		—		1,587
Net income	—	—		—	—		—	—		—	—		—		498,916		—		341,178		—		840,094
Other comprehensive income/(loss):
Unrealized gains on available for sale debt securities	—	—		—	—		—	—		—	—		—		—		14,262		9,738		—		24,000
Reclassification of unrealized gains on available for sale debt securities	—	—		—	—		—	—		—	—		—		—		(14,246)		(9,807)		—		(24,053)

Balance at September 30, 2022	441,104	$	44	166,118	$	—	50	$	63	369,265	$	—	$	3,632,903	$	2,504,974	$	16,904	$	4,264,303	$	(2,788)	$	10,416,403


	Class A Ordinary Shares			Class B Ordinary Shares			Class R Redeemable Shares			Deferred Shares			Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Non-Controlling Interests		Treasury Interests		Total Equity
	Shares	Amount		Shares	Amount		Shares	Amount		Shares	Amount
Balance at December 31, 2020	388,135	$	39	218,976	$	—	50	$	63	316,407	$	—	$	2,865,964	$	1,920,635	$	34,395	$	5,077,036	$	(2,317)	$	9,895,815
Contributions	—	—		—	—		—	—		—	—		—		—		—		20,803		—		20,803


Distributions	—	—		—	—		—	—		—	—		—		—		—		(475,901)		—		(475,901)





Dividends ($0.51 per Class A ordinary share)	—	—		—	—		—	—		—	—		—		(211,581)		—		—		—		(211,581)
Other exchanges	41,313	4		(41,313)	—		—	—		41,313	—		586,315		—		4,017		(589,968)		(368)		—
Share-based compensation and related issuances of Class A ordinary shares	63	—		—	—		—	—		—	—		1,939		—		—		—		—		1,939

Net income	—	—		—	—		—	—		—	—		—		611,824		—		575,706		—		1,187,530
Other comprehensive income/(loss):
Unrealized gains on available for sale debt securities	—	—		—	—		—	—		—	—		—		—		4,562		4,012		—		8,574
Reclassification of unrealized gains on available for sale debt securities	—	—		—	—		—	—		—	—		—		—		(22,421)		(18,124)		—		(40,545)

Balance at September 30, 2021	429,511	$	43	177,663	$	—	50	$	63	357,720	$	—	$	3,454,218	$	2,320,878	$	20,553	$	4,593,564	$	(2,685)	$	10,386,634

See accompanying notes to these unaudited condensed consolidated financial statements.

ROYALTY PHARMA PLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	For the Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities:
Cash collections from financial royalty assets	$	1,843,899	$	1,733,147
Cash collections from intangible royalty assets	72,406		113,133
Other royalty cash collections	51,607		27,469
Distributions from equity method investees	33,316		28,213
Interest received	10,556		3,004
Derivative collateral received	—		34,660
Derivative collateral posted	—		(34,660)
Termination payments on derivative instruments	—		(16,093)
Development-stage funding payments - ongoing	(1,606)		(6,263)
Development-stage funding payments - upfront and milestone	(125,000)		(90,000)
Payments for operating and professional costs	(141,653)		(135,272)

Interest paid	(169,476)		(129,759)
Net cash provided by operating activities	1,574,049		1,527,579

Cash flows from investing activities:
Distributions from equity method investees	—		523
Investments in equity method investees	(9,896)		(28,320)
Purchases of equity securities	(62,785)		(100,013)
Proceeds from equity securities	46,158		115,957
Purchases of available for sale debt securities	(393,737)		(52,755)
Proceeds from available for sale debt securities	46,875		46,875
Purchases of marketable securities	(234,869)		(755,668)
Proceeds from sales and maturities of marketable securities	676,705		1,493,135

Acquisitions of financial royalty assets	(1,491,399)		(2,019,768)
Acquisitions of other financial assets	(21,215)		—
Milestone payments	—		(18,600)
Net cash used in investing activities	(1,444,163)		(1,318,634)

Cash flows from financing activities:

Distributions to non-controlling interests	(322,726)		(363,624)
Distributions to non-controlling interests- other	(113,299)		(119,507)
Dividends to shareholders	(249,121)		(211,581)

Contributions from non-controlling interests- R&D	971		6,083
Contributions from non-controlling interests- other	4,869		11,524


Proceeds from issuance of long-term debt, net of discount	—		1,272,533
Debt issuance costs and other	—		(12,245)



Net cash (used in)/provided by financing activities	(679,306)		583,183
Net change in cash and cash equivalents	(549,420)		792,128
Cash and cash equivalents, beginning of period	1,541,048		1,008,680
Cash and cash equivalents, end of period	$	991,628	$	1,800,808

See accompanying notes to these unaudited condensed consolidated financial statements.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization and Purpose

Royalty Pharma plc is an English public limited company incorporated under the laws of England and Wales that was created for the purpose of consolidating our predecessor entities and facilitating the initial public offering (“IPO”) of our Class A ordinary shares. “Royalty Pharma,” the “Company,” “we,” “us” and “our” refer to Royalty Pharma plc and its subsidiaries on a consolidated basis.

We are the largest buyer of biopharmaceutical royalties and a leading funder of innovation across the biopharmaceutical industry. 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.

We control Royalty Pharma Holdings Ltd. (“RP Holdings”), a private limited company incorporated under the laws of England and Wales and U.K. tax resident, through our ownership of RP Holdings’ Class A ordinary shares and RP Holdings’ Class B ordinary shares (the “RP Holdings Class B Interests”). The Continuing Investors Partnerships (defined below) have a non-controlling interest in RP Holdings through their ownership of RP Holdings Class B Interests. We conduct our business through RP Holdings and its subsidiaries.

RP Holdings is the sole owner of Royalty Pharma Investments 2019 ICAV (“RPI 2019 ICAV”), which is an Irish collective asset management entity formed to facilitate our Exchange Offer Transactions (defined below), and is the successor to Royalty Pharma Investments, an Irish unit trust (“Old RPI”). RP Holdings is directly or indirectly owned by RPI US Partners 2019, LP, a Delaware limited partnership, RPI International Holdings 2019, LP, a Cayman Islands exempted limited partnership (together, the “Continuing Investors Partnerships”) and Royalty Pharma plc. Prior to the Exchange Offer Transactions, Old RPI was owned by various partnerships (the “Legacy Investors Partnerships”).

RP Management, LLC (the “Manager”), a Delaware limited liability company, is responsible for our management, including our day-to-day operations, pursuant to advisory and management agreements (collectively, the “Management Agreement”).

Exchange Offer Transactions

We consummated an exchange offer on February 11, 2020 to facilitate the IPO. Through the exchange offer, investors which represented 82% of the aggregate limited partnership in the Legacy Investors Partnerships exchanged their limited partnership interests in the Legacy Investors Partnerships for limited partnership interests in the Continuing Investors Partnerships. The exchange offer transaction together with (i) the concurrent incurrence of indebtedness under senior secured credit facilities and (ii) the issuance of additional interests in Continuing Investors Partnerships to satisfy performance payments payable in respect of assets acquired prior to the date of the IPO are referred to as the “Exchange Offer Transactions.”

As a result of the Exchange Offer Transactions, we own indirectly an 82% economic interest in Old RPI through our subsidiary RPI 2019 Intermediate Finance Trust, a Delaware statutory trust (“RPI Intermediate FT”). We are entitled to 82% of the economics of Old RPI’s wholly-owned subsidiaries, RPI Finance Trust, a Delaware statutory trust (“RPIFT”) and RPI Acquisitions (Ireland) Limited (“RPI Acquisitions”), an Irish private limited company, and 66% of Royalty Pharma Collection Trust, a Delaware statutory trust (“RPCT”). The remaining 34% of RPCT is owned by the Legacy Investors Partnerships and Royalty Pharma Select Finance Trust, a Delaware statutory trust (“RPSFT”), which is wholly-owned by Royalty Pharma Select, an Irish unit trust.

2. Summary of Significant Accounting Policies

Basis of Preparation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In the opinion of management, all adjustments considered necessary to present fairly the results of the interim periods have been included and consist only of normal and recurring adjustments. Certain information and footnote disclosures have been condensed or omitted as permitted under GAAP. As such, the information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2021, included in our Annual Report on Form 10-K.

The preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of income, revenues and expenses during the reporting period. Actual results may differ from those estimates. The results for the interim periods are not necessarily indicative of results for the full year.

We continue to monitor the impact from the COVID-19 pandemic on our operational and financial performance. To date, certain marketers have commented that the performance of products on which we own royalties have been impacted by the COVID-19 pandemic. However, the COVID-19 pandemic has not had a material impact on our results of operations and liquidity and we do not believe it is reasonably likely to in the future.

Basis of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Royalty Pharma plc and all majority-owned and controlled subsidiaries, as well as variable interest entities, where we are the primary beneficiary. We consolidate based upon evaluation of our power, through voting rights or similar rights, to direct the activities of another entity that most significantly impact the entity’s economic performance. For consolidated entities where we own or are exposed to less than 100% of the economics of such entity, we record Net income attributable to non-controlling interests on our condensed consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective non-controlling parties.

We report non-controlling interests related to the portion of ownership interests of consolidated subsidiaries not owned by us which are attributable to: (1) the Legacy Investors Partnerships’ ownership of approximately 18% in Old RPI, (2) the Continuing Investors Partnerships’ ownership in RP Holdings through their ownership of RP Holdings Class B Interests, (3) a de minimis interest in RPCT held by RPSFT and (4) RPI EPA Holdings, LP’s (“EPA Holdings”) ownership of the RP Holdings’ Class C ordinary share (the “RP Holdings Class C Special Interest”). Income will not be allocated to EPA Holdings until certain performance conditions are met.

All intercompany transactions and balances have been eliminated in consolidation.

Concentrations of Credit Risk

Financial instruments that subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, available for sale securities, financial royalty assets, derivatives and receivables. Our cash management and investment policy limits investment instruments to investment-grade securities with the objective to preserve capital and to maintain liquidity until the funds are needed for operations. Our cash and cash equivalents and marketable securities balances as of September 30, 2022 and December 31, 2021 were held with State Street, Bank of America and Scotiabank. Our primary operating accounts significantly exceed the Federal Deposit Insurance Corporation limits.

The majority of our financial royalty assets and receivables arise from contractual royalty agreements that entitle us to royalties on the sales of underlying biopharmaceutical products in the United States, Europe and the rest of the world, with concentrations of credit risk limited due to the broad range of marketers responsible for paying royalties to us and the variety of geographies from which our royalties on product sales are derived. The products in which we hold royalties are marketed by leading industry participants, including, among others, Vertex, Biogen, AbbVie, Johnson & Johnson, Merck & Co., Pfizer, Astellas, Novartis and Gilead. As of September 30, 2022 and December 31, 2021, Vertex, as the marketer and payor of our royalties on the cystic fibrosis franchise, accounted for 31% and 32%, respectively, of our current portion of financial royalty assets and represented the largest individual marketer and payor of our royalties.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We monitor the financial performance and creditworthiness of the counterparties to our royalty agreements so that we can properly assess and respond to changes in their credit profile. To date, we have not experienced any significant losses with respect to the collection of income or revenue on our royalty assets.

Significant Accounting Policies

There have been no material changes to our significant accounting policies from our Annual Report on Form 10-K for the year ended December 31, 2021.

3. Available for Sale Debt Securities

Cytokinetics Commercial Launch Funding

On January 7, 2022, we entered into a long-term funding agreement with Cytokinetics, Incorporated (“Cytokinetics”) to support further development of aficamten and potential commercialization of omecamtiv mecarbil. As part of the funding agreement, we agreed to provide capital (“Cytokinetics Commercial Launch Funding”) of up to $300 million, which is comprised of five tranches, including an initial tranche of $50 million that was funded upon closing. In the three months ended June 30, 2022, we amended the long-term funding agreement with Cytokinetics to increase the required draw amount. 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”). As of September 30, 2022, we expect $125 million of the optional $200 million to remain available under the Cytokinetics Commercial Launch Funding due to the likelihood that certain regulatory milestones will not be met by December 31, 2022. Each tranche has an interest-free and payment-free period of six calendar quarters, followed by 34 calendar quarters of installment re-payments totaling 1.9 times the amount drawn.

We elected the fair value option to account for the Cytokinetics Commercial Launch Funding, recorded within Available for sale debt securities on the condensed consolidated balance sheets, as it most accurately reflects the nature of the funding arrangement. The Cytokinetics Funding Commitments, which include options and forwards over the subsequent tranches, are recognized at fair value within Other liabilities as of September 30, 2022 and within Available for sale debt securities as of December 31, 2021 on the condensed consolidated balance sheets. The unrealized changes in the fair value of the funded Cytokinetics Commercial Launch Funding and the Cytokinetics Funding Commitments are recorded within (Gains)/losses on available for sale debt securities in the condensed consolidated statements of operations.

MorphoSys Development Funding Bonds

On June 2, 2021, we announced a long-term strategic funding partnership with MorphoSys AG (“MorphoSys”) to support its acquisition of Constellation Pharmaceuticals, Inc. which closed on July 15, 2021. As part of the funding agreement, we agreed to provide MorphoSys up to $350 million of capital (the “Development Funding Bonds”), of which MorphoSys was required to draw a minimum of $150 million. Our commitment to fund at least $150 million of the Development Funding Bonds was recognized as the Development Funding Bond Forward. During the three months ended September 30, 2022, we funded $300 million of the Development Funding Bonds, which represents additional funding of $150 million above the minimum funding commitment (“Additional Funding”) and we settled the Development Funding Bond Forward at the same time. We have no remaining funding commitment under the Development Funding Bonds. We expect to receive a return of 2.2 times the amount funded on the Development Funding Bonds payable on a quarterly basis over nine years, with the first payment beginning during the three months ended December 31, 2024.

We elected the fair value option to account for the Development Funding Bonds and the Development Funding Bond Forward as it most accurately reflects the nature of the instruments. The Development Funding Bonds and the Development Funding Bond Forward are recorded within Available for sale debt securities on our consolidated balance sheet. The changes in the fair values of the Development Funding Bonds and the Development Funding Bond Forward are recorded within (Gains)/losses on available for sale debt securities in the condensed consolidated statements of operations.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Series A Biohaven Preferred Shares

On April 5, 2019, RPIFT funded the purchase of 2,495 Series A Biohaven Preferred Shares from Biohaven Pharmaceutical Holding Company Ltd. (“Biohaven”) at a price of $50,100 per preferred share for a total of $125 million. The approval of Nurtec ODT by the U.S. Food and Drug Administration (“FDA”) in February 2020 resulted in a payment due to us of two times the original purchase price of the Series A Biohaven Preferred Shares payable in equal quarterly installments beginning in the three months ended March 31, 2021 through the three months ended December 31, 2024. In the three months ended March 31, 2021, we began receiving payments from the quarterly redemption of the Series A Biohaven Preferred Shares.

On October 3, 2022, Pfizer acquired Biohaven, which was a change of control event that accelerated the redemption of all outstanding Series A Biohaven Preferred Shares at a price equal to two times the original purchase price. In connection with the completion of Pfizer’s acquisition of Biohaven, all outstanding Series A Biohaven Preferred Shares were redeemed in a lump sum payment. We no longer hold any Series A Biohaven Preferred Shares.

The Series A Biohaven Preferred Shares are classified as Available for sale debt securities on our condensed consolidated balance sheets. The unrealized change in the fair value of the Series A Biohaven Preferred Shares is recorded within Unrealized gains/(losses) on available for sale debt securities in the condensed consolidated statements of comprehensive income. In the three and nine months ended September 30, 2022, $7.1 million and $24.1 million, respectively, of the unrealized gains were reclassified from other comprehensive income to Interest income in the condensed consolidated statements of operations. In the three and nine months ended September 30, 2021, $11.8 million and $40.5 million, respectively, of the unrealized gains were reclassified from other comprehensive income to Interest income in the condensed consolidated statements of operations.

Series B Biohaven Preferred Shares

On August 7, 2020, we entered into the Series B Biohaven Preferred Share Purchase Agreement (“Series B Biohaven Preferred Share Agreement”) with Biohaven where we committed to acquire 3,992 shares of Series B Biohaven Preferred Shares at a price of $50,100 per preferred share (the “Commercial Launch Preferred Equity”) for a total of $200 million payable on a quarterly basis between the three months ended March 31, 2021 and the three months ended December 31, 2024. Our commitment to purchase the Series B Biohaven Preferred Shares is recognized as the Series B Forwards.

On October 3, 2022, Pfizer acquired Biohaven, which was a change of control event that accelerated the issuance of all unissued Series B Biohaven Preferred Shares and the redemption of all outstanding Series B Biohaven Preferred Shares at a price equal to approximately 1.8 times the original issue price. In connection with the completion of Pfizer’s acquisition of Biohaven, we purchased all remaining Series B Biohaven Preferred Shares simultaneously with the redemption of all outstanding Series B Biohaven Preferred Shares, for which we received a lump sum payment. We no longer hold any Series B Biohaven Preferred Shares.

As of September 30, 2022, we have acquired 2,279 shares of Series B Biohaven Preferred Shares. We elected the fair value option to account for the Series B Biohaven Preferred Shares and the Series B Forwards, which are recorded in aggregate as Available for sale debt securities on the condensed consolidated balance sheets. We believe the fair value option most accurately reflects the nature of these instruments. The unrealized changes in the fair values of the Series B Biohaven Preferred Shares and Series B Forwards are recorded within (Gains)/losses on available for sale debt securities in the condensed consolidated statements of operations.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The table below summarizes our available for sale debt securities recorded at fair value as of September 30, 2022 and December 31, 2021 (in thousands):


	Cost		Unrealized Gains/(Losses)		Fair Value		Current Assets		Non-Current Assets		Current Liabilities		Non-Current Liabilities (3)		Total
As of September 30, 2022
Debt securities (1)	$	584,824	$	98,007	$	682,831	$	343,031	$	339,800	$	—	$	—	$	682,831
Forwards (2)	—		66,316		66,316		66,316		—		—		—		66,316
Funding commitments (2)	(9,400)		(500)		(9,900)		—		—		—		(9,900)		(9,900)
Total available for sale debt securities	$	575,424	$	163,823	$	739,247	$	409,347	$	339,800	$	—	$	(9,900)	$	739,247

As of December 31, 2021
Debt securities (1)	$	204,509	$	49,191	$	253,700	$	66,000	$	187,700	$	—	$	—	$	253,700
Forwards (2)	—		16,700		16,700		—		16,700		—		—		16,700
Total available for sale debt securities	$	204,509	$	65,891	$	270,400	$	66,000	$	204,400	$	—	$	—	$	270,400

(1)The cost for the Series A Biohaven Preferred Shares represents amortized cost. The cost for the Series B Biohaven Preferred Shares represents the amounts paid to purchase the instruments. The cost of the Development Funding Bonds represents the amounts funded. The cost associated with the funded Cytokinetics Commercial Launch Funding reflects the fair value on the purchase date.

(2)There are no costs associated with the forwards. The cost associated with the funding commitments represents the fair value on the purchase date.

(3)Reflected within Other liabilities on the condensed consolidated balance sheet.

4. Fair Value Measurements and Financial Instruments

Fair Value Hierarchy

We determine the fair value of assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value as follows:

•Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

•Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

•Level 3: Prices or valuation that require inputs that are both significant to the fair value measurement and unobservable.

Our financial instruments consist primarily of cash and cash equivalents, marketable securities, equity securities, derivatives, available for sale debt securities, royalty interests and long-term debt. Cash and cash equivalents, marketable securities, equity securities, derivatives, available for sale debt securities and certain royalty interests are reported at their respective fair values on our condensed consolidated balance sheets. For financial instruments which are carried at fair value, the level in the fair value hierarchy is based on the lowest level of inputs that is significant to the fair value measurement in its entirety. Outstanding borrowings and non-current financial royalty assets are reported at their amortized costs on our condensed consolidated balance sheets, for which fair values are disclosed. The remaining financial instruments are reported on our condensed consolidated balance sheets at amounts that approximate fair values.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes assets and liabilities measured at fair value on a recurring basis at the dates indicated, classified in accordance with the fair value hierarchy described above (in thousands):


	As of September 30, 2022								As of December 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:

Cash equivalents
Money market funds	$	—	$	—	$	—	$	—	$	598,253	$	—	$	—	$	598,253
Commercial paper	—		—		—		—		—		13,997		—		13,997
Certificates of deposit	—		—		—		—		—		40,954		—		40,954

Marketable securities

Commercial paper	—		27,750		—		27,750		—		207,457		—		207,457
Certificates of deposit	—		88,087		—		88,087		—		374,415		—		374,415
U.S. government securities	—		24,089		—		24,089		—		—		—		—
Available for sale debt securities
Debt securities (1)	—		—		343,031		343,031		—		—		66,000		66,000
Forwards (2)	—		—		66,316		66,316		—		—		—		—
Derivative instruments (3)	—		—		84,860		84,860		—		—		—		—

Total current assets	$	—	$	139,926	$	494,207	$	634,133	$	598,253	$	636,823	$	66,000	$	1,301,076

Equity securities	244,524		—		18,296		262,820		226,787		—		43,013		269,800
Available for sale debt securities
Debt securities (1)	—		—		339,800		339,800		—		—		187,700		187,700
Forwards (2)	—		—		—		—		—		—		16,700		16,700


Derivative instruments (3)	—		—		12,730		12,730		—		—		—		—
Royalty at fair value (4)	—		—		13,937		13,937		—		—		—		—
Total non-current assets	$	244,524	$	—	$	384,763	$	629,287	$	226,787	$	—	$	247,413	$	474,200

Liabilities:




Available for sale debt securities

Funding commitments (5)	—		—		(9,900)		(9,900)		—		—		—		—
Total non-current liabilities	$	—	$	—	$	(9,900)	$	(9,900)	$	—	$	—	$	—	$	—

(1)Reflects the fair value of the Series A Biohaven Preferred Shares and Series B Biohaven Preferred Shares. As of September 30, 2022, amounts also include the fair value of the funded portion of the Cytokinetics Commercial Launch Funding and the Development Funding Bonds.

(2)Reflects the fair value of our obligations to fund the acquisitions of the Series B Biohaven Preferred Shares as recorded within current assets as of September 30, 2022 and within non-current assets as of December 31, 2021. As of December 31, 2021, the amount also reflects the fair value of our obligations to fund the Development Funding Bonds as recorded within non-current assets.

(3)Related to the Milestone Acceleration Option (defined below) recorded within Other current assets and Other assets on the condensed consolidated balance sheet.

(4)Recorded within Other assets on the condensed consolidated balance sheet. See Note 8–Non-Consolidated Affiliates for additional discussion.

(5)Related to the fair value of the Cytokinetics Funding Commitments as reflected within Other liabilities on the condensed consolidated balance sheet.

For the three and nine months ended September 30, 2022, we recognized gains of $5.2 million and losses of $12.8 million, respectively, on equity securities still held as of September 30, 2022. For the three and nine months ended September 30, 2021, we recognized gains of $10.0 million and $22.6 million, respectively, on equity securities still held as of September 30, 2022.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The tables presented below summarize the change in the combined fair value (current and non-current) of Level 3 financial instruments, which relate to equity securities, a royalty interest, derivative instruments and available for sale debt securities, including the underlying securities, forwards and funding commitments (in thousands):


	For the Three Months Ended September 30, 2022												For the Three Months Ended September 30, 2021
	Equity Securities		Debt Securities		Forwards		Funding Commitments		Derivative Instruments		Royalty at Fair Value		Debt Securities		Forwards
Balance at the beginning of the period	$	28,785	$	363,000	$	28,100	$	(8,100)	$	71,800	$	21,215	$	240,400	$	30,800
Purchases	—		314,579		—		—		—		—		17,585		—
Losses on initial recognition (1)	—		(8,800)		—		—		—		—		—		—
Losses on equity securities	(10,489)		—		—		—		—		—		—		—
Gains on derivative financial instruments	—		—		—		—		25,790		—		—		—
Unrealized gains/(losses) on available for sale debt securities included in other comprehensive income/(losses) (2)	—		13,050		—		—		—		—		(2,575)		—
Gains/(losses) on available for sale debt securities included in earnings (3)	—		14,200		40,643		(1,800)		—		—		(200)		(14,685)
Other non-operating expense	—		—		—		—		—		(7,278)		—		—
Settlement of forwards (4)	—		2,427		(2,427)		—		—		—		4,215		(4,215)

Redemption of debt securities	—		(15,625)		—		—		—		—		(15,625)		—
Balance at the end of the period	$	18,296	$	682,831	$	66,316	$	(9,900)	$	97,590	$	13,937	$	243,800	$	11,900

(1)Represents the difference in (a) the fair value of the Additional Funding (as defined above) of the Development Funding Bonds and (b) the actual additional funded amount of $150 million. Refer to footnote (3) below for discussion on the change in fair value of the Development Funding Bond Forward.

(2)Related to Series A Biohaven Preferred Shares.

(3)Amounts reflect changes in the fair values of the Series B Biohaven Preferred Shares, Series B Forwards, and Development Funding Bond Forward. For the three months ended September 30, 2022, amounts also reflect the change in the fair value of the funded portion of the Cytokinetics Commercial Launch Funding and the Cytokinetics Funding Commitments.

(4)Amounts reflect the fair value attributed to the Series B Forwards that were settled as we acquired the Series B Biohaven Preferred Shares, which is included in the fair value of the Series B Biohaven Preferred Shares. Amounts also reflect the fair value attributed to the Development Funding Bond Forward that was settled upon funding the Development Funding Bonds in the three months ended September 30, 2022, which is included in the fair value of the Development Funding Bonds.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	For the Nine Months Ended September 30, 2022												For the Nine Months Ended September 30, 2021
	Equity Securities		Debt Securities		Forwards		Funding Commitments		Derivative Instruments		Royalty at Fair Value		Debt Securities		Forwards
Balance at the beginning of the period	$	43,013	$	253,700	$	16,700	$	—	$	—	$	—	$	214,400	$	18,600
Purchases	28,785		393,737		—		—		—		21,215		52,755		—
Gains/(losses) on initial recognition (1)	—		600		—		(9,400)		—		—		—		—
Losses on equity securities	(12,810)		—		—		—		—		—		—		—
Gains on derivative financial instruments	—		—		—		—		97,590		—		—		—
Unrealized gains on available for sale debt securities included in other comprehensive losses (2)	—		24,000		—		—		—		—		8,574		—
Gains/(losses) on available for sale debt securities included in earnings (3)	—		44,400		62,885		(500)		—		—		301		7,945
Other non-operating expense	—		—		—		—		—		(7,278)		—		—
Settlement of forwards (4)	—		13,269		(13,269)		—		—		—		14,645		(14,645)
Transfer out of Level 3 (5)	(40,692)		—		—		—		—		—		—		—
Redemption of debt securities	—		(46,875)		—		—		—		—		(46,875)		—
Balance at the end of the period	$	18,296	$	682,831	$	66,316	$	(9,900)	$	97,590	$	13,937	$	243,800	$	11,900

(1)Represents purchase price allocation to arrive at the appropriate fair value on initial recognition. Amounts also represent the difference in (a) the fair value of the Additional Funding (as defined above) of the Development Funding Bonds and (b) the actual additional funded amount of $150 million. Refer to footnote (3) below for discussion on the change in fair value of the Development Funding Bond Forward.

(2)Related to Series A Biohaven Preferred Shares.

(3)Amounts reflect changes in the fair values of the Series B Biohaven Preferred Shares, Series B Forwards and Development Funding Bond Forward. For the nine months ended September 30, 2022, amounts also reflect the change in the fair value of the funded portion of the Cytokinetics Commercial Launch Funding and the Cytokinetics Funding Commitments.

(5)Related to transfer restriction expiration of BioCryst common stock.

Valuation Inputs for Recurring Fair Value Measurements

Below is a discussion of the valuation inputs used for financial instruments classified as Level 2 and Level 3 measurements in the fair value hierarchy.

ApiJect Investment

We utilized the discounted cash flow method using Level 3 inputs, including forecasted cash flows and the weighted average cost of capital, to estimate the fair value as of September 30, 2022 of the equity securities and revenue participation right that we acquired from ApiJect Holdings, Inc. (“ApiJect”), a private company, in April 2022. Our estimate of the forecasted cash flows and the weighted average cost of capital could reasonably be different than those selected by a market participant in the event of a sale of the instruments, which would mean that the estimated fair value could be significantly higher or lower. Refer to Note 8–Non-Consolidated Affiliates for additional discussion.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Cytokinetics Commercial Launch Funding

We estimated the fair value of the funded Cytokinetics Commercial Launch Funding as of September 30, 2022 by utilizing probability-adjusted discounted cash flow calculations using Level 3 inputs, including an estimated risk-adjusted discount rate and the probability that there will be a change of control event, which would result in accelerated payments. Developing a risk-adjusted discount rate and assessing the probability that there will be a change of control event over the duration of the Cytokinetics Commercial Launch Funding requires significant judgement. Our estimate of the risk-adjusted discount rate could reasonably be different than the discount rate selected by a market participant, which would mean that the estimated fair value could be significantly higher or lower. Our expectation of the probability and timing of the occurrence of a change of control event could reasonably be different than the timing of an actual change of control event, and if so, would mean that the estimated fair value could be significantly higher or lower than the fair value determined by management at any particular date.

We estimated the fair value of the Cytokinetics Funding Commitments as of September 30, 2022 using a Monte Carlo simulation methodology that includes simulating the interest rate movements using a Geometric Brownian Motion-based pricing model. This methodology simulates the likelihood of future discount rates exceeding the counterparty’s assumed cost of debt, which would impact Cytokinetics’ decision to exercise its option to draw on each respective tranche. This methodology incorporates Level 3 fair value measurements and inputs, including an assumed interest rate volatility of 30% and an assumed risk-adjusted discount rate of 17.9%. We also assumed probabilities for the occurrence of each regulatory or clinical milestone, which impacts the availability of each future tranche of funding. Our estimate of the risk-adjusted discount rate, the interest rate volatility and the probabilities of each underlying milestone could reasonably be different than the assumptions selected by a market participant, which would mean that the estimated fair value could be significantly higher or lower.

BioCryst Common Stock

In November 2021, we purchased 3,846 thousand shares of common stock of BioCryst Pharmaceuticals, Inc. (“BioCryst”), calculated based on the volume-weighted average price of BioCryst’s common stock over a period preceding the closing of the transaction. As part of the transaction, we were restricted from selling the BioCryst common stock for six months following the close of the transaction. We determined the fair value of the BioCryst common stock as of December 31, 2021 based on the closing stock price and adjusted for the transfer restriction, which was determined by calculating the value of a put option over the BioCryst common stock to match the duration of the transfer restriction. This methodology incorporated Level 3 inputs, including the estimated volatility of the BioCryst common stock, which required the use of significant judgement. Our estimated volatility could be reasonably different than the actual volatility of BioCryst’s common stock, which would mean that the estimated fair value for the BioCryst common stock could be significantly higher or lower than the fair value determined by management at any particular date. The transfer restriction expired and the BioCryst common stock was transferred from a Level 3 to a Level 1 asset during the three months ended June 30, 2022.

MorphoSys Development Funding Bonds

The fair value of the Development Funding Bonds and the Development Funding Bond Forward as of September 30, 2022 and December 31, 2021, respectively, was based on a discounted cash flow calculation using an estimated risk-adjusted discount rate, which is a Level 3 fair value input. Our estimate of a risk adjusted discount rate could reasonably be different than the discount rate selected by a market participant in the event of a sale of the instrument, which would mean that the estimated fair value could be significantly higher or lower. During the three months ended September 30, 2022, the Development Funding Bond Forward was settled upon funding the Development Funding Bonds.

Series A Biohaven Preferred Shares

The fair value of the Series A Biohaven Preferred Shares as of September 30, 2022 and December 31, 2021 was based on the cash flows due to us from Biohaven of two times the original purchase price of the Series A Biohaven Preferred Shares payable in equal quarterly installments of $15.6 million following the FDA approval and starting one-year after FDA approval through the three months ended December 31, 2024. When the FDA approved Nurtec ODT in February 2020, we became entitled to receive a fixed payment amount of $250 million payable in equal quarterly payments between the three months ended March 31, 2021 and the three months ended December 31, 2024.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

We estimated the fair value of the Series A Biohaven Preferred Shares as of September 30, 2022 and December 31, 2021 using probability-adjusted discounted cash flow calculations incorporating Level 3 fair value measurements and inputs, including estimated risk-adjusted discount rates and the probability of a change of control event occurring during the investment term, which would result in accelerated payments and redemptions. Assessing the probability that there will be a change of control event over a four-year time period and developing a risk-adjusted discount rate requires significant judgement. As of September 30, 2022, we estimated that a change of control event was imminent and, as such, we did not apply a discount rate. Our estimate of a risk adjusted discount rate was 9.5% as of December 31, 2021.Our estimated discount rate could reasonably be different than the discount rate selected by a market participant, which would mean that the estimated fair value could be significantly higher or lower.

Series B Biohaven Preferred Shares

The fair value of each of the Series B Biohaven Preferred Shares and Series B Forwards as of September 30, 2022 and December 31, 2021 were based on probability-adjusted discounted cash flow calculations using Level 3 fair value measurements and inputs, including estimated risk-adjusted discount rates and the probability that there will be a change of control event in different periods of time, which would result in accelerated payments and redemptions. Assessing the probability that there will be a change of control event over the duration of the Series B Biohaven Preferred Shares and developing a risk-adjusted discount rate requires significant judgement. As of September 30, 2022, we estimated that a change of control event was imminent. Our estimate of a risk adjusted discount rate, expectation of the probability and timing of the occurrence of a change of control event could reasonably be different than those determined by a market participant, which would mean that the estimated fair value could be significantly higher or lower.

Milestone Acceleration Option

On August 7, 2020, we entered into an expanded funding agreement with Biohaven, including the Series B Biohaven Preferred Share Agreement, to fund the development of zavegepant and the commercialization of Nurtec ODT in exchange for royalties and success-based milestones payable over time. We exercised our right to accelerate outstanding zavegepant milestone payments in a lump sum amount (“Milestone Acceleration Option”) in connection with Pfizer’s acquisition of Biohaven. The Milestone Acceleration Option is an embedded derivative instrument for which the associated fair value was not material prior to three months ended June 30, 2022, when Pfizer announced its intended acquisition of Biohaven. As of September 30, 2022, the fair value of the Milestone Acceleration Option was $97.6 million, of which $84.9 million was recorded within Other current assets and $12.7 million was recorded within Other assets on the condensed consolidated balance sheet. For the three and nine months ended September 30, 2022, we recorded unrealized gains of $25.8 million and $97.6 million, respectively, related to the change in the fair value of the Milestone Acceleration Option within (Gains)/losses on derivative financial instruments in the condensed consolidated statements of operations.

We estimated the fair value of the Milestone Acceleration Option as of September 30, 2022 using the “with-and-without” methodology, which is a variation of the income approach and is based on the difference between cash flows for two different scenarios. The prospective cash flows for the success-based milestone payments include the Milestone Acceleration Option in the first scenario. For the second scenario, the prospective cash flows are estimated assuming they remain payable over time. The difference between the fair value of these two scenarios represents the fair value of the Milestone Acceleration Option. This methodology includes the use of Level 3 fair value measurements and inputs, including estimated risk-adjusted discount rates, estimated probabilities of achieving the success-based milestones, and the probability that there will be a change of control event in different periods of time, which would result in accelerated milestone payments. Assessing the probability that there will be a change of control event, the likelihood that the success-based milestones are achieved over the duration of the Milestone Acceleration Option and developing a risk-adjusted discount rate requires significant judgement; however, as of September 30, 2022, we estimated that a change of control was imminent. Our estimate of a risk adjusted discount rate, probabilities of achieving marketing approval, and the probability and timing of the occurrence of a change of control event could reasonably be different than those determined by a market participant, which would mean that the estimated fair value could be significantly higher or lower.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Other Financial Instruments

Financial instruments whose fair values are measured on a recurring basis using Level 2 inputs primarily consist of commercial paper, certificates of deposit and U.S. government securities. We measure the fair value of these financial instruments with the help of third-party pricing services that either provide quoted market prices in active markets for identical or similar securities or observable inputs for their pricing without applying significant adjustments.

Financial Assets Not Measured at Fair Value

Financial royalty assets are measured and carried on the condensed consolidated balance sheets at amortized cost using the effective interest method. The current portion of financial royalty assets approximates fair value. Management calculates the fair value of financial royalty assets using the forecasted royalty payments that are expected to be received based on the projected product sales for all royalty bearing products as estimated by sell-side equity research analysts’ consensus sales forecasts. Where such consensus sales forecasts are not available, management uses reasonable judgment to make assumptions about the projected product sales. These projected future royalty payments by asset along with any projected incoming or outgoing milestone payments are then discounted to a present value using appropriate individual discount rates. The fair value of financial royalty assets is classified as Level 3 within the fair value hierarchy since it is determined based upon inputs that are both significant and unobservable. Estimated fair values based on Level 3 inputs and related carrying values for the non-current portion of financial royalty assets as of September 30, 2022 and December 31, 2021 are presented below (in thousands):


	As of September 30, 2022				As of December 31, 2021
	Fair Value		Carrying Value, net		Fair Value		Carrying Value, net
Financial royalty assets, net	$	18,490,959	$	14,287,399	$	19,047,183	$	13,718,245

5. Financial Royalty Assets

Financial royalty assets consist of contractual rights to cash flows relating to royalty payments derived from the expected sales of patent-protected biopharmaceutical products that entitle us and our subsidiaries to receive a portion of income from the sale of such products by third parties.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The gross carrying value, cumulative allowance for changes in expected cash flows, exclusive of the allowance for credit losses, and net carrying value for the current and non-current portion of financial royalty assets as of September 30, 2022 and December 31, 2021 are as follows (in thousands):


		As of September 30, 2022
	Estimated Royalty Duration (1)	Gross Carrying Value		Cumulative Allowance for Changes in Expected Cash Flows (Note 6)		Net Carrying Value (4)

Cystic fibrosis franchise	2037 (2)	$	5,343,413	$	—	$	5,343,413
Tysabri	(3)	1,722,204		(119,691)		1,602,513
Trelegy	2029-2030	1,298,901		—		1,298,901
Imbruvica	2027-2032	1,441,303		(550,915)		890,388
Tremfya	2031-2032	885,917		—		885,917
Xtandi	2027-2028	1,032,627		(226,217)		806,410
Other	2023-2040	5,523,607		(1,195,662)		4,327,945
Total		$	17,247,972	$	(2,092,485)	$	15,155,487
Less: Cumulative allowance for credit losses (Note 6)						(192,231)
Total financial royalty assets, net						$	14,963,256

(1)Durations shown represent our estimates as of the current reporting date of when a royalty will substantially end, which may depend on clinical trial results, regulatory approvals, contractual terms, commercial developments, estimates of patent expiration dates (which may include estimated patent term extensions) or other factors and may vary by geography. There can be no assurances that our royalties will expire when expected.

(2)Royalty is perpetual; year shown represents Trikafta 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)The net carrying value by asset is presented before the allowance for credit losses. Refer to Note 6–Cumulative Allowance and the Provision for Changes in Expected Cash Flows from Financial Royalty Assets for additional information.


		As of December 31, 2021
	Estimated Royalty Duration (1)	Gross Carrying Value		Cumulative Allowance for Changes in Expected Cash Flows (Note 6)		Net Carrying Value (5)

Cystic fibrosis franchise	2037 (2)	$	5,335,641	$	(48,636)	$	5,287,005
Tysabri	(3)	1,846,069		(16,617)		1,829,452
Imbruvica	2027-2032	1,438,730		(236,871)		1,201,859
Xtandi	2027-2028	1,100,065		(172,101)		927,964
Tremfya	2031-2032	881,671		—		881,671
Evrysdi	2030-2035 (4)	727,774		—		727,774
Other	2023-2040	4,697,591		(909,916)		3,787,675
Total		$	16,027,541	$	(1,384,141)	$	14,643,400
Less: Cumulative allowance for credit losses (Note 6)						(310,804)
Total financial royalty assets, net						$	14,332,596

(2)Royalty is perpetual; year shown represents Trikafta 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)Key patents on Evrysdi in the United States expire in 2035, but our royalty will cease when aggregate royalties paid to us equal $1.3 billion.

(5)The net carrying value by asset is presented before the allowance for credit losses. Refer to Note 6–Cumulative Allowance and the Provision for Changes in Expected Cash Flows from Financial Royalty Assets for additional information.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

6. Cumulative Allowance and the Provision for Changes in Expected Cash Flows from Financial Royalty Assets

The cumulative allowance for changes in expected future cash flows from financial royalty assets is presented net within the non-current portion of financial royalty assets on the condensed consolidated balance sheets and includes the following activities:

•the movement in the cumulative allowance related to changes in forecasted royalty payments expected to be received based on projected product sales for royalty bearing products as estimated by sell-side equity research analysts’ consensus sales forecasts, and

•the movement in the cumulative allowance for current expected credit losses, primarily associated with new financial royalty assets with limited protective rights and changes in the underlying cash flow forecasts of financial royalty assets with limited protective rights.

The following table sets forth the activity in the cumulative allowance for changes in expected cash flows from financial royalty assets, inclusive of the cumulative allowance for credit losses, as of the dates indicated (in thousands):


	Activity for the Period
Balance at December 31, 2021 (1)	$	(1,694,945)

Increases to the cumulative allowance for changes in expected cash flows from financial royalty assets	(987,507)
Decreases to the cumulative allowance for changes in expected cash flows from financial royalty assets	273,538
Write-off of cumulative allowance	5,625
Current period provision for credit losses, net (2)	118,573
Balance at September 30, 2022	$	(2,284,716)

(1)Includes $310.8 million related to cumulative allowance for credit losses.

(2)In the nine months ended September 30, 2022, the provision income for credit losses was primarily related to a change in the payor for a particular product and a significant decline in the value of the Tazverik financial royalty asset.

7. Intangible Royalty Assets, Net

The following tables summarize the cost, accumulated amortization and net carrying value of our intangible royalty assets as of September 30, 2022 and December 31, 2021 (in thousands):


As of September 30, 2022	Cost		Accumulated Amortization		Net Carrying Value

DPP-IV patents	$	606,216	$	606,216	$	—

Total intangible royalty assets	$	606,216	$	606,216	$	—


As of December 31, 2021	Cost		Accumulated Amortization		Net Carrying Value

DPP-IV patents	$	606,216	$	600,546	$	5,670

Total intangible royalty assets	$	606,216	$	600,546	$	5,670

As of September 30, 2022, the intangible royalty assets were fully amortized as our royalties on Januvia and Janumet expired in the three months ended March 31, 2022. Our royalties on the other DPP-IV products have also substantially ended.

Revenue from intangible assets is tied to underlying patent protected sales of DPP-IV products of various licensees. Such revenue is earned from sales occurring primarily in the United States and Europe; however, we do not have the ability to disaggregate such revenue from licensees based on the geography of the underlying sales as this information may not be provided to us by marketers. For the three months ended September 30, 2022, revenue from intangible royalty assets was not material. Individual licensees exceeding 10% or more of revenue from intangible royalty assets accounted for 63% of revenues from intangible royalty assets in the three months ended September 30, 2021. Individual licensees exceeding 10% or more of revenue from intangible royalty assets accounted for 90% and 80% of revenues from intangible royalty assets in the nine months ended September 30, 2022 and 2021, respectively.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

8. Non-Consolidated Affiliates

We have equity investments in certain entities at a level that provide us with significant influence. We account for such investments as equity method investments or as equity securities for which we have elected the fair value option.

ApiJect

During the three months ended June 30, 2022, we acquired common stock and a revenue participation right from ApiJect. We elected the fair value option to account for our investments in ApiJect because it is more reflective of current values for our investments in ApiJect. We are also required to purchase additional common stock from ApiJect if certain milestones are achieved. The fair value of our equity investment was recorded within Equity securities and the change in fair value was recorded within (Gains)/losses on equity securities. The fair value of the revenue participation right was recorded within Other assets and the change in fair value was recorded within Other non-operating expense, net. No amounts were due from ApiJect as of September 30, 2022.

The Legacy SLP Interest

In connection with the Exchange Offer Transactions, we acquired a special limited partnership interest in the Legacy Investors Partnerships (the “Legacy SLP Interest”) from the Continuing Investors Partnerships for $303.7 million in exchange for issuing shares in our subsidiary. As a result, we became a special limited partner in the Legacy Investors Partnerships. 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 an income allocation on a similar basis. Our income allocation is equal to the general partner’s former contractual rights to the income of the Legacy Investors Partnerships, net of amortization of the basis difference. The Legacy SLP Interest is treated as an equity method investment as our Manager is also the Manager of the Legacy Investors Partnerships and has the ability to exercise significant influence. The Legacy Investors Partnerships no longer participate in investment opportunities from June 30, 2020 and, as such, the value of the Legacy SLP Interest is expected to decline over time. The Legacy Investors Partnerships also indirectly own a non-controlling interest in Old RPI.

The income allocation from the Legacy SLP Interest is based on an estimate as the Legacy Investors Partnerships are private partnerships that are expected to report on a lag subsequent to the date of this quarterly report. Management’s estimate of equity in earnings from the Legacy SLP Interest for the current period will be updated for historical results in the subsequent period. During the three and nine months ended September 30, 2022, we recorded a loss allocation of $2.1 million and an income allocation of $7.2 million, respectively, within Equity in losses/(earnings) of equity method investees. During the three and nine months ended September 30, 2021, we recorded income allocations of $11.2 million and $41.9 million, respectively, within Equity in losses/(earnings) of equity method investees. We received cash distributions from the Legacy SLP Interest of $5.8 million and $19.9 million in the three and nine months ended September 30, 2022, respectively. We received cash distributions from the Legacy SLP Interest of $6.2 million and $14.8 million in the three and nine months ended September 30, 2021, respectively.

The Avillion Entities

We account for our partnership interests in Avillion Financing I, LP and its related entities (“Avillion I”), BAv Financing II, LP and its related entities (“Avillion II,” together with Avillion I, the “Avillion Entities”) as equity method investments because RPIFT has the ability to exercise significant influence over the Avillion Entities. During the three and nine months ended September 30, 2022, we recorded a loss allocation from the Avillion Entities of $1.2 million and $9.3 million, respectively, within Equity in losses/(earnings) of equity method investees. During the three and nine months ended September 30, 2021, we recorded a loss allocation from the Avillion Entities of $8.4 million and $23.4 million, respectively, within Equity in losses/(earnings) of equity method investees.

On December 19, 2017, the FDA approved a supplemental New Drug Application for Pfizer’s Bosulif. Avillion I is eligible to receive fixed payments from Pfizer based on this approval under its co-development agreement with Pfizer. The only operations of Avillion I are the collection of cash and unwinding of the discount on the series of fixed annual payments due from Pfizer. We received distributions from Avillion I of $13.4 million during each of the nine months ended September 30, 2022 and 2021, respectively.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In May 2018, RPIFT entered into an agreement, which was amended in July 2021 and was further amended in June 2022, to increase the funding amount by $27.5 million, which totaled $150.0 million over multiple years in Avillion II, which is a party to a co-development agreement with AstraZeneca, to fund a portion of the costs of Phase 2 and 3 clinical trials to advance PT027 through a global clinical development program for the treatment of asthma in exchange for royalties, a series of success-based milestones and other potential payments.

Our maximum exposure to loss at any particular reporting date is limited to the current carrying value of the investment plus the unfunded commitments. As of September 30, 2022 and December 31, 2021, RPIFT had unfunded commitments related to the Avillion Entities of $28.8 million and $11.2 million, respectively.

9. Research & Development (“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. R&D funding expense 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. During the nine months ended September 30, 2022 and 2021, we did not enter into any new ongoing R&D funding arrangements.

We recognized R&D funding expense of $25.5 million and $126.6 million for the three and nine months ended September 30, 2022, respectively. We recognized R&D funding expense of $90.5 million and $96.3 million for the three and nine months ended September 30, 2021, respectively. During the nine months ended September 30, 2022, R&D funding expense primarily related to upfront and milestone development-stage funding payments of $100.0 million and $25.0 million to acquire royalties on development-stage product candidates from Cytokinetics and Theravance Biopharma, Inc., respectively. During the nine months ended September 30, 2021, we recognized $90.0 million as upfront R&D funding expense in exchange for future royalties on two development-stage products from MorphoSys.

10. Borrowings

Our borrowings as of September 30, 2022 and December 31, 2021 consisted of the following (in thousands):


Type of Borrowing	Date of Issuance	Maturity	As of September 30, 2022		As of December 31, 2021
Senior Unsecured Notes:
$1,000,000, 0.75% (issued at 99.322% of par)	9/2020	9/2023	$	1,000,000	$	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


Unamortized debt discount and issuance costs			(188,740)		(203,930)
Total debt carrying value			7,111,260		7,096,070
Less: Current portion of long-term debt			(996,583)		—
Total long-term debt			$	6,114,677	$	7,096,070

Senior Unsecured Notes

On July 26, 2021, we issued $1.3 billion of senior unsecured notes (the “2021 Notes”) comprised of $600.0 million principal amount of notes due September 2031 and $700.0 million principal amount of notes due September 2051. Interest on each series of the 2021 Notes accrues at the respective rate per annum and is payable semi-annually in arrears on March 2 and September 2 of each year, which began on March 2, 2022. The 2021 Notes were issued at a total discount of $27.5 million and we capitalized approximately $12.3 million in debt issuance costs primarily composed of underwriting fees. The 2021 Notes were issued with a weighted average coupon rate and a weighted average effective interest rate of 2.80% and 3.06%, respectively.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

On September 2, 2020, we issued $6.0 billion of senior unsecured notes (the “2020 Notes” and, together with the 2021 Notes, the “Notes”). We used the net proceeds from the 2020 Notes offering, together with available cash on hand, to repay in full the outstanding principal amounts of term loans under our prior senior secured credit facilities. Interest on each series of the 2020 Notes accrues at the respective rate per annum and is payable semi-annually in arrears on March 2 and September 2 of each year. The 2020 Notes were issued at a total discount of $149.0 million and we capitalized approximately $40.4 million in debt issuance costs primarily comprised of underwriting fees. The 2020 Notes were issued with a weighted average coupon rate and a weighted average effective interest rate of 2.125% and 2.50%, respectively.

On August 3, 2021, we completed an exchange offer for the 2020 Notes where certain holders elected to tender their unregistered outstanding notes for freely tradable exchange notes that were registered under the Securities Act of 1933.

The Notes may be redeemed at our option at a redemption price equal to the greater of (i) 100% of the principal amount of the Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis at the treasury rate, plus a make-whole premium as defined in the indenture. In each case, accrued and unpaid interest is also required to be redeemed to the date of redemption.

Upon the occurrence of a change of control triggering event and downgrade in the rating of our Notes by two of three credit agencies, the holders may require us to repurchase all or part of their Notes at a price equal to 101% of the aggregate principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.

Our obligations under the Notes are fully and unconditionally guaranteed by RP Holdings, a non-wholly-owned subsidiary. We are required to comply with certain covenants under our Notes and as of September 30, 2022, we were in compliance with all applicable covenants.

As of September 30, 2022 and December 31, 2021, the fair value of our outstanding Notes using Level 2 inputs was approximately $5.6 billion and $7.2 billion, respectively.

Senior Unsecured Revolving Credit Facility

On September 15, 2021, we entered into an amended and restated revolving credit agreement (the “Credit Agreement”). The Credit Agreement amended and restated the prior credit agreement that our subsidiary RP Holdings, as borrower, entered into on September 18, 2020, which provided for a five-year unsecured revolving credit facility (the “Revolving Credit Facility”) with borrowing capacity of up to $1.5 billion for general corporate purposes. The Credit Agreement extended the maturity of the Revolving Credit Facility to September 15, 2026. As of September 30, 2022 and December 31, 2021, there were no outstanding borrowings under the Revolving Credit Facility.

The Revolving Credit Facility is subject to an interest rate, at our option, of either (a) a base rate determined by reference to the highest of (1) the administrative agent’s prime rate, (2) the federal funds effective rate and the overnight bank funding rate, plus 0.5% and (3) the one month adjusted LIBOR, plus 1% or (b) the Eurocurrency Rate or the Alternative Currency Daily Rate (each as defined in the Credit Agreement), plus in each case, the applicable margin. The applicable margin for the Revolving Credit Facility varies based on our public debt rating. Accordingly, the interest rates for the Revolving Credit Facility fluctuates during the term of the facility based on changes in the applicable interest rate and future changes in our public debt rating.

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 consolidated EBITDA, each as defined and calculated with the ratio level calculated with further adjustments as set forth in the Credit Agreement and (ii) a consolidated coverage ratio at or above 2.50 to 1.00 of consolidated EBITDA to consolidated interest expense, each as defined and calculated with further adjustments as set forth in the Credit Agreement. All obligations under the Revolving Credit Facility are unconditionally guaranteed by us. Noncompliance with the leverage ratio and interest coverage ratio covenants under the Credit Agreement could result in our lenders requiring us to immediately repay all amounts borrowed. If these financial covenants are not satisfied, the Credit Agreement prohibits us from engaging in certain activities, such as incurring additional indebtedness, paying dividends, making certain payments and acquiring and disposing of assets. As of September 30, 2022, RP Holdings was in compliance with these covenants.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Principal Payments on the Notes

The future principal payments for our borrowings as of September 30, 2022 over the next five years and thereafter are as follows (in thousands):



Year	Principal Payments
Remainder of 2022	$	—
2023	1,000,000
2024	—
2025	1,000,000
2026	—
Thereafter	5,300,000
Total (1)	$	7,300,000

(1)Excludes unamortized debt discount and issuance costs of $188.7 million as of September 30, 2022, which are amortized through interest expense over the remaining life of the underlying debt obligations.

11. Shareholders’ Equity

Capital Structure

We have two classes of voting shares: Class A ordinary shares and Class B ordinary shares, each of which has one vote per ordinary share. The Class A ordinary shares and Class B ordinary shares vote together as a single class on all matters submitted to a vote of shareholders, except as otherwise required by applicable law. Our Class B ordinary shares are not publicly traded and holders of Class B ordinary shares only have limited rights to receive a distribution equal to their nominal value upon a liquidation, dissolution or winding up of the Company. As of September 30, 2022, we had 441,104 thousand Class A ordinary shares and 166,118 thousand Class B ordinary shares outstanding.

An exchange agreement entered into in connection with the IPO by us, RP Holdings, the Continuing Investors Partnerships, RPI International Partners 2019, LP and EPA Holdings (the “Exchange Agreement”) governs the exchange of RP Holdings Class B Interests held by the Continuing Investors Partnerships for Class A ordinary shares. Pursuant to the Exchange Agreement, RP Holdings Class B interests are exchangeable on a one-for-one basis for Class A ordinary shares on a quarterly basis. Each such exchange also results in the re-designation of the same number of our Class B ordinary shares as deferred shares. As of September 30, 2022, we had outstanding deferred shares of 369,265 thousand.

In addition, we have in issue 50 thousand Class R redeemable shares, which do not entitle the holder to voting or dividend rights. The Class R redeemable shares may be redeemed at our option in the future. Any such redemption would be at the nominal value of £1 each.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Non-Controlling Interests

The net change in the balance of our four non-controlling interests for the three and nine months ended September 30, 2022 and 2021 is as follows (in thousands):


	RPSFT		Legacy Investors Partnerships		Continuing Investors Partnerships		EPA Holdings		Total
June 30, 2022	$	8,882	$	1,716,186	$	2,655,870	$	—	$	4,380,938
Contributions	—		1,570		1,400		—		2,970
Distributions	(4,175)		(95,084)		(38,621)		—		(137,880)
Other exchanges	—		—		(61,886)		—		(61,886)
Net Income	1,935		21,432		54,396		—		77,763
Other comprehensive income/(loss):
Unrealized gains on available for sale debt securities	—		2,294		2,975		—		5,269
Reclassification of unrealized gains on available for sale debt securities	—		(1,250)		(1,621)		—		(2,871)
September 30, 2022	$	6,642	$	1,645,148	$	2,612,513	$	—	$	4,264,303


	RPSFT		Legacy Investors Partnerships		Continuing Investors Partnerships		EPA Holdings		Total
December 31, 2021	$	13,528	$	1,809,269	$	2,649,154	$	—	$	4,471,951
Contributions	—		4,964		4,209		—		9,173
Distributions	(20,188)		(302,670)		(110,964)		—		(433,822)
Other exchanges	—		—		(124,108)		—		(124,108)
Net Income	13,302		133,595		194,281		—		341,178
Other comprehensive income/(loss):
Unrealized gains on available for sale debt securities	—		4,218		5,520		—		9,738
Reclassification of unrealized gains on available for sale debt securities	—		(4,228)		(5,579)		—		(9,807)
September 30, 2022	$	6,642	$	1,645,148	$	2,612,513	$	—	$	4,264,303


	RPSFT		Legacy Investors Partnerships		Continuing Investors Partnerships		EPA Holdings		Total
June 30, 2021	$	20,640	$	1,894,027	$	2,757,019	$	—	$	4,671,686
Contributions	—		3,300		2,730		—		6,030
Distributions	(18,562)		(109,780)		(31,372)		—		(159,714)
Other exchanges	—		—		(38,305)		—		(38,305)
Net income	13,851		63,424		42,592		—		119,867
Other comprehensive loss:									—
Unrealized losses on available for sale debt securities	—		(453)		(625)		—		(1,078)
Reclassification of unrealized gains on available for sale debt securities	—		(2,066)		(2,856)		—		(4,922)
September 30, 2021	$	15,929	$	1,848,452	$	2,729,183	$	—	$	4,593,564

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


	RPSFT		Legacy Investors Partnerships		Continuing Investors Partnerships		EPA Holdings		Total
December 31, 2020	$	12,436	$	1,939,509	$	3,125,091	$	—	$	5,077,036
Contributions	—		13,207		7,596		—		20,803
Distributions	(44,691)		(332,069)		(99,141)		—		(475,901)
Other exchanges	—		—		(589,968)		—		(589,968)
Net income	48,184		233,424		294,098		—		575,706
Other comprehensive income/(loss):
Unrealized gains on available for sale debt securities	—		1,507		2,505		—		4,012
Reclassification of unrealized gains on available for sale debt securities	—		(7,126)		(10,998)		—		(18,124)
September 30, 2021	$	15,929	$	1,848,452	$	2,729,183	$	—	$	4,593,564

The Continuing Investors Partnerships’ ownership in RP Holdings decreases as the Continuing Investors Partnerships exchange RP Holdings Class B Interests held for Class A ordinary shares. As of September 30, 2022, the Continuing Investors Partnerships owned approximately 27% of RP Holdings with the remaining 73% owned by Royalty Pharma plc.

RP Holdings Class C Special Interest Held by EPA Holdings

EPA Holdings, an affiliate of the Manager, is entitled to Equity Performance Awards (as defined below) through its RP Holdings Class C Special Interest based on our performance, as determined on a portfolio-by-portfolio basis. Investments made during each two-year period are grouped together as separate portfolios (each, a “Portfolio”). Subject to certain conditions, at the end of each fiscal quarter, EPA Holdings is entitled to a distribution from RP Holdings in respect of each Portfolio equal to 20% of the Net Economic Profit (defined as the aggregate cash receipts for all new portfolio investments in such Portfolio less Total Expenses (defined as interest expense, operating expense and recovery of acquisition cost in respect of such Portfolio)) for such Portfolio for the applicable measuring period (the “Equity Performance Awards”). The Equity Performance Awards will be allocated and paid by RP Holdings to EPA Holdings as the holder of 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 expect any material Equity Performance Awards to be payable until certain performance conditions discussed above are met.

Dividends

The holders of Class A ordinary shares are entitled to receive dividends subject to approval by our board of directors. The holders of Class B ordinary shares do not have any rights to receive dividends; however, RP Holdings Class B Interests are entitled to dividends and distributions from RP Holdings. In the nine months ended September 30, 2022, we declared and paid three quarterly cash dividends of $0.19 per Class A ordinary share for an aggregate amount of $249.1 million to holders of our Class A ordinary shares. In the nine months ended September 30, 2021, we declared and paid three quarterly cash dividends of $0.17 per Class A ordinary share for an aggregate amount of $211.6 million to holders of our Class A ordinary shares.

2020 Independent Directors Equity Incentive Plan

On June 15, 2020, our 2020 Independent Director Equity Incentive Plan was approved and became effective, whereby 800 thousand Class A ordinary shares have been reserved for future issuance to our independent directors.

RSU Activity and Share-based Compensation

We grant RSUs to our independent directors under the 2020 Independent Director Equity Incentive Plan. Share-based compensation expense is recognized on a straight-line basis over the requisite service period of generally one year as part of General and administrative expenses in the condensed consolidated statements of operations. In the three and nine months ended September 30, 2022 and 2021, respectively, we did not recognize material share-based compensation expenses.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

12. Earnings per Share

Basic earnings per share (“EPS”) is calculated by dividing net income attributable to us by the weighted average number of Class A ordinary shares outstanding during the period. Diluted EPS is calculated by dividing net income attributable to us, including the impact of potentially dilutive securities, by the weighted average number of Class A ordinary shares outstanding during the period, including the number of Class A ordinary shares that would have been outstanding if the potentially dilutive securities had been issued. Our Class B ordinary shares, Class R redeemable shares and deferred shares do not share in the earnings or losses attributable to us and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share for Class B ordinary shares, Class R redeemable shares and deferred shares under the two-class method has not been presented.

Our outstanding Class B ordinary shares are, however, considered potentially dilutive shares of Class A ordinary shares because Class B ordinary shares, together with the related RP Holdings Class B Interests, are exchangeable into Class A ordinary shares on a one-for-one basis. Potentially dilutive securities also include Class B ordinary shares contingently issuable to EPA Holdings related to Equity Performance Awards and unvested RSUs issued under our 2020 Independent Director Equity Incentive Plan. We use the “if-converted” method to determine the potentially dilutive effect of our outstanding Class B ordinary shares, and the treasury stock method to determine the potentially dilutive effect of the unvested RSUs. For the three and nine months ended September 30, 2022 and 2021, Class B ordinary shares contingently issuable to EPA Holdings were evaluated and were determined not to have any dilutive impact.

The following table sets forth reconciliations of the numerators and denominators used to calculate basic and diluted earnings per Class A ordinary share for the three and nine months ended September 30, 2022 and 2021 (in thousands, except per share amounts):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Numerator
Consolidated net income	$	220,414	$	221,796	$	840,094	$	1,187,530
Less: Net income attributable to Continuing Investors Partnerships	54,396		42,592		194,281		294,098
Less: Net income attributable to Legacy Investors Partnerships and RPSFT	23,367		77,275		146,897		281,608
Net income attributable to Royalty Pharma plc - basic	142,651		101,929		498,916		611,824
Add: Reallocation of net income attributable to non-controlling interest from the assumed conversion of Class B ordinary shares	54,396		42,592		194,281		294,098
Net income attributable to Royalty Pharma plc - diluted	$	197,047	$	144,521	$	693,197	$	905,922

Denominator
Weighted average Class A ordinary shares outstanding - basic	439,293		428,230		436,542		409,253
Add: Dilutive effects as shown separately below
Class B ordinary shares exchangeable for Class A ordinary shares	167,927		178,942		170,651		197,881
Unvested RSUs	6		2		16		18
Weighted average Class A ordinary shares outstanding - diluted	607,226		607,174		607,209		607,152

Earnings per Class A ordinary share - basic	$	0.32	$	0.24	$	1.14	$	1.49
Earnings per Class A ordinary share - diluted	$	0.32	$	0.24	$	1.14	$	1.49

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

13. Indirect Cash Flow

Adjustments to reconcile consolidated net income to net cash provided by operating activities are summarized below (in thousands):


	For the Nine Months Ended September 30,
	2022		2021
Cash flow from operating activities:
Consolidated net income	$	840,094	$	1,187,530
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Income from financial royalty assets	(1,578,555)		(1,538,871)
Provision for changes in expected cash flows from financial royalty assets	595,396		186,337
Amortization of intangible assets	5,670		17,200
Amortization of debt discount and issuance costs	16,026		14,822

(Gains)/losses on derivative financial instruments	(97,590)		21,436
Losses on equity securities	22,970		17,980
Equity in losses/(earnings) of equity method investees	2,117		(18,532)


Distributions from equity method investees	33,316		28,213

Loss on extinguishment of debt	—		358

Share-based compensation	1,587		1,939
Interest income accretion	(24,053)		(40,545)
Gains on available for sale debt securities	(97,985)		(8,246)

Termination of derivative financial instruments	—		(16,093)
Other	3,443		3,263
Decrease/(increase) in operating assets:
Cash collected on financial royalty assets	1,843,899		1,733,147

Accrued royalty receivable	37,574		(26,502)

Other royalty income receivable	(4,108)		(7,833)
Other current assets and other assets	8,253		(473)
Increase/(decrease) in operating liabilities:
Accounts payable and accrued expenses	10,492		(2,138)
Interest payable	(44,497)		(25,413)


Net cash provided by operating activities	$	1,574,049	$	1,527,579

14. Commitments and Contingencies

Funding Commitments

We have various funding commitments as of September 30, 2022 as described below. See Note 3–Available for Sale Debt Securities for additional discussion of the respective arrangements.

Cytokinetics Commercial Launch Funding

As of September 30, 2022, $250 million of the Cytokinetics Commercial Launch Funding remained unfunded. 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. As of September 30, 2022, we expect $125 million of the optional $200 million to remain available under the Cytokinetics Commercial Launch Funding due to the likelihood that certain regulatory milestones will not be met by December 31, 2022.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Series B Biohaven Preferred Shares

As of September 30, 2022, we have a remaining commitment of $85.8 million under the Commercial Launch Preferred Equity to purchase 1,713 shares of Series B Biohaven Preferred Shares. On October 3, 2022, Pfizer acquired Biohaven which was a change of control event that accelerated the issuance and redemption of all unissued Series B Biohaven Preferred Shares. In connection with the completion of Pfizer’s acquisition of Biohaven, we have no remaining commitment related to the Series B Biohaven Preferred Shares.

Other Commitments

We have commitments to advance funds to counterparties through our investment in the Avillion Entities. Please refer to Note 8–Non-Consolidated Affiliates for details of these arrangements. We also have requirements to make Operating and Personnel Payments over the life of the Management Agreement as described in Note 15–Related Party Transactions, which are variable and primarily based on cash receipts.

Indemnifications

In the ordinary course of our business, we may enter into contracts or agreements that contain customary indemnifications relating to such things as confidentiality agreements and representations as to corporate existence and authority to enter into contracts. The maximum exposure under such agreements is indeterminable until a claim, if any, is made. However, no such claims have been made against us to date and we believe that the likelihood of such occurrences taking place in the future is remote.

Legal Proceedings

We are a party to legal actions with respect to a variety of matters in the ordinary course of business. Some of these proceedings may be based on complex claims involving substantial uncertainties and unascertainable damages. Unless otherwise noted, it is not possible to determine the probability of loss or estimate damages, and therefore we have not established accruals for any of these proceedings on our condensed consolidated balance sheets. When we determine that a loss is both probable and reasonably estimable, we record a liability, and, if the liability is material, we disclose the amount of the liability reserved. We do not believe the outcome of any existing legal proceedings to which we are a party, either individually or in the aggregate, will adversely affect our business, financial condition or results of operations.

15. Related Party Transactions

The Manager

The Manager is the investment manager of Royalty Pharma plc and its subsidiaries. The sole member of the Manager, Pablo Legorreta, holds an interest in us and serves as our Chief Executive Officer and Chairman of our board of directors.

Pursuant to the Management Agreement, we pay quarterly operating and personnel expenses to the Manager or its affiliates (“Operating and Personnel Payments”) equal to 6.5% of the cash receipts from royalty investments 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 as a non-controlling interest in Old RPI and for which the expense is reflected on our consolidated net income, is calculated as the greater of $1 million per quarter and 0.3125% of Royalty Investments (as defined in the limited partnership agreements of the Legacy Investor Partnerships) during the previous twelve calendar months.

During the three and nine months ended September 30, 2022, total operating and personnel payments incurred were $40.6 million and $117.8 million, respectively, including the amounts attributable to Old RPI, and were recognized within General and administrative expenses in the condensed consolidated statements of operations. During the three and nine months ended September 30, 2021, total operating and personnel payments incurred were $39.9 million and $108.0 million, respectively, including the amounts attributable to Old RPI, and were recognized within General and administrative expenses in the condensed consolidated statements of operations.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Distributions Payable to Non-Controlling Interests

The distributions payable to non-controlling interests represent the contractual cash flows required to be distributed based on the Legacy Investors Partnerships’ non-controlling interest in Old RPI and RPSFT’s non-controlling interest in RPCT. The distributions payable to non-controlling interests include the following (in thousands):


	As of September 30, 2022		As of December 31, 2021
Due to Legacy Investors Partnerships	$	98,601	$	92,608
Due to RPSFT	7,130		15,326
Total distributions payable to non-controlling interests	$	105,731	$	107,934

Acquisition from Bristol Myers Squibb

In November 2017, RPI Acquisitions, a consolidated subsidiary, entered into a purchase agreement with Bristol Myers Squibb (“BMS”) to acquire from BMS a percentage of its future royalties on worldwide sales of Onglyza, Farxiga and related diabetes products marketed by AstraZeneca (the “Purchase Agreement”). On December 8, 2017, RPI Acquisitions entered into a purchase, sale and assignment agreement (“Assignment Agreement”) with a wholly-owned subsidiary of BioPharma Credit PLC (“BPCR”), an entity related to us. Under the terms of the Assignment Agreement, RPI Acquisitions assigned the benefit of 50% of the payment stream acquired from BMS to BPCR in consideration for BPCR meeting 50% of the funding obligations owed to BMS under the Purchase Agreement.

As of September 30, 2022 and December 31, 2021, the financial royalty asset of $110.9 million and $130.9 million, respectively, on the condensed consolidated balance sheets represents only our right to the future payment streams acquired from BMS.

Other Transactions

Henry Fernandez, the lead independent director of our board of directors, serves as the chairman and chief executive officer of MSCI Inc. (“MSCI”). On April 16, 2021, we entered into an agreement with MSCI with an initial term of seven years to assist MSCI in the design of a classification framework and index methodologies in order to expand MSCI’s thematic index suite with the launch of new indexes. In return, we will receive a percentage of MSCI’s revenues from those indexes. No amounts were due from MSCI as of both September 30, 2022 and December 31, 2021. The financial impact associated with this transaction has not been material to date.

In connection with the Exchange Offer Transactions, we acquired the Legacy SLP Interest from the Continuing Investors Partnerships in exchange for issuing shares in our subsidiary. As a result, we became a special limited partner in the Legacy Investors Partnerships. The Legacy Investors Partnerships own a non-controlling interest in Old RPI. Refer to Note 8–Non-Consolidated Affiliates for additional discussion of the Legacy SLP Interest and our investments in other non-consolidated entities.

RPIFT owns 27,210 limited partnership interests in the Continuing Investors Partnership whose only substantive operations are their investment in our subsidiaries. The total investment of $4.3 million is recorded as treasury interests, of which $1.5 million and $1.6 million were held by non-controlling interests as of September 30, 2022 and December 31, 2021, respectively.

Based on its ownership percentage of RP Holdings relative to the Company, each Continuing Investor Partnership pays a pro rata portion of any costs and expenses in connection with the contemplation of, formation of, listing and ongoing operation of us and any of our subsidiaries, including any third-party expenses of managing us and any of our subsidiaries, such as accounting, audit, legal, reporting, compliance, administration (including directors’ fees), financial advisory, consulting, investor relations and insurance expenses relating to our affairs and those of any subsidiary.

ROYALTY PHARMA PLC

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

16. Subsequent Events

In October 2022, we entered into a R&D funding agreement with MSD International Business GmbH (“Merck”) to co-fund the development of MK-8189, an investigational oral PDE10A inhibitor currently being evaluated in a Phase 2b study for the treatment of schizophrenia. We funded $50 million upon closing, and if Merck decides to proceed with Phase 3. we have the option to fund up to an additional $375 million. In exchange, we are eligible to receive milestone payments upon certain regulatory approvals and royalties on annual worldwide sales of any approved product.

In October 2022, GSK plc (“GSK”) announced that the limited efficacy demonstrated in the ContRAst Phase 3 program does not support a suitable benefit/risk profile for otilimab as a potential treatment for rheumatoid arthritis. As a result, GSK has decided not to progress with regulatory submissions. Following this announcement, we wrote off the financial royalty asset associated with otilimab, which had a carrying value of $160.1 million as of September 30, 2022.

Item 2. 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 and financial condition, cash flows and other changes in financial condition. 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 included elsewhere in this Quarterly Report on Form 10-Q and in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K.

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, Kalydeco, Orkambi and Symdeko, Biogen’s Tysabri, AbbVie and Johnson & Johnson’s Imbruvica, Astellas and Pfizer’s Xtandi, GSK’s Trelegy, Novartis’ Promacta, Pfizer’s Nurtec ODT, Johnson & Johnson’s Tremfya, Roche’s Evrysdi, Gilead’s Trodelvy, and 13 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 capital-efficient 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 research and development 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 in approved products that generate predictable cash flows and may offer upside potential from unapproved indications. Since inception in 1996 through 2021, we have deployed $15.0 billion of cash to acquire royalties on approved products. From 2012 through 2021, we have acquired $10.2 billion of royalties 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 2021, we have deployed $7.8 billion to acquire royalties on development-stage product candidates.

While we classify our acquisitions in these two broad categories, several of our acquisitions of royalties on approved products were driven by the long-term potential of these products in other, unapproved indications. Similarly, some of our royalty acquisitions in development-stage product candidates are for products that are approved 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/R&D Funding – 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 and/or marketer of a therapy in exchange for funding. A synthetic royalty may also include contingent milestone payments. We also fund ongoing research and development (“R&D”), typically for large biopharmaceutical companies, in exchange for future royalties and/or 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. One example is our strategic alliance with MSCI Inc. (“MSCI”) to develop thematic life sciences indices.

Background and Format of Presentation

We consummated an exchange offer on February 11, 2020 to facilitate our IPO. Through the exchange offer, investors which represented 82% of the aggregate limited partnership 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”). The exchange offer transaction together with (i) the concurrent incurrence of indebtedness under senior credit facilities and (ii) the issuance of additional interests in Continuing Investors Partnerships to satisfy performance payments payable in respect of assets acquired prior to the date of the IPO are referred to as the “Exchange Offer Transactions.”

We control Royalty Pharma Holdings Ltd (“RP Holdings”) through our ownership of RP Holdings’ Class A ordinary shares and RP Holdings’ Class B ordinary shares (the “RP Holdings Class B Interests”). RP Holdings is the sole owner of RPI 2019 ICAV, which is an Irish collective asset management entity formed to facilitate our Exchange Offer Transactions, and is the successor to Old RPI.

The remaining 34% of RPCT is owned by the Legacy Investors Partnerships and Royalty Pharma Select Finance Trust, a Delaware statutory trust (“RPSFT”), which is wholly-owned by Royalty Pharma Select, an Irish unit trust.

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 generally accepted accounting principles in the United States (“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 generated and updated each reporting period by manually compiling sell-side equity research analysts’ consensus sales estimates for each of the products in which we own royalties. We then calculate our expected royalty cash flows using these consensus sales forecasts. In any given reporting period, any decline or increase in the expected future cash flows associated with a financial royalty asset is recognized in our income statement as non-cash provision expense or provision income, respectively.

As a result of the non-cash charges associated with applying the effective interest method accounting methodology, our income statement activity can be volatile and unpredictable. Small declines in sell-side equity research analysts’ consensus sales forecasts over a long term horizon can result in an immediate non-cash income statement expense recognition which generates a corresponding cumulative allowance that reduces the gross asset balance, 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 royalty and beginning in the second quarter of 2015, declines in near-term sales forecasts of sell-side equity research analysts caused us to recognize non-cash provision expense. Over the course of 10 quarters, we recognized non-cash provision expense as a result of these changes in forecasts including non-cash provision expense of $743.2 million in 2016, ultimately reaching a peak cumulative allowance of $1.30 billion by September 30, 2017 related to this financial royalty asset. 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. While small reductions in the cumulative allowance for the cystic fibrosis franchise were recognized as provision income over the course of 2017 and 2018, there remained a $1.10 billion cumulative allowance that was fully reduced by recognizing provision income of $1.10 billion in 2019 as a result of an increase in sell-side equity research analysts’ consensus sales forecasts associated with the Trikafta approval. This example illustrates the volatility caused by our accounting model.

In addition, due to the nature of our effective interest methodology, there is no direct correlation between our income from financial royalty assets and our royalty receipts. Therefore, management believes investors should not look to income from royalties and the associated provision for changes in future cash flows as a measure of our near-term financial performance or as a source for predicting future income or growth trends. 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 royalty receipts as the primary measure of our operating performance. Royalty receipts refer to the summation 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.

In addition to analyzing our results on a GAAP basis, management also reviews our results on a non-GAAP basis. The closest comparable GAAP measure to each of the non-GAAP measures that management review is Net cash provided by operating activities. The key non-GAAP metrics we focus on are Adjusted Cash Receipts, Adjusted EBITDA and Adjusted Cash Flow, each of which is further discussed in the section titled “Non-GAAP Financial Results.”

Adjusted Cash Receipts and Adjusted Cash Flow are used by management as key liquidity measures in the evaluation of our ability to generate cash from operations. Both measures are an indication of our strength and the performance of the business. Management uses Adjusted Cash Flow to compare its performance against non-GAAP adjusted net income used by companies in the biopharmaceutical industry. Adjusted EBITDA, which is derived from Adjusted Cash Receipts, is used by our lenders to assess our ability to meet our financial covenants.

Refer to the section titled “Non-GAAP Reconciliations” for additional discussion of management’s use of non-GAAP measures as supplemental financial measures.

Portfolio Overview

Our portfolio consists of royalties on more than 35 marketed therapies and 13 development-stage product candidates. The therapies in our portfolio address therapeutic areas such as rare disease, cancer, neurology, infectious disease, hematology and diabetes, and are delivered to patients across both primary and specialty care settings. The table below includes royalty receipts for the three and nine months ended September 30, 2022 and 2021 by product in order of contribution to royalty receipts for the nine months ended September 30, 2022 (in thousands).



Royalties	Marketer(s)	Therapeutic Area	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
			2022		2021		2022		2021
Cystic fibrosis franchise (1)	Vertex	Rare disease	$	207,882	$	182,876	$	591,733	$	505,708
Tysabri	Biogen	Neurology	91,252		95,805		281,819		274,796
Imbruvica	AbbVie, Johnson & Johnson	Cancer	74,391		87,924		241,943		264,348
Xtandi	Pfizer, Astellas	Cancer	45,717		40,237		141,100		117,049
Promacta	Novartis	Hematology	50,067		48,151		132,679		124,617
Januvia, Janumet, Other DPP-IVs (2)	Merck & Co., others	Diabetes	1,029		37,934		72,406		113,133
Tremfya	Johnson & Johnson	Immunology	21,409		16,610		68,062		16,610
Nurtec ODT/Biohaven payment (3)	Pfizer (5)	Neurology	20,459		17,948		59,549		51,170
Trelegy	GSK	Respiratory	42,720		—		42,720		—
Cabometyx/Cometriq	Exelixis, Ipsen, Takeda	Cancer	14,612		12,038		40,523		22,167
Farxiga/Onglyza	AstraZeneca	Diabetes	11,522		9,321		32,336		26,996
Evrysdi	Roche	Rare disease	9,602		5,897		26,933		10,546
Prevymis	Merck & Co.	Infectious disease	11,052		9,929		25,174		27,331
Trodelvy	Gilead	Cancer	6,496		2,521		17,428		8,118
Orladeyo	BioCryst	Rare disease	6,265		2,502		15,456		3,471
Erleada	Johnson & Johnson	Cancer	5,586		3,736		15,305		9,957
Crysvita	Ultragenyx, Kyowa Kirin	Rare disease	5,241		4,576		14,887		12,092
Emgality	Lilly	Neurology	4,657		4,542		13,845		11,356
Oxlumo	Alnylam	Rare disease	596		653		1,945		653
Other products (4)			73,349		129,003		212,260		349,242
Total royalty receipts			$	703,904	$	712,203	$	2,048,103	$	1,949,360

(1)The cystic fibrosis franchise includes the following approved products: Kalydeco, Orkambi, Symdeko/Symkevi and Trikafta/Kaftrio.

(2)Januvia, Janumet, Other DPP-IVs include the following approved products: Onglyza, Kombiglyze, Galvus, Eucreas and Nesina. The Other DPP-IVs are marketed by AstraZeneca, Novartis and Takeda.

(3)Quarterly redemption payments of $15.6 million commenced in the first quarter of 2021 related to the Series A Biohaven Preferred Shares (presented as Proceeds from available for sale debt securities on the statements of cash flows). The remaining amounts are related to royalty receipts from Nurtec ODT.

(4)Other products primarily include royalty receipts on the following products: Bosulif (a product co-developed by our joint venture investee, Avillion I, for which receipts are presented as Distributions from equity method investees on the statements of cash flows), Cimzia, Entyvio, Gavreto, HIV franchise, IDHIFA, Letairis, Lexiscan, Mircera, Myozyme, Nesina, Soliqua, Tazverik and contributions from the Legacy SLP Interest (defined below).

(5)In October 2022, Pfizer completed its acquisition of Biohaven.

Financial Overview

Financial Highlights

•Net cash provided by operating activities totaled $1.6 billion and $1.5 billion for the nine months ended September 30, 2022 and 2021, respectively. Net cash provided by operating activities is the closest comparable GAAP financial measure to the supplemental non-GAAP liquidity measures that follow.

•Adjusted Cash Receipts (a non-GAAP metric) totaled $1.7 billion and $1.6 billion for the nine months ended September 30, 2022 and 2021, respectively.

•Adjusted EBITDA (a non-GAAP metric) totaled $1.6 billion and $1.5 billion for the nine months ended September 30, 2022 and 2021, respectively.

•Adjusted Cash Flow (a non-GAAP metric) totaled $1.3 billion and $1.2 billion for the nine months ended September 30, 2022 and 2021, respectively.

Understanding Our Results of Operations

We report non-controlling interests related to the portion of ownership interests of consolidated subsidiaries not owned by us which are attributable to:

1. The Legacy Investors Partnerships’ 18% ownership interest in Old RPI. The value of this non-controlling interest will decline over time as the assets in Old RPI expire.

2. RP Holdings Class B Interests held indirectly by the Continuing Investors Partnerships, which represent an approximate 27% ownership interest in RP Holdings as of September 30, 2022 and are exchangeable for our Class A ordinary shares. The value of this non-controlling interest will decline over time if the investors who indirectly own RP Holdings Class B Interests conduct exchanges for our Class A ordinary shares.

3. A de minimis interest in RPCT held by RPSFT as a result of a 2011 reorganization transaction. The value of this non-controlling interest will decline over time as the royalty assets owned by RPCT expire and is expected to be substantially eliminated by the end of 2022.

4. The RP Holdings Class C ordinary share (the “RP Holdings Class C Special Interest”) held by RPI EPA Holdings, LP (“EPA Holdings”), an affiliate of RP Management, LLC (the “Manager”). Income will not be allocated to this non-controlling interest until certain performance conditions are met.

All of the results of operations of RP Holdings, Old RPI and RPCT are consolidated into our financial statements.

EPA Holdings is entitled to receive Equity Performance Awards through its RP Holdings Class C Special Interest. 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 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 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.

We recognize interest income related to our financial royalty assets. Royalty revenue relates solely to revenue from our DPP-IV products for which the patent rights have been licensed to various counterparties. For the three and nine months ended September 30, 2022 and 2021, the royalty payors accounting for greater than 10% of our total income and other revenues in any one period are shown in the table below:



		For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Royalty Payor	Royalties	2022		2021		2022		2021
Vertex	Cystic fibrosis franchise	35	%	33	%	36	%	33	%
AbbVie	Imbruvica	13	%	16	%	15	%	17	%

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 on individual products 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 (i.e., 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 three months ended March 31, 2022. Our royalties on other DPP-IVs have also substantially ended and we do not expect any material revenue from our DPP-IVs in the future periods.

Other royalty income

Other royalty income primarily includes income from financial royalty assets that have been fully amortized by the expected expiration date 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 financial royalty asset beyond the estimated duration by which the financial asset was fully amortized. 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 condensed 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:

•expense or income related to the current period activity resulting from adjustments to the cumulative allowance for changes in expected cash flows; and

•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 to 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 reduce the cumulative allowance previously established for a financial royalty asset for the incremental increase in the present value of cash flows expected to be collected. This results in provision income (i.e., a credit to the provision).

Most of the same variables and management’s estimates affecting the recognition of interest income on our financial royalty assets also impact the provision. In any period, we will recognize provision income or expense as a result of the following factors: (1) changes in expected cash flows of the underlying pharmaceutical products, derived primarily from sell-side equity research analysts’ consensus sales forecasts, (2) regulatory approval of additional indications which leads to new cash flow streams, (3) changes to the estimated duration of the royalty (i.e., patent expiration date) and (4) changes in amounts and timing of projected royalty receipts and milestone payments.

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 are expected to comprise the most significant component of G&A expenses on an ongoing basis.

Under the management agreements (collectively, the “Management Agreement”), we pay quarterly operating and personnel expenses to the Manager or its affiliates (“Operating and Personnel Payments”) equal to 6.5% of the cash receipts from royalty investments 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 as a non-controlling interest in Old RPI 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 Transactions, 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 and royalties if products are commercialized. Our investments in Avillion Financing I, LP (“Avillion I”) and BAv Financing II, LP (“Avillion II”, or, together with Avillion I, the “Avillion Entities”) are accounted for using the equity method.

Other (income)/expenses, net

Other (income)/expenses, net primarily includes the change in fair market value of our equity securities, the unrealized gains or losses on derivative instruments and available for sale debt securities, including related forwards and funding commitments, and interest income.

Net income attributable to non-controlling interests

The net income attributable to non-controlling interests includes the Legacy Investors Partnerships’ approximately 18% share of earnings in Old RPI. As the Legacy Investors Partnerships no longer participate in investment opportunities, the related net income attributable to this non-controlling interest is expected to decline over time.

Net income attributable to non-controlling interests includes RP Holdings Class B Interests 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 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 also includes RPSFT’s 20% share of earnings in RPCT, which is a consolidated subsidiary of Old RPI. We expect net income attributable to this non-controlling interest to decline over time as the royalty assets owned by RPCT expire and to be substantially eliminated by the end of 2022.

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 section titled “Understanding Our Financial Reporting.”

Results of Operations

For the Three and Nine Months Ended September 30, 2022 and 2021

The comparison of our historical results of operations for the three and nine months ended September 30, 2022 and 2021 is as follows:


(in thousands)	For the Three Months Ended September 30,				Change				For the Nine Months Ended September 30,				Change
	2022		2021		$		%		2022		2021		$		%
Income and other revenues:
Income from financial royalty assets	$	551,682	$	505,832	$	45,850	9.1	%	$	1,578,555	$	1,538,871	$	39,684	2.6	%
Revenue from intangible royalty assets	1,073		63,406		(62,333)		(98.3)	%	37,196		139,594		(102,398)		(73.4)	%
Other royalty income	20,708		16,535		4,173		25.2	%	55,716		35,298		20,418		57.8	%
Total income and other revenues	573,463		585,773		(12,310)		(2.1)	%	1,671,467		1,713,763		(42,296)		(2.5)	%
Operating expenses:
Provision for changes in expected cash flows from financial royalty assets	305,061		137,837		167,224		121.3	%	595,396		186,337		409,059		219.5	%
Research and development funding expense	25,500		90,500		(65,000)		(71.8)	%	126,606		96,263		30,343		31.5	%
Amortization of intangible assets	—		5,796		(5,796)		(100.0)	%	5,670		17,200		(11,530)		(67.0)	%
General and administrative expenses	50,692		48,588		2,104		4.3	%	154,075		136,665		17,410		12.7	%

Total operating expenses, net	381,253		282,721		98,532		34.9	%	881,747		436,465		445,282		102.0	%
Operating income	192,210		303,052		(110,842)		(36.6)	%	789,720		1,277,298		(487,578)		(38.2)	%
Other expense/(income):
Equity in losses/(earnings) of equity method investees	3,251		(2,749)		6,000		(218.3)	%	2,117		(18,532)		20,649		(111.4)	%
Interest expense	46,977		44,327		2,650		6.0	%	141,006		119,168		21,838		18.3	%

Other (income)/expenses, net	(78,432)		39,678		(118,110)		(297.7)	%	(193,497)		(10,868)		(182,629)		*
Total other (income)/expenses, net	(28,204)		81,256		(109,460)		(134.7)	%	(50,374)		89,768		(140,142)		(156.1)	%
Consolidated net income	220,414		221,796		(1,382)		(0.6)	%	840,094		1,187,530		(347,436)		(29.3)	%
Net income attributable to non-controlling interests	77,763		119,867		(42,104)		(35.1)	%	341,178		575,706		(234,528)		(40.7)	%
Net income attributable to Royalty Pharma plc	$	142,651	$	101,929	$	40,722	40.0	%	$	498,916	$	611,824	$	(112,908)	(18.5)	%

*Percentage change is not meaningful.

Total income and other revenues

Income from financial royalty assets

Income from financial royalty assets by top products for the three and nine months ended September 30, 2022 and 2021 is as follows, in order of contribution to income for the nine months ended September 30, 2022:


(in thousands)	For the Three Months Ended September 30,				Change				For the Nine Months Ended September 30,				Change
	2022		2021		$		%		2022		2021		$		%
Cystic fibrosis franchise	$	203,383	$	192,832	$	10,551	5.5	%	$	599,504	$	563,245	$	36,259	6.4	%
Imbruvica	76,251		94,626		(18,375)		(19.4)	%	244,515		290,056		(45,541)		(15.7)	%
Tysabri	54,029		54,335		(306)		(0.6)	%	157,953		156,083		1,870		1.2	%
Xtandi	24,724		28,527		(3,803)		(13.3)	%	73,662		81,245		(7,583)		(9.3)	%
Tremfya	30,493		6,765		23,728		*		72,309		6,765		65,544		*
Promacta	22,321		19,287		3,034		15.7	%	66,911		55,250		11,661		21.1	%
Other	140,481		109,460		31,021		28.3	%	363,701		386,227		(22,526)		(5.8)	%
Total income from financial royalty assets	$	551,682	$	505,832	$	45,850	9.1	%	$	1,578,555	$	1,538,871	$	39,684	2.6	%

*Percentage change is not meaningful.

Three months ended September 30, 2022 and 2021

Income from financial royalty assets increased by $45.9 million, or 9.1%, in the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily driven by income related to recently acquired assets, primarily Trelegy and Tremfya, acquired in the three months ended September 30, 2022 and 2021, respectively. The increase was partially offset by declines in sell-side equity research analysts’ consensus sales forecasts for Imbruvica.

Nine Months Ended September 30, 2022 and 2021

Income from financial royalty assets increased by $39.7 million, or 2.6%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by income from recently acquired assets, primarily Trelegy and Tremfya, in addition to the strong performance of the cystic fibrosis franchise. The increase in income was partially offset by the maturing of our royalties from the HIV franchise and declines in sell-side equity research analysts’ consensus sales forecasts for Imbruvica and Tazverik.

Revenue from intangible royalty assets

Three months ended September 30, 2022 and 2021

Revenue from intangible royalty assets decreased by $62.3 million, or 98.3%, in the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily driven by the maturity of our royalties on Januvia and Janumet in the three months ended March 31, 2022 and the recognition of underpaid royalties on Tradjenta of approximately $21.7 million in the three months ended September 31, 2021.

Nine Months Ended September 30, 2022 and 2021

Revenue from intangible royalty assets decreased by $102.4 million, or 73.4%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the maturity of our royalties on Januvia and Janumet and the recognition of underpaid royalties on Tradjenta in the prior year period.

Other royalty income

Three months ended September 30, 2022 and 2021

Other royalty income increased by $4.2 million, or 25.2%, in the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily related to growth in the ongoing product launches of Trodelvy and Nurtec ODT that arose from our R&D funding agreements with Immunomedics and Biohaven, respectively.

Nine Months Ended September 30, 2022 and 2021

Other royalty income increased by $20.4 million, or 57.8%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily related to income from Trodelvy and Nurtec ODT.

Provision for changes in expected cash flows from financial royalty assets

The breakdown of our provision for changes in expected future cash flows includes the following:

•expense or income related to the current period activity resulting from adjustments to the cumulative allowance for changes in expected cash flows; and

•expense or income related to the provision for current expected credit losses.

As the provision activity is a combination of income and expense items, the provision breakdown by royalty, exclusive of the provision for current expected credit losses, is as follows, based on the largest contributors to each period’s provision income or expense:


(in thousands)	For the Three Months Ended September 30, 2022					For the Three Months Ended September 30, 2021
Royalty			Royalty
Imbruvica	$	133,750	Tazverik	$	(98,381)	$	115,546
Tysabri	119,691		Xtandi	(53,142)		58,917
Xtandi	73,063		Cabometyx/Cometriq	(44,263)		12,022
Tazverik	46,804		Promacta	(19,900)		9,682
Cystic fibrosis franchise	(54,609)		Nesina	127,241		2,506
Other	41,976		Other	24,589		(2,261)
Total provision, exclusive of provision for credit losses	360,675		Total provision, exclusive of provision for credit losses			196,412
Provision for current expected credit losses	(55,614)		Provision for current expected credit losses			(58,575)
Total provision	$	305,061	Total provision			$	137,837


(in thousands)	For the Nine Months Ended September 30, 2022			For the Nine Months Ended September 30, 2021
Royalty			Royalty
Imbruvica	$	314,044	Tazverik	$	176,937
Tazverik	124,975		Imbruvica	107,542
Tysabri	103,073		Emgality	54,902
Xtandi	54,116		Cabometyx/Cometriq	40,499
Cystic fibrosis franchise	(48,636)		Tysabri	(112,720)
Other	166,397		Other	(57,480)
Total provision, exclusive of provision for credit losses	713,969		Total provision, exclusive of provision for credit losses	209,680
Provision for current expected credit losses	(118,573)		Provision for current expected credit losses	(23,343)
Total provision	$	595,396	Total provision	$	186,337

Three months ended September 30, 2022 and 2021

In the three months ended September 30, 2022, we recorded provision expense of $305.1 million, comprised of $360.7 million in provision expense for changes in expected cash flows and $55.6 million in provision income for current expected credit losses. We recorded provision expense for changes in expected cash flows primarily related to Imbruvica, Tysabri, Xtandi and Tazverik due to significant declines in sell-side equity research analysts’ consensus sales forecasts, which was partially offset by provision income for the cystic fibrosis franchise due to an increase in sell-side equity research analysts’ consensus sales forecasts. The provision income for credit losses was primarily driven by a change in the payor for a particular product.

In the three months ended September 30, 2021, we recorded provision expense of $137.8 million, comprised of $196.4 million in provision expense for changes in expected cash flows and $58.6 million in provision income for current expected credit losses. We recorded provision expense for changes in expected cash flows for Tazverik and Xtandi, primarily due to significant declines in sell-side equity research analysts’ consensus forecasts. The provision income for credit losses was driven by a significant decrease in current expected credit losses related to Tazverik as a result of the corresponding significant decline in the financial asset value.

Nine Months Ended September 30, 2022 and 2021

In the nine months ended September 30, 2022, we recorded provision expense of $595.4 million, comprised of $714.0 million in provision expense for changes in expected cash flows and $118.6 million in provision income for current expected credit losses. We recorded provision expense for changes in expected cash flows for Imbruvica, Tazverik, and Tysabri 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 as well as a change in the payor for a particular product.

In the nine months ended September 30, 2021, we recorded provision expense of $186.3 million, comprised of $209.7 million in provision expense for changes in expected cash flows and $23.3 million in provision income for current expected credit losses. We recorded provision expense for changes in expected cash flows for Tazverik, Imbruvica and Emgality, primarily due to declines in sell-side equity research analysts’ consensus forecasts, which was partially offset by provision income for Tysabri due to an increase in sell-side equity research analysts’ consensus forecasts. The provision income for credit losses was driven by a significant decrease in current expected credit losses related to Tazverik. The provision income for credit losses was partially offset by provision expense for credit losses recognized as a result of the increases to our portfolio of financial royalty assets, including the incremental $100.0 million financial royalty asset related to the start of the oral zavegepant Phase 3 program and a new royalty interest in Cabometyx/Cometriq.

R&D funding expense

Three months ended September 30, 2022 and 2021

R&D funding expense decreased by $65.0 million, or 71.8%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily driven by lower upfront R&D funding expense. In the three months ended September 30, 2022, we recognized upfront R&D funding expense of $25.0 million in exchange for a royalty on a development-stage product from Theravance Biopharma, Inc. (“Theravance”). In the three months ended September 30, 2021, we recognized upfront R&D funding expense of $90.0 million in exchange for royalties on two development-stage products from MorphoSys AG (“MorphoSys”), paid on the closing of our strategic funding partnership with MorphoSys in July 2021.

Nine Months Ended September 30, 2022 and 2021

R&D funding expense increased by $30.3 million, or 31.5%, for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. In the nine months ended September 30, 2022, we recognized upfront R&D funding expense of $125.0 million in exchange for royalties on development-stage products from Cytokinetics and Theravance. In the nine months ended September 30, 2021, we recognized upfront R&D funding expense of $90.0 million in exchange for royalties on two development-stage products from MorphoSys.

G&A expenses

Three months ended September 30, 2022 and 2021

G&A expenses were relatively flat in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Nine Months Ended September 30, 2022 and 2021

G&A expenses increased by $17.4 million, or 12.7%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by higher Operating and Personnel Payments due to increased cash receipts from royalty investments.

Equity in losses/(earnings) of equity method investees

Three months ended September 30, 2022 and 2021

Equity in losses of equity method investees was $3.3 million in the three months ended September 30, 2022 compared to equity in earnings of equity method investees of $2.7 million in the three months ended September 30, 2021, primarily driven by a decline in equity in earnings from the Legacy SLP Interest.

Nine Months Ended September 30, 2022 and 2021

Equity in losses of equity method investees was $2.1 million in the nine months ended September 30, 2022 compared to equity in earnings of equity method investees of $18.5 million in the nine months ended September 30, 2021, primarily driven by a decline in equity in earnings from the Legacy SLP Interest which was partially offset by lower equity in losses from Avillion.

Interest expense

Three months ended September 30, 2022 and 2021

Interest expense slightly increased by $2.7 million, or 6.0%, in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily driven by the issuance of $1.3 billion senior unsecured notes in July 2021 (“2021 Notes”). The weighted average coupon rate was 2.245% and 2.212% in the three months ended September 30, 2022 and 2021, respectively.

Nine Months Ended September 30, 2022 and 2021

Interest expense increased by $21.8 million, or 18.3% in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the issuance of the 2021 Notes. The weighted average coupon rate was 2.245% and 2.154% in the nine months ended September 30, 2022 and 2021, respectively.

Refer to the “Liquidity and Capital Resources” section for additional discussion of the Notes.

Other (income)/expenses, net

Three months ended September 30, 2022 and 2021

Other income, net was $78.4 million in the three months ended September 30, 2022 compared to other expense, net of $39.7 million in the three months ended September 30, 2021. During the three months ended September 30, 2022, we recognized $44.2 million of gains on available for sale debt securities and $25.8 million of gains on our milestone acceleration option derivative financial instruments, primarily driven by our estimate that a change of control event for Biohaven was imminent. In the three months ended September 30, 2021, we recognized $17.0 million of losses on derivative financial instruments, primarily driven by the change in fair value of the treasury lock contracts related to our 2021 Notes and the recognition of $14.9 million of losses on available for sale debt securities.

Nine Months Ended September 30, 2022 and 2021

Other income, net increased by $182.6 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily attributed to $98.0 million of gains on our available for sale debt securities and $97.6 million of gains on our milestone acceleration option derivative financial instruments recognized during the nine months ended September 30, 2022, primarily driven by our estimate that a change of control event for Biohaven was imminent. In the nine months ended September 30, 2021, we recognized $21.4 million of losses on derivative instruments, primarily related to the treasury lock contracts and we recognized $8.2 million of gains on available for sale debt securities.

Net income attributable to non-controlling interests

Three months ended September 30, 2022 and 2021

Net income attributable to the Legacy Investors Partnerships decreased by $42.0 million in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily driven by lower net income attributable to Old RPI.

Net income attributable to the Continuing Investors Partnerships increased by $11.8 million in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, primarily driven by higher net income attributable to RP Holdings in the three months ended September 30, 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 resulted in a decline in the Continuing Investors Partnerships’ ownership of RP Holdings.

Net income attributable to RPSFT decreased by $11.9 million in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. We expect net income attributable to RPSFT to continue to decline as the assets held by RPCT mature.

Nine Months Ended September 30, 2022 and 2021

Net income attributable to the Legacy Investors Partnerships decreased by $99.8 million in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily driven by lower net income attributable to Old RPI.

Net income attributable to the Continuing Investors Partnerships decreased by $99.8 million in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, primarily driven by lower net income attributable to RP Holdings in the nine months ended September 30, 2022. Exchanges by investors in the Continuing Investors Partnerships who indirectly own RP Holdings Class B Interests for our Class A ordinary shares resulted in a decline in the Continuing Investors Partnerships’ ownership of RP Holdings.

Net income attributable to RPSFT decreased by $34.9 million in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. We expect net income attributable to RPSFT to continue to decline as the assets held by RPCT mature.

Key Developments and Upcoming Events Relating to Our Portfolio

The key developments impacting our cash receipts and income and revenue from our royalty interests are discussed below:

Commercial Products

•Cystic fibrosis franchise. In April 2021, Vertex announced European Commission (“EC”) approval for Kaftrio in combination with ivacaftor for the treatment of patients with cystic fibrosis ages 12 and older who have at least one F508del mutation.

In June 2021, Vertex announced that U.S. Food and Drug Administration (“FDA”) approved Trikafta for the treatment of children with cystic fibrosis ages 6 through 11 who have at least one F508del mutation or have certain mutations that are responsive to Trikafta based on in vitro data.

In January 2022, Vertex announced that the EC granted approval for the label expansion of Kaftrio in combination with ivacaftor for the treatment of cystic fibrosis in patients ages 6 through 11 years old who have at least one F508del mutation in the cystic fibrosis transmembrane conductance regulator gene.

In November 2022, Vertex announced the submission of a New Drug Application (“NDA”) with the FDA for Trikafta in patients ages 2 through 5 years and that filings for approvals with the European Medicines Agency (“EMA”) and the Medicines and Healthcare products Regulatory Agency are expected by the end of 2022.

•Tysabri. In April 2021, Biogen announced that the EC granted marketing authorization for a subcutaneous injection of Tysabri to treat relapsing-remitting multiple sclerosis. Biogen also announced that it had received a complete response letter from the FDA for its supplemental biologics license application for subcutaneous Tysabri. The complete response letter indicated that the FDA was unable to approve Biogen’s filing as submitted.

In August 2021, Biogen announced results from Phase 3b NOVA study evaluation every six-week dosing with Tysabri intravenous administration in relapsing-remitting multiple sclerosis. Results show that every six-week Tysabri intravenous administration provides a high level of efficacy in controlling multiple sclerosis disease activity in patients who switched from the approved every four-week dosing regimen.

•Imbruvica. In June 2021, Johnson and Johnson announced Phase 3 GLOW study results for Imbruvica in combination with Venetoclax for the treatment of first-line chronic lymphocytic leukemia and small lymphocytic lymphoma demonstrated superior progression-free survival versus chlorambucil plus obinutuzumab as a first-line treatment of chronic lymphocytic leukemia. The study also showed improved duration of remission and significantly improved depth of remission. Johnson & Johnson had indicated that approval could occur in 2022.

In August 2021, AbbVie announced that the U.S. District Court for the District of Delaware had issued a decision holding patent rights relating to Imbruvica were valid and infringed by a generic product from Alvogen and Natco. The decision, which is subject to appeal, prohibits regulatory approval of that generic product until the last AbbVie patent expires. Previously, AbbVie entered into several settlement and license agreements with other generic companies. Consequently, AbbVie does not expect any generic product entry prior to March 30, 2032, assuming pediatric exclusivity is granted.

In June 2022, Johnson & Johnson announced primary results from the Phase 3 SHINE study, which demonstrated that the combination of once-daily oral Imbruvica plus bendamustine-rituximab (BR) and rituximab maintenance significantly reduced the risk of disease progression or death by 25% compared to patients who received placebo plus BR and rituximab maintenance in patients aged 65 years or older with newly diagnosed mantle cell lymphoma. With a median follow-up of 84.7 months, the Imbruvica plus BR and rituximab maintenance combination showed a statistically significant and clinically meaningful 2.3 year improvement in median progression-free survival (6.7 years) vs. BR (4.4 years). The safety profile of the Imbruvica plus BR regimen was consistent with the known safety profiles of Imbruvica as well as BR.

In August 2022, AbbVie and Johnson & Johnson announced that the FDA approved Imbruvica for the treatment of pediatric patients one year and older with chronic graft-versus-host disease.

In August 2022, Johnson & Johnson announced that the European Commission granted marketing authorization for the expanded use of Imbruvica in an all-oral, fixed-duration treatment combination with venetoclax for adults with previously untreated chronic lymphocytic leukemia. The approval is based on the pivotal Phase 3 GLOW study and the fixed-duration cohort of the Phase 2 CAPTIVATE study.

•Xtandi. In May 2021, Astellas and Pfizer announced that the EC approved Xtandi for the treatment of patients with metastatic hormone-sensitive prostate cancer.

In September 2021, Astellas and Pfizer announced that Xtandi plus androgen deprivation therapy reduced the risk of death by 34% compared to placebo plus androgen deprivation therapy in the Phase 3 ARCHES study in men with metastatic hormone-sensitive prostate cancer. The primary results from the ARCHES trial were published in 2019.

In October 2022, Pfizer announced positive top-line results from the Phase 3 TALAPRO-2 study of Talzenna, an oral poly ADP-ribose polymerase inhibitor, in combination with Xtandi compared to placebo plus Xtandi in men with metastatic castration-resistant prostate cancer. The study met its primary endpoint with a statistically significant and clinically meaningful improvement in radiographic progression-free survival. The results of the primary endpoint exceeded the pre-specified hazard ratio of 0.696. The safety of Talzenna plus Xtandi was generally consistent with the known safety profile of each medicine. Pfizer intends to share data with global regulatory authorities to potentially support a regulatory filing.

In November 2022, Pfizer indicated that there could be a potential readout of the Phase 3 EMBARK trial for high-risk non-metastatic prostate cancer in the first half of 2023.

•Nurtec ODT. In May 2021, Biohaven announced that the FDA approved Nurtec ODT for the preventative treatment of migraine, indicated for adult patients with episodic migraine who experience less than 15 headache days per month.

In April 2022, Pfizer and Biohaven announced that the EC has granted marketing authorization for Vydura (rimegepant) for both the acute treatment of migraine with or without aura, and prophylaxis of episodic migraine in adults who have at least four migraine attacks per month.

In October 2022, Pfizer completed its acquisition of Biohaven. Pfizer acquired all outstanding shares of Biohaven not already owned by Pfizer for $148.50 per share in cash for a total of approximately $11.6 billion. Pfizer also made payments at closing to settle Biohaven’s third-party debt and to redeem all of Biohaven’s outstanding redeemable preferred shares which we owned.

•Trodelvy. In April 2021, Gilead announced the FDA granted full approval to Trodelvy for adult patients with unresectable locally advanced or metastatic triple-negative breast cancer (TNBC) who have received two or more prior systemic therapies, at least one of them for metastatic disease. The approval is supported by data from the Phase 3 ASCENT study.

In April 2021, Gilead announced that the FDA granted an accelerated approval of Trodelvy for use in adult patients with locally advanced or metastatic urothelial cancer who have previously received a platinum-containing chemotherapy and either a programmed death receptor-1 or a programmed death-ligand 1 inhibitor. The accelerated approval was based on data from the international Phase 2, single-arm TROPHY study.

In June 2021, Gilead announced superior outcomes to standard of care in second-line treatment of metastatic TNBC in the Phase 3 ASCENT study. Trodelvy more than doubled overall survival as a second-line treatment in the new ASCENT subgroup analysis.

In October 2021, Gilead announced a collaboration with Merck & Co. to investigate Trodelvy in combination with Keytruda as a first-line treatment for people with locally advanced or metastatic TNBC.

In November 2021, Gilead announced that the EC granted marketing authorization for Trodelvy as a monotherapy indicated for the treatment of adult patients with unresectable or metastatic TNBC who have received two or more prior systemic therapies, at least one of them for advanced disease. The EC’s decision is supported by results from the Phase 3 ASCENT study where Trodelvy reduced the risk of death by 49% and improved median overall survival to 11.8 months versus 6.9 months with physician’s choice of chemotherapy.

In January 2022, Gilead announced it has entered into two clinical trial collaboration and supply agreements with Merck & Co. to evaluate the combination of Trodelvy and Merck & Co.’s anti-PD-1 therapy Keytruda in first-line metastatic non-small cell lung cancer (NSCLC). As part of the collaboration, Merck & Co. will sponsor a global Phase 3 clinical trial of Trodelvy in combination with Keytruda as a first-line treatment of patients with metastatic NSCLC.

Additionally, Gilead and Merck & Co. established an agreement where Gilead will sponsor a Phase 2 signal-seeking study evaluating combinations that include pembrolizumab in first-line NSCLC.

In June 2022, Gilead announced results from the primary analysis of the Phase 3 TROPiCS-02 study of Trodelvy versus physicians’ choice of chemotherapy in heavily pre-treated HR+/HER2- metastatic breast cancer patients who received prior endocrine therapy, CDK4/6 inhibitors and two to four lines of chemotherapy. The study met its primary endpoint of progression-free survival with a statistically significant and clinically meaningful 34% reduction in the risk of disease progression or death. The first interim analysis of the key secondary endpoint of overall survival demonstrated a trend in improvement. Patients will be followed for a subsequent overall survival analysis. The safety profile for Trodelvy was consistent with prior studies.

In September 2022, Gilead announced positive overall survival results from the Phase 3 TROPiCS-02 study evaluating Trodelvy versus comparator physicians’ choice of chemotherapy in patients with HR+/HER2- metastatic breast cancer who received endocrine-based therapies and at least two chemotherapies. In the study, Trodelvy demonstrated a statistically significant and clinically meaningful improvement of 3.2 months in overall survival compared to chemotherapy. The TROPiCS-02 study met its primary endpoint of progression-free survival earlier this year, and demonstrated improved median progression-free survival in both HER2-low and IHC0 groups. The FDA has accepted for priority review the supplemental Biologics License Application based on this data and assigned a Prescription Drug User Fee Act (“PDUFA”) date for February 2023.

•Cabometyx. In January 2021, Exelixis announced that the FDA approved Cabometyx for patients with advanced renal cell carcinoma (RCC) as a first-line treatment in combination with Bristol Myers Squibb’s Opdivo. The approval was based on the Phase 3 CheckMate 9ER trial, in which the combination of Cabometyx and Opdivo significantly improved overall survival while doubling progression-free survival and objective response rate versus sunitinib as a first-line treatment for patients with advanced RCC.

In March 2021, Ipsen announced that the EC approved the combination of Cabometyx and Opdivo for the first-line treatment of advanced RCC.

In August 2021, Exelixis announced that their partners Takeda and Ono received approval in Japan for Cabometyx in combination with Opdivo for the treatment of unresectable or metastatic RCC.

In September 2021, Exelixis announced detailed results from the expanded Cohort 6 of the Phase 1b COSMIC-021 trial of Cabometyx in combination with atezolizumab in patients with metastatic castration-resistant prostate cancer, which included patients with metastatic castration-resistant prostate cancer who had been previously treated with novel hormone therapies enzalutamide or abiraterone acetate used along with prednisone. Following discussions with FDA, Exelixis announced that it will not pursue a regulatory submission for the combination regimen based on cohort 6 of COSMIC-021. Exelixis believes that CONTACT-02, a global Phase 3 pivotal trial that initiated enrollment in June 2020 may serve as a basis for future regulatory applications.

In September 2021, Exelixis announced FDA approved Cabometyx for patients with previously treated radioactive iodine-refractory differentiated thyroid cancer. The approval was based on the Phase 3 COSMIC-311 pivotal trial.

In March 2022, Exelixis announced results from the final analysis of the second primary endpoint of overall survival from the Phase 3 COSMIC-312 trial, which evaluated cabozantinib in combination with atezolizumab versus sorafenib in patients with previously untreated advanced hepatocellular carcinoma. The final analysis showed neither improvement nor detriment in overall survival for cabozantinib in combination with atezolizumab versus sorafenib.

In May 2022, Ipsen announced that it received approval from the EC for Cabometyx as a monotherapy for the treatment of adult patients with locally advanced or metastatic differentiated thyroid carcinoma, refractory or not eligible to radioactive iodine who have progressed during or after prior systemic therapy.

In September 2022, Exelixis announced detailed results from COSMIC-313, an ongoing Phase 3 trial evaluating Cabometyx, nivolumab and ipilimumab versus the combination of nivolumab and ipilimumab in patients with previously untreated advanced intermediate- or poor-risk RCC, which met its primary endpoint, demonstrating significant improvement in progression-free survival at the primary analysis. At a prespecified interim analysis for the secondary endpoint of overall survival, the combination of Cabometyx, nivolumab and ipilimumab did not demonstrate a significant benefit. Following discussions with FDA, Exelixis does not intend to submit a supplemental NDA based on currently available data, but will plan to discuss a potential regulatory submission with FDA when results of the next overall survival analysis are available.

Exelixis has indicated it expects initial Phase 3 data by year-end 2022 from CONTACT-01 in metastatic NSCLC and in the first half of 2023 from CONTACT-03 in advanced or metastatic RCC.

•Evrysdi. In March 2021, Roche announced that the EC approved Evrysdi for the treatment of spinal muscular atrophy (SMA) in patients two months of age and older, with a clinical diagnosis of SMA Type 1, Type 2 or Type 3 or with one to four splicing modifier of motor neuron 2 copies.

In June 2021, Evrysdi was approved in Japan for the treatment of SMA.

In May 2022, Roche announced that the FDA has approved a label extension for Evrysdi to include infants under two months old with SMA. The approval is based on the interim efficacy and safety data from the RAINBOWFISH study in newborns, which showed that the majority of pre-symptomatic infants treated with Evrysdi achieved key milestones such as sitting and standing with half walking after 12 months of treatment.

•Orladeyo. In January 2021, Orladeyo was approved in Japan, becoming the first and only prophylactic hereditary angioedema (HAE) medication approved in the region.

In April 2021, BioCryst announced that the EC approved Orladeyo for the prevention of recurrent HAE attacks in patients 12 years and older.

In April 2021, BioCryst announced approval of Japanese National Health Insurance System price listing of Orladeyo for prophylactic treatment of HAE.

•Oxlumo. In July 2021, Alnylam announced results from ILLUMINATE-C, a Phase 3 open-label study of lumasiran in patients of all ages with advanced primary hyperoxaluria type 1 associated with progressive decline in renal function. Results from the primary analysis at six months demonstrated a substantial reduction in plasma oxalate from baseline in patients with advanced disease, including those on hemodialysis. The safety and tolerability profile of lumasiran following six months of treatment was encouraging across all ages, with no drug related serious adverse events and injection site reactions as the most common adverse event.

In March 2022, the FDA accepted Alnylam’s supplemental NDA for lumasiran for the reduction of plasma oxalate in the treatment of patients with advanced primary hyperoxaluria type 1. The FDA has set an action date for October 6, 2022. Additionally, a Type II Variation for lumasiran to amend the label in patients with advanced primary hyperoxaluria Type 1 was submitted and validated by the EMA in December 2021.

In October 2022, Alnylam announced that the FDA approved a label expansion for Oxlumo, now indicated for the treatment of primary hyperoxaluria type 1 to lower urinary oxalate and plasma oxalate levels in pediatric and adult patients. The approval is based on positive efficacy and safety results of the ILLUMINATE-C Phase 3 study of Oxlumo in patients with severe renal impairment, including those on hemodialysis.

•Tremfya. In February 2022, Johnson & Johnson announced results from the Phase 2a VEGA proof-of-concept study. Results showed that the combination of Tremfya and golimumab, a tumor necrosis factor-alpha antagonist, induced higher rates of clinical response, clinical remission, endoscopic improvement and a composite histologic-endoscopic endpoint at 12 weeks than either treatment alone in adults with moderately to severely active ulcerative colitis. Rates of adverse events were comparable among treatment groups.

In February 2022, Johnson & Johnson announced results from the Phase 2b QUASAR Induction Study 1. Results showed that a significantly greater proportion of adults with moderately to severely active ulcerative colitis who previously had an inadequate response or intolerance to conventional therapies or selected advanced therapies and were treated with Tremfya achieved clinical response at week 12 (Tremfya 200 mg: 61.4% and Tremfya 400 mg: 60.7%), the study’s primary endpoint compared with placebo (27.6%). Safety data at week 12 was consistent with the safety profile for Tremfya in approved indications.

•Tazverik: In August 2022, Ipsen completed its acquisition of Epizyme. Ipsen acquired all the outstanding shares of Epizyme at a price of $1.45 per share plus a contingent value right of $1 per share.

Development-Stage Product Candidates

•Aficamten. In December 2021, Cytokinetics announced the FDA granted breakthrough therapy designation for aficamten for the treatment of symptomatic obstructive hypertrophic cardiomyopathy (oHCM) based on results from REDWOOD-HCM.

In February 2022, Cytokinetics announced positive topline results from Cohort 3 of the REDWOOD-HCM Phase 2 trial. Results from Cohort 3 showed that substantial reductions in the average resting left ventricular outflow tract pressure gradient (LVOT-G) as well as the post-Valsalva LVOT-G were achieved for patients with oHCM and a resting or post-Valsalva LVOT-G of greater than 50 mmHg whose background therapy included disopyramide and in the majority a beta-adrenergic blocker. The safety and tolerability of aficamten were consistent with prior experience in REDWOOD-HCM with no treatment interruptions and no serious adverse events attributed to treatment reported by the investigators.

•BCX9930. In April 2022, BioCryst announced that it is pausing enrollment in clinical trials with BCX9930, while BioCryst investigates elevated serum creatinine levels seen in some patients. BioCryst will not enroll new patients in the REDEEM-1, REDEEM-2 or RENEW clinical trials during the investigation. Patients currently enrolled in the trials are expected to continue on the study drug.

In May 2022, BioCryst announced that it plans to discuss with regulators whether clinical trials with amended protocols could resume using stepped dosing to 400 milligrams twice-daily of BCX9930 by the end of the third quarter of 2022.

In August 2022, BioCryst announced that FDA lifted its partial clinical hold on the BCX9930 program. BioCryst will resume enrollment in global clinical trials under revised protocols at a reduced dose of 400 mg twice daily of BCX9930. This includes the REDEEM-1 and REDEEM-2 pivotal trials in patients with paroxysmal nocturnal hemoglobinuria and the RENEW proof-of-concept trial in patients with C3 glomerulopathy, immunoglobulin A nephropathy and primary membranous nephropathy. Additionally, screening has begun for new patients to participate in the trials and BioCryst expects to have data from approximately 15 newly-enrolled patients by the middle of 2023 to inform its decision to either fully invest in the pivotal program, or to discontinue the BCX9930 program.

•Gantenerumab. In October 2021, Roche announced that gantenerumab, an anti-amyloid beta antibody developed for subcutaneous administration, has been granted breakthrough therapy designation by the FDA for the treatment of people living with Alzheimer’s disease. This designation is based on data showing that gantenerumab significantly reduced brain amyloid plaque, a pathological hallmark of Alzheimer’s disease, in the ongoing SCarlet RoAD and Marguerite RoAD open-label extension trials, as well as other studies.

In March 2022, Roche announced a new Phase 3 Alzheimer’s disease prevention trial (SKYLINE). Roche has stated that it intends to enter into a collaboration agreement with Banner Alzheimer’s Institute’s Alzheimer’s Prevention Initiative, Massachusetts General Hospital and the University of Southern California Alzheimer’s Therapeutic Research Institute to further exchange scientific insights and advance the trial goals. SKYLINE aims to evaluate the potential of gantenerumab to slow disease progression in people with the earliest biologic signs of Alzheimer’s disease and who show no signs of cognitive impairment.

Roche has indicated it expects Phase 3 data from the GRADUATE 1/2 trial in Alzheimer’s disease in the fourth quarter of 2022.

•Omecamtiv mecarbil. In February 2022, Cytokinetics announced that FDA has accepted and filed its NDA for omecamtiv mecarbil. The FDA assigned the NDA a standard review with a PDUFA date of November 30, 2022. The FDA also indicated that it is currently not planning to hold an advisory committee meeting to discuss the application. The submission is supported by GALACTIC-HF, which demonstrated a positive effect on the primary composite endpoint of cardiovascular death or heart failure events in patients with heart failure and reduced ejection fraction who were receiving standard of care plus omecamtiv mecarbil.

In February 2022, Cytokinetics announced results from METEORIC-HF, a Phase 3 trial evaluating the effect of treatment with omecamtiv mecarbil compared to placebo on exercise capacity in patients with heart failure with reduced ejection fraction. After 20 weeks of treatment, there was no change in peak oxygen uptake in patients treated with omecamtiv mecarbil versus placebo.

In June 2022, Cytokinetics announced that the FDA had informed the company that the Cardiovascular and Renal Drugs Advisory Committee will review its NDA on December 13, 2022. Additionally, the FDA has assigned the NDA a PDUFA date of February 28, 2023.

•Otilimab. In October 2022, GSK plc (“GSK”) announced that the limited efficacy demonstrated in the ContRAst Phase 3 program does not support a suitable benefit/risk profile for otilimab as a potential treatment for rheumatoid arthritis. As a result, GSK has decided not to progress with regulatory submissions.

•Pelabresib. In December 2021, MorphoSys presented data from the Phase 2 MANIFEST study evaluating pelabresib in the treatment of myelofibrosis. As of September 10, 2021, the data cut-off, a total of 84 JAK inhibitor-naive patients were enrolled and received the first-line combination of pelabresib and ruxolitinib. The data showed 68% (n=57) of patients treated with the combination achieved a greater than or equal to 35% reduction in spleen volume from baseline at week 24 and 60% (n=47) maintained a greater than or equal to 35% reduction in spleen volume at week 48. Most patients also saw their symptoms reduced with 56% (n=46) achieving greater than or equal to 50% reduction in total symptom score from baseline at week 24.

•PT027. In September 2021, AstraZeneca and Avillion announced positive results from MANDALA and DENALI, two Phase 3 trials evaluating PT027 (albuterol/budesonide) in patients with asthma. PT027 is a potential first-in-class inhaled, fixed-dose combination of albuterol, a short-acting beta2-agonist, and budesonide, an inhaled corticosteroid. In MANDALA, PT027 demonstrated a statistically significant and clinically meaningful reduction in the risk of severe exacerbations compared to albuterol, when used as a rescue medicine in response to symptoms. In DENALI, PT027 showed a statistically significant improvement in lung function measured by forced expiratory volume in one second, compared to the individual components albuterol and budesonide, and compared to placebo. The safety and tolerability of PT027 in both trials was consistent with the known profiles of the components. The FDA has accepted for filing the NDA for AstraZeneca’s PT027 and a regulatory decision is currently expected by the second half of 2022.

In May 2022, Avillion LLP, a drug development company focused on the co-development and financing of pharmaceutical candidates from proof-of-concept through to regulatory approval, announced that FDA accepted for filing the NDA for AstraZeneca’s PT027. The proposed indication is for the as-needed treatment or prevention of bronchoconstriction and for the prevention of exacerbation of asthma. The co-development partnership between AstraZeneca and Avillion also recently expanded to include the BATURA study, a randomized Phase 3b decentralized trial to further assess the role of PT027 in preventing asthma exacerbations.

•Tulmimetostat: In October 2022, MorphoSys announced preliminary Phase 1/2 results of tulmimetostat (CPI-0209), an oral, investigational next-generation selective dual inhibitor of EZH2 and EZH1, in heavily pretreated patients with advanced cancers. Results showed responses or disease stabilization in five cohorts with evaluable patients. The safety profile of tulmimetostat was consistent with the mechanism of action of EZH2 inhibition.

•Zavegepant. In March 2021, Biohaven announced that it enrolled the first patient in a Phase 2/3 clinical trial of oral zavegepant for the preventive treatment of migraine. Accordingly, per the agreement with Biohaven announced in August 2020, we paid $100 million to Biohaven for the achievement of this milestone, bringing total zavegepant funding to $250 million. Pfizer expects data from the trial in the third quarter of 2023.

In December 2021, Biohaven announced positive topline results from the second pivotal clinical trial evaluating the safety and efficacy of intranasal zavegepant for the acute treatment of migraine in adults. The Phase 3 study achieved its co-primary regulatory endpoints of pain freedom and freedom of most bothersome symptom at two hours and showed broad efficacy by demonstrating statistically significant superiority to placebo across a total of 15 prespecified primary and secondary outcome measures.

In May 2022, Biohaven announced that the FDA accepted for review a NDA for zavegepant nasal spray for the acute treatment of migraine in adults. The PDUFA date is in the first quarter of 2023.

Non-GAAP Financial Results

In addition to analyzing our results on a GAAP basis, management also reviews our results on a non-GAAP basis. 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. As a result, management places importance on royalty receipts as they are predictable and we use them as a measure of our operating performance. Refer to section titled “Non-GAAP Reconciliations” for additional discussion of management’s use of non-GAAP measures as supplemental financial measures and reconciliations from the most directly GAAP comparable measures of Net cash provided by operating activities.

Adjusted Cash Receipts is a measure calculated with inputs directly from the statements of cash flows and includes (1) royalty receipts by product: (i) Cash collections from royalty assets (financial assets and intangible assets), (ii) Other royalty cash collections, (iii) Distributions from equity method investees, plus (2) Proceeds from available for sale debt securities; less (1) Distributions to non-controlling interests, which represent contractual distributions of royalty receipts and proceeds from available for sale debt securities to our historical non-controlling interests related to the Legacy Investors Partnerships and RPSFT. Adjusted Cash Receipts is most directly comparable to the GAAP measure of Net cash provided by operating activities.

Adjusted EBITDA and Adjusted Cash Flow are similar non-GAAP liquidity measures that are both most closely comparable to the GAAP measure, Net cash provided by operating activities. Adjusted EBITDA is important to our lenders and is defined under the Credit Agreement as Adjusted Cash Receipts less Payments for operating and professional costs. Payments for operating and professional costs are comprised of Payments for operating and professional costs and Payments for rebates from the statements of cash flows.

Adjusted Cash Flow is defined as Adjusted EBITDA less (1) Development-stage funding payments - ongoing, (2) Development-stage funding payments - upfront and milestone, (3) Interest paid, net of Interest received, (4) Investments in equity method investees and (5) Other (including Derivative collateral posted, net of Derivative collateral received, and Termination payments on derivative instruments) plus (1) Contributions from non-controlling interests- R&D, all directly reconcilable to the statements of cash flows.

Adjusted Cash Receipts and Adjusted Cash Flow are used by management as key liquidity measures in the evaluation of our ability to generate cash from operations. Both measures are an indication of the strength of the Company and the performance of the business. Management also uses Adjusted Cash Flow to compare its performance against non-GAAP adjusted net income used by companies in the biopharmaceutical industry. Adjusted EBITDA, as derived from Adjusted Cash Receipts, is used by our lenders to assess our ability to meet our financial covenants.

The table below includes the royalty receipts and non-GAAP financial results for the three and nine months ended September 30, 2022 and 2021 by product in order of contribution to royalty receipts for the nine months ended September 30, 2022 (in thousands).


Royalties	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				Nine Months Year-to-Date Change
	2022		2021		2022		2021		$		%
Cystic fibrosis franchise (1)	$	207,882	$	182,876	$	591,733	$	505,708	$	86,025	17.0	%
Tysabri	91,252		95,805		281,819		274,796		7,023		2.6	%
Imbruvica	74,391		87,924		241,943		264,348		(22,405)		(8.5)	%
Xtandi	45,717		40,237		141,100		117,049		24,051		20.5	%
Promacta	50,067		48,151		132,679		124,617		8,062		6.5	%
Januvia, Janumet, Other DPP-IVs (2)	1,029		37,934		72,406		113,133		(40,727)		(36.0)	%
Tremfya	21,409		16,610		68,062		16,610		51,452		*
Nurtec ODT/Biohaven payment (3)	20,459		17,948		59,549		51,170		8,379		16.4	%
Trelegy	42,720		—		42,720		—		42,720		—	%
Cabometyx/Cometriq	14,612		12,038		40,523		22,167		18,356		82.8	%
Farxiga/Onglyza	11,522		9,321		32,336		26,996		5,340		19.8	%
Evrysdi	9,602		5,897		26,933		10,546		16,387		155.4	%
Prevymis	11,052		9,929		25,174		27,331		(2,157)		(7.9)	%
Trodelvy	6,496		2,521		17,428		8,118		9,310		114.7	%
Orladeyo	6,265		2,502		15,456		3,471		11,985		*
Erleada	5,586		3,736		15,305		9,957		5,348		53.7	%
Crysvita	5,241		4,576		14,887		12,092		2,795		23.1	%
Emgality	4,657		4,542		13,845		11,356		2,489		21.9	%
Oxlumo	596		653		1,945		653		1,292		197.9	%
Other products (4)	73,349		129,003		212,260		349,242		(136,982)		(39.2)	%
Total royalty receipts	$	703,904	$	712,203	$	2,048,103	$	1,949,360	$	98,743	5.1	%
Distributions to non-controlling interests	(107,183)		(125,427)		(322,726)		(363,624)		40,898		(11.2)	%
Adjusted Cash Receipts (non-GAAP)	$	596,721	$	586,776	$	1,725,377	$	1,585,736	$	139,641	8.8	%
Payments for operating and professional costs	(48,650)		(53,509)		(141,653)		(135,272)		(6,381)		4.7	%
Adjusted EBITDA (non-GAAP)	$	548,071	$	533,267	$	1,583,724	$	1,450,464	$	133,260	9.2	%
Development-stage funding payments - ongoing	(500)		(500)		(1,606)		(6,263)		4,657		(74.4)	%
Development-stage funding payments - upfront and milestone	(25,000)		(90,000)		(125,000)		(90,000)		(35,000)		38.9	%
Interest paid, net	(75,302)		(64,587)		(158,920)		(126,755)		(32,165)		25.4	%
Investments in equity method investees	(6,846)		(10,893)		(9,896)		(28,320)		18,424		(65.1)	%
Contributions from non-controlling interests- R&D	240		2,003		971		6,083		(5,112)		(84.0)	%
Other	—		(18,223)		—		(16,093)		16,093		(100.0)	%
Adjusted Cash Flow (non-GAAP)	$	440,663	$	351,067	$	1,289,273	$	1,189,116	$	100,157	8.4	%

Weighted average Class A ordinary shares outstanding - diluted	607,226		607,174		607,209		607,152

*Percentage change is not meaningful.

(1)The cystic fibrosis franchise includes the following approved products: Kalydeco, Orkambi, Symdeko/Symkevi and Trikafta/Kaftrio.

(2)Januvia, Janumet, Other DPP-IVs include the following approved products: Onglyza, Kombiglyze, Galvus, Eucreas and Nesina. The Other DPP-IVs are marketed by AstraZeneca, Novartis and Takeda.

Adjusted Cash Receipts (non-GAAP)

Nine Months Ended September 30, 2022 and 2021

Adjusted Cash Receipts increased by $139.6 million to $1.7 billion in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by an increase in royalty receipts from the cystic fibrosis franchise and newly acquired royalties. This growth was partially offset by a decline in royalty receipts from maturing royalties, such as the HIV franchise and Januvia, Janumet and other DPP-IVs, as well as unfavorable foreign exchange movements. The increase in Adjusted Cash Receipts also reflects a decline in distributions to non-controlling interests due to maturing royalties jointly owned by the Legacy Investors Partnerships and RPSFT.

Below we discuss the key drivers of royalty receipts.

Royalty 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 $86.0 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily driven by the launch of Kaftrio in additional countries outside the United States and the performance of Trikafta in the United States, including its uptake in children 6 through 11 years old.

•Tysabri – Royalty receipts from Tysabri, which is marketed by Biogen for the treatment of multiple sclerosis, increased by $7.0 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, largely due to continued global patient growth and positive channel dynamics in the United States.

•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 $22.4 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The decrease was largely due to a slower-than-anticipated recovery of the chronic lymphocytic leukemia market from COVID-19 and increased competition from newer therapies in the United States.

•Xtandi – Royalty receipts from Xtandi, which is marketed by Pfizer and Astellas for the treatment of prostate cancer, increased by $24.1 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by demand across various prostate cancer indications and a true-up of royalties from prior periods.

•Promacta – Royalty receipts from Promacta, which is marketed by Novartis for the treatment of chronic immune thrombocytopenia purpura (ITP) and aplastic anemia, increased by $8.1 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This growth was mainly driven by increased use in ITP and uptake as first-line treatment for severe aplastic anemia.

•Januvia, Janumet, Other DPP-IVs – Royalty receipts from the DPP-IVs for type 2 diabetes, which includes Januvia and Janumet, both marketed by Merck & Co., decreased by $40.7 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Royalty receipts from Januvia, Janumet and other DPP-IVs substantially ended in the three months ended June 30, 2022.

•Tremfya – Royalty receipts from Tremfya, which is marketed by Johnson & Johnson for the treatment of plaque psoriasis and active psoriatic arthritis, were $68.1 million in the nine months ended September 30, 2022, largely driven by market growth and continued market share gains. We acquired the Tremfya royalty in July 2021.

•Nurtec ODT/Biohaven payment – Royalty receipts from Nurtec ODT, which is marketed by Pfizer for the acute and preventative treatment of migraine, increased by $8.4 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by prescription volume growth. In addition, we received $46.9 million in fixed payments from Biohaven related to the Series A Biohaven Preferred Shares during each of the nine months ended September 30, 2022 and 2021.

•Trelegy – Royalty receipts from Trelegy, which is marketed by GSK for the maintenance treatment of chronic obstructive pulmonary disease and asthma, were $42.7 million in the nine months ended September 30, 2022, primarily attributable to strong patient demand and growth of the single inhaler triple therapy market. We acquired the Trelegy royalty in July 2022.

•Cabometyx/Cometriq – Royalty receipts from Cabometyx/Cometriq, which is marketed by Exelixis, Ipsen and Takeda, were $40.5 million in the nine months ended September 30, 2022, primarily due to the uptake of Cabometyx in combination with Opdivo as a first-line treatment for patients with advanced renal cell carcinoma. We acquired the Cabometyx/Cometriq royalty in March 2021.

Distributions to Non-Controlling Interests

Distributions to non-controlling interests decreased by $40.9 million to $322.7 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, which positively impacted Adjusted Cash Receipts. The decrease in distributions to non-controlling interests is primarily due to maturing royalties jointly owned by the Legacy Investors Partnerships and RPSFT.

Adjusted EBITDA (non-GAAP)

Nine Months Ended September 30, 2022 and 2021

Adjusted EBITDA increased by $133.3 million to $1.6 billion in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 as a result of the factors noted above in “Adjusted Cash Receipts (Non-GAAP).” Payments for operating and professional costs, the only adjustment between Adjusted Cash Receipts and Adjusted EBITDA, increased in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by higher Operating and Personnel Payments from increased cash receipts from our royalties.

Adjusted Cash Flow (non-GAAP)

Nine Months Ended September 30, 2022 and 2021

Adjusted Cash Flow increased by $100.2 million to $1.3 billion in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by the factors noted above in “Adjusted Cash Receipts (non-GAAP)” and “Adjusted EBITDA (non-GAAP).” The increase was partially offset by higher upfront and milestone development-stage funding payments of $35.0 million and higher net interest paid of $32.2 million due to the first interest payments made on the 2021 Notes in the nine months ended September 30, 2022.

Non-GAAP Reconciliations

Adjusted Cash Receipts, Adjusted EBITDA and Adjusted Cash Flow are non-GAAP measures presented as supplemental measures to our GAAP financial performance. These non-GAAP financial measures exclude the impact of certain items and therefore have not been calculated in accordance with GAAP. In each case, because our operating performance is a function of our liquidity, the non-GAAP measures used by management are presented and defined as supplemental liquidity measures. We caution readers that amounts presented in accordance with our definitions of Adjusted Cash Receipts, Adjusted EBITDA, and Adjusted Cash Flow may not be the same as similar measures used by other companies. Not all companies and analysts calculate the non-GAAP measures we use in the same manner. We compensate for these limitations by using non-GAAP financial measures as supplements to GAAP financial measures and by presenting the reconciliations of the non-GAAP financial measures to their most comparable GAAP financial measures, in each case being Net cash provided by operating activities.

We believe that Adjusted Cash Receipts and Adjusted Cash Flow provide meaningful information about our operating performance because the business is heavily reliant on its ability to generate consistent cash flows and these measures reflect the core cash collections and cash charges comprising our operating results. Management strongly believes that our significant operating cash flow is one of the attributes that attracts potential investors to our business.

In addition, we believe that Adjusted Cash Receipts and Adjusted Cash Flow help identify underlying trends in the business and permit investors to more fully understand how management assesses our performance, including planning and forecasting for future periods. Adjusted Cash Receipts and Adjusted Cash Flow are used by management as key liquidity measures in the evaluation of our ability to generate cash from operations. Both measures are an indication of our strength and the performance of the business. Management uses Adjusted Cash Receipts and Adjusted Cash Flow when considering available cash, including for decision-making purposes related to funding of acquisitions, voluntary debt repayments, dividends and other discretionary investments. Further, these non-GAAP financial measures help management, the audit committee and investors evaluate our ability to generate liquidity from operating activities.

Management believes that Adjusted EBITDA is an important non-GAAP measure in analyzing our liquidity and is a key component of certain material covenants contained within our credit agreement. Noncompliance with the interest coverage ratio and leverage ratio 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. Consequently, Adjusted EBITDA is critical to the assessment of our liquidity.

Management uses Adjusted Cash Flow to evaluate its ability to generate cash from operations, the performance of the business and our performance as compared to our peer group. Management also uses Adjusted Cash Flow to compare its performance against non-GAAP adjusted net income measures used by many companies in the biopharmaceutical industry, even though each company may customize its own calculation and therefore one company’s metric may not be directly comparable to another’s. We believe that non-GAAP financial measures, including Adjusted Cash Flow, are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry.

The non-GAAP financial measures used in this Quarterly Report on Form 10-Q have limitations as analytical tools, and you should not consider them in isolation or as a substitute for the analysis of our results as reported under GAAP. We have provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, in each case being Net cash provided by operating activities below.

To arrive at Adjusted Cash Receipts, we start with the GAAP line item, Net cash provided by operating activities, and adjust for the following items from the statements of cash flows: to add back (1) Proceeds from available for sale debt securities (redemption of Biohaven Preferred Shares), which are cash inflows that management believes are derived from royalties and form part of our core business strategy, (2) Distributions from equity method investees which are classified as cash inflows from investing activities, (3) Interest paid, net of Interest received, (4) Development-stage funding payments, (5) Payments for operating and professional costs, (6) Payments for rebates and (7) Termination payments on derivative instruments, and to deduct (1) Distributions to non-controlling interests, which represents distributions to our historical non-controlling interests related to the Legacy Investors Partnerships and RPSFT, and (2) Derivative collateral posted or (received), net, both of which are excluded when management assesses its operating performance through cash collections, or Adjusted Cash Receipts.

To arrive at Adjusted EBITDA, we start with Net cash provided by operating activities and adjust for the following items from the statements of cash flows: to add back (1) Proceeds from available for sale debt securities (redemption of Biohaven Preferred Shares), (2) Distributions from equity method investees which are classified as cash inflows from investing activities, (3) Interest paid, net of Interest received, (4) Development-stage funding payments and (5) Termination payments on derivative instruments, and to deduct (1) Distributions to non-controlling interests and (2) Derivative collateral posted or (received), net.

To arrive at Adjusted Cash Flow, we start with Net cash provided by operating activities and adjust for the following items from the statements of cash flows: to add back (1) Proceeds from available for sale debt securities (redemption of Biohaven Preferred Shares), (2) Distributions from equity method investees classified as cash inflows from investing activities and (3) Contributions from non-controlling interests-R&D, and to deduct (1) Distributions to non-controlling interests and (2) Investments in equity method investees. This is intended to present an Adjusted Cash Flow measure that is representative of cash generated from the broader business strategy of acquiring royalty-generating assets that are available for reinvestment and for discretionary purposes.


(in thousands)	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2022		2021		2022		2021
Net cash provided by operating activities (GAAP)	$	538,827	$	469,759	$	1,574,049	$	1,527,579
Adjustments:
Proceeds from available for sale debt securities (1), (2)	15,625		15,625		46,875		46,875
Distributions from equity method investees – investing (2)	—		—		—		523
Interest paid, net (2)	75,302		64,587		158,920		126,755
Development-stage funding payments - ongoing (3)	500		500		1,606		6,263
Development-stage funding payments - upfront and milestone (3)	25,000		90,000		125,000		90,000
Payments for operating and professional costs	48,650		53,509		141,653		135,272
Termination payments on derivative instruments	—		16,093		—		16,093
Distributions to non-controlling interests (2)	(107,183)		(125,427)		(322,726)		(363,624)
Derivative collateral received, net (2)	—		2,130		—		—
Adjusted Cash Receipts (non-GAAP)	$	596,721	$	586,776	$	1,725,377	$	1,585,736

Net cash provided by operating activities (GAAP)	$	538,827	$	469,759	$	1,574,049	$	1,527,579
Adjustments:
Proceeds from available for sale debt securities (1), (2)	15,625		15,625		46,875		46,875
Distributions from equity method investees – investing (2)	—		—		—		523
Interest paid, net (2)	75,302		64,587		158,920		126,755
Development-stage funding payments - ongoing (3)	500		500		1,606		6,263
Development-stage funding payments - upfront and milestone (3)	25,000		90,000		125,000		90,000
Termination payments on derivative instruments	—		16,093		—		16,093
Distributions to non-controlling interests (2)	(107,183)		(125,427)		(322,726)		(363,624)
Derivative collateral received, net (2)	—		2,130		—		—
Adjusted EBITDA (non-GAAP)	$	548,071	$	533,267	$	1,583,724	$	1,450,464

Net cash provided by operating activities (GAAP)	$	538,827	$	469,759	$	1,574,049	$	1,527,579
Adjustments:
Proceeds from available for sale debt securities (1), (2)	15,625		15,625		46,875		46,875
Distributions from equity method investees – investing (2)	—		—		—		523

Contributions from non-controlling interests-R&D (2)	240		2,003		971		6,083
Distributions to non-controlling interests (2)	(107,183)		(125,427)		(322,726)		(363,624)
Investments in equity method investees (2), (4)	(6,846)		(10,893)		(9,896)		(28,320)
Adjusted Cash Flow (non-GAAP)	$	440,663	$	351,067	$	1,289,273	$	1,189,116

(1)Receipts from the quarterly redemption of the Series A Biohaven Preferred Shares are presented as Proceeds from available for sale debt securities on the statements 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.


Reconciling Adjustment			Statements of Cash Flows Classification
Proceeds from available for sale debt securities			Investing activities
Investments in equity method investees			Investing activities
Distributions to non-controlling interests			Financing activities
Interest paid, net			Operating activities (Interest paid less Interest received)
Derivative collateral received, net			Operating activities (Derivative collateral received less Derivative collateral posted)
Contributions from non-controlling interests- R&D			Financing activities
Distributions from equity method investees - investing			Investing activities

(3)Our lenders consider all payments made to support R&D activities for development-stage product candidates similar to asset acquisitions as these funds are expected to generate operational returns in the future. All ongoing development-stage funding payments and upfront and milestone development-stage funding payments are reported as R&D funding expense in net income and are added back in aggregate to Net cash provided by operating activities to arrive at Adjusted EBITDA. As a result, Adjusted EBITDA captures the full add-back for development-stage funding payments.

(4)We consider all payments to fund our operating joint ventures that are performing R&D activities for development-stage product candidates similar to asset acquisitions as these funds are expected to generate operational returns in the future. As a result, amounts funded through capital calls by our equity method investees, the Avillion Entities, are deducted to arrive at Adjusted Cash Flow, but are not deducted in Adjusted EBITDA.

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, by making hybrid investments and by acquiring businesses with significant existing royalty assets or the potential for the creation of such assets.

For the nine months ended September 30, 2022, we invested $2.1 billion in royalties and related assets. While volatility exists in the total amount of our 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.

Summary of Royalty Acquisition Activity

•In October 2022, we entered into a R&D funding agreement with MSD International Business GmbH (“Merck”) to co-fund the development of MK-8189, an investigational oral PDE10A inhibitor currently being evaluated in a Phase 2b study for the treatment of schizophrenia. We funded $50 million upon closing, and if Merck decides to proceed with Phase 3, we have the option to fund up to an additional $375 million. In exchange, we are eligible to receive milestone payments associated with certain regulatory approvals as well as royalties on annual worldwide sales of any approved product.

•In July 2022, we acquired all of the equity interests in Theravance Respiratory Company, LLC from Theravance and Innoviva, Inc. which entitles us to the right to receive royalties on the annual worldwide sales of Trelegy for an upfront payment of $1.31 billion and up to $300 million in additional payments contingent upon the achievement of certain sales milestones. Additionally, we agreed to provide Theravance $25 million in upfront funding and a potential $15 million regulatory milestone payment to support the clinical development of ampreloxetine.

•In June 2022, we acquired an ex-U.S. royalty interest in Gavreto from Blueprint Medicines for an upfront payment of $175 million and contingent sales-based milestones up to $165 million.

•In April 2022, we acquired common stock and a revenue participation right from ApiJect Holdings, Inc. for $50 million.

•In January 2022, we acquired a royalty interest in aficamten from Cytokinetics, Incorporated (“Cytokinetics”) for $150 million comprised of an upfront payment of $50 million and two additional $50 million payments, conditional upon the initiation of potential pivotal clinical trials for oHCM and nonobstructive hypertrophic cardiomyopathy, respectively. In February 2022, Cytokinetics announced that it initiated the clinical trial for oHCM, which triggered a $50 million payment from us in March 2022. Additionally, we will provide Cytokinetics long-term capital of up to $300 million (“Cytokinetics Commercial Launch Funding”) to support further development of aficamten and potential commercialization of omecamtiv mecarbil. The Cytokinetics Commercial Launch Funding is available in five tranches, including an initial tranche of $50 million funded upon closing.

•In November 2021, we acquired incremental royalty interests in BCX9930 and Orladeyo (berotralstat) from BioCryst for an upfront cash payment of $150 million. Additionally, we paid $50 million to purchase 3,846 thousand shares of BioCryst common stock, which was calculated based on the volume-weighted average price of BioCryst common stock over a period preceding the closing of the transaction. The funds from this transaction will enable further advancement of BCX9930 and support additional investment in the global launch of Orladeyo (berotralstat).

•In June 2021, we announced a long-term strategic funding partnership with MorphoSys to support its acquisition of Constellation Pharmaceuticals, Inc. (“Constellation”), which closed on July 15, 2021. We agreed to provide up to $2.025 billion of funding to MorphoSys, comprised of an upfront payment of $1.425 billion, additional milestone payments of up to $150 million, up to $350 million of capital (“Development Funding Bonds”). In connection with the closing of its acquisition of Constellation, we purchased 1,337,552 ordinary shares of MorphoSys for $100 million at a price of €63.35 per ordinary share, based on the average trading price of the ordinary shares over a period preceding the closing of the acquisition. In September 2022, we funded $300 million under the Development Funding Bonds.

•In April 2021, we acquired a royalty interest in Oxlumo from Dicerna Pharmaceuticals, Inc. for an upfront cash payment of $180 million and up to $60 million in contingent sales-based milestone payments. Oxlumo, which has been approved by the FDA and EMA for the treatment of primary hyperoxaluria type 1, is marketed by Alnylam.

•In March 2021, we acquired a royalty interest in the cabozantinib products Cabometyx and Cometriq from GSK for an upfront payment of $342 million and up to $50 million in additional payments contingent on the achievement of regulatory approvals of cabozantinib for prostate cancer and lung cancer in the United States and Europe.

•In January 2021, we acquired a royalty interest in seltorexant from Minerva Neurosciences, Inc. for an upfront payment of $60 million and up to $95 million in additional milestone payments, contingent on the achievement of certain clinical, regulatory and commercialization milestones. Seltorexant is currently in Phase 3 development for the treatment of major depressive disorder with insomnia symptoms by Johnson & Johnson.

Additionally, in April 2021, we entered into an agreement with MSCI, a leading provider of critical decision support tools and services, to assist MSCI in the design of a classification framework and index methodologies to expand MSCI’s thematic index suite with the launch of new indexes. In return, we will receive a portion of MSCI’s revenues from those indexes. The financial impact associated with this transaction has not been material to date and is not expected to be material for the year ended December 31, 2022.

Liquidity and Capital Resources

Overview

Our primary source of liquidity is cash provided by operations. For the nine months ended September 30, 2022 and 2021, we generated $1.6 billion and $1.5 billion, respectively, in Net cash provided by operating activities. We believe that our existing capital resources, cash provided by operating activities and 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 July 2021, we issued $1.3 billion of senior unsecured notes. Additionally, we have a Revolving Credit Facility (defined below) which provides for borrowing capacity of up to $1.5 billion that remains undrawn and available to us as of September 30, 2022. As of September 30, 2022 and December 31, 2021, the par value of our total outstanding borrowings was $7.3 billion and $7.3 billion, respectively. A summary of our borrowing activities, balances and compliance with certain debt covenants under various financing arrangements is included in Note 10. Borrowings of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

We have historically funded our acquisition program through free cash flow, 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 conversion of our Adjusted Cash Receipts to Adjusted Cash Flow. We expect to continue funding our current and planned operating costs (excluding acquisitions) principally through our cash flow from operations and our acquisition program through cash flow and issuances of equity and debt. In the past, 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 presents a summary of our cash flow activity for the nine months ended September 30, 2022 and 2021:


(in thousands)	For the Nine Months Ended September 30,
	2022		2021		Change
Cash provided by (used in):
Operating activities	$	1,574,049	$	1,527,579	$	46,470
Investing activities	(1,444,163)		(1,318,634)		(125,529)
Financing activities	(679,306)		583,183		(1,262,489)

Analysis of Cash Flow Changes

Operating Activities

Cash provided by operating activities increased by $46.5 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by an increase in cash collections from financial royalty assets of $110.8 million. The increase in royalty receipts was partially offset by lower cash collections from intangible assets of $40.7 million as our royalties on Januvia, Janumet and other DPP-IVs have substantially ended in the three months ended June 30, 2022 and higher interest paid of $39.7 million, primarily due to the first interest payments made on the 2021 Notes in the nine months ended September 30, 2022.

Investing Activities

Cash used in investing activities increased by $125.5 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by a higher use of cash of $341.0 million to purchase available for sale debt securities and a $295.6 million decrease in the overall net cash provided by marketable securities. Partially offsetting this was a $528.4 million decrease in cash used for acquisitions of financial royalty assets.

Financing Activities

Cash used in financing activities in the nine months ended September 30, 2022 was $679.3 million compared to cash provided by financing activities of $583.2 million in the nine months ended September 30, 2021, primarily driven by $1.3 billion net proceeds received from our issuance of 2021 Notes in July 2021.

Sources of Capital

As of September 30, 2022, our cash and cash equivalents and marketable securities totaled $991.6 million and $139.9 million, respectively. As of December 31, 2021, our cash and cash equivalents and marketable securities totaled $1.5 billion and $581.9 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 at September 30, 2022 and December 31, 2021 consisted of the following (in thousands):


	Date of Issuance	Maturity	As of September 30, 2022		As of December 31, 2021
Senior Unsecured Notes:
$1,000,000, 0.75% (issued at 99.322% of par)	9/2020	9/2023	$	1,000,000	$	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			7,300,000		7,300,000
Unamortized debt discount and issuance costs			(188,740)		(203,930)
Total long-term debt, including current portion			7,111,260		7,096,070
Less: Current portion of long-term debt			(996,583)		—
Total long-term debt			$	6,114,677	$	7,096,070

Senior Unsecured Notes

On July 26, 2021, we issued the 2021 Notes with a weighted average coupon rate of 2.80% and requiring annual interest payments of approximately $36.4 million, paid semi-annually. On September 2, 2020, we issued $6.0 billion of senior unsecured note (the “2020 Notes”) with a weighted average coupon rate of 2.125% and requiring annual interest payments of approximately $127.5 million, paid semi-annually. We used the net proceeds from the 2020 Notes offering, together with available cash on hand, to repay in full the outstanding principal amounts of term loans under our prior senior secured credit facilities. We refer to the 2020 Notes and 2021 Notes, collectively, as the “Notes.” Indentures governing the Notes contain certain covenants with which we were in compliance as of September 30, 2022.

Senior Unsecured Revolving Credit Facility

On September 15, 2021, we entered into an amended and restated revolving credit agreement (the “Credit Agreement”). The Credit Agreement amends and restates the credit agreement that our subsidiary RP Holdings, as borrower, entered into on September 18, 2020, which provided for a five-year unsecured Revolving Credit Facility with borrowing capacity of up to $1.5 billion for general corporate purposes. The Credit Agreement extends the maturity of the Revolving Credit Facility to September 15, 2026. The Credit Agreement contains certain customary covenants which we were in compliance as of September 30, 2022. The Revolving Credit Facility remains undrawn and available to us as of September 30, 2022.

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:

•Synthetic Royalties/R&D Funding – 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 and/or marketer of a therapy in exchange for funding. A synthetic royalty may also include contingent milestone payments. We also fund ongoing R&D, typically for large biopharmaceutical companies, in exchange for future royalties and/or milestones if the product or indication we are funding is approved.

•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. One example is our strategic alliance with MSCI to develop thematic life sciences indices.

Distributions to Shareholders

We paid dividends to holders of our Class A ordinary shares of $249.1 million and $211.6 million in the nine months ended September 30, 2022 and 2021, respectively. We do not have a legal obligation to pay a quarterly dividend or dividends at any specified rate or at all.

Other Funding Arrangements

In January 2022, we entered into a long-term funding agreement with Cytokinetics to provide up to $300 million of capital (“Cytokinetics Commercial Launch Funding”) available in five tranches to support Cytokinetics for further development of aficamten and potential commercialization of omecamtiv mecarbil. We funded the initial tranche of $50 million of the Cytokinetics Commercial Launch Funding upon closing. In the three months ended June 30, 2022, we amended the long-term funding agreement with Cytokinetics to increase the required draw amount. 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. As of September 30, 2022, we expect $125 million of the optional $200 million to remain available under the Cytokinetics Commercial Launch Funding due to the likelihood that certain regulatory milestones will not be met by December 31, 2022.

On August 7, 2020, we entered into the Series B Biohaven Preferred Share Purchase Agreement (“Series B Biohaven Preferred Share Agreement”) with Biohaven where we committed to acquire 3,992 shares of Series B Biohaven Preferred Shares at a price of $50,100 per preferred share (the “Commercial Launch Preferred Equity”) for a total of $200 million payable on a quarterly basis from the three months ended March 31, 2021 through the three months ended December 31, 2024. In the three months ended March 31, 2021, we began purchasing the Series B Biohaven Preferred Shares and have a remaining commitment of $85.8 million under our Commercial Launch Preferred Equity as of September 30, 2022.

On October 3, 2022, Pfizer acquired Biohaven, which was a change of control event that accelerated the issuance and redemption of all unissued Series B Biohaven Preferred Shares. In connection with the completion of Pfizer’s acquisition of Biohaven, we have no remaining commitment related to the Series B Biohaven Preferred Shares.

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 requirements, which approximate $44.8 million as of September 30, 2022.

We also have certain milestone payments 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 the nine months ended September 30, 2022, we made a $50 million payment to Cytokinetics in connection with its initiation of the first pivotal clinical trial in oHCM. In the nine months ended September 30, 2021, we made a $100 million payment to Biohaven related to a development milestone that was achieved upon the start of the oral zavegepant Phase 3 program.

Debt Service

As of September 30, 2022, the future principal and interest payments under our Notes over the next five years and thereafter are as follows:


(in thousands)	Principal Payments		Interest Payments
Year
Remainder of 2022	$	—	$	—
2023	1,000,000		163,850
2024	—		156,350
2025	1,000,000		156,350
2026	—		144,350
Thereafter	5,300,000		2,070,250
Total (1)	$	7,300,000	$	2,691,150

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 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 cash receipts, the amounts are variable. 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.

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 September 30, 2022, the par value and carrying value of the total outstanding and guaranteed Notes was $7.3 billion and $7.1 billion, respectively.

The following financial information presents summarized combined balance sheet information as of September 30, 2022 and December 31, 2021 and summarized combined statement of operations information for the nine months ended September 30, 2022 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 September 30, 2022 and December 31, 2021 or for the nine months ended September 30, 2022.


Summarized Combined Balance Sheets
(in thousands)	As of September 30, 2022		As of December 31, 2021
Current assets	$	73,356	$	95,946
Current interest receivable on intercompany notes due from Non-Guarantor Subsidiaries	8,859		16,974
Current intercompany notes receivable due from Non-Guarantor Subsidiaries	272,792		—
Non-current assets	3,309		4,145
Non-current intercompany notes receivable due from Non-Guarantor Subsidiaries	1,990,604		2,039,576

Current liabilities	1,012,209		59,030
Current interest payable on intercompany notes due to Non-Guarantor Subsidiaries	3,611		16,974

Current intercompany notes payable due to Non-Guarantor Subsidiaries	272,792		—
Non-current liabilities	6,113,932		7,095,450
Non-current intercompany notes payable due to Non-Guarantor Subsidiaries	1,675,604		2,039,576


Summarized Combined Statement of Operations	For the Nine Months Ended September 30, 2022
(in thousands)

Interest income on intercompany notes receivable from Non-Guarantor Subsidiaries	$	43,658
Other income	723
Operating expenses	155,585
Interest expense on intercompany notes payable with Non-Guarantor Subsidiaries	38,410

Net loss	149,614

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.

Our most critical accounting policies relate to our financial royalty assets. 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. There have been no material changes to our critical accounting policies and estimates as described in our Annual Report on Form 10-K.

Recent Accounting Pronouncements

See Note 2–Summary of Significant Accounting Policies to our condensed consolidated financial statements for additional information on recently issued accounting standards.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk exposures that affect the disclosures presented in “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in the Annual Report on Form 10-K.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) prior to the filing of this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were, in design and operation, effective to the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the three months ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness Of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

For a description of our legal proceedings, refer to Note 14–Commitments and Contingencies, which is incorporated herein by reference.

Item 1A. RISK FACTORS

There have been no material changes with respect to the risk factors disclosed in the Annual Report on Form 10-K.

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition and results of operations.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS

The following exhibits are filed as a part of this Quarterly Report on Form 10-Q:


Exhibit No.			Description of Exhibit
10.1*			Amended and Restated Management and Services Agreement dated October 3, 2022, among the Company and RP Management, LLC
10.2*			Amended and Restated Management and Services Agreement dated October 3, 2022, among Royalty Pharma Holdings Limited and RP Management, LLC
10.3*			Second Amended and Restated Management and Services Agreement dated October 3, 2022, among Royalty Pharma Investments 2019 ICAV and RP Management, LLC
31.1*			Certification of the Registrant ’s Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934
31.2*			Certification of the Registrant ’s Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934
32*			Certification of the Registrant’ Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS			XBRL Instance Document
101.SCH			XBRL Schema Document
101.CAL			XBRL Calculation Linkbase Document
101.DEF			XBRL Definition Linkbase Document
101.LAB			XBRL Label Linkbase Document
101.PRE			XBRL Presentation Linkbase

* Filed or furnished herewith

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


ROYALTY PHARMA PLC
(Registrant)

/s/ Pablo Legorreta
Pablo Legorreta
Chief Executive Officer

Date: November 8, 2022

/s/ Terrance Coyne
Terrance Coyne
Chief Financial Officer

Date: November 8, 2022