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As filed with the Securities and Exchange Commission on May 22, 2020

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Royalty Pharma plc

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

England and Wales   2834   Not Applicable
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

110 East 59th Street

New York, New York 10022

(212) 883-0200

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Pablo Legorreta

Chief Executive Officer

110 East 59th Street

New York, New York 10022

(212) 883-0200

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Richard D. Truesdell, Jr., Esq.
Marcel Fausten, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
   Arthur R. McGivern, Esq.
Edwin M. O’Connor, Esq.
Benjamin K. Marsh, Esq.
Goodwin Procter LLP
620 Eighth Avenue
New York, New York 10018
(212) 813-8800

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check One):

 

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 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate
Offering Price(1)(2)

 

Amount of

Registration Fee

Class A Ordinary Shares, par value $             per share

  $100,000,000   $12,980

 

 

 

(1)

Estimated solely for the purpose of determining the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

(2)

Includes                Class A ordinary shares subject to the underwriters’ option to purchase additional Class A ordinary shares.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MAY 22, 2020

PRELIMINARY PROSPECTUS

 

 

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            Shares

Royalty Pharma plc

Class A Ordinary Shares

 

 

We are offering              Class A ordinary shares.

This is our initial public offering, and no public market exists for our Class A ordinary shares. We expect the initial public offering price for our Class A ordinary shares to be between $             and $             per share.

Upon completion of this offering, we will have two classes of ordinary shares: the Class A ordinary shares offered hereby and Class B shares, each of which has one vote per share.

This offering is being conducted through what is commonly referred to as an “Up-C” structure, which is often used by partnerships and limited liability companies undertaking an initial public offering. We are a holding company and immediately after the consummation of the Reorganization Transactions and this offering our principal asset will be our ownership interests in Royalty Pharma Holdings Ltd. See “Organizational Structure.” Upon the completion of this offering, we and the Continuing Investors Partnerships (as defined herein) will hold     % and     % of the ordinary shares of Royalty Pharma Holdings Ltd., respectively.

We intend to apply to have our Class A ordinary shares listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “            .”

 

 

Investing in our Class A ordinary shares involves risks. See “Risk Factors” beginning on page 21.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per
Share
     Total  

Public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $                    $                

Proceeds, before expenses, to us(2)

   $                    $                

 

(1)

The underwriters may also exercise their option to purchase up to an additional              Class A ordinary shares from us, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus. Please see “Underwriting” for additional information regarding underwriting compensation.

(2)

We have agreed to reimburse the underwriters for certain expenses in connection with the offering. See “Underwriting.”

The underwriters expect to deliver the shares to purchasers on or about                     , 2020 through the book-entry facilities of The Depository Trust Company.

 

 

 

J.P. Morgan   Morgan Stanley   BofA Securities  

Goldman Sachs & Co. LLC

  Citigroup   UBS Investment Bank
Evercore ISI   Cowen   SunTrust Robinson Humphrey

                    , 2020


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We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. This prospectus does not constitute an offer to sell or a solicitation of any offer to buy any security other than the registered securities to which it relates, nor does it constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in such jurisdiction. The information contained in this prospectus is accurate as of the date on the cover. Our business, financial condition, results of operations and prospects may have changed since then. To the extent required by applicable law, we will update this prospectus during the offering period to reflect material changes to the disclosures contained herein.

For investors outside the United States: We have not and the underwriters have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the Class A ordinary shares and the distribution of this prospectus outside the United States. See “Underwriting.”

Through and including                     , 2020 (the 25th day after the date of this prospectus), all dealers effecting transactions in our ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

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BASIS OF PRESENTATION

Prior to the consummation of the Reorganization Transactions described under “Organizational Structure—Reorganization Transactions,” in this prospectus, “Royalty Pharma,” the “Company,” “we,” “us” and “our” refer to Royalty Pharma Investments (“Old RPI”) and its controlled subsidiaries, RPI Finance Trust (“RPIFT”), RPI Acquisitions (Ireland), Limited (“RPI Acquisitions”), which are 100% owned, and Royalty Pharma Collection Trust (the “Collection Trust”), which is 80% owned by RPIFT and 20% owned by Royalty Pharma Select Finance Trust, a Delaware statutory trust (“RPSFT”). After the consummation of the Reorganization Transactions described in this prospectus, “Royalty Pharma plc,” “Royalty Pharma,” the “Company,” “we,” “us” and “our” refer to Royalty Pharma plc, an English public limited company incorporated under the laws of England and Wales, and its subsidiaries on a consolidated basis, as they exist upon the closing of this offering.

The “Manager” refers to RP Management, LLC, a Delaware limited liability company, our external advisor which provides us with all advisory and day-to-day management services.

Unless the context otherwise requires, “our royalties,” “our product portfolio” and “our interests in products” refer to our contractual interests in revenue streams from the sale of biopharmaceutical products. When we refer to the “royalty receipts” generated by our portfolio, we are referring to the summation of the following line items from our GAAP Statement of Cash Flows: Cash collections from royalty assets (both financial assets and intangible assets), Other royalty cash collections and Distributions from non-consolidated affiliates. When we discuss our acquisition of royalties, this includes various structures, including third-party royalties and similar payment streams such as earn-outs that are tied to sales of biopharmaceutical products, synthetic or hybrid royalties, research and development (“R&D”) funding and acquisitions of companies that own significant royalties and similar payment streams, as described further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Uses of Capital.” Acquisitions of royalties can be accounted for in several ways, typically as a financial asset or an intangible asset. Within the financial asset classification, we acquire royalties on both approved products and development-stage product candidates. Beyond financial assets and intangible assets, we may also acquire royalties through an equity investment where our underlying investee is partnering with biopharmaceutical companies to jointly develop a product for which marketing and commercialization is or will be the responsibility of such biopharmaceutical company partner. Alternatively, we may acquire other contractual rights to royalty streams classified as financial instruments, such as acquisitions of earnout payments representing an indirect interest in sales of a pharmaceutical product. Our investment in Biogen’s Tecfidera, classified as available for sale debt securities, is one such example. Finally, royalties can arise through our research and development funding arrangements, whereby royalty revenue is generated through milestones or royalties we are entitled to on products coming out of our research and development collaboration arrangements.

Unless otherwise indicated, all references in this prospectus to monetary amounts are to U.S. dollars. Certain monetary amounts, percentages and other figures included elsewhere in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

MARKET AND INDUSTRY DATA

This prospectus includes industry and market data that we obtained from periodic industry publications, third-party studies and surveys, filings of public companies in our industry and internal company data. These sources include government and industry sources. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Although we believe the industry and market data to be reliable as of the date of this prospectus, this information could prove to be inaccurate. Industry and market data could be wrong because of the method by which sources obtained their data and because information cannot always be verified with complete certainty due to the limits on the availability

 

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and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. In addition, we do not know all of the assumptions regarding general economic conditions or growth that were used in preparing the forecasts from the sources relied upon or cited herein.

TRADEMARKS AND TRADE NAMES

This prospectus contains trademarks, service marks and trade names of third parties or their products, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and should not be read to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, service marks and trade names.

NON-GAAP FINANCIAL MEASURES

In this prospectus, we have included financial measures that are compiled in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) as well as certain non-GAAP financial measures. These non-GAAP financial measures include Adjusted Cash Receipts, Adjusted EBITDA and Adjusted Cash Flow, which are each 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 Wall Street 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 our business is heavily reliant on our 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 our business and permit investors to more fully understand how management assesses the performance of the Company, 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 the Company’s ability to generate cash from operations. Both measures are indications of the strength of the Company and the performance of our 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 the Company’s 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

 

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lenders requiring the Company 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, to evaluate the performance of the business and to evaluate the Company’s performance as compared to its 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 sell-side research analysts, investors, and other interested parties to evaluate companies in our industry.

The non-GAAP financial measures used in this prospectus 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. For more information regarding these non-GAAP financial measures and a reconciliation of such measures to comparable GAAP financial measures, see “Selected Historical Financial Data—Non-GAAP Reconciliations.”

 

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PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in our Class A ordinary shares. You should read this entire prospectus carefully, including the “Risk Factors” section and the consolidated financial statements and the notes to those statements.

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, including Imbruvica, Januvia, Kalydeco, Trikafta, Truvada, Tysabri and Xtandi. 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 believe that our significant scale, flexible business model and extensive expertise uniquely position us to take advantage of the increasing innovation in the biopharmaceutical industry. We seek to create favorable outcomes for all parties and play an important role in providing capital to the biopharmaceutical ecosystem that supports innovation and positively impacts human health.

Since our founding in 1996 through December 31, 2019, we have deployed a total of $18 billion of cash to acquire biopharmaceutical royalties. We estimate that this represents more than 50% of all royalty transactions during this period. Our portfolio today consists of royalties on more than 45 marketed therapies and four development-stage product candidates. The therapies in our portfolio address therapeutic areas such as rare diseases, oncology, neurology, HIV, cardiology and diabetes, and are delivered to patients across both primary and specialty care settings. In 2019, a total of 22 therapies in our portfolio each generated 2019 end-market sales of more than $1 billion, including seven therapies that each generated 2019 end-market sales of more than $3 billion. In 2019, we generated operating cash flow of $1.67 billion, Adjusted Cash Receipts of $2.11 billion and Adjusted Cash Flow of $1.64 billion. Between 2012 and 2019, we grew our Adjusted Cash Receipts at a compound annual growth rate (“CAGR”) of 11%.

Our business is supported by significant growth and unprecedented innovation within the biopharmaceutical industry. Global prescription pharmaceutical sales are expected to grow from approximately $875 billion in 2019 to approximately $1.2 trillion in 2024, representing a CAGR of 7%, according to EvaluatePharma despite nearly $100 billion in cumulative sales being lost to expected patent expiries during the same period. The growth of the biopharmaceutical industry is driven by global, secular trends, including population growth, increasing life expectancy and growth of the middle classes in emerging markets. In addition, a dramatic acceleration of medical research in recent years has led to a better understanding of the molecular origins of disease and identification of potential targets for therapeutic intervention. This has created research and development opportunities for new drugs. The significant pace of biopharmaceutical innovation coupled with the proliferation of new biotechnology companies and the increasing cost of drug development has created a significant capital need over recent years that we believe will provide a sustainable tailwind for our business.

Royalties play a fundamental and growing role in the biopharmaceutical industry. As a result of the increasing cost and complexity of drug development, the creation of a new drug today typically involves a number of industry participants. Academia and other research institutions conduct basic research and license new technologies to industry for further development. Biotechnology companies typically in-license these new



 

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technologies, add value through applied research and early-stage clinical development, and then either out-license the resulting development-stage product candidates to large biopharmaceutical companies for late-stage clinical development and commercialization, or commercialize the products themselves. As new drugs are transferred along this value chain, royalties are created as compensation for the licensing or selling institutions. Biotechnology companies are also increasingly creating royalties on existing products within their portfolios, known as synthetic royalties, in order to provide a source of non-dilutive capital to fund their businesses. As a result of this industry paradigm, the development of a single new drug can lead to the creation of multiple royalties. Given our leadership position within the royalty sector, we are able to capitalize on the growing volumes of royalties that are created as new therapies are developed to address unmet medical needs.

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 in the most attractive therapies across the biopharmaceutical industry. The success of our business has been the result of a focused strategy of actively identifying and tracking the development and commercialization of key new therapies, allowing us to move quickly to make acquisitions when opportunities arise. We acquire royalties on approved products, often in the early stages of their commercial launches, and development-stage product candidates with strong proof of concept data, mitigating development risk and expanding our opportunity set.

We are dedicated to the identification, evaluation and acquisition of attractive royalties and royalty-related assets. We have demonstrated a consistent ability to identify and acquire royalties on leading biopharmaceutical therapies. In our first decade of operations, we acquired royalties on premier therapeutic areas and drug classes, including oncology (Neulasta, Neupogen, Rituxan), neuropathic pain (Lyrica), HIV (Biktarvy, Genvoya, Prezista, Symtuza, Truvada, Atripla) and TNF inhibitors (Humira, Remicade, Cimzia). More recently, we have acquired royalties on a new wave of leading therapies, including both approved products and development-stage product candidates in cystic fibrosis (Kalydeco, Orkambi, Symdeko, Trikafta), oncology (Ibrance, Imbruvica, Trodelvy (sacituzumab govitecan-hziy), Tazverik, Xtandi), multiple sclerosis (Tecfidera, Tysabri) and migraine (Emgality, Nurtec ODT (rimegepant), vazegepant), among others. Going forward, we believe we are well positioned to continue to acquire royalties on leading therapies from across the biopharmaceutical industry to generate sustainable growth and create long-term value for our shareholders.



 

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We believe that we have established ourselves as a partner of choice across the entire biopharmaceutical ecosystem, collaborating with a wide array of institutions to fund innovation. The graphic below provides examples of the broad array of companies and institutions from which we have acquired royalties, and the leading therapies on which we have acquired royalties. The therapies shown reflect examples from our current portfolio as well as earlier acquisitions.

 

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Our Portfolio

Our current portfolio includes royalties on more than 45 commercial products and four development-stage product candidates. Growth Products are defined as royalties with a duration expiring after December 31, 2020. We define all other royalties on approved products as Mature Products. The following table provides an overview of our current portfolio of royalties:

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Our Strengths

We believe that the following elements of our business and product portfolio provide a unique and compelling proposition to investors seeking exposure to the biopharmaceutical sector.

 

   

Our portfolio provides direct exposure to a broad array of blockbuster therapies. Our portfolio of royalties entitles us to payments based directly on the top-line sales of more blockbuster therapies than any other global biopharmaceutical company. In 2019, our portfolio included royalties on 22 therapies that each have estimated end-market sales of more than $1 billion, including seven therapies that each have estimated end-market sales of more than $3 billion.

 

   

Our portfolio is highly diversified across products, therapeutic areas and marketers. Our portfolio consists of royalties on more than 45 marketed biopharmaceutical therapies which address a wide range of therapeutic areas, including rare diseases, oncology, neurology, HIV, cardiology and diabetes. In the year ended December 31, 2019, while the top five therapies accounted for 56% of our royalty receipts (excluding receipts from Tecfidera milestone payments), no individual therapy accounted for more than 16% of our royalty receipts, no therapeutic area accounted for more than 22% of our royalty receipts and no marketer represented more than 20% of our royalty receipts.

 

   

The key growth-driving royalties in our portfolio are protected by long patent lives. The estimated weighted average royalty duration of our portfolio is approximately 15 years based on projected cumulative cash royalty receipts. Our largest marketed royalty in 2019 was on Vertex’s cystic fibrosis franchise, and existing patent applications covering Trikafta, the most significant product in that franchise, are expected to provide exclusivity through 2037. Several of our marketed royalties have unlimited durations and could provide cash flows for many years after key patents have expired.

 

   

We have a long track record of identifying and acquiring royalties on blockbuster therapies and growing our royalty receipts. Between 2017 and 2019, royalty receipts from our Growth Portfolio grew at a CAGR of nearly 40%. Between 2012, when we began acquiring royalties on development-stage product candidates, and 2019, we grew our Adjusted Cash Receipts from $1.0 billion to $2.1 billion, reflecting a CAGR of 11%. Since the beginning of 2012 through 2019, we deployed $13.0 billion of cash to acquire new royalties, representing average annual royalty acquisitions of $1.6 billion. These acquisitions have added more than 25 new royalties to our portfolio, including ten royalties on therapies with estimated 2019 end market sales of more than $1 billion, representing an average of more than one new blockbuster per year. We are selective in the royalties that we acquire, and a number of our royalty assets have outperformed sell-side equity research analysts’ consensus forecasts, allowing us to capture upside that was under-appreciated by the market.

 

   

We have a simple and highly efficient operating model which generates substantial cash flow for reinvestment in new biopharmaceutical royalties. Our capital-efficient operating model requires limited operating expenses and no material capital investment in fixed assets or infrastructure in order to support the ongoing growth of our business. As a result, we generate high Adjusted Cash Flow relative to our Adjusted Cash Receipts and we convert the vast majority of our Adjusted Cash Flow into operating cash flow. Between 2015 and 2019, we generated a total of $11.1 billion of Adjusted Cash Receipts and $8.9 billion of Adjusted Cash Flow. Our high cash flow conversion provides us with significant capital that we can deploy within our business. Our primary focus for capital deployment is on royalty acquisitions, through which we believe we can continue to grow our Adjusted Cash Receipts and Adjusted Cash Flow and to create significant value for our shareholders.



 

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Our business model captures many of the most attractive aspects of the biopharmaceutical industry, but with reduced exposure to many common industry challenges. The biopharmaceutical industry benefits from a number of highly attractive characteristics, including long product life cycles, significant barriers to entry and non-cyclical revenues. 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 from across the biopharmaceutical industry. We focus on the acquisition of royalties on approved products or development-stage product candidates that have generated strong proof of concept data, avoiding the risks associated with early stage research and development. By acquiring royalties, we are able to realize payments based directly on the top-line sales of leading biopharmaceutical therapies, without the costs associated with fixed research and development, manufacturing and commercial infrastructure.

 

   

Our unique role in the biopharmaceutical ecosystem positions us to benefit from multiple compounding growth drivers. As a result of our significant scale and highly flexible business model, we believe that we are uniquely positioned to capitalize on multiple compounding growth drivers: an accelerating understanding of the molecular origins of disease, technological innovation leading to the creation of new treatment modalities, increasing number of biopharmaceutical industry participants with significant capital needs, competitive industry dynamics which reward companies that can rapidly execute broad clinical development programs, increasing FDA drug approvals which reached an all-time high in 2018 and the potential for multiple royalties to be created from each new drug that reaches the market.

 

   

We have the ability to capitalize on innovation from across the biopharmaceutical ecosystem. Our approach is to first assess innovative science in areas of significant unmet medical need and then evaluate how to acquire royalties on therapies that we believe are attractive. We closely follow a broad range of therapeutic areas and treatment modalities and are therefore able to move quickly when we identify compelling opportunities to acquire new royalties. We believe that we have established ourselves as a partner of choice to the biopharmaceutical industry, extending from innovators from academic institutions, research hospitals and not-for-profits through small and mid-cap biotechnology companies to leading global pharmaceutical companies.

 

   

We have a talented, long-tenured team with deep relevant experience. Our team has significant experience identifying, evaluating and acquiring royalties on biopharmaceutical therapies. Together they have been responsible for $18 billion of acquisitions of biopharmaceutical royalties and related assets from 1996 through 2019. Our acquisitions have included many of the industry’s leading therapies across the past three decades, such as Humira, Imbruvica, Trikafta, Lyrica, Tecfidera, Xtandi, Neupogen and Rituxan, among others.

Our Competitive Advantages

We believe that we have established a number of significant competitive advantages that will enable us to further advance our leadership position and our status as a partner of choice to the biopharmaceutical ecosystem.

 

   

We are the leader in acquiring biopharmaceutical royalties. Since our founding in 1996 through December 31, 2019, we deployed $18 billion of cash for royalty acquisitions. We estimate this to represent a market share of more than 50% by value during that period. This compares to our next nearest competitor, which we believe has executed $2.4 billion of transactions, which we estimate to represent market share of 7% during that period. Since 1996, we have executed 11 of the 13 royalty transactions that have occurred with an aggregate value of more than $500 million, representing estimated market share of more than 80% in this transaction size range.

 

   

We have deep access to attractively priced investment grade debt that provides a significant cost of capital advantage. We believe that we have an attractive cost of capital that enables us to acquire high-quality biopharmaceutical royalties at competitive prices while still creating value for our shareholders.



 

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As of May 22, 2020, we had an aggregate of $6.0 billion of secured credit facilities in place with a blended cost of 1.8%, based on London Interbank Offered Rates (“LIBOR”).

 

   

We have a highly flexible business model that provides multiple avenues to sustain the growth of our royalty receipts. Our model allows us to invest across a wide range of parameters, including therapeutic area, treatment modality, development-stage and transaction structure. We seek to acquire royalties on the most innovative and high potential therapies across the biopharmaceutical industry, including multiple products per therapeutic class. Our broad scope maximizes our total addressable market and has allowed us to provide a broad range of solutions to our partners across the biopharmaceutical ecosystem.

 

   

We seek to provide a “win-win” solution for our partners. We believe that our ability to provide mutually beneficial outcomes for our partners is important for the ongoing success of our business and for the maintenance of our leadership position within our industry. We believe that we are able to provide these favorable outcomes as a result of our flexible business model, which enables us to tailor our approach to match the specific needs of our partners.

 

   

We have highly differentiated transaction capabilities. We have deep experience in royalty valuation, transaction structuring and transaction execution, as well as extensive knowledge across a wide range of therapeutic areas, drug classes and treatment modalities. We have established streamlined internal processes that allow us to quickly assess and gain conviction in the value of assets when opportunities arise and execute transactions efficiently. This enables us to provide our partners with a high degree of transaction certainty.

Our Growth Strategies

We intend to grow our business by continuing to be a partner of choice to constituents across the biopharmaceutical value chain, extending our leadership position in biopharmaceutical royalties and continuing to expand our role funding innovation within the biopharmaceutical industry. The key elements of our growth strategy are summarized below.

 

   

Continue to acquire royalties on approved products which provide dependable cash flows. The biopharmaceutical industry is undergoing a period of strong growth and unprecedented innovation. We intend to capitalize on this innovation by continuing to acquire royalties on approved products, particularly those that are early in their life cycles, so that we can participate in the growth that is generated as they penetrate their markets, and enter new indications or geographies.

 

   

Acquire royalties on attractive development-stage product candidates in the late-stages of clinical development. We intend to continue to supplement our diverse portfolio of royalties on approved products with acquisitions of royalties on development-stage product candidates that have generated strong clinical proof of concept data. We seek to acquire royalties on innovative development-stage product candidates in the late-stages of clinical development, in order to minimize risk while providing attractive upside potential. There are a number of different approaches that we can utilize to acquire such royalties. We can collaborate directly with the innovator to acquire a new synthetic royalty, monetize an existing royalty held by an innovator that has out-licensed a development-stage product candidate, or provide capital to an innovator to co-fund clinical development of a development-stage product candidate in exchange for a share of future product sales, if approved.

 

   

Further expand our market opportunity by acquiring royalties in connection with M&A transactions. We acquire royalties in connection with merger and acquisition (“M&A”) transactions, in some cases 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 biopharmaceutical companies to acquire other biopharmaceutical companies that own significant royalties. We may also seek to acquire biopharmaceutical companies that have significant royalties or with products that could be out-licensed to create a royalty.



 

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Continue to grow our network of partners, particularly outside the United States. Given the significant growth of the biopharmaceutical ecosystem globally, we are expanding our network of relationships with potential partners in regions outside the United States. Based on data from EvaluatePharma, we estimate that between 2015 and 2019, there were more than $300 billion in biopharmaceutical out-licensing transactions, where a value was disclosed, including approximately 50% or $150 billion involving licensors based outside the United States. This creates additional opportunities for us to partner with these licensors to acquire the royalties that typically result from such licensing transactions.

 

   

Maintain our strong and cohesive company culture as we grow. We have a strong, collaborative and cohesive culture that we have established over the 23 years since our founding. Our culture is defined by a focus on teamwork, creativity and rigorous thought, as well as a commitment to funding innovation in the biopharmaceutical industry which ultimately seeks to improve the lives of patients. As we become a public company and embark on the next stage of our growth, we are committed to maintaining this culture as we believe it is critical to our ongoing success.

Our Opportunity

We are able to capitalize on the growing volumes of royalties that are created as new therapies move through the drug development value chain. We are also able to provide tailored solutions to the specific needs of the parties within the biopharmaceutical ecosystem. These parties include:

 

   

Academic Institutions, Research Hospitals and Not-for-Profits—We acquire existing royalties, typically in order to facilitate the diversification of asset portfolios and/or to provide funds for the support of ongoing scientific research or major capital projects.

 

   

Small and Mid-Sized Biotechnology Companies—We provide non-dilutive financing through the acquisition of existing royalties, the acquisition of new synthetic royalties or the funding of clinical trials in exchange for future royalties.

 

   

Global Biopharmaceutical Companies—We acquire non-strategic, passive royalties or provide funding for clinical trials in exchange for future royalties.

Our Approach

Our approach is to first assess innovative science in areas of significant unmet medical need and then evaluate how to acquire royalties on therapies that we believe are attractive. Our team of scientific experts actively monitors the evolving treatment landscape across many therapeutic areas and treatment modalities in order to identify new opportunities. We analyze a wide range of scientific data and stay in constant communication with leading physicians, scientists, biopharmaceutical executives and venture capital firms. This allows us to quickly assess and gain conviction in the value of assets when acquisition opportunities arise. Our focus is to create significant long-term value for our shareholders by acquiring both approved products and development-stage product candidates through a variety of structures. This will enable us to continue building a well-diversified portfolio of royalties on leading products.

Our History and Team

Since our inception in 1996, Royalty Pharma has been a leader in establishing royalties as a new source of funding in the biopharmaceutical industry. The significant success of our business has been the result of a singular, focused strategy of actively identifying and tracking the development and commercialization of key new therapies for the treatment of diseases with significant unmet medical needs and revenue potential, and sourcing, evaluating and acquiring long duration royalties on those products.



 

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We have sought to continuously adapt and evolve our strategy, business model and capital structure in order to expand our market opportunity, enhance our competitive advantage, optimize our cost of capital and continue to create significant value for our shareholders. Royalty Pharma was initially founded as a finite-life, serial fund. In 2004, Royalty Pharma converted into an evergreen business, with an indefinite life, and created the first securitization debt facility backed by pharmaceutical royalties. In 2007, Royalty Pharma converted its securitization debt facility into a syndicated term loan facility. Each of these changes has led to a lower blended cost of capital and ever greater scale, further driving our ability to deploy capital and capture market share. We believe that our initial public offering is the next logical step in the evolution of our strategy, business model and capital structure.

The graphic below provides additional detail on the scale of our royalty acquisitions and market share across these three phases of our history.

 

 

 

LOGO

 

1.

Data reflects full announced transaction values; total royalty acquisitions and estimated market share shown to current; average annual royalty acquisitions as of year-end 2019

The Manager

Since the inception of our business, all aspects of our business and operations have been conducted by RP Management, LLC, a Delaware limited liability company (the “Manager”), pursuant to advisory and management agreements. Mr. Legorreta, our Chief Executive Officer and the Chairman of our Board, and our other key advisory professionals are employees of the Manager. The Manager is an “investment adviser” registered with the U.S. Securities and Exchange Commission (the “SEC”) under the U.S. Investment Advisers Act of 1940. In connection with this offering, we, RP Holdings and RPI will each enter into a management agreement with the Manager (collectively, the “Management Agreement”). The Manager (or an affiliate of the Manager) will receive a quarterly Operating and Personnel Payment (as defined herein) in cash pursuant to the Management Agreement. We have no personnel of our own and the Operating and Personnel Payment is intended to fund operating and personnel costs of the Manager and its affiliates. The Operating and Personnel Payment is equal to 6.5% of the Adjusted Cash Receipts for such quarter and 0.25% of the GAAP value of our security investments as of the end of such quarter. In addition, EPA Holdings (as defined herein), an affiliate of the Manager, will be entitled, subject to applicable law, through its ownership of RP Holdings Class C Special Interests, to future quarterly equity distributions from Royalty Pharma Holdings Ltd. (“RP Holdings”) of RP Holdings Class B Interests based on our performance, which will be exchanged for our Class A ordinary shares. The equity distributions are made on a portfolio-by-portfolio basis (with portfolios comprised of investments made during sequential two-year periods) and are equal to, in respect of each portfolio, 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



 

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cost in respect of such portfolio)) for such portfolio for the applicable measuring period (“Equity Performance Awards”). We do not currently expect any material Equity Performance Awards resulting in the issuance of such Class A ordinary shares to be made until the late 2020s. See “Certain Relationships and Related Party Transactions.”

The Reorganization Transactions

We are a newly formed English public limited company created for the purpose of consolidating our predecessor entities and facilitating this offering. Immediately after the consummation of the Reorganization Transactions (as defined below) and this offering our principal asset will be our ownership of all of the RP Holdings Class A Interests.

The diagram below depicts our organizational structure immediately following this offering. The diagram is provided for illustrative purposes only and does not represent all legal entities affiliated with our organizational structure.

 

 

LOGO

Pursuant to an exchange offer transaction that was consummated on February 11, 2020, indirect investors in Old RPI were offered the opportunity to exchange their indirect investments in Old RPI for limited partnership interests in RPI US Partners 2019, LP (the “Continuing US Investors Partnership”) and RPI International Holdings 2019, LP (the “Continuing International Investors Partnership” and together with the Continuing US Investors Partnership, the “Continuing Investors Partnerships”). The exchange offer transaction, together with (i) the concurrent incurrence of indebtedness under our new credit facility 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 this offering, are referred to as the “Exchange Offer Transactions.” As used in this prospectus, “Continuing Investors” refers to the investors who have received limited partnership interests in the Continuing Investors Partnerships prior to this offering. The Continuing Investors Partnerships own, directly or indirectly, all of the outstanding RP Holdings Class B ordinary shares, which will be initially held through a depositary. We refer to the RP Holdings Class B ordinary shares or the depositary receipts that represent them as the “RP Holdings Class B Interests.” As a result of the Exchange Offer Transactions, a wholly-owned subsidiary of RP Holdings owns 82% of the economic interest in Old RPI. Investors that did not elect to participate in the Exchange Offer Transactions



 

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continue to own their interests in Old RPI, which will cease to make new investments after June 30, 2020. From the Exchange Date until the expiration of the investment period of RPI US Partners, LP; RPI US Partners II, LP; RPI International Partners, LP; and RPI International Partners II, LP (the “Legacy Investors Partnerships”) on June 30, 2020 (the “Legacy Date”), RPI will participate proportionately with the Legacy Investors Partnerships in any acquisition made by Old RPI. Following the Legacy Date, Old RPI will cease making new acquisitions.

Prior to, and as a condition precedent to the closing of this offering, various reorganization transactions will be effected, including the following:

 

   

the Exchange Offer Transactions; and

 

   

the execution of the Management Agreement with the Manager.

We refer to these transactions collectively as the “Reorganization Transactions.”

Summary of the Offering Structure

 

   

This offering is being conducted through what is commonly referred to as an “Up-C” structure, which is often used by partnerships and limited liability companies when they decide to undertake an initial public offering.

 

   

After the completion of this offering, we will operate and control the business affairs of RP Holdings through our ownership of 100% of RP Holdings’ Class A ordinary shares (the “RP Holdings Class A Interests”), conduct our business through RP Holdings and its subsidiaries and include RP Holdings and its subsidiaries in our consolidated financial statements.

 

   

Investors in this offering will purchase our Class A ordinary shares.

 

   

Upon completion of this offering, the Continuing Investors Partnerships will hold a number of our Class B shares equal to the number of RP Holdings Class B Interests held by them at such time. Our Class B shares will not be publicly traded and will not entitle holders to receive dividends or distributions upon a liquidation, dissolution or winding up of the Company. However, the RP Holdings Class B Interests will be entitled to dividends and distributions.

 

   

Our Class A ordinary and Class B shares will vote together as a single class on all matters submitted to a vote of shareholders, except as otherwise required by applicable law, with each share entitled to one vote.

 

   

Continuing International Investors Partnership and Continuing US Investors Partnership will, upon instruction of any of their partners from time to time following the consummation of the offering, distribute the RP Holdings Class B Interests held on behalf of such partner that are subject to such instruction which will then be exchanged for our Class A ordinary shares (subject to the terms of the underwriters’ “lock-up” agreements described in “Underwriting”). Pursuant to agreements with the Continuing Investors Partnerships, certain of the Continuing Investors have agreed to exchange, shortly before or upon consummation of this offering, interests in the Continuing Investors Partnerships into an aggregate of          Class A ordinary shares representing     % of the total outstanding Class A ordinary shares after giving effect to the offering.

 

   

As a result of the Reorganization Transactions and this offering, upon completion of this offering:

 

   

Our Class A ordinary shares will be held as follows:

 

   

                 shares (or                  shares if the underwriters exercise in full their option to purchase additional Class A ordinary shares) by investors in this offering.

 

   

Our Class B shares (together with the same number of RP Holdings Class B Interests) will be held as follows:

 

   

                 shares by the Continuing Investors Partnerships.



 

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The combined voting power in the Company will be as follows:

 

   

    % by investors in this offering (or     % if the underwriters exercise in full their option to purchase additional Class A ordinary shares); and

 

   

    % by the Continuing Investors Partnerships (or     % if the underwriters exercise in full their option to purchase additional Class A ordinary shares). The Continuing Investors will have the right to cause the Continuing Investors Partnerships to vote their allocable portion of Class B shares held on their behalf in the manner directed by them.

See “Risk Factors—Risks Relating to Our Organization and Structure,” “Organizational Structure” and “Certain Relationships and Related Party Transactions.”

Risk Factors

Before you invest in our Class A ordinary shares, you should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk Factors.” These risks and uncertainties include factors related to:

 

   

sales risks of biopharmaceutical products on which we receive royalties;

 

   

the ability of the Manager to identify suitable assets for us to acquire;

 

   

uncertainties related to the acquisition of interests in development-stage biopharmaceutical product candidates and our strategy to add development-stage product candidates and late stage funding opportunities 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 the Manager or its affiliates to attract and retain highly talented professionals;

 

   

our expected status as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes and the resulting consequences to U.S. investors, including in the case that a “qualified electing fund” election is not timely made with respect to us;

 

   

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

 

   

the risks, uncertainties and other factors we identify in “Risk Factors” and elsewhere in this prospectus and in our filings with the SEC.

Corporate Information

Our predecessor was founded in 1996 and we were incorporated under the laws of England and Wales on February 6, 2020. We are a newly formed company, previously had no material assets and have not engaged in any business or other activities except in connection with the Reorganization Transactions described under “Organizational Structure.” Our principal executive offices are located at 110 East 59th Street, New York, NY 10022, and our telephone number is (212) 883-0200. Our Internet site is www.royaltypharma.com. Our website and the information contained therein or connected thereto is not incorporated into this prospectus or the registration statement of which it forms a part. Our agent for service in the United States is CSC North America located at 251 Little Falls Drive, Wilmington, Delaware, 19808.



 

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OFFERING

 

Class A ordinary shares offered by us

             shares.

 

Option to purchase additional Class A ordinary shares

We have granted the underwriters an option to purchase up to an additional              Class A ordinary shares, exercisable for 30 days after the date of this prospectus.

 

Class A ordinary shares to be outstanding after this offering

             shares (or              shares if the underwriters exercise in full their option to purchase additional Class A ordinary shares from us). If all then outstanding RP Holdings Class B Interests were exchanged for newly issued Class A ordinary shares on a one-for-one basis, Class A ordinary shares (or              shares if the underwriters’ option is exercised in full) would be outstanding.

 

Class B shares to be outstanding after this offering

             shares.

 

Voting power held by holders of Class A ordinary shares after giving effect to this offering

    % (or     % if the underwriters exercise in full their option to purchase additional Class A ordinary shares from us).

 

Voting power held by holders of Class B shares after giving effect to this offering

    % (or     % if the underwriters exercise in full their option to purchase additional Class A ordinary shares from us).

 

Use of proceeds

We estimate that the net proceeds to us from the sale of our Class A ordinary shares in this offering will be approximately $            , or approximately $             if the underwriters exercise their option to purchase additional Class A ordinary shares in full, assuming an initial public offering price of $            per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses. Each $1 increase (decrease) in the public offering price per share would increase (decrease) our net proceeds, after deducting estimated underwriting discounts and commissions, by $            million (assuming no exercise of the underwriters’ option to purchase Class A additional shares).

 

  We intend to use the net proceeds from the sale of our Class A ordinary shares to acquire royalties and for general corporate purposes. See “Use of Proceeds.”

 

Proposed symbol

“            ”

 

Voting rights

Each of our Class A ordinary shares and Class B shares entitles its holder to one vote on all matters to be voted on by our shareholders.


 

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Holders of our Class A ordinary shares and Class B shares will vote together as a single class on all matters presented to our shareholders for their vote or approval, except as otherwise required by applicable law. See “Description of Share Capital.”

 

  The Continuing Investors Partnerships, which own all of our outstanding Class B shares, will vote such shares as directed by the Continuing Investors.

 

Dividends

We currently intend to pay quarterly cash dividends following the offering beginning at the end of September and for each quarter thereafter. Assuming that              Class A ordinary shares are outstanding after this offering, we anticipate that the amount of our quarterly cash dividends will be $            per share.

 

  Immediately following this offering, we will be a holding company, and our principal asset will be a controlling equity interest in RP Holdings. If we decide to pay a dividend, to the extent permitted by applicable law, we will need to cause RP Holdings to make distributions to us in an amount sufficient to cover such dividend and RP Holdings will need to cause its subsidiaries to make distributions in an amount sufficient to cover such dividend payable by it. If RP Holdings makes such distributions to us, the Continuing Investors Partnerships will be entitled to receive pro rata distributions on their RP Holdings Class B Interests.

 

  Subject to the foregoing, the payment of any interim dividends by us will be at the sole discretion of our board of directors, which may change our dividend policy at any time, and will be paid out of our distributable reserves. Our board of directors will take into account general economic and business conditions, our strategic plans and prospects, our business and asset acquisition opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions and obligations (including our Senior Secured Credit Facilities, defined herein), legal, tax and regulatory restrictions, other constraints on the payment of dividends by us to our shareholders, and such other factors as our board of directors may deem relevant.

 

For limitations on our ability to pay dividends, see “Dividend Policy.”

 

Taxation

We generally do not expect to be subject to Irish or U.S. federal income taxation, or to be subject to a material amount of taxation in the U.K. or any other jurisdiction. We will be classified as a corporation for U.S. federal income tax purposes and expect to be treated as a passive foreign investment company (“PFIC”), for U.S. federal income tax purposes. Assuming we are a PFIC, a shareholder that is otherwise subject to U.S. federal income taxation will be subject to certain adverse tax consequences as a result of owning our Class A ordinary shares, including in connection with



 

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certain distributions and dispositions, unless it makes certain PFIC-related elections, including an election to recognize its pro rata share of our income on a current basis as though it were deemed distributed to it and to pay taxes on such deemed distribution regardless of whether we make actual cash distributions during the taxable year. Although we currently intend to make annual cash distributions in an amount sufficient to cover the anticipated U.S. federal, state and local income tax liabilities of our shareholders in respect of their pro rata share of such income, it is possible that such tax liabilities will exceed the cash dividends that such shareholders receive from us. See “Material Tax Considerations—Material U.S. Federal Income Tax Considerations—Taxation of Shareholders—Taxable U.S. Holders—Passive Foreign Investment Companies” and “Dividend Policy.”

 

Leverage

We currently utilize, and expect to continue to utilize, leverage and are therefore exposed to risks related to our leverage. The use of leverage magnifies the potential for loss and may increase the risks associated with investing in our Class A ordinary shares. See “Risk Factors—Risks Relating to Our Business—We use leverage in connection with our capital deployment, which magnifies the potential for loss if the royalties acquired do not generate sufficient income to us.”

 

Operating and personnel payment

We will pay the Manager a quarterly Operating and Personnel Payment pursuant to the Management Agreement. We have no personnel of our own and the Operating and Personnel Payment is intended to fund operating and personnel costs of the Manager and its affiliates. The Operating and Personnel Payment is based on Adjusted Cash Receipts and the value of certain investments and will not be subject to adjustment based on actual operating and personnel expenses of the Manager. See “Certain Relationships and Related Party Transactions—Management Agreement.”

 

Equity performance awards

EPA Holdings, an affiliate of the Manager, holds all of the RP Holdings Class C Special Interests which entitles it to the Equity Performance Awards based on our performance. See “Certain Relationships and Related Party Transactions—Equity Performance Awards.”

 

Exchange agreement

Continuing International Investors Partnership and Continuing US Investors Partnership will, upon instruction of any of their partners from time to time following the consummation of the offering, distribute the RP Holdings Class B Interests held on behalf of such partner that are subject to such instruction which will then be exchanged for our Class A ordinary shares (subject to the terms of the underwriters’ “lock-up” agreements). Pursuant to agreements with the Continuing Investors Partnerships, certain of the Continuing Investors have agreed to exchange, shortly before or upon consummation of this offering, interests in the Continuing Investors Partnerships into an aggregate of          Class A ordinary shares representing     % of the



 

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total outstanding Class A ordinary shares after giving effect to the offering.

 

Risk Factors

See “Risk Factors” for a discussion of risks you should consider carefully before deciding to invest in our Class A ordinary shares.

Unless we specifically state otherwise, the information in this prospectus does not take into account:

 

   

the issuance of up to              Class A ordinary shares issuable upon exercise of the underwriters’ option to purchase additional Class A ordinary shares from us; and

 

   

the issuance of up to              Class A ordinary shares issuable upon exchange of the same number of RP Holdings Class B Interests that will be held by the Continuing Investors Partnerships immediately following this offering.



 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA

The following tables set forth summary historical financial and other data of Old RPI for the periods presented. Royalty Pharma plc was formed as an English company on February 6, 2020 and has not, to date, conducted any activities other than those incident to its formation and the preparation of this prospectus and the registration statement of which this prospectus forms a part.

The following tables set forth certain summary historical consolidated financial and other data of Old RPI as of the dates and for the periods indicated. The business of Old RPI is the predecessor of Royalty Pharma plc for financial reporting purposes. The historical financial data as of and for the years ended December 31, 2019, 2018 and 2017 were derived from the audited consolidated financial statements of Old RPI included elsewhere in this prospectus. The historical financial data as of and for the years ended December 31, 2016 and 2015 were derived from the audited consolidated financial statements that do not appear in this prospectus.

The historical financial data as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 were derived from the unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.

The unaudited pro forma information gives effect to (i) the Reorganization Transactions described under “Organizational Structure,” and (ii) the sale of                Class A ordinary shares in this offering and the application of the net proceeds from this offering, as if each had been completed as of December 31, 2019, in the case of the unaudited pro forma consolidated balance sheet data as of December 31, 2019, and as of January 1, 2019 with respect to the unaudited pro forma combined consolidated statements of operations data. See “Unaudited Pro Forma Financial Information” and “Capitalization.”



 

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The summary historical and pro forma financial and other data presented below do not purport to be indicative of the results that can be expected for any future period and should be read together with “Capitalization,” “Unaudited Pro Forma Financial Information,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Royalty Pharma Investments’ financial statements and related notes thereto included elsewhere in this prospectus.

 

($ in thousands)

  Pro
Forma(1)(2)
    Year Ended December 31,     Three months ended
March 31,
 
    2019     2019     2018     2017     2016     2015     2020     2019  

Consolidated Results of Operations Data:

               

Income and other revenues:

               

Income from financial royalty assets

  $ 1,648,837     $ 1,648,837     $ 1,524,816     $ 1,539,417     $ 1,502,088     $ 1,484,041     $ 462,844     $ 382,216  

Revenue from intangible royalty assets

    145,775       145,775       134,118       38,090       373,591       166,668       34,983       43,246  

Other royalty income

    19,642       19,642       135,960       20,423       1,731       1,711       3,052       9,421  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income and other revenues

    1,814,254       1,814,254       1,794,894       1,597,930       1,877,410       1,652,420       500,879       434,883  

Operating expenses:

               

Research and development funding expense

    83,036       83,036       392,609       117,866       91,021       98,381       7,639       22,991  

Provision for changes in expected cash flows from financial royalty assets

    (1,019,321     (1,019,321     (57,334     400,665       925,800       570,183       88,012       (50,033

Amortization of intangible assets

    23,924       23,924       33,267       33,267       68,203       68,160       5,733       6,599  

General and administrative expenses

    163,519       103,439       61,906       106,440       69,512       121,418       38,065       24,426  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    2,563,096       2,623,176       1,364,446       939,692       722,874       794,278       361,430       430,900  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to controlling interest

                         $ 2,348,535     $ 1,377,729     $ 1,210,025     $ 565,907     $ 581,426     $ 71,240     $ 367,444  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                  As of/for the
period ended
March 31,
 

($ in thousands)

  2019     2018     2017     2016     2015     2020  

Consolidated Balance Sheet Data (at end of period):

           

Cash and cash equivalents

  $ 283,682     $ 1,924,211     $ 1,381,571     $ 1,674,219     $ 1,720,871     $ 624,367  

Marketable securities

    56,972       —         —         —         —         567,980  

Total assets

    12,449,895       11,370,147       11,373,532       10,481,999       10,815,682       13,371,612  

Current portion of long-term debt

    281,984       281,436       280,928       172,684       184,383       182,128  

Long-term debt, excluding current portion

    5,956,138       6,237,896       6,520,855       5,724,690       5,804,190       5,774,958  

Total shareholders’/unitholders’ equity

    6,141,438       4,552,079       4,460,546       4,445,620       4,676,908       7,162,693  

Cash Flow Data:

           

Net cash provided by (used in):

           

Operating activities

    1,667,239       1,618,317       1,418,313       1,482,595       1,305,825       471,104  

Investing activities

    (2,116,142     303,424       (1,587,707     (605,932     64,287       (672,943

Financing activities

    (1,191,626     (1,379,101     (123,254     (923,315     (6,746     542,524  


 

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    Pro
Forma(1)(2)
                                  Three months ended
March 31,
 

($ in thousands)

  2019     2019     2018     2017     2016     2015     2020     2019  

Other Financial Measures:

               

Royalty Receipts – Growth Products

               

Cystic fibrosis franchise

  $ 424,741     $ 424,741     $ 224,214     $ 37,340     $ 12,163     $ —       $ 99,403     $ 106,939  

Tysabri

    332,816       332,816       338,697       263,790       —         —         83,807       82,635  

Imbruvica

    270,558       270,558       209,171       149,376       103,247       54,464       77,709       61,102  

HIV franchise

    262,939       262,939       224,321       185,515       185,014       199,421       83,887       76,383  

Januvia, Janumet, Other DPP-IVs

    143,298       143,298       106,689       103,250       313,394       162,962       34,788       32,738  

Xtandi

    120,096       120,096       105,958       86,977       64,019       —         34,777       27,568  

Promacta

    86,266       86,266       —         —         —         —         35,748       —  

Tazverik

    —         —         —         —         —         —         —       —  

Crysvita

    —         —         —         —         —         —         —       —  

Other Growth
Products (3)

    242,767       210,166       192,241       133,554       127,919       118,372       72,133       56,640  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Royalty Receipts – Growth Products

  $ 1,883,481     $ 1,850,880     $ 1,401,291     $ 959,802     $ 805,756     $ 535,219     $ 522,252     $ 444,005  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Royalty Receipts – Mature Products

               

Tecfidera (4)

    150,000       150,000       750,000       600,000       600,000       425,000       —         150,000  

Lyrica

    128,264       128,246       126,916       124,126       119,132       142,122       6,087       29,605  

Letairis

    112,656       112,656       130,078       123,178       111,361       101,183       14,562       38,459  

Remicade

    6,068       6,068       121,055       138,488       147,883       162,705       —         6,068  

Humira

    —         —         499,055       455,399       400,990       351,615       —         —    

Other Mature
Products (5)

    21,047       21,047       45,450       68,267       276,979       400,016       743       10,164  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Royalty Receipts – Mature Products

  $ 418,017     $ 418,017     $ 1,672,554     $ 1,509,458     $ 1,656,345     $ 1,582,641     $ 21,392     $ 234,296  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to non-controlling interest

    (525,804     (154,084     (268,693     (278,727     (321,795     (310,299     (161,387     (41,460
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Cash Receipts (non-GAAP)(7)

  $ 1,775,694     $ 2,114,813     $ 2,805,152     $ 2,190,533     $ 2,140,306     $ 1,807,561     $ 382,257     $ 636,841  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Payments for operating and professional costs(6)

    (145,176     (88,524     (72,660     (101,180     (64,923     (70,834     (25,838     (17,705
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (non-GAAP)(7)

  $ 1,630,518     $ 2,026,289     $ 2,732,492     $ 2,089,353     $ 2,075,383     $ 1,736,727     $ 356,419     $ 619,136  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Development-stage funding payments – ongoing

    (83,036     (83,036     (108,163     (118,366     (90,521     (98,381     (7,639     (22,991

Interest paid, net

    (214,520     (234,828     (243,216     (228,451     (226,378     (215,504     (48,867     (54,349

Swap collateral (posted) or received, net

    —         (45,270     2,957       (2,950     2,316       (2,316     45,252       (360

Swap termination payments

    (35,488     —         —         —         —         —         (35,448     —    

Investment in non-consolidated affiliates

    (27,042     (27,042     (24,173     (2,000     (8,722     (21,407     (13,142     (8,842

Contributions from non-controlling interest - R&D

    19,348       —         —         —         —         —         1,260       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Cash Flow (non-GAAP)(7)

  $ 1,289,820     $ 1,636,113     $ 2,359,897     $ 1,737,586     $ 1,752,078     $ 1,399,119     $ 297,835     $ 532,594  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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(1)

The unaudited pro forma Consolidated Results of Operations Data and the Cash Flow Data for the period ended December 31, 2019 and the unaudited pro forma Consolidated Balance Sheet Data as of December 31, 2019 present selected financial data after giving effect to the Reorganization Transactions and the sale of Class A ordinary shares in this offering, as further described in “Unaudited Pro Forma Financial Information.” The assumptions and adjustments to the Consolidated Results of Operations Data are described in the notes to the unaudited pro forma financial information in “Unaudited Pro Forma Financial Information.”

The assumptions and adjustments to the Cash Flow Data are described in note (14) in “Selected Historical Financial Data.”

(2)

The unaudited pro forma Other Financial Measures as of and for the period ended December 31, 2019 present selected non-GAAP measures, which are supplemental measures to our GAAP financial measures, after giving effect to the Reorganization Transactions and the sale of Class A ordinary shares in this offering, as further described in “Unaudited Pro Forma Financial Information.” The adjustments and assumptions to the Other Financial Measures are described in “Selected Historical Data—Non-GAAP Financial Measures” and note (15) in “Selected Historical Financial Data.”

 

(3)

Other Growth Products include royalties on the following products: Bosulif (a product co-developed by our joint venture investee, Avillion, for which receipts are presented as Distributions received from nonconsolidated affiliates on the Statement of Cash Flows), Cimzia, Conbriza/Fablyn/Viviant, Emgality, Entyvio, Erleada, Farxiga/Onglyza, Lexiscan, Mircera, Myozyme, Nesina, Priligy and Soliqua. Other Growth Products also include contributions from the Legacy SLP Interest.

(4)

Receipts from Tecfidera milestone payments are presented as Proceeds from available for sale debt securities on the Statement of Cash Flows.

(5)

Other Mature Products primarily include royalties on the following products: Prezista, Rotateq, Savella and Thalomid.

(6)

Payments for operating and professional costs include Payments for operating costs and professional services and Payments for rebates, both from the Statement of Cash Flows.

(7)

Adjusted Cash Receipts and Adjusted Cash Flow are key non-GAAP financial measures used by management to assess financial operating performance on a levered and unlevered basis, cash distribution levels, and for purposes of evaluating cash available to service debt and reinvest in the business. Adjusted EBITDA is an important non-GAAP financial measure in analyzing our liquidity and is a key component of certain material covenants contained within our credit agreement. Each non-GAAP financial measure functions as a supplemental measure of liquidity and is not required by, or presented in accordance with, GAAP. They are not measurements of our performance or liquidity under GAAP and should not be considered as alternatives to Net cash provided by operating activities or Consolidated net income before tax or any other performance or liquidity measure derived in accordance with GAAP. For additional information, see “Selected Historical Financial Data—Non-GAAP Reconciliations” below.

Adjusted Cash Receipts is a measure calculated with inputs directly from the Statement of Cash Flows and includes (1) royalty receipts: (i) Cash collections from royalty assets (financial assets and intangible assets), (ii) Other royalty cash collections, (iii) Distributions from non-consolidated affiliates, plus (2) Proceeds from available for sale debt securities (Tecfidera milestone payments), and less (3) Distributions to non-controlling interest. Adjusted Cash Receipts can be further stratified by Growth Products and Mature Products. Growth Products are defined as royalties with a duration expiring after December 31, 2020. All other royalties on approved products are defined as Mature Products.

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.

Adjusted Cash Flow is defined as Adjusted EBITDA less (1) Development-stage funding payments — ongoing, (2) Interest paid, net, (3) Swap collateral (posted) or received, net, (4) Swap termination payments, and (5) Investment in non-consolidated affiliates, plus (1) Contributions from non-controlling interest - R&D, all directly reconcilable to the Statement of Cash Flows.



 

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RISK FACTORS

An investment in our Class A ordinary shares involves risks. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before investing in our Class A ordinary shares. If any of the adverse events described in the following risk factors, as well as other factors which are beyond our control, actually occurs, our business, results of operations and financial condition may suffer significantly. As a result, the trading price of our Class A ordinary shares could decline, and you may lose all or part of your investment in our Class A ordinary shares. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

Risks Relating to Our Business

Biopharmaceutical products are subject to sales risks.

Biopharmaceutical product sales may be lower than expected due to a number of reasons, including pricing pressures, insufficient demand, product competition, failure of clinical trials, lack of market acceptance, obsolescence, loss of patent protection, the impact of the COVID-19 global pandemic or other factors and development-stage product candidates may fail to reach the market. Unexpected side effects, safety or efficacy concerns can arise with respect to a product, leading to product recalls, withdrawals or declining sales. As a result, payments of our royalties may be reduced or cease. In addition, these payments may be delayed, causing our near-term financial performance to be weaker than expected.

The royalty market may not grow at the same rate as it has in the past, or at all, and we may not be able to acquire sufficient royalties to sustain the growth of our business.

We have been able to grow our business over time by acquiring numerous royalties, including those relating to many of the industry’s leading therapies. We may not be able to identify and acquire a sufficient number of royalties, or royalties of sufficient scale, to invest the full amount of capital that may be available to us in the future, which could prevent us from executing our growth strategy and negatively impact our results of operations. Changes in the royalty market, including its structure and participants, or a reduction in the growth of the biopharmaceutical industry, could lead to diminished opportunities for us to acquire royalties, fewer royalties (or royalties of significant scale) being available, or increased competition for royalties. Even if we continue to acquire royalties, they may not generate a meaningful return for a period of several years, if at all, due to the price we pay for such royalties or other factors relating to the underlying products. As a result, we may not be able to continue to grow as we have in the past, or at all.

Acquisitions of royalties from development-stage biopharmaceutical product candidates are subject to a number of uncertainties.

We may continue to and in the future acquire more royalties on development-stage product candidates that have not yet received marketing approval by any regulatory authority. There can be no assurance that the FDA, the EMA or other regulatory authorities will approve such products or that such products will be brought to market timely or at all, or that the market will be receptive to such products. If the FDA, the EMA or other regulatory authority approves a development-stage product candidates that generates our royalty, the labeling, packaging, adverse event reporting, storage, advertising, promotion and recordkeeping for the product will be subject to extensive and ongoing regulatory requirements. The subsequent discovery of previously unknown problems with the product, including adverse events of unanticipated severity or frequency, may result in restrictions on the marketing of the product, and could include withdrawal of the product from the market.

In addition, the developers of these development-stage product candidates may not be able to raise additional capital to continue their discovery, development and commercialization activities, which may cause them to delay, reduce the scope of, or eliminate one or more of their clinical trials or research and development programs. If

 

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other product developers introduce and market products that are more effective, safer or less expensive than the relevant products that generate our royalties, or if such developers introduce their products prior to the competing products underlying our royalties, such products may not achieve commercial success and thereby result in a loss for us.

Further, the developers of such products may not have sales, marketing or distribution capabilities. If no sales, marketing or distribution arrangements can be made on acceptable terms or at all, the affected product may not be able to be successfully commercialized, which will result in a loss for us. Losses from such assets could have a material adverse effect on our business, financial condition and results of operations.

We intend to continue, and may increase, this strategy of acquiring development-stage product candidates. While we believe that we can readily evaluate and gain conviction about the likelihood of a development-stage product candidate’s approval and achieving significant sales, there can be no assurance that our assumptions will prove correct, that regulatory authorities will approve such development-stage product candidates, that such development-stage product candidates will be brought to market timely or at all, or that such products will achieve commercial success.

Our strategy of acquiring royalty interests in development-stage product candidates, including by co-funding clinical development and acquiring securities of biopharmaceutical companies, is subject to risks and uncertainties.

We intend to continue to provide capital to innovators to co-fund clinical development of a product candidate in exchange for a share of the future revenues of that asset and when we do so, we do not control its clinical development. In these situations, the innovators may not complete activities on schedule or in accordance with our expectations or in compliance with applicable laws and regulations. Failure by one or more of these third parties to meet their obligations, comply with applicable laws or regulations or any disruption in the relationships between us and these third parties, could delay or prevent the development, approval, manufacturing or commercialization of the development-stage product candidate for which we have provided funding.

We seek to further expand our market opportunity by acquiring securities issued by biopharmaceutical companies. Where we may acquire equity securities as all or part of the consideration for business development activities, the value of those securities will fluctuate, and may depreciate in value. We will likely not control the company in which we acquire securities, and as a result, we may have limited ability to determine its management, operational decisions and policies. Further, while we may seek to mitigate the risks and liabilities of such transactions through, among other things, due diligence, there may be risks and liabilities that such due diligence efforts fail to discover, that are not disclosed to us, or that we inadequately assess. In addition, as a result of our activities we receive material non-public information about other companies from time to time. Where such information relates to a company whose equity securities we hold, we may be delayed or prevented from selling such securities when we would otherwise choose to do so, and such delay or prohibition may result in a loss or reduced gain on such securities.

We may undertake strategic acquisitions of biopharmaceutical companies with significant royalty assets. Our failure to realize expected benefits of such acquisitions or our incurrence of unanticipated liabilities, could adversely affect our share price, operating results and results of operations.

We may acquire companies with significant royalty assets or where we believe we could create significant synthetic royalties. These acquired or created royalty assets may not perform as we project. Moreover, the acquisition of operating biopharmaceutical companies will result in the assumption of, or exposure to, liabilities of the acquired business that are not inherent in our other royalty acquisitions, such as direct exposure to product liability claims, high fixed costs and an expansion of our operations and expense structure, thereby potentially decreasing our profitability. The diversion of our management’s attention and any delay or difficulties encountered in connection with any future acquisitions we may consummate could result in the disruption of our on-going business operations. Despite our business, financial and legal due diligence efforts, we have limited

 

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experience in assessing acquisition opportunities, and we ultimately may be unsuccessful in ascertaining or evaluating all risks associated with such acquisitions. Moreover, we may need to raise additional funds through public or private debt or equity financing, including issuing additional Class A ordinary shares, to acquire any businesses or products, which may result in dilution for shareholders or the incurrence of indebtedness. As a result, our acquisition of biopharmaceutical companies could adversely impact our business, results of operations and financial condition.

We use leverage in connection with our capital deployment, which magnifies the potential for loss if the royalties acquired do not generate sufficient income to us.

We use borrowed funds to finance a significant portion of our deployed capital. The use of leverage creates an opportunity for an increased return but also increases the risk of loss if our assets do not generate sufficient income to us. The interest expense and other costs incurred in connection with such borrowings may not be covered by the income from our assets. In addition, leverage may inhibit our operating flexibility and reduce cash flow available for dividends to our shareholders.

The level of our indebtedness could limit our ability to respond to changing business conditions. The various agreements relating to our borrowings may impose operating and financial restrictions on us which could affect the number and size of the royalties that we may pursue. Therefore, no assurance can be given that we will be able to take advantage of favorable conditions or opportunities as a result of any restrictive covenants under our indebtedness. There can also be no assurance that additional debt financing, either to replace or increase existing debt financing, will be available when needed or, if available, will be obtainable on terms that are commercially reasonable. Additional risks related to our leverage include:

 

   

our royalties may be used as collateral for our borrowings;

 

   

in the event of a default under any of our secured borrowings, one or more of our creditors or their assignees could obtain control of our royalties and, in the event of a distressed sale, these creditors could dispose of these royalties for significantly less value than we could realize for them;

 

   

we have to comply with various financial covenants in the agreements that govern our debt, including requirements to maintain certain leverage ratios and coverage ratios, which may affect our ability to achieve our business objectives;

 

   

our ability to pay dividends to our shareholders may be restricted;

 

   

to the extent that interest rates at which we borrow increase, our borrowing costs will increase and our leveraging strategy will become more costly, which could lead to diminished net profits; and

 

   

because our debt utilizes LIBOR as a factor in determining the applicable interest rate, the expected discontinuation and transition away from LIBOR may increase the cost of servicing our debt, lead to higher borrowing costs and have an adverse effect on our results of operations and cash flows.

We have no employees and will be entirely dependent upon the Manager for all the services we require.

Because we are “externally managed,” we will not employ our own personnel, but will instead depend upon the Manager, its executive officers and its employees for virtually all of the services we require. The Manager selects and manages the acquisition of royalties and similar payment streams that meet our investment criteria and provides all of our other administrative services. Accordingly, our success is largely dependent upon the expertise and services of the executive officers and other personnel provided to us through the Manager. The Management Agreement has an initial term of ten years, after which it can be renewed for an additional term of three years, unless either the Company or the Manager provides notice of non-renewal 180 days prior the expiration of the initial term or renewal term. The Manager may not be removed during the initial or any renewal term without cause. While our agreement with the Manager requires its executives to devote substantially all of their time to managing us and any legacy vehicles related to Old RPI or RPI unless otherwise approved by Board, such resources may prove to be inadequate to meet our needs.

 

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There can be no assurance that the policies and procedures we have established to mitigate conflicts of interest will be effective in doing so.

Pursuant to the Management Agreement, the Manager cannot manage another entity that invests in or acquires royalties other than any legacy vehicle related to Old RPI or RPI. Every executive of our Manager will be subject to a non-compete agreement that is effective for 18 months following termination of their employment with the Manager for any reason. The Company is a beneficiary of this agreement. In addition, executives of the Manager must devote substantially all of their business time to managing the Company and any legacy vehicle related to Old RPI or RPI, unless otherwise approved by the Board. Despite this, the ability of our Manager and its officers and employees to engage in other business activities, subject to the terms of our Management Agreement, may reduce the amount of time our Manager, its officers or other employees spend managing us.

Furthermore, there could be conflicts of interest between us and our senior advisory personnel. For instance, Mr. Legorreta, our Chief Executive Officer, is also a co-founder of and has significant influence over Pharmakon Advisors, which shares physical premises with the Manager. Pharmakon manages BioPharma Credit PLC (LSE: BPCR) and other investment vehicles that collectively are leading providers of debt capital to the biopharmaceutical industry. Mr. Legorreta has a substantial investment in BioPharma Credit. Even though he has the involvement with Pharmakon and BioPharma Credit PLC described above, Mr. Legorreta does not have any material constraints on the time he has available to devote to us and the Manager. From time to time, the Manager and Pharmakon may pursue similar investment opportunities for their respective clients, although we believe that actual conflicts of interest are rare due to the differing investment strategies of the Company and Pharmakon, and the fact that royalty holders, rather than the Company and Pharmakon, determine the type of transaction they seek. Under arrangements with Pharmakon, the Manager subleases office space to Pharmakon, and the parties may provide research, business development, legal, compliance, financial and administrative services to one another. The Manager and Pharmakon reimburse each other to the extent that one of them provides materially more services to the other than they receive in return. In consideration of the support provided to Pharmakon by the Manager, certain employees of the Manager receive compensation from Pharmakon. In addition, Mr. Legorreta has founded and participates in two foundations that provide medical research funding.

In addition, the structure of our Manager’s compensation arrangements may have unintended consequences for us. We have agreed to pay our Manager the Operating and Personnel Payment, a portion of which is based on the mark-to-market value of security investments, including equity securities and derivative financial instruments, at the end of each quarter and is payable to the Manager regardless of whether we realize any gain on the security investments when sold. Consequently, the Manager may be incentivized to have us make security investments regardless of our expected gain on such investments, which may not align with our or our shareholders’ long term interests.

Our business is subject to interest rate and foreign exchange risk.

The interest rates at which we borrow is not fixed, but rather varies from time to time in relation to the overall interest rates in the economy. We are subject to interest rate fluctuation exposure through our borrowings under our Senior Secured Credit Facilities and our investments in money market accounts and marketable securities, the majority of which bear a variable interest rate. To the extent that interest rates generally increase, our borrowing costs will increase and our leveraging strategy will become more costly, leading to diminished net profits.

Certain products pay royalties in currencies other than U.S. dollars, which creates foreign currency risk primarily with respect to the Euro, Swiss Franc and Japanese Yen, as our functional and reporting currency is the U.S. dollar. In addition, our results of operations are subject to foreign currency exchange risk through transactional exposure resulting from movements in exchange rates between the time we recognize royalty income or royalty revenue and the time at which the transaction settles, or we receive the royalty payment. Because we are entitled to royalties on worldwide sales for various products, there is an underlying exposure to

 

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foreign currency as the marketer converts payment amounts from local currencies to U.S. dollars. Therefore, cash received may differ from the estimated receivable based on fluctuations in currency. As a result, significant changes in foreign exchange rates can impact our results.

Information about the biopharmaceutical products underlying the royalties we buy available to us may be limited and therefore our ability to analyze each product and its potential future cash flow may be similarly limited.

We may have limited information concerning the products generating the royalties we are evaluating for acquisition. Often, the information we have regarding products following our acquisition of a royalty may be limited to the information that is available in the public domain. Therefore, there may be material information that relates to such products that we would like to know but do not have and may not be able to obtain. For example, we do not always know the results of studies conducted by marketers of the products or others or the nature or amount of any complaints from doctors or users of such products. In addition, the market data that we obtain independently may also prove to be incomplete or incorrect. Due to these and other factors, the actual cash flow from a royalty may be significantly lower than our estimates.

Our future income is dependent upon numerous royalty-specific assumptions and, if these assumptions prove not to be accurate, we may not achieve our expected rates of returns.

Our business model is based on multiple-year internal and external forecasts regarding product sales and numerous product-specific assumptions in connection with each royalty acquisition, including where we have limited information regarding the product. There can be no assurance that the assumptions underlying our financial models, including those regarding product sales or competition, patent expirations or license terminations for the products underlying our portfolio, are accurate. These assumptions involve a significant element of subjective judgment and may be and in the past have been adversely affected by post-acquisition changes in market conditions and other factors affecting the underlying product. Our assumptions regarding the financial stability or operational or marketing capabilities of the partner obligated to pay us royalties may also prove and in the past have proven to be incorrect. Due to these and other factors, the assets in our current portfolio or future assets may not generate expected returns or returns in line with our historical financial performance or in the time periods we expect. This could negatively impact our results of operation for a given period.

We make assumptions regarding the royalty duration for terms that are not contractually fixed, and a shortened royalty term could result in a reduction in the effective interest rate, a decline in income from royalties, significant reductions in royalty payments compared to expectations, or a permanent impairment.

In accordance with GAAP, we classify most royalty assets that we acquire as financial assets that are measured at amortized cost using the prospective effective interest method described in ASC 835-30. The effective interest rate is calculated by forecasting the expected cash flows to be received over the life of the asset relative to the initial invested amount, net of any purchased receivables. A critical component of such forecast is our assumptions regarding duration of the royalty.

The royalty duration is important for purposes of accurately measuring interest income over the life of a royalty. In making assumptions around the royalty duration for terms that are not contractually fixed, we consider the strength of existing patent protection, expected entry of generics, geographical exclusivity periods and potential patent term extensions tied to the underlying product.

The duration of a royalty usually varies on a country-by-country basis and can be based on a number of factors, such as patent expiration dates, regulatory exclusivity, years from first commercial sale of the patent-protected product, the entry of competing generic or biosimilar products, or other terms set out in the contracts governing the royalty. It is common for royalty durations to expire earlier or later than anticipated due to unforeseen positive or negative developments over time, including with respect to the granting of patents and

 

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patent term extensions, the invalidation of patents, litigation between the party controlling the patents and third party challengers of the patents, the ability of third parties to design around or circumvent valid patents, the granting of regulatory exclusivity periods or extensions, timing for the arrival of generic or biosimilar competitor products, changes to legal or regulatory regimes affecting intellectual property rights or the regulation of pharmaceutical products, product life cycles, and industry consolidations.

An unexpected shortening of a royalty term has not caused a permanent impairment in recent years. However, if an unexpected shortening of a royalty term were to occur, it could result in a reduction in the effective interest rate, a decline in income from royalties, a significant reduction in royalty payments compared to expectations, or a permanent impairment.

Our reliance on a limited number of products may have a material adverse effect on our financial condition and results of operation.

While our current asset portfolio includes royalties relating to over 45 marketed therapies and four development-stage product candidates, the top five therapies accounted for 56% of our royalty receipts (excluding receipts from Tecfidera milestone payments) in the year ended December 31, 2019. In addition, our asset portfolio may not be fully diversified by geographic region or other criteria. Any significant deterioration in the cash flows from the top products in our asset portfolio could have a material adverse effect on our business, financial condition and results of operations.

We face competition in acquiring assets and locating suitable assets to acquire.

There are a limited number of suitable and attractive opportunities to acquire high-quality royalties available in the market. Therefore, competition to acquire such royalties is intense and may increase. We compete with other potential acquirers for these opportunities, including companies that market the products on which royalties are paid, financial institutions and others. These competitors may be able to access lower cost capital, may be larger than us, may have relationships that provide them access to opportunities before us, or may be willing to acquire royalties for lower projected returns than we are.

Biopharmaceutical products are subject to substantial competition.

The biopharmaceutical industry is a highly competitive and rapidly evolving industry. The length of any product’s commercial life cannot be predicted with certainty. There can be no assurance that one or more products on which we are entitled to a royalty will not be rendered obsolete or non-competitive by new products or improvements on which we are not entitled to a royalty made to existing products, either by the current marketer of such products or by another marketer. Current marketers of products may undertake these development efforts in order to improve their products or to avoid paying our royalty. Adverse competition, obsolescence or governmental and regulatory action or healthcare policy changes could significantly affect the revenues, including royalty-related revenues, of the products which generate our royalties.

Competitive factors affecting the market position and success of each product include:

 

   

effectiveness;

 

   

safety and side effect profile;

 

   

price, including third-party insurance reimbursement policies;

 

   

timing and introduction of the product;

 

   

effectiveness of marketing strategy and execution;

 

   

governmental regulation;

 

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availability of lower-cost generics and/or biosimilars;

 

   

treatment innovations that eliminate or minimize the need for a product; and

 

   

product liability claims.

Products which we have a royalty sales of the biopharmaceutical products that generate our royalties may be rendered obsolete or non-competitive by new products, including generics and/or biosimilars, improvements on existing products or governmental or regulatory action. In addition, as biopharmaceutical companies increasingly devote significant resources to innovate next-generation products and therapies using gene editing and new curative modalities, such as cell and gene therapy, products on which we have a royalty may become obsolete. These developments could have a material adverse effect on the sales of the biopharmaceutical products that generate our royalties, and consequently could materially adversely affect our business, financial condition and results of operations.

Marketers of products that generate our royalties are outside of our control.

In the case of our royalty receivables, our cash flow consists primarily of payments supported by royalties paid by marketers. These marketers may have interests that are different from our interests. For example, these marketers may be motivated to maximize income by allocating resources to other products and, in the future, may decide to focus less attention on the products generating our royalties or by allocating resources to develop products that do not generate royalties to us. There can be no assurance that any marketer or person with whom the marketer has a working relationship has adequate resources and motivation to continue to produce, market and sell the products generating our royalties. Aside from any limited audit rights relating to the activities of the marketers that we may have in certain circumstances pursuant to the terms of our arrangements with the licensor, we do not have oversight rights with respect to the marketers’ operations and do not have rights allowing us to direct their operations or strategy nor do our agreements contain performance standards for their operations. We also have limited information on the marketers’ operations.

In these circumstances, while we may be able to receive certain information relating to sales of products through the exercise of audit rights and review of royalty reports we receive from the licensor, we will not have the right to review or receive certain information relating to products that the marketers may have, including the results of any studies conducted by the marketers or others, or complaints from doctors or users of products. The market performance of the products generating our royalties may therefore be diminished by any number of factors relating to the marketers that are outside of our control.

The marketers of biopharmaceutical products are, generally, entirely responsible for the ongoing regulatory approval, commercialization, manufacturing and marketing of products.

Generally, the holders of royalties on products have granted exclusive regulatory approval, commercialization, manufacturing and marketing rights to the marketers of such products. The marketers have full control over those efforts and sole discretion to determine the extent and priority of the resources they will commit to their program for a product. Accordingly, the successful commercialization of a product depends on the marketer’s efforts and is beyond our control. If a marketer does not devote adequate resources to the ongoing regulatory approval, commercialization and manufacture of a product, or if a marketer engages in illegal or otherwise unauthorized practices, the product’s sales may not generate sufficient royalties, or the product’s sales may be suspended, and consequently, could adversely affect our business.

License agreements relating to products may, in some instances, be unilaterally terminated or disputes may arise which may affect our royalties.

License agreements relating to the products generating our royalties may be terminated, which may adversely affect sales of such products and therefore the payments we receive. For example, under certain license agreements, marketers retain the right to unilaterally terminate the agreements with the licensors. When the last

 

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patent covering a product expires or is otherwise invalidated in a country, a marketer may be economically motivated to terminate its license agreement, either in whole or with respect to such country, in order to terminate its payment and other obligations. In the event of such a termination, a licensor may no longer receive all of the payments it expected to receive from the licensee and may also be unable to find another company to continue developing and commercializing the product on the same or similar terms as those under the license agreement that has been terminated.

In addition, license agreements may fail to provide significant protection for the licensor in case of the licensee’s failure to perform or in the event of disputes. License agreements which relate to the products underlying our royalties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what the licensor believes to be the scope of its rights to the relevant intellectual property or technology, or decrease the licensee’s financial or other obligations under the relevant agreement, any of which could in turn impact the value of our royalties and have a material adverse effect on our business, financial condition, results of operations and prospects. If a marketer were to default on its obligations under a license agreement, the licensor’s remedy may be limited either to terminating certain licenses related to certain countries or to generally terminate the license agreement with respect to such country. In such cases, we may not have the right to seek to enforce the rights of the licensor and we may be required to rely on the resources and willingness of the licensor to enforce its rights against the licensee.

In any of these situations, if the expected payments under the license agreements do not materialize, this could result in a significant loss to us and materially adversely affect our business, financial condition and results of operations.

The insolvency of a marketer could adversely affect our receipt of cash flows on the related royalties that we hold.

If a marketer were to become insolvent and seek to reorganize under Chapter 11 of Title 11 of the U.S. Code, as amended, or the Bankruptcy Code, or liquidate under Chapter 7 of the Bankruptcy Code (or foreign equivalent), such event could delay or impede the payment of the amounts due under a license agreement, pending a resolution of the insolvency proceeding. Any unpaid royalty payments due for the period prior to the filing of the bankruptcy proceeding would be unsecured claims against the marketer, which might not be paid in full or at all. While royalty payments due for periods after the filing may qualify as administrative expenses entitled to a higher priority, the actual payment of such post-filing royalty payments could be delayed for a substantial period of time and might not be in the full amount due under the license agreement. The licensor would be prevented by the automatic stay from taking any action to enforce its rights without the permission of the bankruptcy court. In addition, the marketer could elect to reject the license agreement, which would require the licensor to undertake a new effort to market the applicable product with another distributor. Such proceedings could adversely affect the ability of a payor to make payments with respect to a royalty, and could consequently adversely affect our business, financial condition and results of operations.

Unsuccessful attempts to acquire new royalties could result in significant costs and negatively impact subsequent attempts to locate and acquire other assets.

The investigation of each specific target royalty and the negotiation, drafting and execution of relevant agreements, disclosure and other documents requires substantial management time and attention and results in substantial costs for accountants, attorneys and others. If a decision is made not to complete a specific acquisition, the costs incurred for the proposed transaction would not be recoverable from a third party. Furthermore, even if an agreement is reached relating to a specific target asset, we may fail to consummate the acquisition for any number of reasons, including, in the case of an acquisition of a royalty through a business combination with a public company, approval by the target company’s public shareholders. Multiple unsuccessful attempts to acquire new royalties could hurt our reputation, result in significant costs and waste the

 

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Manager’s time. The opportunity cost of diverting management and financial resources could negatively impact our ability to locate and acquire other assets.

Most of our royalties are classified as financial assets that are measured at amortized cost using the effective interest method of accounting as a result of which our GAAP results of operations can be volatile and unpredictable which could adversely affect the trading price of our Class A ordinary shares.

In accordance with GAAP, most of the royalty assets we acquire are treated as investments in cash flow streams and are thus classified as financial assets. Under this classification, our royalty assets are treated as having a yield component that resembles loans measured at amortized cost under the effective interest accounting methodology. Under this accounting methodology, we calculate the effective interest rate on each royalty asset using a forecast of the expected cash flows to be received over the life of the 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 royalty asset.

As a result of applying the effective interest method of accounting, our income statement activity in respect of many of our royalties can be volatile and unpredictable as a result of non-cash charges associated with the provision. Small declines in sell-side equity research analysts’ consensus forecasts over a multi-year period can result in an immediate non-cash income statement expense recognition, even though the applicable cash inflows will not be realized for many years into the future. For example, in late 2014 we acquired our cystic fibrosis franchise. Beginning in the second quarter of 2015, declines in near-term sales forecasts of sell-side equity research analysts caused us to build up a provision for this royalty asset. Over the course of 10 quarters, we recognized non-cash charges to the income statement as a result of these changes in forecasts, ultimately accumulating a peak cumulative provision of $1.3 billion by September 30, 2017, including a non-cash expense of $743.2 million in 2016 related to this royalty interest. With the approval of the Vertex triple combination therapy, Trikafta, in October 2019, sell-side equity research analysts’ consensus forecasts increased to reflect the larger addressable market and the increase in the expected duration of the Trikafta royalty. While small reductions in the cumulative provision for the royalties related to our cystic fibrosis (“CF”) franchise were recognized in 2017 and 2018, there remained a $1.1 billion cumulative provision balance that was fully offset by a $1.1 billion credit to the provision in 2019 as a result of an increase in sell-side equity research analysts’ consensus forecasts from the Trikafta approval. The financial statement impact caused by the application of the effective interest accounting methodology could result in a negative perception of our results in a given period, which could cause the price of our Class A ordinary shares to decline.

Sales of the products that generate our royalties are subject to uncertainty related to healthcare reimbursement policies, managed care considerations and pricing pressures.

In both the U.S. and non-U.S. markets, sales of medical, biopharmaceutical products, and the success of such products, depends in part on the availability and extent of coverage and reimbursement from third-party payors, including government healthcare programs and private insurance plans.

In the United States, pharmaceutical product pricing is subject to enhanced government regulation, public scrutiny and calls for reforms. Some states have implemented, and other states are considering, pharmaceutical price controls or patient access constraints under their Medicaid program. There have also been recent state legislative efforts that have generally focused on increasing transparency around drug costs or limiting drug prices. In addition, the growth of large managed care organizations and prescription benefit managers, as well as the prevalence of generic substitution, has hindered price increases for prescription drugs. Continued intense public scrutiny of the price of drugs, together with government and payor dynamics, may limit the ability of producers and marketers to set or adjust the price of products based on their value. There can be no assurance that new or proposed products will be considered cost-effective or that adequate third-party reimbursement will be available to enable the producer or marketer of such product to maintain price levels sufficient to realize an

 

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appropriate return. Outside the United States, numerous major markets, including the EU, Japan and China, have pervasive government involvement in funding healthcare, and, in that regard, fix the pricing and reimbursement of pharmaceutical products. Consequently, in those markets, the products generating our royalties are subject to government decision-making and budgetary actions.

These pricing pressures may have a material adverse effect on our current royalties and the attractiveness of future acquisitions of royalties.

The products that generate our royalties are subject to uncertainty related to the regulation of the healthcare industry.

The U.S. healthcare industry is highly regulated and subject to frequent and substantial changes. For example, the U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (the “ACA”) was enacted by Congress in March 2010 and established a major expansion of healthcare coverage, financed in part by a number of new rebates, discounts, and taxes that had a significant effect on the expenses and profitability on the companies that manufacture the products that generate our royalties. These companies and their products face uncertainty due to federal legislative and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the ACA.

Other U.S. federal or state legislative or regulatory action and/or policy efforts could adversely affect the healthcare industry, including, among others, general budget control actions, changes in patent laws, the importation of prescription drugs from outside the United States at prices that are regulated by governments of various foreign countries, revisions to reimbursement of biopharmaceutical products under government programs, restrictions on U.S. direct-to-consumer advertising or limitations on interactions with healthcare professionals. No assurances can be provided that these laws and regulations will not have a material adverse effect on our business, financial condition and results of operations.

In addition, many of the products in our portfolio benefit from regulatory exclusivity. If, in an effort to regulate pricing, regulatory exclusivity is not maintained, our business, financial condition and results of operations may be adversely impacted.

The biopharmaceutical industry may be negatively affected by federal government deficit reduction policies, which could reduce the value of the royalties that we hold.

In an effort to contain the U.S. federal deficit, the pharmaceutical industry could be considered a potential source of savings via legislative proposals. Government action to reduce federal spending on entitlement programs, including Medicare, Medicaid or other publicly funded or subsidized health programs, or to lower drug spending, may affect payment for the products that generate our royalties. These and any other cost controls and/or any significant additional taxes or fees that may be imposed on the biopharmaceutical industry as part of deficit reduction efforts could reduce cash flows from our royalties and therefore have a material adverse effect on our business, financial condition and results of operations.

Sales of products that generate our royalties are subject to regulatory approvals and actions in the United States and foreign jurisdictions that could harm our business.

The procedures to approve biopharmaceutical products for commercialization vary among countries and can involve additional testing and time. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval and many include additional risks, such as pricing approval.

There can be no assurance that any of these regulatory approvals will be granted or not be revoked or restricted in a manner that would have a material adverse effect on the sales of such products and on the ability of payors to make payments with respect to such royalties to us.

 

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The manufacture and distribution of a biopharmaceutical product may be interrupted by regulatory agencies or supplier deficiencies.

The manufacture of products generating our royalties is typically complex and is highly regulated. In particular, biopharmaceutical products are manufactured in specialized facilities that require the approval of, and ongoing regulation by, the FDA in the United States and, if manufactured outside of the United States, both the FDA and non-U.S. regulatory agencies, such as the EMA. With respect to a product, to the extent that operational standards set by such agencies are not adhered to, manufacturing facilities may be closed or production interrupted until such time as any deficiencies noted by such agencies are remedied. Any such closure or interruption may interrupt, for an indefinite period of time, the manufacture and distribution of a product and therefore the cash flows from the related biopharmaceutical asset may be significantly less than expected.

In addition, manufacturers of a product may rely on third parties for selected aspects of product development, such as packaging or to supply bulk raw material used in the manufacture of such product. In the United States, the FDA requires that all suppliers of pharmaceutical bulk materials and all manufacturers of pharmaceuticals for sale in or from the United States adhere to the FDA’s current “Good Manufacturing Practice” regulations and guidelines and similar requirements that exist in jurisdictions outside the United States. Licensees generally rely on a small number of key, highly specialized suppliers, manufacturers and packagers. Any interruptions, however minimal, in the operation of these manufacturing and packaging facilities could have a material adverse effect on production and product sales and therefore a material adverse effect on our business, financial condition and results of operations.

Product liability claims may diminish the returns on biopharmaceutical products.

The developer, manufacturer or marketer of a product could become subject to product liability claims. A product liability claim, regardless of its merits, could adversely affect the sales of the product and the amount of any related royalty payments, and consequently, could materially adversely affect the ability of a payor to make payments with respect to a royalty.

Although we believe that we will not bear responsibility in the event of a product liability claim against the developer, manufacturer, marketer or other seller of the product that generates our royalty, such claims could materially adversely affect our business, financial condition and results of operations due to the lower than expected cash flows from the royalty.

We are typically not involved in maintaining, enforcing and defending patent rights on products that generate our royalties.

Our right to receive royalties generally depends on the existence of valid and enforceable claims of registered and/or issued patents in the United States and elsewhere in the world. The products on which we receive payments are dependent on patent protection and on the fact that the manufacturing, marketing and selling of such products do not infringe, misappropriate or otherwise violate intellectual property rights of third parties. Typically, we have no ability to control the prosecution, maintenance, enforcement or defense of patent rights, but must rely on the willingness and ability of our partners or their marketers to do so. While we believe that these third parties are in the best position and have the requisite business and financial motivation to do so, there can be no assurance that these third parties will vigorously prosecute, maintain, enforce or defend such rights. Even if such third parties seek to prosecute, maintain, enforce or defend such rights, they may not be successful.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has, in recent years, been the subject of much litigation. Furthermore, changes in patent laws or interpretation of patent laws in the United States and in other jurisdictions could increase the uncertainties surrounding the successful prosecution of patent applications and the successful

 

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enforcement or defense of issued patents by our partners, all of which could diminish the value of patent protection relating to the biopharmaceutical assets. As a result, the issuance, scope, validity, enforceability and commercial value of the patent rights of our partners and their marketers are highly uncertain. In addition, such third parties’ pending and future patent applications may not result in patents being issued which protect their products, development-stage product candidates and technologies or which effectively prevent others from commercializing competitive products, development-stage product candidates and technologies. Moreover, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and its scope can be reinterpreted after issuance.

Even if the patent applications our partners and their marketers license or own do issue as patents, they may not issue in a form that will provide them with any meaningful protection, prevent competitors or other third parties from competing with them or otherwise provide them with any competitive advantage. Competitors or other third parties may be able to circumvent patents of our partners and their marketers by developing similar or alternative products in a non-infringing manner. The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, which could limit the ability of our partners and their marketers from stopping others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of their products, development-stage product candidates and technologies.

Any loss or reduction in the scope or duration of patent protection for any product that generates our royalties, or any failure to successfully prosecute, maintain, enforce or defend any patents that protect any such product may result in a decrease in the sales of such product and any associated royalties payable to us. Any such event would have a material adverse effect on the ability of the payor to make payments of royalties to us or may otherwise reduce the value of our royalty interest, and could consequently materially adversely affect our business, financial condition and results of operations. In cases where our contractual arrangements with our partner permit us to do so, we could participate in patent suits brought by third parties but this could result in substantial litigation costs, divert management’s attention from our core business and there can be no assurance that such suits would be successful.

The existence of third-party patents in relation to products may result in additional costs for the marketer and reduce the amount of royalties paid to us.

The commercial success of a product depends, in part, on avoiding infringement, misappropriation or other violations of the intellectual property rights and proprietary technologies of others. Third-party issued patents or patent applications claiming subject matter necessary to manufacture and market a product could exist or issue in the future. Such third-party patents or patent applications may include claims directed to the mechanism of action of a product. There can be no assurance that a license would be available to marketers for such subject matter if such infringement were to exist or, if offered, would be offered on reasonable and/or commercially feasible terms. Without such a license, it may be possible for third parties to assert infringement or other intellectual property claims against the marketer of such product based on such patents or other intellectual property rights.

Even if the marketer was able to obtain a license, it could be non-exclusive, thereby giving its competitors and other third parties access to the same technologies. In addition, if a marketer of a product that generates our royalties is required to obtain a license from a third party, the marketer may, in some instances, have the right to offset the licensing and royalty payments to such third party against royalties that would be owed to our partner, which may ultimately reduce the value of our royalty interest. An adverse outcome in infringement or other intellectual property-related proceedings could subject a marketer to significant liabilities to third parties, require disputed rights to be licensed from third parties or require the marketer to cease or modify its manufacturing, marketing and distribution of any affected product, any of which could reduce the amount of cash flow generated by the affected products and any associated royalties payable to us and therefore have a material adverse effect on our business, financial condition and results of operations.

 

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Disclosure of trade secrets of marketers of products could negatively affect the competitive position of the products underlying our biopharmaceutical assets.

The marketers of the products that generate our royalties depend, in part, on trade secrets, know-how and technology, which are not protected by patents, to maintain the products’ competitive position. This information is typically protected through confidentiality agreements with parties that have access to such information, such as collaborative partners, licensors, employees and consultants. Any of these parties may breach the agreements and disclose the confidential information or competitors might independently develop or learn of the information in some other way, which could harm the competitive position of the products and therefore reduce the amount of cash flow generated by our royalty interest.

The internal computer systems of our partners may fail or suffer security breaches, which could result in a significant disruption of their ability to operate their business effectively, adversely affect the cash flow generated by the related biopharmaceutical products, and adversely affect our business and operating results.

The internal computer systems and cloud-based computing services of our partners and those of their current and any future collaborators and other contractors or consultants are vulnerable to damage or interruption from computer viruses, data corruption, cyber-based attacks, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. If such an event were to occur and cause interruptions in their operations, it could result in a disruption of their development and commercialization programs and business operations, whether due to a loss of trade secrets or other proprietary information or other similar disruptions. To the extent that any disruption or security breach were to result in a loss of, or damage to, a partner’s data or applications, or inappropriate disclosure of confidential or proprietary information, our partners’ operations may be harmed and the development and commercialization of their products, development-stage product candidates and technologies could be delayed. Such an event may reduce the amount of cash flow generated by the related biopharmaceutical products and therefore have a material adverse effect on our business, financial condition and results of operations.

Cyber-attacks or other failures in telecommunications or information technology systems could result in information theft, data corruption and significant disruption of our business operations.

We utilize information technology systems and networks to process, transmit and store electronic information in connection with our business activities. As use of digital technologies has increased, cyber incidents, including deliberate attacks and attempts to gain unauthorized access to computer systems and networks, have increased in frequency and sophistication. These threats pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. We have been subject to these attacks in the past and expect to be subject to them in the future. There can be no assurance that we will be successful in preventing cyber-attacks or mitigating their effects. Any cyber-attack or destruction or loss of data could have a material adverse effect on our business. In addition, we may suffer reputational harm or face litigation as a result of cyber-attacks or other data security breaches and may incur significant additional expense to implement further data protection measures.

Changes in the application of accounting standards issued by the U.S. Financial Accounting Standards Board or other standard-setting bodies may adversely affect our financial statements.

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, which are periodically revised, interpreted and/or expanded. From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies. It is possible that future accounting standards we are required to adopt may require changes to the current accounting treatment that we apply to our consolidated financial statements and may require us to make significant changes to our systems. Such changes could result in a material adverse impact on our financial condition and results of operations.

 

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Our ability to pay periodic dividends to our shareholders may be limited by applicable provisions of English law and contractual restrictions and obligations.

Subject to the terms of our indebtedness or other contractual obligations, the approval and payment of any interim dividends will be at the sole discretion of our board of directors, which may change our dividend policy at any time and the payment of any final dividends will be subject to majority approval by holders of Class A ordinary and Class B shares and in each case will be paid out of profits available for that purpose under English law. There can be no assurance that any dividends, whether quarterly or otherwise, will or can be paid. Our ability to pay dividends to our shareholders will depend on a number of factors, including among other things, general economic and business conditions, our strategic plans and prospects, our business and acquisition opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions and obligations, including fulfilling our current and future capital commitments, legal, tax and regulatory restrictions, restrictions and other implications on the payment of dividends by us to our shareholders and such other factors as our board of directors may deem relevant.

Our Articles of Association will authorize the board of directors to approve interim dividends without shareholder approval to the extent that such dividends appear justified by profits available for such purpose. The board of directors may also recommend final dividends be approved and declared by shareholders at an annual general meeting. No such dividend may exceed the amount recommended by the board of directors.

Under English law, dividends and distributions may only be made out of profits available for that purpose. Profits available for distribution are accumulated, realized profits, to the extent that they have not been previously utilized by distribution or capitalization, less its accumulated, realized losses, to the extent that they have not been previously written off in a reduction or reorganization of capital duly made. The amount of our distributable reserves is a cumulative calculation. We may be profitable in a single financial year but unable to pay a dividend if the profits of that year do not offset all previous years’ accumulated, realized losses. Additionally, we may only make a distribution if our net assets are not less than the amount of our aggregate called-up share capital and undistributable reserves, and if, and to the extent that, the distribution does not reduce the amount of those assets to less than that aggregate.

A shareholder who receives a distribution under circumstances where he or she knows or has reasonable grounds for believing that the distribution is unlawful in the circumstances is obliged to repay such distribution (or that part of it, as the case may be) to us.

If we were determined to be an investment company under the U.S. Investment Company Act of 1940, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business, results of operations and financial condition.

We intend to conduct our business so as not to become regulated as an investment company under the U.S. Investment Company Act. An entity generally will be determined to be an investment company for purposes of the U.S. Investment Company Act if, absent an applicable exemption, (i) it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or (ii) it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the ICA 40% Test.

We do not hold ourselves out as being engaged primarily, or propose to engage primarily, in the business of investing, reinvesting or trading in securities, and believe that we are not engaged primarily in the business of investing, reinvesting or trading in securities. We believe that, for U.S. Investment Company Act purposes, we are engaged primarily, through one or more of our subsidiaries, in the business of purchasing or otherwise acquiring certain obligations that represent part or all of the sales price of merchandise. Our subsidiaries that are so engaged rely on Section 3(c)(5)(A) of the U.S. Investment Company Act, which, as interpreted by the SEC

 

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staff, requires each such subsidiary to invest at least 55% of its assets in “notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance, and services,” which we refer to as the ICA Exception Qualifying Assets.

In a no-action letter, dated August 13, 2010, to Royalty Pharma, our predecessor, the SEC staff promulgated an interpretation that royalty interests that entitle an issuer to collect royalty receivables that are directly based on the sales price of specific biopharmaceutical assets that use intellectual property covered by specific license agreements are ICA Exception Qualifying Assets under Section 3(c)(5)(A). We rely on this no-action letter for the position that royalty receivables relating to biopharmaceutical assets that we hold are ICA Exception Qualifying Assets under Section 3(c)(5)(A) and Section 3(c)(6), which is described below.

To ensure that we are not obligated to register as an investment company, we must not exceed the thresholds provided by the ICA 40% Test. For purposes of the ICA 40% Test, the term investment securities does not include U.S. government securities or securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on Section 3(c)(1) or Section 3(c)(7) of the U.S. Investment Company Act, such as majority-owned subsidiaries that rely on Section 3(c)(5)(A). We also may rely on Section 3(c)(6), which, based on SEC staff interpretations, requires us to invest, either directly or through majority-owned subsidiaries, at least 55% of our assets in, as relevant here, businesses relying on Section 3(c)(5)(A). Therefore, the assets that we and our subsidiaries hold and acquire are limited by the provisions of the U.S. Investment Company Act and the rules and regulations promulgated thereunder.

If the SEC or its staff in the future adopts a contrary interpretation to that provided in the no-action letter to Royalty Pharma or otherwise restricts the conclusions in the SEC staff’s no-action letter such that royalty interests are no longer treated as ICA Exception Qualifying Assets for purposes of Section 3(c)(5)(A) and Section 3(c)(6), or the SEC or its staff in the future determines that the no-action letter does not apply to some or all types of royalty receivables relating to biopharmaceutical assets, our business will be materially and adversely affected. In particular, we would be required either to convert to a corporation formed under the laws of the United States or a state thereof (which would likely result in our being subject to U.S. federal corporate income taxation) and to register as an investment company, or to stop all business activities in the United States until such time as the SEC grants an application to register us as an investment company formed under non-U.S. law. It is unlikely that such an application would be granted and, even if it were, requirements imposed by the Investment Company Act, including limitations on our capital structure, our ability to transact business with affiliates and our ability to compensate key employees, could make it impractical for us to continue our business as currently conducted. Our ceasing to qualify for an exemption from registration as an investment company would materially and adversely affect the value of your Class A ordinary shares and our ability to pay dividends in respect of our Class A ordinary shares.

The success of our business depends upon key members of the Manager’s senior advisory team who may not continue to work for the Manager.

We depend on the expertise, skill and network of business contacts of the advisory professionals of the Manager, who evaluate, negotiate, structure, execute, monitor and service our assets in accordance with the terms of the Management Agreement between us and the Manager. Our future success depends to a significant extent on the continued service and coordination of the senior advisory professionals of the Manager, particularly Mr. Legorreta. Pursuant to the Management Agreement, executives of the Manager must devote substantially all of their business time to managing the Company, unless otherwise approved by the Board. Despite this, Mr. Legorreta and other key advisory professionals may have other demands on their time now and in the future, and we cannot assure you that they will continue to be actively involved in our business. Each of these individuals is an employee of the Manager and is not subject to an employment contract with us. The departure of any of these individuals or competing demands on their time in the future could have a material adverse effect on our ability to achieve our business objectives. This could have a material adverse effect on our financial condition and results of operations.

 

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The senior advisory professionals of the Manager have relationships with participants in the biopharmaceutical industry, financial institutions and other advisory professionals, which we rely upon to source potential asset acquisition opportunities. If the senior advisory professionals of the Manager fail to maintain such relationships, or to develop new relationships with other sources, we will not be able to grow our current asset portfolio. In addition, we can offer no assurance that these relationships, even if maintained, will generate asset acquisition opportunities for us in the future.

The equity performance awards payable to an affiliate of the Manager may create incentives that are not fully aligned with the interests of our shareholders.

An affiliate of the Manager is entitled to Equity Performance Awards based on our performance as measured by our Net Economic Profit, as discussed in “Certain Relationships and Related Party Transactions—Equity Performance Awards.” The right to equity performance awards may create an incentive for the Manager to make riskier or more speculative asset acquisitions than would be the case absent such equity performance awards. In addition, the Manager may cause us to incur more debt or otherwise use more leverage in connection with asset acquisitions, as generally the use of leverage can increase the rate of return on an investment and therefore our profits. This equity performance awards structure may encourage the Manager to cause us to borrow money to finance additional asset acquisitions or to maintain leverage which poses higher risks for our business when it would otherwise be appropriate to not use such leverage. Under certain circumstances, the use of borrowed money may increase the likelihood of default, which would disfavor our shareholders. In addition, there is no correlation between our profits and the obligation of our board of directors to pay dividends to shareholders. Consequently, you may receive limited or no dividends while an affiliate of the Manager remains entitled to equity performance awards based on our Net Economic Profit. In addition, even though Equity Performance Awards are payable on a portfolio-by-portfolio basis (with portfolios comprised of investments made during sequential two-year periods) in order to reduce the risks that affiliates of the Manager will be paid Equity Performance Awards on individual investments even though our overall portfolio of investments is not performing well, Equity Performance Awards may nevertheless be payable to affiliates of the Manager when our overall portfolio of investments is not performing as well as the individual portfolios that are used as the basis for measuring the Equity Performance Awards. See “Certain Relationships and Related Party Transactions—Equity Performance Awards.”

Our board of directors may make decisions with respect to the cash generated from our operations that may result in no dividends to you.

Our board of directors is under no obligation to pay dividends to our shareholders, and it may decide to use cash to fund asset acquisitions or operations in lieu of paying dividends. We will pay equity performance awards to an affiliate of the Manager based on our Net Economic Profit regardless of whether any dividends are made to our shareholders. Our board’s decisions with respect to our cash may result in no dividends to our shareholders. Furthermore, our board’s decisions with respect to dividends may adversely affect the market price of our Class A ordinary shares. In the event that we generate positive income, but pay limited or no dividends, you may, if you have made certain elections for U.S. federal income tax purposes with respect to your Class A ordinary shares, have a tax liability on our income in excess of the actual cash dividends received by you. If our board of directors decides to approve limited or no dividends, your primary remedy will be to sell your Class A ordinary shares at prevailing market prices, including at a loss, which prices may be low due to unfavorable or inconsistent dividends.

The royalties that we acquire following this offering may fall outside the biopharmaceutical industry, and any such assets, and the cash flows therefrom, may not resemble the assets in our current portfolio.

We have discretion as to the types of healthcare assets that we may acquire following consummation of this offering. While we expect the Manager to acquire assets that primarily fall within the biopharmaceutical industry, we are not obligated to do so and may acquire other types of healthcare assets that are peripheral to or

 

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outside of the biopharmaceutical industry. Consequently, our asset acquisitions following this offering, and the cash flows from such assets, may not resemble those of the assets in our current portfolio. There can be no assurance that assets acquired following this offering will have returns similar to the returns expected of the assets in our current portfolio or be profitable at all.

The Manager may be the subject of a change of control resulting in a disruption in our operations that could adversely affect our business, financial condition and results of operations.

There could be a change of control of the Manager and, in such a case, the new controlling party may have a different philosophy, employ advisory professionals who are less experienced, be unsuccessful in identifying asset acquisition opportunities or have a track record that is not as successful as that of the Manager prior to such a change of control. If the foregoing were to occur, we could experience difficulty in making new asset acquisitions, and the value of our existing assets, our business, results of operations and financial condition could materially suffer.

The Manager’s liability is limited under the Management Agreement, and we have agreed to indemnify the Manager against certain liabilities. As a result, we could experience unfavorable operating results or incur losses for which the Manager would not be liable.

Pursuant to the Management Agreement, the Manager will not assume any responsibility other than to render the services called for thereunder. Under the terms of the Management Agreement, the Manager and its affiliates (including EPA Holdings) and their respective officers, directors, stockholders, members, employees, agents and partners, and any other person who is entitled to indemnification (each, an “Indemnitee”) will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the Management Agreement, except those resulting from acts constituting fraud, bad faith, willful misconduct, gross negligence (as such concept is interpreted under the laws of the State of New York) and a material breach of the Management Agreement that is not cured in accordance with its terms or a violation of applicable securities laws.

In addition, to the fullest extent permitted by law, we have agreed to indemnify the Indemnitees from and against any and all claims, liabilities, damages, losses, penalties, actions, judgments, costs and expenses (including amounts paid in satisfaction of judgments, in compromises and settlements, as fines and penalties and legal or other costs and reasonable expenses of investigating or defending against any claim or alleged claim) of any nature whatsoever, known or unknown, liquidated or unliquidated that are incurred by any Indemnitee or to which such Indemnitee may be subject by reason of its activities on behalf of the Company or any of its subsidiaries to the extent that such Indemnitee’s conduct did not constitute fraud, bad faith, willful misconduct, gross negligence (as such concept is interpreted under the laws of the State of New York), material breach of the Management Agreement that is not cured in accordance with the terms of the Management Agreement or a violation of applicable securities laws. As a result, we could experience unfavorable operating results or incur losses for which the Manager would not be liable.

Operational risks may disrupt our businesses, result in losses or limit our growth.

We and the Manager rely heavily on our respective financial, accounting, information and other data processing systems and cloud computing services, as well as those of our current and future collaborators, contractors or consultants. Such systems are vulnerable to damage or interruption from computer viruses, data corruption, cyber-based attacks, unauthorized access, natural disasters, pandemics, such as the current COVID-19 pandemic, terrorism, war and telecommunication and electrical failures. If any of these events occur and such systems do not operate properly or are disabled or if there is any unauthorized disclosure of data, whether as a result of tampering, a breach of network security systems, a cyber-incident or attack or otherwise, we could suffer substantial financial loss, increased costs, a disruption of our business, loss of trade secrets or other proprietary information, liability to us, regulatory intervention or reputational damage.

Furthermore, federal, state and international laws and regulations relating to data privacy and protection, such as the European Union’s General Data Protection Regulation (“GDPR”), which took effect in May 2018,

 

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and the California Consumer Privacy Act (“CCPA)”, which took effect in January 2020, can expose us to enforcement actions and investigations by regulatory authorities, and potentially result in regulatory penalties and significant legal liability, if our information technology security efforts or data privacy and protection compliance efforts fail. In addition, we operate a business that is highly dependent on information systems and technology. Our information systems and technology and that of the Manager may not continue to be able to accommodate our growth, and the cost of maintaining such systems may increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could have a material adverse effect on our business, financial condition and results of operations.

A disaster or a disruption in the public infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, could have a material adverse effect on our ability to continue to operate our business without interruption. Our disaster recovery programs and those of the Manager may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.

In addition, sustaining our growth may require us or the Manager to commit additional management, operational and financial resources to identify new professionals to join the team and to maintain appropriate operational and financial systems to adequately support expansion. Due to the fact that the market for hiring talented professionals is competitive, we may not be able to grow at the pace we desire.

The current outbreak of the novel coronavirus, or COVID-19, or the future outbreak of any other highly infectious or contagious diseases, could materially and adversely affect our results of operations, financial condition and cash flows. Further, the spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of an as yet unknown magnitude and duration.

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread to over 100 countries, including every state in the United States. On March 11, 2020 the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to COVID-19.

The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. Many experts predict that the outbreak will trigger a period of global economic slowdown or a global recession. COVID-19 or another pandemic could have material and adverse effects on us due to, among other factors:

 

   

a general decline in business activity;

 

   

the destabilization of the markets could negatively impact our partners in the biopharmaceutical industry and the sales of products generating our royalties;

 

   

difficulty accessing the capital and credit markets on favorable terms, or at all, and a severe disruption and instability in the global financial markets, or deteriorations in credit and financing conditions which could affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis;

 

   

the potential negative impact on the health of our Manager’s highly qualified personnel, especially if a significant number of them are impacted;

 

   

a deterioration in our ability to ensure business continuity during a disruption;

 

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interruptions, shortages, delivery delays and potential discontinuation of supply to our partners, which could (i) delay the clinical trials of the development-stage product candidates underlying our assets and result in a loss of our market share for products generating our royalties or development-stage product candidates underlying our assets, if approved, and (ii) hinder our partners’ ability to timely distribute products generating our royalties and satisfy customer demand;

 

   

travel restrictions, shelter-in-place policies or restrictions and other disruptions, which could cause or continue to cause delays and other direct impacts at our partners’ manufacturing sites, which could impact the ability of our partners to manufacture development-stage product candidates underlying our biopharmaceutical assets and products generating our royalties; and

 

   

potential interruptions to our partners’ clinical trial programs of development-stage product candidates underlying our biopharmaceutical assets, including: (i) the potential diversion of healthcare resources away from the conduct of clinical trials to focus on pandemic concerns; (ii) changes in hospital or research institution policies or government regulations, which could delay or adversely impact our partners’ ability to conduct their clinical trials; and (iii) pauses to or delays of trial procedures (particularly any procedures that may be deemed non-essential), patient dosing, shipment of our partners’ development-stage product candidates, distribution of clinical trial materials, study monitoring, site inspections and data analysis due to reasons related to the pandemic, each of which could cause or continue to cause a disruption or delay to the development or the approval of development-stage product candidates underlying our biopharmaceutical assets.

The rapid development and fluidity of this situation makes it impossible to predict the ultimate adverse impact of COVID-19. Nevertheless, COVID-19 presents material uncertainty which could adversely affect our results of operations, financial condition and cash flows.

Legal claims and proceedings could adversely impact our business.

We may be subject to a wide variety of legal claims and proceedings. Regardless of their merit, these claims can require significant time and expense to investigate and defend. Since litigation is inherently uncertain, there is no guarantee that we will be successful in defending ourselves against such claims or proceedings, or that our assessment of the materiality of these matters, including any reserves taken in connection therewith, will be consistent with the ultimate outcome of such matters. The resolution of, or increase in the reserves taken in connection with, one or more of these matters could have a material adverse effect on our business, results of operations, cash flows and financial condition.

We are subject to the U.K. Bribery Act, the U.S. Foreign Corrupt Practices Act and other anti-corruption laws, as well as export control laws, import and customs laws, trade and economic sanctions laws and other laws governing our operations.

Our operations are subject to anti-corruption laws, including the U.K. Bribery Act 2010 (“Bribery Act”), the U.S. Foreign Corrupt Practices Act of 1977, as amended the (“FCPA”), the U.S. domestic bribery statute contained in 18 U.S.C. §201, the U.S. Travel Act, and other anti-corruption laws that apply in countries where we do business. The Bribery Act, the FCPA and these other laws generally prohibit us and our employees and intermediaries from authorizing, promising, offering, or providing, directly or indirectly, improper or prohibited payments, or anything else of value, to government officials or other persons to obtain or retain business or gain some other business advantage. Under the Bribery Act, we may also be liable for failing to prevent a person associated with us from committing a bribery offense. We and our commercial partners operate in a number of jurisdictions that pose a high risk of potential Bribery Act or FCPA violations, and we participate in collaborations and relationships with third parties whose corrupt or illegal activities could potentially subject us to liability under the Bribery Act, FCPA or local anti-corruption laws, even if we do not explicitly authorize or have actual knowledge of such activities. In addition, we cannot predict the nature, scope or effect of future

 

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regulatory requirements to which our international operations might be subject or the manner in which existing laws might be administered or interpreted.

We are also subject to other laws and regulations governing our international operations, including regulations administered by the governments of the United Kingdom and the United States, and authorities in the European Union, including applicable export control regulations, economic sanctions and embargoes on certain countries and persons, anti-money laundering laws, import and customs requirements and currency exchange regulations, collectively referred to as the Trade Control laws.

There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the Bribery Act, the FCPA or other legal requirements, including Trade Control laws. If we are not in compliance with the Bribery Act, the FCPA and other anti-corruption laws or Trade Control laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the Bribery Act, the FCPA, other anti-corruption laws or Trade Control laws by the United Kingdom, United States or other authorities could also have an adverse impact on our reputation, our business, results of operations and financial condition.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. It is possible that governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant criminal, civil and administrative sanctions, including monetary penalties, damages, fines, disgorgement, individual imprisonment and exclusion from participation in government-funded healthcare programs, such as Medicare and Medicaid, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, reputational harm, and we may be required to curtail or restructure our operations, any of which could adversely affect our ability to operate our business and our results of operations.

The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. The shifting compliance environment and the need to build and maintain robust and expandable systems to comply with multiple jurisdictions with different compliance and/or reporting requirements increases the possibility that a healthcare company may run afoul of one or more of the requirements.

The EU directive on alternative investment fund managers (the “AIFM Directive”) may significantly increase our compliance costs.

The AIFM Directive has been implemented into the national law of the majority of member states of the European Economic Area and the United Kingdom (each an “AIFM state”). The AIFM Directive sets out minimum conditions related to the marketing of interests in alternative investment funds (such as our Class A ordinary shares) in the AIFM states and may impact our ability to attract investors in the AIFM states and may significantly increase our and the Manager’s compliance costs. Such conditions include requirements for us to register with the competent authority in the relevant AIFM in order to market the Class A ordinary shares to investors, state requirements to file periodic reports with the competent authority in the relevant AIFM state and requirements to comply with disclosure and reporting obligations in respect of investors in the relevant AIFM state. Such reports and disclosures may become publicly available. While such conditions are met in relation to

 

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the AIFM states where our Class A ordinary shares will be marketed, there can be no guarantee that this will continue to be the case. The AIFM Directive does not, however, prohibit an investor in such AIFM state from subscribing for our Class A ordinary shares at their own initiative in circumstances where such Class A ordinary shares have not been marketed in such AIFM state and we may issue our Class A ordinary shares to such investors, as long as they have provided us and the Manager with representations that they have done so at their own initiative.

In each AIFM state, our Class A ordinary shares may only be offered to investors in accordance with local measures implementing the AIFM Directive. Investors, together with any person making or assisting in the decision to invest in us, who are situated, domiciled or who have a registered office, in an AIFM state where our Class A ordinary shares are not being offered pursuant to private placement rules implementing the AIFM Directive may invest, or effect an investment in our Class A ordinary shares, but only in circumstances where they do so at their own initiative. Any investor subscribing for our Class A ordinary shares at their own initiative in such AIFM state should note that as we have not been registered for marketed in that AIFM state, no reports will be filed with the competent authority in the relevant AIFM state by or in respect of us and no investor shall be entitled to receive any disclosure or report that is mandated in respect of an alternative investment fund being marketed pursuant to the AIFM Directive.

Risks Relating to Our Organization and Structure

We are a holding company with no operations and will rely on our subsidiaries to provide us with funds necessary to meet our financial obligations and to pay dividends.

We are a holding company with no material direct operations. Our principal asset is the controlling equity interest in RP Holdings. As a result, we will be dependent on loans, dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations and to pay dividends on our ordinary shares. Our subsidiaries are legally distinct from us and may be prohibited or restricted from paying dividends or otherwise making funds available to us under certain conditions. If the cash we receive from our subsidiaries pursuant to dividend payments is insufficient for us to fund our obligations, or if a subsidiary is unable to pay dividends to us, provided that we have sufficient distributable profits, our net assets exceed the total of our called-up share capital and distributable reserves and any dividend would not reduce our net assets to less than such total, we may be required to raise cash through the incurrence of debt, the issuance of equity or the sale of assets to fund the payment of the dividends. However, there is no assurance that we would be able to raise cash by these means. If the ability of any of our subsidiaries to pay dividends or make other distributions or payments to us is materially restricted by regulatory or legal requirements, bankruptcy or insolvency, or our need to maintain our financial strength ratings, or is limited due to operating results or other factors, it could materially adversely affect our ability to pay our operating costs and other corporate expenses and we may be unable to, or our board may exercise its discretion not to, pay dividends.

Our structure will result in tax distributions to owners of RP Holdings Class C Special Interests.

RP Holdings will be treated as a partnership for U.S. federal income tax purposes and will have owners that are subject to U.S. federal income taxation. To the extent permitted by applicable law, RP Holdings is required to make cash distributions, or tax distributions, to owners of RP Holdings Class C Special Interests, calculated using an assumed tax rate that is generally uniform for all recipients regardless of their tax status. Funds used by RP Holdings to satisfy its tax distribution obligations will not be available for reinvestment in our business.

Risks Relating to Our Class A Ordinary Shares and this Offering

There may not be an active trading market for our Class A ordinary shares, which may cause our Class A ordinary shares to trade at a discount from the initial offering price and make it difficult to sell the Class A ordinary shares that you purchase.

Prior to this offering, there has not been a public trading market for our Class A ordinary shares. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on

 

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Nasdaq or how liquid that market may become. It is possible that after this offering an active trading market will not develop or, if one does develop, it may not be sustained, which would make it difficult for you to sell your Class A ordinary shares at an attractive price or at all. The initial public offering price per share will be determined by agreement among us and the representative of the underwriters of this offering, and may not be indicative of the price at which our Class A ordinary shares will trade in the public market after this offering.

The market price of our Class A ordinary shares may decline due to the large number of Class A ordinary shares eligible for future sale.

The market price of our Class A ordinary shares could decline as a result of sales of a large number of Class A ordinary shares in the market after this offering or the perception that such sales could occur. These sales, or the possibility that these sales could occur, also may make it more difficult for us to sell Class A ordinary shares in the future at a time and at a price that we deem appropriate. See “Class A Ordinary Shares Eligible for Future Sale.” Subject to the lock-up restrictions described under “Underwriting,” we may issue and sell in the future additional Class A ordinary shares.

Upon the closing of this offering, except as otherwise described herein, all shares that are being offered hereby will be freely tradable without restriction, assuming they are not held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. In addition, we intend to grant registration rights to the holders of             Class A ordinary shares or their transferees (including those holders of              RP Holdings Class B Interests exchangeable on a one-for-one basis for Class A ordinary shares pursuant to the Exchange Agreement), entitling them to the right to demand that we file a registration statement with the SEC registering the offer and sale of a specified number of Class A ordinary shares. See “Class A Ordinary Shares Eligible for Future Sale—Registration Rights.” Any Class A ordinary shares registered pursuant to the registration rights agreement will be freely tradable in the public market, subject to applicable lock-up periods, if any. In addition, in connection with this offering, we, all of our directors, our executive officers, the Manager, certain employees of the Manager and the Continuing Investors Partnerships (which hold all of our Class B shares and RP Holdings Class B Interests exchangeable for Class A ordinary shares) have each agreed, subject to certain exceptions, to be subject to a 180-day lock-up restriction. See “Class A Ordinary Shares Eligible for Future Sale—Lock-up Agreements.” J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC may waive these restrictions at their discretion. The market price of our Class A ordinary shares may decline significantly when this lock-up restriction lapses.

If securities or industry analysts do not publish research or reports about our business, or if they downgrade their recommendations regarding our Class A ordinary shares, the trading price and trading volume of our Class A ordinary shares could decline.

The trading market for our Class A ordinary shares will be influenced by the research and reports that industry or securities analysts publish about us or our business. If any of the analysts who cover us downgrades our Class A ordinary shares or publishes inaccurate or unfavorable research about our business, the market price of our Class A ordinary shares may decline. If analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price or trading volume of our Class A ordinary shares to decline and our Class A ordinary shares to be less liquid.

We have broad discretion in the use of our cash and cash equivalents, including the net proceeds from this offering, and may not use them effectively.

We will have broad discretion in the application of our cash, cash equivalents and investments, including the net proceeds from this offering, and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our Class A ordinary shares. The failure by management to apply these funds effectively could result in financial losses that could have a material adverse impact on our business, cause the price of our Class A ordinary shares to decline, and interfere with our ability to acquire royalty assets. Pending

 

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their use, we may invest our cash and cash equivalents, including the net proceeds from this offering, in a manner that does not produce income or that loses value. See the section titled “Use of Proceeds” appearing elsewhere in this prospectus.

We may not be able to use the net proceeds we receive in this offering toward royalty acquisitions.

We intend to use the net proceeds to us from this offering to acquire royalties and for general corporate purposes. However, due to the potential unavailability of appropriate royalty acquisitions, we cannot assure you that the net proceeds from this offering will be used for the above purposes within a certain period of time or at all. Until we use the net proceeds to us from this offering, we plan to invest them in short-term investments, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds from this offering in ways that enhance shareholder value, we may fail to achieve expected financial results. You will not have the opportunity to influence our decisions on how we use our net proceeds from this offering. See “Use of Proceeds.”

The market price of our Class A ordinary shares may be volatile, which could cause the value of your investment to decline.

Even if a trading market develops, the market price of our Class A ordinary shares may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of Class A ordinary shares in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including:

 

   

market conditions in the broader stock market in general, or in our industry in particular;

 

   

variations in our quarterly operating results or dividends to shareholders;

 

   

additions or departures of key management personnel at the Manager;

 

   

failure to meet analysts’ earnings estimates;

 

   

publication of research reports about our industry;

 

   

third-party healthcare reimbursement policies and practices;

 

   

litigation and government investigations;

 

   

changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business;

 

   

no results, or projected results, from marketers of products that generate our royalties;

 

   

results from, and any delays to, the clinical trial programs of development-stage product candidates underlying our biopharmaceutical assets or other issues relating to such products, including regulatory approval or commercialization;

 

   

adverse market reaction to any indebtedness that we may incur or securities we may issue in the future;

 

   

changes in market valuations of similar companies or speculation in the press or investment community;

 

   

announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments;

 

   

litigation;

 

   

economic and political conditions or events; and

 

   

adverse publicity about the industries in which we participate or individual scandals.

 

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These and other factors may cause the market price of and demand for our Class A ordinary shares to fluctuate significantly, which may limit or prevent you from reselling your Class A ordinary shares at or above the initial public offering price.

The stock market in general has from time to time experienced extreme price and volume fluctuations, including in recent months. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against public companies. This type of litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

You will suffer dilution in the net tangible book value of the Class A ordinary shares that you purchase.

The initial public offering price of our Class A ordinary shares will be substantially higher than the net tangible book value as further adjusted per share issued and outstanding immediately after this offering. Investors who purchase Class A ordinary shares in this offering will pay a price per share that substantially exceeds the net tangible book value per Class A ordinary share. If you purchase our Class A ordinary shares in this offering, you will experience immediate and substantial dilution of $            in the net tangible book value per share. See “Dilution.”

Future offerings of debt or equity securities by us may adversely affect the market price of our Class A ordinary shares.

In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional Class A ordinary shares or offering debt or other equity securities, including commercial paper, medium-term notes, senior or subordinated notes, or debt securities convertible into equity. Future acquisitions or other investments could require substantial additional capital in excess of cash from operations. We would expect to finance the capital required for acquisitions through a combination of additional issuances of equity, corporate indebtedness, asset-backed financing and/or cash from operations.

Issuing additional Class A ordinary shares or other equity securities or securities convertible into equity may dilute the economic and voting rights of our shareholders at the time of such issuance or reduce the market price of our Class A ordinary shares or both. Upon liquidation, holders of debt securities and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our Class A ordinary shares. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing or nature of our future offerings. Thus, holders of our Class A ordinary shares bear the risk that our future offerings may reduce the market price of our Class A ordinary shares and dilute their shareholdings in us. See “Description of Share Capital.”

Our Articles of Association to be effective in connection with the closing of this offering will provide that the courts of England and Wales will be the exclusive forum for the resolution of all shareholder complaints other than complaints asserting a cause of action arising under the Securities Act and the Exchange Act, and that the U.S. federal district courts will be the exclusive forum for the resolution of any shareholder complaint asserting a cause of action arising under the Securities Act and the Exchange Act.

Our Articles of Association to be effective in connection with the closing of this offering will provide that the courts of England and Wales will be the exclusive forum for resolving all shareholder complaints other than shareholder complaints asserting a cause of action arising under the Securities Act and the Exchange Act, and that the U.S. federal district courts will be the exclusive forum for resolving any shareholder complaint asserting a cause of action arising under the Securities Act and the Exchange Act, including applicable claims arising out of this offering. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial

 

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forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. If a court were to find either choice of forum provision contained in our Articles of Association to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our results of operations and financial condition.

U.S. investors may have difficulty enforcing civil liabilities against our company, our directors or members of senior management and the experts named in this prospectus.

We are a public limited company with our registered office in England and our subsidiaries are incorporated in various jurisdictions, including jurisdictions outside the United States. One of our directors is not a resident of the United States, and a substantial portion of our assets and the assets of this director are located outside the United States. As a result, it may be difficult for investors to effect service of process on this director in the United States or to enforce in the United States judgments obtained in U.S. courts against us or this director based on the civil liability provisions of the U.S. securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of England may render you unable to enforce a judgment against our assets or the assets of our directors and executive officers. In addition, it is doubtful whether English courts would enforce certain civil liabilities under U.S. securities laws in original actions or judgments of U.S. courts based upon these civil liability provisions. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in the United Kingdom. An award for monetary damages under the U.S. securities laws would likely be considered punitive if it does not seek to compensate the claimant for loss or damage suffered and is intended to punish the defendant. The enforceability of any judgment in the United Kingdom will depend on the particular facts of the case as well as the laws and treaties in effect at the time. The United States and the United Kingdom do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. As a result of the above, public holders of our Class A ordinary shares may have more difficulty in protecting their interest through actions against our management, directors or major shareholders than they would as shareholders of a U.S. public company.

The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation and these differences may make our Class A ordinary shares less attractive to investors.

We are incorporated under English law. The rights of holders of our Class A ordinary shares are governed by English law, including the provisions of the Companies Act 2006 (the “U.K. Companies Act”), and by our Articles of Association. These rights differ in certain respects from the rights of shareholders in typical U.S. corporations and these differences may make our Class A ordinary shares less attractive to investors.

The City Code on Takeovers and Mergers (the “Takeover Code”) applies, among other things, to an offer for a public company whose registered office is in the United Kingdom (or the Channel Islands or the Isle of Man) and whose securities are not admitted to trading on a regulated market in the United Kingdom (or the Channel Islands or the Isle of Man) if the company is considered by the Panel on Takeovers and Mergers (the “Takeover Panel”) to have its place of central management and control in the United Kingdom (or the Channel Islands or the Isle of Man). This is known as the “residency test.” The test for central management and control under the Takeover Code is different from that used by the U.K. tax authorities. Under the Takeover Code, the Takeover Panel will determine whether we have our place of central management and control in the United Kingdom by looking at various factors, including the structure of our board of directors, the functions of the directors and where they are resident.

If at the time of a takeover offer the Takeover Panel determines that we have our place of central management and control in the United Kingdom, we would be subject to a number of rules and restrictions, including but not limited to the following: (i) our ability to enter into deal protection arrangements with a bidder would be extremely limited; (ii) we might not, without the approval of our shareholders, be able to perform certain

 

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actions that could have the effect of frustrating an offer, such as issuing shares or carrying out acquisitions or disposals; and (iii) we would be obliged to provide equality of information to all bona fide competing bidders.

Given that our current intention is not to have central management and control situated within the United Kingdom (or the Channel Islands or the Isle of Man, but to have such management and control situated within the United States), we do not currently envisage that the Takeover Code will apply to an offer for the Company.

Under English law, and whether or not the Company is subject to the Takeover Code, an offeror for the Company that has acquired (i) 90% in value of; and (ii) 90% of the voting rights carried by the shares to which the offer relates may exercise statutory squeeze-out rights to compulsorily acquire the shares of the non-assenting minority. However, if an offer for the Company is conducted by way of a scheme of arrangement the threshold for the offeror obtaining 100% of Company shares comprises two components (i) approval by a majority in number of each class of Company shareholders present and voting at the shareholder meeting; and (ii) approval of Company shareholders representing 75% or more in value of each class of Company shareholders present and voting at that meeting.

As an English public limited company, certain capital structure decisions will require shareholder approval, which may limit our flexibility to manage our capital structure.

Prior to the consummation of this offering, we altered the legal status of our company under English law from a private limited company by re-registering as a public limited company and changing our name from Royalty Pharma Ltd to Royalty Pharma plc. English law provides that a board of directors may only allot shares (or rights to subscribe for or convert into shares) with the prior authorization of shareholders, such authorization stating the aggregate nominal amount of shares that it covers and valid for a maximum period of five years, each as specified in the articles of association or relevant shareholder resolution. We have obtained authority from our shareholders to allot additional shares for a period of five years from             , which authorization will need to be renewed upon expiration (i.e., at least every five years) but may be sought more frequently for additional five-year terms (or any shorter period).

English law also generally provides shareholders with preemptive rights when new shares are issued for cash. However, it is possible for the articles of association, or for shareholders to pass a special resolution at a general meeting, being a resolution passed by at least 75% of the votes cast, to disapply preemptive rights. Such a disapplication of preemptive rights may be for a maximum period of up to five years from the date of adoption of the articles of association, if the disapplication is contained in the articles of association, or from the date of the shareholder special resolution, if the disapplication is by shareholder special resolution. In either case, this disapplication would need to be renewed by our shareholders upon its expiration (i.e., at least every five years). We have obtained authority from our shareholders to disapply preemptive rights for a period of five years from             , which disapplication will need to be renewed upon expiration (i.e., at least every five years) to remain effective, but may be sought more frequently for additional five-year terms (or any shorter period).

English law also generally prohibits a public company from repurchasing its own shares without the prior approval of shareholders by ordinary resolution, being a resolution passed by a simple majority of votes cast, and other formalities. Such approval may be for a maximum period of up to five years. See “Description of Share Capital.”

The United Kingdom’s vote in favor of withdrawing from the European Union may have a negative effect on global economic conditions, financial markets and our business, which could reduce the market price of our Class A ordinary shares.

In June 2016, a majority of those voting in a national referendum in the United Kingdom voted to withdraw from the European Union. The withdrawal of the United Kingdom from the European Union (commonly referred to as “Brexit”) took effect on January 31, 2020 (the “Exit Day”). A post-Brexit transition period started on the Exit Day and is scheduled to expire on December 31, 2020. During the transition period most EU law continues

 

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to apply to the United Kingdom while the future relationship between the United Kingdom and the EU is formally negotiated, based on terms set out in the political declaration on the framework for the future relationship made by the United Kingdom and EU negotiators. These developments, may have a significant adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. In particular, it could also lead to a period of considerable uncertainty in relation to the U.K. financial and banking markets, as well as on the regulatory process in Europe. As a result of this uncertainty, global financial markets could experience significant volatility, which could adversely affect the market price of our Class A ordinary shares. Asset valuations, currency exchange rates and credit ratings may also be subject to increased market volatility. Lack of clarity about future U.K. laws and regulations as the United Kingdom determines which European Union rules and regulations to replace or replicate, including financial laws and regulations, tax and free trade agreements, intellectual property rights, could increase costs, depress economic activity and restrict our access to capital.

We may also face new regulatory costs and challenges that could have an adverse effect on our operations. Depending on the terms for a future relationship between the United Kingdom and European Union, the United Kingdom could lose the benefits of global trade agreements negotiated by the European Union on behalf of its members, which may result in increased trade barriers that could make our doing business in Europe more difficult. In addition, currency exchange rates in the pound sterling and the euro with respect to each other and the U.S. dollar have already been adversely affected by Brexit. Furthermore, at present, there are no indications of the effect Brexit will have on the pathway to obtaining marketing approval for any of our development-stage product candidates in the United Kingdom, or what, if any, role the EMA may have in the approval process.

If our Class A ordinary shares are not eligible for deposit and clearing within the facilities of DTC, then transactions in our securities may be disrupted.

The facilities of DTC are a widely-used mechanism that allow for rapid electronic transfers of securities between the participants in the DTC system, which include many large banks and brokerage firms. We expect that our Class A ordinary shares will be eligible for deposit and clearing within the DTC system. We expect to enter into arrangements with DTC whereby we will agree to indemnify DTC for any stamp duty or SDRT that may be assessed upon it as a result of its service as a depository and clearing agency for our Class A ordinary shares. We expect these actions, among others, will result in DTC agreeing to accept the Class A ordinary shares for deposit and clearing within its facilities.

DTC is not obligated to accept the Class A ordinary shares for deposit and clearing within its facilities in connection with this offering and, even if DTC does initially accept the Class A ordinary shares, it will generally have discretion to cease to act as a depository and clearing agency for the ordinary shares, including to the extent that any changes in U.K. law (including changes as a result of the U.K.’s withdrawal from the EU, which could affect the stamp duty or SDRT position as further discussed in the section entitled “Material Tax Considerations—Material U.K. Tax Considerations” of this prospectus) change the stamp duty or SDRT position in relation to the Class A ordinary shares. If DTC determined prior to the completion of this offering that the shares are not eligible for clearance within the DTC system, then we would not expect to complete the Reorganization Transactions contemplated by this prospectus in their current form. However, if DTC determined at any time after the completion of this offering that the shares were not eligible for continued deposit and clearance within its facilities, then we believe the shares would not be eligible for continued listing on a U.S. securities exchange and trading in the shares would be disrupted. While we would pursue alternative arrangements to preserve our listing and maintain trading, any such disruption could have a material adverse effect on the market price of our Class A ordinary shares.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public entity, we will be subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended (“U.S. Exchange Act”), the requirements of the U.S. Sarbanes-Oxley Act of 2002

 

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(“U.S. Sarbanes-Oxley Act”), and the requirements of the U.K. Companies Act and, if applicable, the Takeover Code. The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. After the closing of this offering, we will be obligated to file with the SEC annual and quarterly information and other reports that are specified in the Exchange Act, and therefore will need to have the ability to prepare financial statements that are compliant with all SEC reporting requirements on a timely basis. In addition, we will be subject to other reporting and corporate governance requirements, including certain requirements of Nasdaq and certain provisions of the Sarbanes-Oxley Act and the regulations promulgated thereunder, which will impose significant compliance obligations upon us. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required, and management’s attention may be diverted from other business concerns.

We expect our compliance with the requirements under the U.S. Exchange Act, the U.S. Sarbanes-Oxley Act, the U.K. Companies Act and, if applicable, the Takeover Code and the rules and regulations thereunder to increase our legal and financial compliance costs and to make some activities more time consuming and costly. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

Failure to establish and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business, reputation and the trading price of our Class A ordinary shares.

We have not previously been required to comply with the requirements of the U.S. Sarbanes–Oxley Act, including the internal controls evaluation and certification requirements of Section 404 of that statute, and we will not be required to comply with all of those requirements until we have been subject to the reporting requirements of the U.S. Exchange Act for a specified period of time. Accordingly, our internal controls over financial reporting do not currently meet all of the standards contemplated by Section 404 that we will eventually be required to meet. We are in the process of addressing our internal controls over financial reporting and are establishing formal policies, processes and practices related to financial reporting and to the identification of key financial reporting risks, assessment of their potential effect and linkage of those risks to specific areas and activities within our organization.

Additionally, we have begun the process of documenting our internal controls procedures to satisfy the requirements of Section 404, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. During the course of our ongoing evaluation and integration of the internal controls over financial reporting, we may identify areas requiring improvement, and we may have to design enhanced processes and controls to address issues identified through this review. For example, we anticipate that the Manager will hire additional administrative and accounting personnel to conduct our financial reporting.

Because we do not currently have comprehensive documentation of our internal controls over financial reporting and have not yet tested our internal controls over financial reporting in accordance with Section 404, we cannot conclude in accordance with Section 404 that we do not have a material weakness in our internal controls over financial reporting or a combination of significant deficiencies that could result in the conclusion that we have a material weakness in our internal controls over financial reporting. As a public entity, we will be required to complete our initial assessment in a timely manner. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our financial reporting could be adversely affected. We may be unable to report our financial information on a timely or reliable basis, which may subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange

 

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listing rules, and result in a breach of the covenants under the agreements governing any of our financing arrangements. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements could also suffer if our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could materially adversely affect our business and lead to a decline in the trading price of our Class A ordinary shares.

Risks Relating to Taxation

Our structure involves complex provisions of tax law for which no clear precedent or authority may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis.

The tax treatment of shareholders and us (including the Irish, U.K. and U.S. federal income tax treatment) depends in some instances on determinations of fact and interpretations of complex provisions of applicable tax law for which no clear precedent or authority may be available. You should be aware that our tax position is not free from doubt, and that applicable tax rules are generally subject to review by persons involved in the legislative process and the relevant tax authorities, which could result in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations. The present tax treatment of an investment in our Class A ordinary shares and of our operations may be modified by administrative, legislative or judicial interpretation at any time, and any such action may affect investments and commitments previously made. No ruling will be sought from the any relevant tax authority regarding any of the tax issues discussed herein other than from the U.K. tax authority in relation to U.K. stamp taxes, and no assurance can be given that the relevant tax authorities will not challenge any of our tax positions and that such challenge would not succeed. If any such position is successfully challenged, our tax liabilities could materially increase, which would have an adverse effect on our profitability, cash flows and the value of your investment in our Class A ordinary shares.

There have been significant changes both made and proposed to international tax laws that increase the complexity, burden and cost of tax compliance for all multinational groups. The Organization for Economic Co-operation and Development (“OECD”) is continuously considering recommendations for changes to existing tax laws. We expect to continue to monitor these and other developments in international tax law.

We expect to be classified as a PFIC for U.S. federal income tax purposes, which could subject U.S. holders of our Class A ordinary shares to adverse U.S. federal income tax consequences.

We expect to be classified as a PFIC for U.S. federal income tax purposes. A foreign corporation is generally a PFIC if either at least 75% of its gross income is “passive income,” or 50% of the gross value of its assets is attributable to assets that produce, or are held for the production of, passive income. We generally expect that our income, which consists primarily of passive income, and our assets, which consist primarily of assets that produce passive income, will satisfy these tests and result in our treatment as a PFIC for the current taxable year and any future taxable year. If you are a U.S. Holder (as defined below in “Material Tax Considerations—Material U.S. Federal Income Tax Considerations”) and do not make a QEF election with respect to us or a mark-to-market election with respect to our Class A ordinary shares, you will be subject to potentially material adverse tax consequences, including (i) the treatment of any gain on disposition of our Class A ordinary shares as ordinary income and (ii) the application of a deferred interest charge on such gain and the receipt of certain distributions on our Class A ordinary shares. In addition, regardless of whether a QEF or mark-to-market election is made with respect to us, a U.S. Holder of our Class A ordinary shares will be required to file an annual report on IRS Form 8621 containing such information with respect to its interest in a PFIC as the IRS may require. Failure to file IRS Form 8621 for each applicable taxable year may result in substantial penalties and result in the U.S. Holder’s taxable years being open to audit by the IRS until such Forms are properly filed. Further, if we are a PFIC for any taxable year during which a U.S. Holder holds our Class A ordinary shares, we generally would continue to be treated as a PFIC with respect to that U.S. Holder for all succeeding years during which the U.S. Holder holds our Class A ordinary shares, even if we ceased to meet the

 

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threshold requirements for PFIC status, unless the U.S. Holder makes a special “purging” election on IRS Form 8621. The effect of these adverse tax consequences could be materially adverse to you.

See “Material Tax Considerations--Material U.S. Federal Income Tax Considerations--Taxation of Shareholders--Taxable U.S. Holders--Passive Foreign Investment Companies” for more details regarding the foregoing. The effect of these adverse tax consequences could be materially adverse to you.

If you are a U.S. Holder and make a valid, timely QEF election for us, the potentially adverse tax consequences discussed above may be mitigated, but you could still recognize taxable income in a taxable year with respect to our Class A ordinary shares in excess of any distributions that we make to you in that year, thus giving rise to so-called “phantom income” and to a potential tax liability in excess of actual cash received. In addition, U.S. Holders will also need to make the QEF election with respect to any PFIC owned by us in order to avoid being subject to the adverse tax consequences described above. We expect to provide information to all electing shareholders needed to comply with the QEF election, including with respect to any of our subsidiaries that may be classified as a PFIC. However, no assurance can be given that we will be able to provide information necessary to make QEF elections with respect to any subsidiary that is a PFIC and that we will not control. As a result, even if a U.S. Holder validly makes a timely QEF election with respect to our Class A ordinary shares, the U.S. Holder may continue to be subject to the adverse tax consequences described above with respect to its indirect interest in any of our subsidiaries that are PFICs and that we will not control. U.S. Holders should consult their tax advisors as to the availability and desirability of a QEF election, as well as the impact of such election on interests in any lower-tier PFICs.

If you are a U.S. Holder and make a valid, timely mark-to-market election with respect to our Class A ordinary shares, you will recognize as ordinary income or loss in each year that we are a PFIC an amount equal to the difference between your basis in our Class A ordinary shares and the fair market value of the Class A ordinary shares, thus also possibly giving rise to phantom income and a potential tax liability in excess of actual cash received. Ordinary loss generally is recognized only to the extent of net mark-to-market gains previously included in income. U.S. Holders should also be aware that there is no provision in the U.S. Internal Revenue Code, Treasury regulations or other published authority that would allow them to make the mark-to-market election with respect to any of our subsidiaries that are PFICs (because shares in such subsidiaries are not expected to be publicly traded), potentially rendering such election less beneficial to U.S. Holders than the QEF election. See “Material Tax Considerations—Material U.S. Federal Income Tax Considerations—Taxation of Shareholders—Taxable U.S. Holders—Passive Foreign Investment Companies.”

Distributions that we pay to individual U.S. Holders will not be eligible for taxation at reduced rates, which could potentially adversely affect the value of your Class A ordinary shares.

Distributions made to non-corporate U.S. Holders will not be eligible for taxation at reduced tax rates generally applicable to dividends paid by certain U.S. corporations and “qualified foreign corporations” because of our expected status as a PFIC. The more favorable rates applicable to qualifying corporate dividends could cause individuals to perceive investment in our Class A ordinary shares to be relatively less attractive than investment in the shares of other corporations, and this perception could adversely affect the value of our Class A ordinary shares.

We could be liable for significant taxes due to changes in our eligibility for certain income tax treaty benefits or challenges to our tax positions with respect to the application of income tax treaties.

Our subsidiaries expect to receive revenue from both U.S. and non-U.S. sources. We expect that our subsidiaries generally will be eligible for benefits under the applicable income tax treaty between Ireland and the jurisdiction where income is sourced. While we believe that our subsidiaries are currently eligible to claim the benefits of applicable income tax treaties between Ireland and the jurisdictions in which our income is sourced, no assurances can be provided in this regard, and it is possible that a taxing authority could successfully assert that any of our subsidiaries does not qualify for treaty benefits as a result of its failure to satisfy the applicable requirements to be eligible to claim treaty benefits. If a taxing authority were to challenge our position regarding the application of an applicable income tax treaty, we could become subject to increased withholding taxes, and such taxes could be significant.

 

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Specifically, with respect to certain U.S.-source income, we expect that our subsidiaries will be eligible for benefits under the U.S.-Ireland income tax treaty (the “Treaty”), and, under that Treaty, will not be subject to any U.S. withholding taxes on such U.S.-source payments. Our current treaty position with respect to U.S.-source payments relies in part on U.S. citizens or tax residents (as defined for purposes of the Treaty) owning, directly or indirectly, at least 50% of the beneficial interest in, or at least 50% of the aggregate vote and value of, each of our subsidiaries that earns U.S.-source income. Our treaty position is based on the current U.S. status of the majority of the existing indirect investors in RP Holdings and Old RPI. Subject to certain exceptions, the existing indirect U.S. investors in RP Holdings have the right to exchange their interests for publicly traded Class A ordinary shares. Such publicly traded Class A ordinary shares could be further transferred on the public market to other persons. Therefore, it is possible that over time U.S. persons will own indirectly in the aggregate less than 50% of the interests in our subsidiaries. We currently expect that our Class A ordinary shares and other existing indirect interests in RP Holdings and Old RPI in the aggregate will continue to be owned in sufficient amount by U.S. citizens or tax residents after this offering, and that we will be able to establish such ownership, for purposes of satisfying the 50% ownership requirement under the Treaty. However, there is no assurance that RP Holdings and Old RPI will continue to be owned directly or indirectly by sufficient U.S. citizens or residents or that we will be able to establish to the IRS’ satisfaction such ownership for purposes of satisfying the 50% U.S. ownership requirement under the Treaty. It is possible that if the indirect U.S. ownership in our subsidiaries becomes lower than 50% (or we cannot establish such ownership) we may in the future be able to qualify for another applicable exemption from U.S. withholding under the Treaty, but there can be no assurance in this regard. A substantial portion of our revenue is, and is expected to continue to be, derived from U.S.-source royalties. Therefore, if our subsidiaries failed to qualify for an exemption from U.S. withholding tax under the Treaty (by satisfying either the 50% U.S. ownership requirement or an alternative Treaty exemption) and such royalties were subject to a 30% U.S. withholding tax, our financial position and profitability and the value of your investment in our Class A ordinary shares could be materially and adversely affected.

Furthermore, on August 25, 2016, the Irish Department of Finance announced that, in the context of the publication by the United States Treasury Department of a revised U.S. Model Income Tax Convention in February 2016, discussions have begun with the United States Treasury on updating certain elements of the Treaty. It is at this time not clear what elements of the Treaty may be updated, or when any such updates would go into effect. However, certain elements of the revised U.S. Model Income Tax Convention could, if included in an update to the Treaty, result in our subsidiaries being unable to qualify for the benefits of the Treaty or eliminate or reduce the benefits of the Treaty that otherwise would have been available to us. If our subsidiaries are unable to qualify for the benefits of the Treaty, or if any benefits of the Treaty that otherwise would have been available to us are eliminated or reduced, then all or a portion of our income may become subject to increased withholding taxes, and such taxes could be very significant.

If we were to become subject to increased withholding taxes, we potentially could reorganize Royalty Pharma plc and/or the RPI Group, but no assurance can be provided that any such reorganization transaction could be implemented without triggering any taxable gains to us and/or our shareholders, and such taxable gains could be material.

We could be liable for significant U.S. taxation if our subsidiaries are considered to be engaged in a U.S. trade or business.

In general, if a foreign corporation, such as Royalty Pharma plc, is considered to be engaged in a U.S. trade or business, such corporation’s share of any income that is effectively connected with such U.S. trade or business will be subject to regular U.S. federal income taxation (currently imposed at a maximum rate of 21%) on a net basis and, potentially, an additional 30% U.S. “branch profits” tax on distributions attributable to income that is effectively connected with such U.S. trade or business. In addition, it is possible that such corporation could be subject to taxation on a net basis by state or local jurisdictions within the United States. We intend to conduct our activities, through our subsidiaries, such that no income realized by us will be effectively connected with the conduct of a U.S. trade or business or otherwise subject to regular U.S. federal income taxation on a net basis. As a result, it is anticipated that no income or gains realized by us will be subject to U.S. net federal income taxation, however, no assurance can be provided in this regard. The proper characterization of our income and gains for U.S. tax purposes is not certain, and it is possible that all or a portion of our income and gains could be

 

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characterized as income that is “effectively connected” with the conduct of a U.S. trade or business. If our income and gains were characterized as effectively connected with a U.S. trade or business, we would be subject to significant U.S. taxes, plus interest and possible penalties.

Transfers of our Class A ordinary shares outside DTC may be subject to stamp duty or stamp duty reserve tax (“SDRT”), in the U.K., which would increase the cost of dealing in our Class A ordinary shares.

On completion of this offering, it is anticipated that the new Class A ordinary shares will be issued to a nominee for The Depository Trust Company (“DTC”), and corresponding book-entry interests credited in the facilities of DTC. On the basis of current law, no charges to U.K. stamp duty or SDRT are expected to arise on the issue of the Class A ordinary shares into DTC’s facilities or on transfers of book-entry interests in ordinary shares within DTC’s facilities and you are strongly encouraged to hold your Class A ordinary shares in book-entry form through the facilities of DTC.

A transfer of title in the Class A ordinary shares from within the DTC system to a purchaser out of DTC and any subsequent transfers that occur entirely outside the DTC system, will generally result in a charge to stamp duty at a rate of 0.5% (rounded up to the nearest £5) of any consideration, which is payable by the transferee of the ordinary shares. Any such duty must be paid (and the relevant transfer document, if any, stamped by HM Revenue & Customs, or HMRC) before the transfer can be registered in our company books. However, if those Class A ordinary shares are redeposited into DTC, the redeposit will generally attract stamp duty or SDRT at the rate of 1.5% to be paid by the transferor.

In connection with the completion of this offering, we expect to put in place arrangements to require that our Class A ordinary shares held in certificated form or otherwise outside the DTC system cannot be transferred into the DTC system until the transferor of the Class A ordinary shares has first delivered the ordinary shares to a depositary specified by us so that stamp duty (and/or SDRT) may be collected in connection with the initial delivery to the depositary. Any such ordinary shares will be evidenced by a receipt issued by the depositary. Before the transfer can be registered in our books, the transferor will also be required to put funds in the depositary to settle the resultant liability to stamp duty (and/or SDRT), which will be charged at a rate of 1.5% of the value of the shares.

For further information about the U.K. stamp duty and SDRT implications of holding ordinary shares, please see the section entitled “Material Tax Considerations—Material U.K. Tax Considerations” of this prospectus.

We expect to operate, and expect that RP Holdings will operate, so as to be treated solely as a resident of the U.K. for tax purposes, but changes to our management and organizational structure and/or to the tax residency laws of other jurisdictions where we operate may cause the relevant tax authorities to treat us or RP Holdings as also being a resident of another jurisdiction for tax purposes.

Under current U.K. tax law, a company that is incorporated in the U.K. is regarded as resident for tax purposes in the U.K. unless (i) it is concurrently treated as resident for tax purposes in another jurisdiction (applying the rules of that other jurisdiction for determining tax residency) that has a double tax treaty with the U.K. and (ii) there is a residency tie-breaker provision in that tax treaty which allocates tax residence to that other jurisdiction.

Based upon our anticipated management and organizational structure, we believe that we and RP Holdings should be regarded as tax resident solely in the U.K. However, because this analysis is highly factual and may depend on future changes in our management and organizational structure, as well as future changes in the tax residency laws of other jurisdictions where we operate, there can be no assurance regarding the determination of our tax residence in the future.

As U.K. tax resident companies, we and RP Holdings will be subject to U.K. corporation tax on our worldwide taxable profits and gains. Should we (or RP Holdings) be treated as resident in a jurisdiction other than the U.K., we (or RP Holdings, as applicable) could be subject to taxation in that jurisdiction and may be required to comply with a number of material and formal tax obligations, including withholding tax and/or reporting obligations provided under the relevant tax law, which could result in additional costs and expenses.

 

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We believe that we should not be subject to material U.K. corporation tax in respect of certain profits of our non-U.K. tax resident subsidiaries as a result of the U.K.’s “controlled foreign companies” rules but it cannot be guaranteed that this will continue to be the case.

As U.K. tax resident companies, we and RP Holdings will be subject to the U.K.’s “controlled foreign companies” rules (the “U.K. CFC Rules”). The U.K. CFC Rules, broadly, can impose a charge to U.K. tax on U.K. tax resident companies that have, alone or together with certain other persons, interests in a non-U.K. tax resident company (the “Controlled Foreign Company”) which is controlled by a U.K. person or persons. The charge under the U.K. CFC Rules applies by reference to certain types of chargeable profit arising to the Controlled Foreign Company, whether or not that profit is distributed, subject to specific exemptions. The types of profits of a Controlled Foreign Company that can potentially be subject to a U.K. corporation tax charge under the U.K. CFC Rules include business profits of the Controlled Foreign Company that are attributable to assets or risks that are managed by activities in the U.K., or certain finance profits of the Controlled Foreign Company that arise from capital or other assets contributed, directly or indirectly, to the Controlled Foreign Company from a connected U.K. tax resident company.

Certain non-U.K. entities in which we hold a greater than 25% interest, including RPI (which is Irish tax resident and which is held indirectly by us through our participation in RP Holdings), will be Controlled Foreign Companies for U.K. tax purposes. We and RP Holdings will therefore be required to apply the CFC Rules in respect of our direct and indirect interests in these entities on an ongoing basis. We do not expect material U.K. corporation tax charges to arise under the U.K. CFC Rules in respect of our royalty assets, however no assurances can be given that this will continue to be the case. The U.K. CFC Rules are highly complex and fact-dependent, and changes to, or adverse interpretations of, these rules, or changes in the future activities of RPI or other non-U.K. companies in which we hold an interest, directly or indirectly, may alter this position and could impact our group’s effective tax rate.

We believe that dividends received by us and RP Holdings should be exempt from U.K. corporation tax, but it cannot be guaranteed that this will continue to be the case.

U.K. tax resident companies are subject to U.K. corporation tax on receipt of dividends or other income distributions in respect of shares held by them, unless those dividends or other distributions fall within an exempt class. We believe that dividends received by us from RP Holdings, and dividends received by RP Holdings from RPI, should fall within such an exempt class and therefore should not be subject to U.K. corporation tax. However, a number of conditions must be met in order for such dividends to qualify for this tax exemption, including (in respect of dividends paid by RPI, which is tax resident in Ireland) conditions relating to the application of Irish tax law. As such, it cannot be guaranteed that these conditions for the U.K. tax exemption in respect of distributions will continue at all times to be satisfied. If distributions received by us or by RP Holdings were not to fall within an exempt class, such distributions would likely be subject to U.K. corporation tax at the then prevailing corporation tax rate.

Even where distributions fall within an exempt class, certain anti-avoidance and recharacterization rules may also apply. For instance, if RPI were to constitute an “offshore fund” for U.K. tax purposes that has at any time in an accounting period more than 60% by market value of its investments in debt securities, money placed at interest (other than cash awaiting investment), certain contracts for differences, or in holdings in other offshore funds with, broadly, more than 60% of their investments similarly invested, RP Holdings’ shareholding in RPI may be subject to U.K. corporation tax as a deemed “loan relationship”, with the result that dividends received by RP Holdings from RPI could be subject to U.K. tax as deemed interest and RP Holdings may be subject to U.K. corporation tax on increases in the fair market value of its shareholding in RPI. The term “offshore fund” is defined for U.K. tax purposes through a characteristics-based approach and, broadly, can include arrangements constituted by a non-U.K. resident body corporate in which a reasonable investor would expect to be able to realize their investment entirely, or almost entirely, by reference to net asset value. We believe and have been advised that RP Holdings’ shareholding in RPI should not fall within these rules, however no guarantee can be offered that this will continue to be the case. Changes to, or adverse interpretations of, the offshore funds rules, or changes in the nature of our investments, may alter this position and could impact our group’s effective rate.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements under the captions “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and in other sections of this prospectus that are forward-looking statements. 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, including those factors discussed under the caption entitled “Risk Factors.” You should specifically consider the numerous risks outlined under “Risk Factors.” These risks and uncertainties include factors related to:

 

   

sales risks of biopharmaceutical products on which we receive royalties;

 

   

the ability of the Manager to locate suitable assets for us to acquire;

 

   

uncertainties related to the acquisition of interests in development-stage biopharmaceutical product candidates and our strategy to add development-stage product candidates and late stage funding opportunities 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 the Manager or its affiliates 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 in “Risk Factors” and elsewhere in this prospectus and in our filings with the SEC.

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 prospectus 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 prospectus to conform our prior statements to actual results or revised expectations.

 

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ORGANIZATIONAL STRUCTURE

Organizational Structure Prior to This Offering

Pursuant to the Exchange Offer Transactions which were consummated on February 11, 2020 (the “Exchange Date”), certain investors who invested in Old RPI through the Legacy Investors Partnerships exchanged their limited partnership interests in the Legacy Investors Partnerships for limited partnership interests in the Continuing Investors Partnerships.

As a result of the Exchange Offer Transactions, RPI, through RPI Intermediate FT, owns 82% of the economic interest in Old RPI. From the Exchange Date until the expiration of the Legacy Investors Partnerships’ investment period on June 30, 2020 (the “Legacy Date”), RPI will participate proportionately with the Legacy Investors Partnerships in any investment made by Old RPI. Following the Legacy Date, Old RPI will cease making new acquisitions. See “Unaudited Pro Forma Financial Information.” Following the Legacy Date, we will make new acquisitions through RPI and its wholly-owned subsidiaries (together with RPI, the “RPI Group”).

Organizational Structure Following This Offering

The diagram below depicts our organizational structure immediately following this offering. The diagram is provided for illustrative purposes only and does not represent all legal entities affiliated with our organizational structure.

 

 

LOGO

Immediately following this offering, we will be a holding company and our principal asset will be a controlling equity interest in RP Holdings, a private limited company incorporated under the laws of England and Wales and U.K. tax resident. RP Holdings will be formed in connection with the Reorganization Transactions, following which it will be the sole equity owner of RPI. Through our ownership of 100% of the Class A ordinary shares in RP Holdings which entitles us to 100% of the voting power (subject to certain exceptions as described below) in RP Holdings, we will have the right to appoint the board of directors and control the business and affairs of RP Holdings, and through RP Holdings and its subsidiaries, including RPI, conduct our business. We will include RP Holdings in our consolidated financial statements and will report a non-controlling interest related to the RP Holdings Class B Interests held by the Continuing Investors Partnerships in

 

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RP Holdings. RPI EPA Holdings, LP, a Delaware limited partnership (“EPA Holdings”), which is an affiliate of the Manager and the general partner of the Continuing Investors Partnerships, will also hold Class C Special Interests in RP Holdings, which will entitle EPA Holdings to the Equity Performance Awards described under “Certain Relationships and Related Party Transactions—Equity Performance Awards.” While the RP Holdings Class B Interests and RP Holdings Class C Special Interests are generally non-voting, the RP Holdings Articles (as defined below) will provide that the amendment of certain provisions of the RP Holdings Articles that would alter or change the powers, preferences or special rights of the RP Holdings Class B Interests or the RP Holdings Class C Special Interests so as to affect them adversely must be approved by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a single class, or as otherwise required by applicable law.

Holders of the RP Holdings Class A Interests and RP Holdings Class B Interests will have the right to receive ratably on a pari passu basis such dividends, if any, as may be approved from time to time by the board of directors of RP Holdings out of funds legally available therefor. Dividends in an English company may only be made out of distributable reserves (i.e., accumulated, realized profits (to the extent not previously utilized by distribution or capitalization) less accumulated realized losses (to the extent not previously written-off in a reduction or reorganization of capital duly made)).

Continuing International Investors Partnership and Continuing US Investors Partnership will, upon instruction of any of their partners from time to time following the consummation of the offering, distribute the RP Holdings Class B Interests held on behalf of such partner that are subject to such instruction which will then be exchanged for our Class A ordinary shares (subject to the terms of the underwriters’ “lock-up” agreements described in “Underwriting”). Pursuant to agreements with the Continuing Investors Partnerships, certain of the Continuing Investors have agreed to exchange, shortly before or upon consummation of this offering, interests in the Continuing Investors Partnerships into an aggregate of          Class A ordinary shares representing     % of the total outstanding Class A ordinary shares after giving effect to the offering. RP Holdings Class B Interests are exchangeable on a one-for-one basis for Class A ordinary shares pursuant to the Exchange Agreement with a corresponding redesignation of Class B shares as deferred shares. These exchanges are expected to result in increases in the tax basis (for U.S. federal income tax purposes) of the assets of RP Holdings. The increases in tax basis resulting from such exchanges may reduce the amount of U.S. federal income tax that U.S. shareholders would otherwise be required to pay in the future. See “Material Tax Considerations—Material U.S. Federal Income Tax Considerations—Taxation of Shareholders—Taxable U.S. Holders—Passive Foreign Investment Companies.” This increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain assets to the extent the increase in tax basis is allocated to those assets. The Company will not recognize any tax benefits as a result of these exchanges.

As a result of the Reorganization Transactions and this offering, upon completion of this offering:

 

   

Our Class A ordinary shares will be held as follows:

 

   

                 shares (or                  shares if the underwriters exercise in full their option to purchase additional Class A ordinary shares) by investors in this offering.

 

   

Our Class B shares (together with the same number of RP Holdings Class B Interests) will be held as follows:

 

   

                 shares by the Continuing Investors Partnerships.

 

   

The combined voting power in the Company will be as follows:

 

   

    % by investors in this offering (or     % if the underwriters exercise in full their option to purchase additional Class A ordinary shares); and

 

   

    % by the Continuing Investors Partnerships (or     % if the underwriters exercise in full their option to purchase additional Class A ordinary shares).

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of our Class A ordinary shares in this offering will be approximately $                , or approximately $                  if the underwriters exercise their option to purchase additional Class A ordinary shares from us in full, assuming an initial public offering price of $                 per share (the midpoint of the range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1 increase (decrease) in the public offering price per share would increase (decrease) our net proceeds, after deducting estimated underwriting discounts and commissions, by $                  (assuming no exercise of the underwriters’ option to purchase additional Class A ordinary shares).

We intend to use the net proceeds, including the net proceeds from the issuance and sale of any of the Class A ordinary shares pursuant to an exercise of the underwriters’ option to purchase additional Class A ordinary shares from us, from this offering, after deducting underwriting discounts and other offering expenses, to acquire royalties. We will also use the net proceeds for other general corporate purposes, including operating expenses, such as management and administrative fees and expenses relating to evaluating royalty acquisitions.

If the net proceeds increase due to a higher initial public offering price, we will use the additional proceeds to make acquisitions in accordance with our business objectives and policies and, to the extent that additional net proceeds remain, for working capital and general corporate purposes. If the net proceeds decrease due to a lower initial public offering price, we will have less funds available to make acquisitions in accordance with our business objectives and policies and for working capital or general corporate purposes.

Pending royalty acquisitions in accordance with our business objectives and policies, we will invest any such net proceeds of this offering primarily in cash, cash equivalents, U.S. government securities and other high-quality debt instruments that mature in one year or less, or temporary investments, as appropriate. These assets may have lower yields than our other assets and accordingly result in lower returns or dividends, if any, by us during such period.

 

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DIVIDEND POLICY

You should read the following discussion of our dividend policy in conjunction with the factors and assumptions included in this section. In addition, please read “Special Note Regarding Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.

General

Following this offering, we intend to approve and pay quarterly cash dividends on our Class A ordinary shares with the income generated from net operating cash flows from royalty revenues and interest income earned on our biopharmaceutical assets. We intend to distribute a significant portion of our Adjusted Cash Flow over time to our shareholders.

Dividends for any fiscal quarter, if approved, will be paid no later than 45 days after the end of such quarter. We are not required to pay any dividends, and the payment of any dividend is within the sole discretion of our board of directors. The amount of dividends that we pay is expected to be sufficient for U.S. Holders to pay their taxes on their pro rata share of our taxable income as a result of their making QEF elections under the U.S. tax law’s passive foreign investment company rules, but it is possible that our dividend may be less than such amount of taxes. See “Material Tax Considerations.”

Our ability to pay dividends at the expected quarterly dividend rate or any other rate will be subject to the factors described below under “—Restrictions and Limitations on Dividends and Our Ability to Change Our Dividend Policy” and the risks described under “Risk Factors.”

The per-share dividend for any quarter is equal to the aggregate dividend for that quarter divided by the number of Class A ordinary shares outstanding on the record date for the dividend to be paid in respect of that quarter. Assuming that                  Class A ordinary shares are outstanding after this offering, we anticipate that the initial amount of our quarterly cash dividends will be $                 per share.

We have historically paid quarterly cash distributions to our holders and intend to pay a cash distribution in the aggregate amount of $             in early June 2020.

Payment of Dividends

We do not have a legal obligation to pay a quarterly dividend or dividends at any specified rate or at all. To the extent approved and payable, we intend to pay dividends on or about September 30, December 31, March 31 and June 30 to holders of record on or about the first day of each such month. If the dividend date does not fall on a business day, we will pay the dividend on the business day immediately preceding the indicated dividend date.

Restrictions and Limitations on Dividends and Our Ability to Change Our Dividend Policy

Immediately following this offering, we will be a holding company, and our principal asset will be a controlling equity interest in RP Holdings. If we decide to pay a dividend, to the extent permitted by applicable law, we will need to cause RP Holdings to make distributions to us in an amount sufficient to cover such dividend. If RP Holdings makes such distributions to us, the holders of RP Holdings Class B Interests will be entitled to receive pro rata distributions.

Notwithstanding the foregoing, the approval and payment of any interim dividends will be at the sole discretion of our board of directors, which may change our dividend policy at any time, and the payment of any

 

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final dividends will be subject to majority approval by holders of Class A ordinary and Class B shares and in each case will be paid out of profits available for that purpose under English law. Our board of directors will take into account:

 

   

general economic and business conditions;

 

   

our financial condition and operating results, including our cash position, our net income and our realizations on assets;

 

   

our strategic plans and prospects;

 

   

our business and asset acquisition opportunities;

 

   

working capital requirements and anticipated cash needs;

 

   

contractual restrictions and obligations, including restrictions pursuant to our new credit facility;

 

   

legal, tax and regulatory restrictions and considerations;

 

   

other constraints on the payment of dividends by us to our shareholders; and

 

   

such other factors as our board of directors may deem relevant.

Our Articles of Association will authorize the board of directors to pay interim dividends without shareholder approval to the extent that such dividends appear justified by profits available for such purpose. The board of directors may also recommend final dividends be approved and declared by shareholders at an annual general meeting. No such dividend may exceed the amount recommended by the board of directors.

Under English law, dividends and distributions may only be paid out of profits available for that purpose. Profits available for distribution are accumulated, realized profits, to the extent that they have not been previously utilized by distribution or capitalization, less accumulated, realized losses, to the extent that they have not been previously written off in a reduction or reorganization of capital duly made. The amount of our distributable profits is a cumulative calculation. Immediately following closing of this offering, we will not have any distributable reserves as we will not yet have received any earnings to produce profits, although in the future, our earnings will form part of our distributable reserves required for the payment of future dividends and the making of future distributions. In order to ensure that there are sufficient distributable reserves to pay dividends on the anticipated schedule and increase the level of our distributable reserves to support our future dividends and distributions, we may seek to cancel an amount approximately equal to the total amount of our share premium account and any deferred shares in issue as of a date after closing of the offering by completing a reduction of capital of Royalty Pharma plc implemented through a customary process in the U.K., which is subject to the approval of the English Companies Court.

In particular, prior to closing of the offering, the Continuing Investors Partnerships, as the current shareholders of Royalty Pharma plc, are expected to approve a resolution to reduce the capital of Royalty Pharma plc to allow the creation of distributable reserves. Following closing of this offering, we may therefore seek to obtain the approval of the English Companies Court through a customary procedure, which is required for the creation of distributable reserves to be effective. If we do so we expect to seek to complete such procedure as soon as practicable following closing of the offering. The English Companies Court has discretion as to whether to approve the reduction of capital. The English Companies Court may not approve the reduction of capital if, among other things, the interests of creditors are not adequately safeguarded. If a capital reduction is undertaken, the approval of the English Companies Court is expected to be received within six weeks after the closing of this offering, but it may be later.

 

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We may be profitable in a single financial year but unable to pay a dividend if the profits of that year do not offset all previous years’ accumulated, realized losses. Additionally, the Company may only make a distribution if the amount of its net assets is not less than the aggregate of its called-up share capital and undistributable reserves, and if, and to the extent that, the distribution does not reduce the amount of those net assets to less than that aggregate.

A shareholder who receives a distribution under circumstances where he or she knows or has reasonable grounds for believing that the distribution is unlawful in the circumstances is obliged to repay such distribution (or that part of it, as the case may be) to us.

There is no guarantee that our shareholders will receive quarterly dividends from us. We do not have a legal obligation to pay the expected quarterly dividend or dividends at any other rate or at all. Our dividend policy is subject to certain restrictions and may be changed at any time, including:

 

   

Our dividend policy may be subject to restrictions on dividends under our new credit facility or other debt agreements that we may enter into in the future. Specifically, under our Credit Agreement, distributions by RPI Intermediate FT in any four consecutive fiscal quarter period may not exceed 45% of Consolidated EBITDA (as defined in our Credit Agreement) for the period of four consecutive fiscal quarters most recently ended prior to the making of such distribution, and the making of any such distribution is conditioned on our being in pro forma compliance with the Consolidated Leverage Ratio and Consolidated Coverage Ratio financial covenants set forth in our Credit Agreement. Should we be unable to satisfy these restrictions, we would be prohibited from declaring dividends to our shareholders.

 

   

Our board of directors will have the authority, in its sole discretion, to establish reserves for the prudent conduct of our business and for future dividends to our shareholders, and the establishment of or increase in those reserves could result in a reduction in dividends to our shareholders from levels we currently anticipate under our stated dividend policy.

 

   

Prior to determining the amount of cash available for distribution, we will pay the Manager its Operating and Personnel Payment and reimburse the Manager and its affiliates for any expenses as described under “Certain Relationships and Related Party Transactions— Management Agreement.” The reimbursement of expenses and payment of fees, if any, to the Manager and its affiliates will reduce the amount of cash available to pay dividends to our shareholders.

 

   

The amount of dividends we pay under our dividend policy and the decision to approve any dividend is determined by our board of directors, taking into consideration the terms of our new credit facility, any other agreements we may enter into in the future and the factors set forth above.

 

   

We may lack sufficient cash to pay dividends to our shareholders due to a number of factors, including increases in our general and administrative expenses, principal and interest payments on our outstanding debt, tax expenses, working capital requirements and anticipated cash needs. For a discussion of additional factors that may affect our ability to pay dividends, please read “Risk Factors.”

 

   

If and to the extent our cash available to pay dividends materially declines, we may reduce our quarterly dividend in order to service or repay our debt or fund growth capital expenditures.

 

   

Our ability to pay dividends to our shareholders depends on the performance of the assets held by our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to pay dividends to us may be restricted by, among other things, the provisions of existing and future indebtedness, including our new credit facility, applicable corporate, partnership and trust laws and other laws and regulations.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and capitalization as of March 31, 2020:

 

   

on a historical basis,

 

   

on an as adjusted basis, giving effect to the Reorganization Transactions described under “Organizational Structure”; and

 

   

on a further as adjusted basis to reflect the sale by us of                 Class A ordinary shares in this offering at an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, representing the receipt of approximately $                 in net proceeds after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us, as well as the application of such net proceeds as described in “Use of Proceeds.”

This table should be read in conjunction with “Organizational Structure,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Financial Information” and the historical consolidated financial statements and related notes included elsewhere in this prospectus. Cash and cash equivalents are not components of our total capitalization.

 

(in thousands)

   As of March 31, 2020 (unaudited)  
     Historical     As Adjusted for the
Reorganization
Transactions
     As Further
Adjusted for
This Offering
 

Cash and cash equivalents(1)

   $ 624,367     $                          

Marketable securities

     567,980       
  

 

 

   

 

 

    

 

 

 

Total long-term debt (including current portion)

     5,957,086       
  

 

 

   

 

 

    

 

 

 

Class A ordinary shares, $         par value per share,              shares outstanding actual and              shares outstanding on a further adjusted basis

     —       

Class B shares, $         par value per share,              shares outstanding actual and          shares outstanding on a further adjusted basis

     —       

Additional paid-in capital

     —       
  

 

 

   

 

 

    

 

 

 

Shareholders’ contributions

     2,553,001       

Retained earnings

     2,561,971       

Non-controlling interest

     2,002,775       

Accumulated other comprehensive income/(loss)

     49,212       

Treasury interests

     (4,266     

Total shareholders’ equity

     7,162,693       
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 13,119,779     $        $  
  

 

 

   

 

 

    

 

 

 

 

(1)

As further adjusted cash and cash equivalents reflects the cash distribution of $             that we paid on June 1, 2020.

A $1.00 increase (decrease) in the assumed initial public offering price of $     per Class A ordinary share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the as adjusted amount of each of cash, additional paid-in capital, total shareholders’ equity and total capitalization by $                , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1,000,000 shares in the number of shares

 

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offered by us as set forth on the cover page of this prospectus, would increase (decrease) the as adjusted amount of each of cash, additional paid-in capital, total shareholders’ equity and total capitalization by $                , assuming no change in the assumed initial public offering price of $                 per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

If you invest in our Class A ordinary shares, your interest will be diluted to the extent of the difference between the initial public offering price per Class A ordinary share and the pro forma net tangible book value per Class A ordinary share after this offering. Dilution results from the fact that the per share offering price of the Class A ordinary shares is substantially in excess of the pro forma net tangible book value per share attributable to our existing owners. Pro forma calculations account for the occurrence of the Exchange Offer Transactions.

Our pro forma net tangible book value as of March 31, 2020 was $                , or $                 per share. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, and pro forma net tangible book value per share represents pro forma net tangible book value divided by the number of Class A ordinary shares outstanding, assuming all RP Holdings Class B Interests are exchanged for an equal number of our Class A ordinary shares and a corresponding number of our Class B shares are redesignated as deferred shares.

The following table illustrates this dilution on a per share basis assuming the underwriters do not exercise their option to purchase additional Class A ordinary shares:

 

Assumed initial public offering price per share

   $                    

Pro forma net tangible book value per share as of March 31, 2020

   $                    

Increase in pro forma net tangible book value per share attributable to investors in this offering

   $                    
  

 

 

 

Adjusted pro forma net tangible book value per share after this offering

   $                    
  

 

 

 

Dilution in adjusted pro forma net tangible book value per share to investors in this offering

   $                    
  

 

 

 

The following table sets forth, on a pro forma basis, as of March 31, 2020, the number of Class A ordinary shares that we will issue and the total consideration paid, or to be paid, by the purchasers of Class A ordinary shares in this offering, and the average price per share paid, or to be paid, by existing shareholders and by the new investors, assuming all RP Holdings Class B Interests, are exchanged for an equal number of our Class A ordinary shares, at an assumed initial public offering price of $                 per share, the midpoint of the range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and offering expenses payable by us and a corresponding number of our Class B shares are redesignated as deferred shares:

 

     Class A Ordinary Shares
Purchased
    Total Consideration(1)     Average Price
per
Ordinary
Share
 
     Number      Percentage     Amount      Percentage  
     (in thousands)  

Existing shareholders

                          

New investors

                                                                     $                    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

                             100.0   $                          100.0                       
  

 

 

    

 

 

   

 

 

    

 

 

   

 

(1)

Total consideration is after deducting underwriting discounts and estimated offering expenses.

 

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The foregoing tables assume no exercise of the underwriters’ option to purchase additional Class A ordinary shares. If the underwriters exercise their option to purchase additional Class A ordinary shares, there will be further dilution to new investors.

The number of Class A ordinary shares set forth in the table above is based on                  Class A ordinary shares outstanding and does not reflect the issuance of up to                  Class A ordinary shares issuable upon exercise of the underwriters’ option to purchase additional Class A ordinary shares from us.

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

The unaudited pro forma condensed consolidated balance sheet as of March 31, 2020 and the unaudited pro forma consolidated statements of comprehensive income for the year ended December 31, 2019 and for the three months ended March 31, 2020 present our consolidated financial position and results of operations after giving effect to:

 

   

the Reorganization Transactions;

 

   

the sale by us of                 Class A ordinary shares in this offering at an assumed initial public offering price of $                 per share, the midpoint of the range set forth on the cover page of this prospectus, representing the receipt of $             in net proceeds after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us, as well as the application of such net proceeds as described in “Use of Proceeds”; and

 

   

the Exchange Agreement entered into by us, RP Holdings, the Continuing Investors Partnerships, RPI International Partners 2019, LP and EPA Holdings in connection with the offering that provides that the Continuing International Investors Partnership will promptly distribute to its holders substantially all of the RP Holdings Class B Interests it holds which will be exchanged for our Class A ordinary shares.

With the exception of the execution of a new management agreement with the Manager, for which there is no pro forma impact to the financials, the Reorganization Transactions have already been reflected in the unaudited historical balance sheet as of March 31, 2020. The following pro forma balance sheet as of March 31, 2020 gives pro forma effect to all other transactions identified above as if such events had occurred as of March 31, 2020. The statements of comprehensive income for the year ended December 31, 2019 and for the three months ended March 31, 2020 present the consolidated financial position and consolidated results of operations to give pro forma effect to all transactions identified above as if all such events had been completed as of January 1, 2019.

The unaudited pro forma consolidated financial information has been prepared by management and is based on the historical financial statements of Old RPI prior to the Exchange Date, and its successor for financial reporting purposes, RPI, from the Exchange Date, and their consolidated subsidiaries and the assumptions and adjustments described in the notes to the unaudited pro forma financial information below. The presentation of the unaudited pro forma financial information is prepared in conformity with Article 11 of Regulation S-X.

The historical financial information of Old RPI, RPI and their consolidated subsidiaries has been derived from the consolidated financial statements and accompanying notes included elsewhere in this prospectus.

We based the pro forma adjustments on available information and on assumptions that we believe are reasonable under the circumstances in order to reflect, on a pro forma basis, the impact of the relevant transactions on the historical financial information of Old RPI, RPI and their consolidated subsidiaries. Refer to the notes to the unaudited pro forma financial information below for a discussion of assumptions applied. The pro forma adjustments represent only those transactions which are directly attributable to this offering, factually supportable, and expected to have a continuing impact on our results of operations. The unaudited pro forma financial information does not purport to be indicative of our results of operations or financial position had the relevant transactions occurred on the dates assumed and does not project our results of operations or financial position for any future period or date.

For purposes of the unaudited pro forma financial information, we have assumed that                      Class A ordinary shares will be issued by us at a price per share equal to the midpoint of the range set forth on the cover page of this prospectus, and as a result, immediately following the completion of this offering, the ownership percentage of RP Holdings (excluding RP Holdings Class C Special Interests) represented by RP Holdings Class B Interests will be        %, and the net income attributable to RP Holdings Class B Interests will

 

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accordingly represent        % of our net income. If the underwriters’ option to purchase additional Class A ordinary shares is exercised in full, the ownership percentage represented by RP Holdings Class B Interests will be        %, and the net income attributable to RP Holdings Class B Interests will accordingly represent        % of our net income. The unaudited pro forma consolidated financial information presented assumes no exercise by the underwriters of the option to purchase up to an additional                    Class A ordinary shares from us.

We will incur certain one-time costs in connection with this offering and related Reorganization Transactions, such as accounting, tax, legal and other professional service costs, of approximately $            . Additionally, following the offering, we will incur costs associated with being a U.S. publicly traded company. Such costs will include new or increased expenses for such items as insurance, directors’ fees, accounting work, legal advice and compliance with applicable U.S. regulatory and stock exchange requirements, including costs associated with compliance with the Sarbanes-Oxley Act and periodic or current reporting obligations under the Exchange Act. No pro forma adjustments have been made to reflect such costs because they are not currently objectively determinable.

The unaudited pro forma consolidated financial statements and related notes should be read in conjunction with the information contained in “Organizational Structure,” “Use of Proceeds,” “Capitalization,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements of Old RPI, RPI and their subsidiaries and related notes thereto included elsewhere in this prospectus.

 

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Unaudited Pro Forma Consolidated Statement of Comprehensive Income

For the year ended December 31, 2019

 

    Year Ended December 31, 2019  
    Historical     Pro Forma  
    Old RPI and
Subsidiaries
    Reorganization
Transactions

(unaudited)
    Offering     Royalty
Pharma plc
 
    ($ thousands, except share-related amounts)  
                      (unaudited)  

Total income and revenues

       

Income from financial royalty assets

  $ 1,648,837       —           $ 1,648,837  

Revenue from intangible royalty assets

    145,775       —             145,775  

Other royalty income

    19,642       —             19,642  
 

 

 

   

 

 

       

 

 

 

Total income and other revenues

    1,814,254       —             1,814,254  

Operating expenses

         

Research and development funding expense

    83,036       —             83,036  

Provision for changes in expected cash flows from financial royalty assets

    (1,019,321     —             (1,019,321

Amortization of intangible assets

    23,924       —             23,924  

General and administrative expenses

    103,439       60,080       (a)         163,519  
 

 

 

   

 

 

       

 

 

 

Total operating expenses

    (808,922     60,080       (a)         (748,842
 

 

 

   

 

 

       

 

 

 

Operating income

    2,623,176       (60,080     (a)         2,563,096  

Other expense/(income)

         

Equity in loss/(earnings) of non-consolidated affiliates

    32,517       (83,488     (f)         (50,971

Interest expense

    268,573       (17,709     (b)         250,864

Other non-operating income, net

    (139,333     (72,614     (b)         (211,947
 

 

 

   

 

 

       

 

 

 

Total other expense/(income), net

    161,757       (173,811     (a,b,f)         (12,054
 

 

 

   

 

 

       

 

 

 

Consolidated net income before tax

    2,461,419       113,731       (a,b,f)         2,575,150

Income tax benefit (expense)

    —         —             —    

Consolidated net income

    2,461,419       113,731       (a,b,f)         2,575,150

Less: Net income attributable to non-controlling interest

    (112,884     (466,419     (a,b,c)       (c  

Net income attributable to controlling interest

    2,348,535       (352,688     (a,b,c,f     (c  

Other comprehensive income/(loss)

         

Reclassification of loss on interest rate swaps included in net income

    6,189       (6,189     (b)         —    

Change in unrealized movement on available for sale debt securities

    6,159       —             6,159  

Other comprehensive income

    12,348       (6,189     (b)         6,159
 

 

 

   

 

 

       

 

 

 

Comprehensive income

    2,360,883       (358,877     (a,b,c,f)      
 

 

 

   

 

 

       

 

 

 

Less: Other comprehensive income/(loss) attributable to non-controlling interest

    —         (1,083     (c)         (1,083

Comprehensive income attributable to controlling interest

    2,360,883       (357,794     (a,b,c,f)      

Pro forma earnings per share:

         

Basic

    —         —           (d  

Diluted

    —         —           (d  

Pro forma number of shares used in computing earnings per share:

         

Basic

    —         —           (d  

Diluted

    —         —           (d  

 

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Unaudited Pro Forma Consolidated Statement of Comprehensive Income

For the three months ended March 31, 2020

 

     Three Months Ended March 31, 2020  
     Historical     Pro Forma
(unaudited)
 
     RPI and
Subsidiaries
    Reorganization
Transactions
    Offering     Royalty
Pharma plc
 
                 ($ thousands, except share-
related amounts)
 

Total income and revenues

        

Income from financial royalty assets

   $ 462,844       —           $ 462,844  

Revenue from intangible royalty assets

     34,983       —             34,983  

Other royalty income

     3,052       —             3,052  
  

 

 

   

 

 

       

 

 

 

Total income and other revenues

     500,879       —             500,879  

Operating expenses

          

Research and development funding expense

     7,639       —             7,639  

Provision for changes in expected cash flows from financial royalty assets

     88,012       —             88,012  

Amortization of intangible assets

     5,733       —             5,733  

General and administrative expenses

     38,065       24,211       (a)         62,276  
  

 

 

   

 

 

       

 

 

 

Total operating expenses

     139,449       24,211       (a)         163,660  
  

 

 

   

 

 

       

 

 

 

Operating income

     361,430       (24,211     (a)         337,219  

Other expense/(income)

          

Equity in loss/(earnings) of non-consolidated affiliates

     9,074       (3,044     (f)         6,030  

Interest expense

     53,584       (4,355     (b)         49,229  

Other non-operating income, net

     189,676       (10,900     (b)         178,776  
  

 

 

   

 

 

       

 

 

 

Total other expense/(income), net

     252,334       (18,299     (a,b,f)         234,035  
  

 

 

   

 

 

       

 

 

 

Consolidated net income before tax

     109,096       (5,912     (a,b,f)         103,184  

Income tax benefit (expense)

     —         —             —    

Consolidated net income

     109,096       (5,912     (a,b,f)         103,184  

Less: Net income attributable to non-controlling interest

     (37,856     (18,571     (a,b,c)       (c  

Net income attributable to controlling interest

     71,240       (24,482     (a,b,c,f)       (c  

Other comprehensive income/(loss)

          

Reclassification of loss on interest rate swaps included in net income

     4,066       (4,066     (b)         —    

Change in unrealized movement on available for sale debt securities

     52,725       —             52,725  

Other comprehensive income

     56,791       (4,066     (b)         52,725  
  

 

 

   

 

 

       

 

 

 

Comprehensive income

     128,031       (28,548     (a,b,c,f     (c  
  

 

 

   

 

 

       

 

 

 

Less: Other comprehensive income/(loss) attributable to non-controlling interest

     (9,672     405       (b)         (9,267

Comprehensive income attributable to controlling interest

     118,359       (28,953     (a,b,c,f     (c  

Pro forma earnings per share:

          

Basic

     —         —           (d  

Diluted

     —         —           (d  

Pro forma number of shares used in computing earnings per share:

          

Basic

     —         —           (d  

Diluted

     —         —           (d  

 

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Unaudited Pro Forma Consolidated Balance Sheet

 

    As of March 31, 2020  
    Historical     Pro Forma
(unaudited)
 
    RPI and
Subsidiaries
    Reorganization
Transactions
    Offering     Royalty
Pharma plc
 
    ($ thousands, except share-related amounts)  

Assets:

       

Current assets

       

Cash and cash equivalents

  $ 624,367                                       (e)    $  

Marketable securities

    567,980           567,980  

Financial royalty assets, net

    489,850           489,850  

Accrued royalty receivable

    33,721           33,721  

Available for sale debt securities

    14,007           14,007  

Other royalty income receivable

    7,860           7,860  

Other current assets

    52           52  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,737,837           1,737,837  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial royalty assets, net

    10,708,272           10,708,272

Intangible royalty assets, net

    45,991           45,991  

Equity securities

    283,291           283,291  

Available for sale debt securities

    169,998           169,998  

Derivative financial instruments

    14,071           14,071  

Investment in non-consolidated affiliates

    411,516           411,516  

Other long-term assets

    636           636  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 13,371,612         $ 13,371,612  
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and equity

       

Current liabilities

       

Royalty distribution payable to affiliates

  $ 121,080         $  121,080  

Accounts payable and accrued expenses

    20,753           20,753  

Accrued purchase obligation

    110,000           110,000  

Current portion of long-term debt

    182,128           182,128  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    433,961           433,961  
 

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

    5,774,958           5,774,958  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    6,208,919           6,208,919
 

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

       
 

 

 

   

 

 

   

 

 

   

 

 

 

Shareholders’ equity

       

Shareholders’ contributions

    2,553,001                  (g)   

Class A ordinary shares, $             par value,                  shares authorized,                  shares issued and outstanding

    —                    (g)   

Class B shares, $             par value,                  shares authorized,                  shares issued and outstanding

    —                    (g)   

Additional paid-in capital

    —                    (g,h)   

Retained earnings

    2,561,971                  (g)   

Non-controlling interest

    2,002,775                  (c)   

Accumulated other comprehensive income (loss)

    49,212           49,212  

Treasury interests

    (4,266         (4,266
 

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    7,162,693                  (c,g,h)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 13,371,612                  (c,g,h)    $    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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(a)

Reflects the recognition of incremental Operating and Personnel Payments of $56.6 million and $3.4 million for RPI and for the Legacy Investors Partnerships, respectively, for the year ended December 31, 2019. Reflects the recognition of incremental Operating and Personnel Payments of $23.4 million and $0.8 million for RPI and for the Legacy Investors Partnerships, respectively, for the three months ended March 31, 2020. Under the terms of the new Management Agreement, the Operating and Personnel Payments will be calculated according to the formula described in “Certain Relationships and Related Party Transactions—Management Agreement” for RPI. The Operating and Personnel Payment for Old RPI, an obligation of the Legacy Investors Partnerships as the holder of a noncontrolling interest in Old RPI, for which the expense is reflected in RPI’s consolidated statements of income, is calculated as the greater of $1 million per quarter and 0.3125% of Royalty Investments (as defined therein).

(b)

Reflects the repayment of the RPIFT senior secured credit facilities, the issuance of the new RPI Term Loan A and Term Loan B facilities (the “New Term Loans”), including deferred financing fees, and the termination of the interest rate swaps that were unwound in connection with the refinancing. The terms of the New Term Loans are as follows, with required annual amortization payments of $160 million and $28.4 million associated with Term Loan A and Term Loan B, respectively:

 

Credit Facility

   Principal      Interest      Maturity  
     ($ thousands)  

RPI Term Loan A Facility

   $ 3,200,000        L + 150 bps        2025  

RPI Term Loan B Facility

   $ 2,840,000        L + 175 bps        2027  

 

(c)

As a result of this offering and the Reorganization Transactions, we will initially own approximately         % of the economic interest of Old RPI (excluding the RP Holdings Class C Special Interests).

The non-controlling interest from the Exchange Date relates to the following: (i) 18% is attributable to non-controlling interest holders of Old RPI held by the Legacy Investors Partnerships and (ii) a de minimis percentage is attributable to non-controlling interest holders of certain subsidiaries of Old RPI.

Immediately following the completion of this offering, the ownership percentage held by the non-controlling interest will be         %. The non-controlling interest consists of the following: (i)         % attributable to non-controlling interest holders of certain subsidiaries of Old RPI, (ii)         % attributable to non-controlling interest holders of Old RPI held by the Legacy Investors Partnerships, (iii)         % attributable to non-controlling interest holders of RP Holdings Class B Interests held by the Continuing Investors Partnerships, and (iv) in the future, related to the Equity Performance Awards granted to EPA Holdings, as further described in “Certain Relationships and Related Party Transactions—Equity Performance Awards.”

 

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(d)

The basic and diluted pro forma earnings per Class A ordinary share represent net income attributable to controlling interest divided by a combination of Class A ordinary shares issued in this offering and Class A ordinary shares exchanged by the Continuing International Investors Partnership in exchange for their RP Holdings Class B Interests as described in “Organizational Structure.” Pro forma RP Holdings Class B interests of              were evaluated under the if-converted method for potential dilutive effects and were determined to be antidilutive. The table below presents the computation of pro forma basic and dilutive earnings per share (“EPS”) for the controlling interest.

 

Earnings per Common Share

($ thousands, except share-related amounts)

   Pro Forma
Year Ended
December 31,
2019
     Pro Forma
Three Months
Ended
March 31,
2020
 

Numerator:

     

Net income attributable to controlling interest—basic and diluted

   $                        $                    

Denominator:

     

Weighted average Class A ordinary shares outstanding—basic and diluted

     

Basic earnings per share

   $        $    

Diluted earnings per share

   $        $    

 

(e)

The following sets forth the estimated sources and uses of funds in connection with the Reorganization Transactions and this offering, assuming the issuance of shares of Class A ordinary shares at a price of $             per share (the midpoint of the estimated public offering price range set forth on the cover of this prospectus):

Sources:

 

   

$             gross cash proceeds to us from the offering of Class A ordinary shares.

Uses:

 

   

We will use $            million to pay underwriting discounts and commissions and estimated offering expenses.

 

   

We will use the remaining proceeds as described in “Use of Proceeds.” The effects of such uses are not reflected as a pro forma adjustment as they are not factually supportable at the time of this offering.

 

(f)

Reflects the contribution of the Legacy Special Limited Partnership Interest in the Legacy Investors Partnerships (the “Legacy SLP Interest”). The Legacy SLP Interest will entitle 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. The income allocation attributable to Royalty Pharma plc is equal to the general partner’s former contractual rights to the income of the Legacy Investors Partnerships. The adjustment reflects an increase to Equity in (earnings)/loss of non-consolidated affiliates due to the new equity method investment in the Legacy Investors Partnerships and an increase to the Investment in non-consolidated affiliates.

 

(g)

Reflects an adjustment to equity reflecting (i) the issuance of Class A ordinary shares in this offering at $         par value per share, (ii) the recognition of non-controlling interest of $            as a result of the Reorganization Transactions, which is reflected as a reclassification of $            and a $            from Unitholder’s contributions and Retained earnings, respectively, to Non-controlling interest, and (iii) the reclassification of $            and $            from Unitholder’s contributions and Retained earnings, respectively, to Additional paid-in capital.

 

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(h)

Reflects pro forma adjustments to additional paid-in capital as follows:

 

Pro forma additional paid-in capital
($ thousands)
   As of
March 31,
2020
 

Numerator:

  

Reclassification of historical Retained earnings (see note (g) above)

   $                    

Reclassification of historical Unitholder’s contribution (see note (g) above)

                       

Ordinary shares issued in this offering (see note (g) above)

                       

Adjustment to reflect non-recurring professional services incurred prior to the offering (see notes (e) above)

                       

Pro forma additional paid-in capital

                       

The amount shown for the issuance of ordinary shares in this offering is at an assumed initial public offering price of $            per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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SELECTED HISTORICAL FINANCIAL DATA

The following tables set forth certain summary historical consolidated financial, certain pro-forma financial data and other data of Old RPI as of the dates and for the periods indicated. The business of Old RPI is the predecessor of Royalty Pharma plc for financial reporting purposes. The historical financial data as of December 31, 2019 and 2018, and for the years ended December 31, 2019, 2018 and 2017 were derived from the audited consolidated financial statements of Old RPI included elsewhere in this prospectus. The historical financial data as of and for the years ended December 31, 2016 and 2015 were derived from the audited consolidated financial statements that do not appear in this prospectus. Historical results are not necessarily indicative of the results to be expected for future periods. The historical financial data as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 were derived from the unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Acquisitions impact the comparability of the historical consolidated financial data reflected in this schedule of Selected Historical Financial Data.

The selected historical consolidated financial and other data of Royalty Pharma plc has not been presented as Royalty Pharma plc is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.

The selected historical consolidated financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Financial Data” and the consolidated financial statements and related notes thereto located elsewhere in this prospectus. Amounts in the tables below may not add due to rounding.

 

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The pro forma information gives effect to (i) the Reorganization Transactions and (ii) the sale of Class A ordinary shares in this offering and the application of the net proceeds from this offering, as if each had been completed as of January 1, 2019 with respect to the unaudited pro forma combined consolidated statements of operations data. See “Unaudited Pro Forma Financial Information.”

 

($ in thousands)

  Pro
Forma(14)(15)

(unaudited)
    Year Ended December 31,     Three months ended
March 31,

(unaudited)
 
    2019     2019     2018     2017     2016     2015     2020     2019  

Consolidated Results of Operations Data:

               

Income and other revenues:

               

Income from financial royalty assets

  $ 1,648,837     $ 1,648,837     $ 1,524,816     $ 1,539,417     $ 1,502,088     $ 1,484,041     $ 462,844     $ 382,216  

Revenue from intangible royalty assets(1)

    145,775       145,775       134,118       38,090       373,591       166,668       34,983       43,246  

Other royalty income

    19,642       19,642       135,960       20,423       1,731       1,711       3,052       9,421  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income and other revenues

    1,814,254       1,814,254       1,794,894       1,597,930       1,877,410       1,652,420       500,879       434,883  

Operating expenses:

               

Research and development funding expense

    83,036       83,036       392,609       117,866       91,021       98,381       7,639       22,991  

Provision for changes in expected cash flows from financial royalty assets(2)(19)(20)

    (1,019,321     (1,019,321     (57,334     400,665       925,800       570,183       88,012       (50,033

Amortization of intangible assets

    23,924       23,924       33,267       33,267       68,203       68,160       5,733       6,599  

General and administrative expenses(3)

    163,519       103,439       61,906       106,440       69,512       121,418       38,065       24,426  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (748,842     (808,922     430,448       658,238       1,154,536       858,142       139,449       3,983  

Operating income

    2,563,096       2,623,176       1,364,446       939,692       722,874       794,278       361,430       430,900  

Other expenses (income):

               

Equity in loss/(earnings) of non-consolidated affiliates(4)

    (50,971     32,517       7,023       (163,779     11,347       17,001       9,074       5,529  

Interest expense

    250,864       268,573       279,956       247,339       238,915       224,424       53,584       67,266  

Realized gain on available for sale debt securities

    —         —         (419,481     (412,152     (261,111     (213,604     —         —    

Other (income) expense, net(5)(17)

    (211,947     (139,333     (20,907     (74,896     (28,172     7,749       189,676       (37,989
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (income) expenses, net

    (12,054     161,757       (153,409     (403,488     (39,021     35,570       252,334       34,806  

Consolidated net income before tax

    2,575,150       2,461,419       1,517,855       1,343,180       761,895       758,708       109,096       396,094  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (expense)

    —         —         —         —         —         —         —         —    

Consolidated net income

    2,575,150       2,461,419       1,517,855       1,343,180       761,895       758,708       109,096       396,094  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to non-controlling interest

      (112,884     (140,126     (133,155     (195,988     (177,282     (37,856     (28,650
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to controlling interest

                         $ 2,348,535     $ 1,377,729     $ 1,210,025     $ 565,907     $ 581,426     $ 71,240     $ 367,444  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
                                     
                                  As of/for the
period ended

March 31,
(unaudited)
 

($ in thousands)

  2019     2018     2017     2016     2015     2020  

Consolidated Balance Sheet Data (at end of period):

           

Cash and cash equivalents

  $ 283,682     $ 1,924,211     $ 1,381,571     $ 1,674,219     $ 1,720,871     $ 624,367  

Marketable securities(21)

    56,972       —         —         —         —         567,980  

Total current assets(6)

    832,072       2,608,554       2,947,720       3,004,073       3,043,917       1,737,837  

Financial royalty assets, net (current and non-current)(20)

    11,294,612       8,839,052       8,789,643       7,171,441       6,949,488    

 

11,198,122

 

Total assets(6)(20)

    12,449,895       11,370,147       11,373,532       10,481,999       10,815,682       13,371,612  

Total current liabilities(6)

    333,417       580,172       383,413       297,318       314,390       433,961  

Current portion of long-term debt(6)

    281,984       281,436       280,928       172,684       184,383       182,128  

Long-term debt, excluding current portion(6)

    5,956,138       6,237,896       6,520,855       5,724,690       5,804,190       5,774,958  

Total shareholders’/unitholders’ equity(16)(20)

    6,141,438       4,552,079       4,460,546       4,445,620       4,676,908       7,162,693  

Cash Flow Data:

           

Net cash provided by (used in):

           

Operating activities

    1,667,239       1,618,317       1,418,313       1,482,595       1,305,825       471,104  

Investing activities(7)

    (2,116,142     303,424       (1,587,707     (605,932     64,287       (672,943

Financing activities

    (1,191,626     (1,379,101     (123,254     (923,315     (6,746     542,524  

 

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    Pro
Forma(14)(15)

(unaudited)
                                  Three months
ended March 31,

(unaudited)
 

($ in thousands)

  2019     2019     2018     2017     2016     2015     2020     2019  

Other Financial Measures:

               

Royalty Receipts – Growth Products

               

Cystic fibrosis franchise(8)

  $ 424,741     $ 424,741     $ 224,214     $ 37,340     $ 12,163     $ —       $ 99,403     $ 106,939  

Tysabri

    332,816       332,816       338,697       263,790       —         —         83,807       82,635  

Imbruvica

    270,558       270,558       209,171       149,376       103,247       54,464       77,709       61,102  

HIV franchise

    262,939       262,939       224,321       185,515       185,014       199,421       83,887       76,383  

Januvia, Janumet, Other DPP-IVs(1)

    143,298       143,298       106,689       103,250       313,394       162,962       34,788       32,738  

Xtandi

    120,096       120,096       105,958       86,977       64,019       —         34,777       27,568  

Promacta

    86,266       86,266       —         —         —         —         35,748       —  

Tazverik(18)

    —       —         —         —         —         —         —       —  

Crysvita(18)

    —       —         —         —         —         —         —       —  

Other Growth Products (9)

    242,767       210,166       192,241       133,554       127,919       118,372       72,133       56,640  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Royalty Receipts – Growth Products

  $ 1,883,481     $ 1,850,880     $ 1,401,291     $ 959,802     $ 805,756     $ 535,219     $ 522,252     $ 444,005  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Royalty Receipts – Mature Products

               

Tecfidera (10)

    150,000       150,000       750,000       600,000       600,000       425,000       —         150,000  

Lyrica

    128,246       128,246       126,916       124,126       119,132       142,122       6,087       29,605  

Letairis

    112,656       112,656       130,078       123,178       111,361       101,183       14,562       38,459  

Remicade

    6,068       6,068       121,055       138,488       147,883       162,705       —         6,068  

Humira

    —       —         499,055       455,399       400,990       351,615       —         —    

Other Mature Products (11)

    21,047       21,047       45,450       68,267       276,979       400,016       743       10,164  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Royalty Receipts – Mature Products

  $ 418,017     $ 418,017     $ 1,672,554     $ 1,509,458     $ 1,656,345     $ 1,582,641    

 

 

 

$

 

 

 

21,392

 

 

 

 

 

 

 

 

$

 

 

 

234,296

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to non-controlling interest

    (525,804     (154,084     (268,693     (278,727     (321,795     (310,299  

 

 

 

 

 

 

 

 

 

(161,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,460

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Cash Receipts (non-GAAP)(13)

  $ 1,775,694     $ 2,114,813     $ 2,805,152     $ 2,190,533     $ 2,140,306     $ 1,807,561    

 

 

 

 

$

 

 

 

 

382,257

 

 

 

 

 

 

 

 

 

 

$

 

 

 

 

636,841

 

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Payments for operating and professional costs(12)

    (145,176     (88,524     (72,660     (101,180     (64,923     (70,834  

 

 

 

 

 

 

 

 

 

(25,838

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,705

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (non-GAAP)(13)

  $ 1,630,518     $ 2,026,289     $ 2,732,492     $ 2,089,353     $ 2,075,383     $ 1,736,727    

 

 

 

 

$

 

 

 

 

356,419

 

 

 

 

 

 

 

 

 

 

$

 

 

 

 

619,136

 

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Development-stage funding payments – ongoing

    (83,036     (83,036     (108,163     (118,366     (90,521     (98,381  

 

 

 

 

 

(7,639

 

 

 

 

 

 

 

 

(22,991

 

 

Interest paid, net

    (214,520     (234,828     (243,216     (228,451     (226,378     (215,504  

 

 

 

(48,867

 

 

 

 

 

(54,349

 

Swap collateral (posted) or received, net

    —         (45,270     2,957       (2,950     2,316       (2,316     45,252       (360

Swap termination payments

    (35,448     —         —         —         —         —         (35,448     —    

Investment in non-consolidated affiliates

    (27,042     (27,042     (24,173     (2,000     (8,722     (21,407  

 

 

 

(13,142

 

 

 

 

 

(8,842

 

Contributions from non-controlling interest- R&D

    19,348       —         —       —       —       —    

 

 

 

 

 

1,260

 

 

 

 

 

 

 

 

 

—  

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Cash Flow (non-GAAP)(13)

  $ 1,289,820     $ 1,636,113     $ 2,359,897     $ 1,737,586     $ 1,752,078     $ 1,399,119    

 

 

 

$

 

 

 

297,835

 

 

 

 

 

 

 

 

$

 

 

 

532,594

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Included in revenue from intangible royalty assets and in royalty receipts for the year ended December 31, 2016 was the receipt of $297.5 million (offset by a $30 million milestone payment made to Arisaph Pharmaceuticals, in connection with our existing royalty agreement and settlement terms) related to a contractual license amendment and settlement of the Merck & Co. litigation. In exchange for the payment of

 

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  past-due royalties, we agreed to a five-quarter payment holiday beginning in January 2017. For additional discussion of the Merck & Co. litigation, refer to the notes to our consolidated financial statements included elsewhere in this prospectus. Within the $297.5 million settlement payment, $154.4 million, $126.8 million, and $16.3 million related to sales of Januvia, Janumet and Other DPP-IV products during 2016, 2015 and 2014, respectively.
(2)

The Provision for changes in expected cash flows from financial royalty assets reflects the changes in sell-side equity research analysts’ forecasts on individual products underlying our royalties that impact income recognition for royalty assets classified as financial assets. Refer to Note 2 of our Consolidated Financial Statements included elsewhere in this prospectus for additional information.

(3)

General and administrative expenses include $34.7 million of bad debt expense in 2017 related to chargebacks by Merck & Co. for rebates received by Merck & Co. during the holiday period in connection with overpayments on DPP-IV product sales from prior periods. In 2015, we recorded a $44.5 million reserve for bad debt related to the Merck & Co. lawsuit brought in August 2015 to invalidate our DPP-IV patents in 2015.

(4)

In December 2017, our equity method investee, Avillion I, announced that the FDA approved a supplemental New Drug Application for Pfizer’s BOSULIF (bosutinib) in chronic myeloid leukemia. Avillion is eligible to receive fixed payments from Pfizer based on this approval under the terms of its co-development agreement with Pfizer. As a result, Avillion recognized a gain equal to the present value of a series of guaranteed fixed annual payments due from Pfizer over a 10-year period.

(5)

In February 2017, we sold a royalty asset back to the marketer for cash proceeds of $115.0 million. At the date of sale, the net carrying value of the royalty asset was $62.2 million and we recognized a gain on the sale of $52.8 million, representing the difference between the carrying value and proceeds received.

(6)

Effective January 1, 2016, we retrospectively adopted Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires presentation of debt issuance costs as a direct deduction from the carrying amount of a recognized debt liability on the balance sheet. As a result, we reclassified unamortized debt issuance costs previously classified as other assets to Long-term debt and Current portion of long-term debt for the year ended December 31, 2015.

(7)

See further discussion of investing activities within the “Liquidity and Capital Resources” section within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

(8)

We started collecting 100% of the royalties on cystic fibrosis franchise products in the third quarter of 2018, after a pre-existing capped royalty was repaid in full. Prior to this date, we only collected royalty receipts from the cystic fibrosis franchise equal to the residual royalty of 0%-25%.

(9)

Other Growth Products include royalties on the following products: Bosulif (a product co-developed by our joint venture investee, Avillion, for which receipts are presented as Distributions received from nonconsolidated affiliates on the Statement of Cash Flows), Cimzia, Conbriza/Fablyn/Viviant, Emgality, Entyvio, Erleada, Farxiga/Onglyza, Lexiscan, Mircera, Myozyme, Nesina, Priligy and Soliqua. Other Growth Products also include contributions from the Legacy SLP Interest.

(10)

Receipts from Tecfidera milestone payments are presented as Proceeds from available for sale debt securities on the Statement of Cash Flows.

(11)

Other Mature Products primarily include royalties on the following products: Prezista, Rotateq, Savella and Thalomid.

(12)

Payments for operating and professional costs include Payments for operating costs and professional services and Payments for rebates, both from the Statement of Cash Flows.

(13)

Adjusted Cash Receipts and Adjusted Cash Flow are key non-GAAP financial measures used by management to assess financial operating performance on a levered and unlevered basis, cash distribution levels, and for purposes of evaluating cash available to service debt and reinvest in the business. Adjusted EBITDA is an important non-GAAP financial measure in analyzing our liquidity and is a key component of certain material covenants contained within our credit agreement. Each non-GAAP financial measure functions as a supplemental measure of liquidity and is not required by, or presented in accordance with, GAAP. They are not measurements of our performance or liquidity under GAAP and should not be considered as alternatives to Net cash provided by operating activities or Consolidated net income before tax or any other performance or liquidity measure derived in accordance with GAAP. For additional information, see “—Non-GAAP Reconciliations” below.

 

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Adjusted Cash Receipts is a measure calculated with inputs directly from the Statement of Cash Flows and includes (1) royalty receipts: (i) Cash collections from royalty assets (financial assets and intangible assets), (ii) Other royalty cash collections, (iii) Distributions from non-consolidated affiliates, plus (2) Proceeds from available for sale debt securities (Tecfidera milestone payments), and less (3) Distributions to non-controlling interest. Adjusted Cash Receipts can be further stratified by Growth Products and Mature Products. Growth Products are defined as royalties with a duration expiring after December 31, 2020. All other royalties on approved products are defined as Mature Products.

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.

Adjusted Cash Flow is defined as Adjusted EBITDA less (1) Development-stage funding payments – ongoing, (2) Interest paid, net, (3) Swap collateral (posted) or received, net, (4) Swap termination payments, and (5) Investment in non-consolidated affiliates, plus (1) Contributions from non-controlling interest- R&D, all directly reconcilable to the Statement of Cash Flows.

 

(14)

The unaudited pro forma Consolidated Results of Operations Data and the Cash Flow Data for the period ended December 31, 2019 present selected financial data after giving effect to the Reorganization Transactions and the sale of Class A ordinary shares in this offering, as further described in “Unaudited Pro Forma Financial Information.” The unaudited pro forma Consolidated Results of Operations Data and Cash Flow Data has been prepared by management and is based on the historical financial statements of Old RPI. The assumptions and adjustments to the Consolidated Results of Operations Data are described in the notes to the unaudited pro forma financial information in “Unaudited Pro Forma Financial Information.” The assumptions and adjustments to the Cash Flow Data are presented in the table below and refer to certain notes to the unaudited pro forma financial information in “Unaudited Pro Forma Financial Information.”

 

     Year Ended December 31, 2019  
     Old RPI     Adjustments
(unaudited)
    Pro Forma
Royalty
Pharma plc

(unaudited)
 
     ($ thousands)  

Pro forma adjustments to Cash Flow Data line items:

      

Distributions from non-consolidated affiliates (see note (15)(a) herein)

   $ 14,059     $ 32,601     $ 46,660  

Interest paid, net (see note (b))

     (234,828     20,308       (214,520

Swap collateral posted or (received), net (see note (b))

     (45,270     45,270       —  

Swap termination payments (see note (b))

     —         (35,448     (35,448 )

Payments for operating costs and professional services (see note (a))

     (88,524     (56,652 )     (145,176
  

 

 

   

 

 

   

 

 

 

Pro forma totals:

      

Net cash provided by operating activities

   $ 1,667,239     $ 6,079     $ 1,673,318  
  

 

 

   

 

 

   

 

 

 

 

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(15)

The unaudited pro forma Other Financial Measures as of and for the period ended December 31, 2019 present selected non-GAAP measures, which are supplemental measures to our GAAP financial measures, after giving effect to the Reorganization Transactions and the sale of Class A ordinary shares in this offering, as further described in “Unaudited Pro Forma Financial Information.” The adjustments and assumptions to the Other Financial Measures are described in footnote (7) to the Reconciliations of Adjusted Cash Receipts, Adjusted EBITDA and Adjusted Cash Flow tables on the following pages. Below, we have included the adjustment related to Adjusted Cash Receipts, which is not an adjustment in the non-GAAP reconciliation of the same metric.

 

     Year Ended December 31, 2019  
     Old RPI      Adjustments
(unaudited)
     Pro Forma
Royalty
Pharma plc

(unaudited)
 
     ($ thousands)  

Pro forma adjustments to Other Financial Measures:

        

Royalty Receipts – Growth Products

        

Other Growth Products

   $ 210,166      $ 32,601(a)      $ 242,767  

 

(a)

As a result of the Reorganization Transactions, we hold the Legacy SLP Interest. 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 in an amount equal to the Legacy general partner’s former contractual rights to approximately 18% of the net cash flows of Old RPI. As such, cash distributions received on this new equity method investment in the Legacy Investors Partnerships are included as a pro forma adjustment in Other Growth Products within Adjusted Cash Receipts, a non-GAAP measure.

 

(16)

Pro forma adjustments also include a reversal of Distributions to unitholders. Historically, Distributions to unitholders included a payment in respect of the per interest distribution to all limited partners in Old RPI and a distribution for performance payments due to the Legacy general partner. Had the Reorganization Transactions and offering occurred on January 1, 2019, we would have made payments of dividends to our shareholders in place of distributions. The dividends paid reflects the amount that would have been paid to holders the Continuing Investors Partnerships as holders of Class B interests of RP Holdings, including the limited partnership interests issued to the Legacy general partner in exchange for extinguishing the performance payments payable in respect of assets acquired prior to the Exchange Date, on the same per share/interest basis applied historically. As a result, we would not have made cash distributions to satisfy performance payments payable during 2019.

As a result of reflecting the Reorganization Transactions as of January 1, 2019, the cash distributions paid to non-controlling interest in 2019 would be increased as a result of the new non-controlling interest related to the Legacy Investors Partnership.

Distributions to unitholders made in respect of the new non-controlling interest related to the RP Holdings Class B Interests held by the Continuing Investors Partnerships would continue to be reflected as the equivalent of dividends paid and would show up in Dividend distributions to non-controlling interests.

 

(17)

In 2018, we adopted Accounting Standards Update No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which requires that all equity investments be measured at fair value with changes in fair value recognized in net income. Upon adoption of this standard, we recorded a cumulative-effect adjustment upon adoption decreasing retained earnings by $2.9 million as a result of accumulated other comprehensive income previously recognized on our available for sale equity securities. We recognized $13.9 million in unrealized losses on equity securities in earnings in 2018 and $155.7 million of unrealized gains in 2019. Unrealized gains and losses on equity securities were previously recorded as a component of accumulated other comprehensive income.

 

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(18)

Royalties on Tazverik and Crysvita were acquired in the fourth quarter of 2019 and will not generate cash receipts until 2020.

 

(19)

The Vertex triple combination therapy, Trikafta, was approved by the FDA in October 2019. Sell-side equity research analysts’ consensus forecasts increased due to expected sales of the newly approved Cystic fibrosis franchise product and resulted in a reversal of the entire cumulative allowance for changes in expected cash flows in the fourth quarter of 2019 related to this royalty asset.

 

(20)

In 2020, we adopted Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. We applied the guidance using the modified retrospective method and recorded a cumulative-effect adjustment of $192.7 million to opening retained earnings as of January 1, 2020. The allowance for credit losses is reflected in the non-current portion of Financial royalty assets, net, with the periodic activity flowing through the Provision for changes in expected cash flows from financial royalty assets. Refer to Note 7 of our Interim Condensed Consolidated Financial Statements included elsewhere in this prospectus for additional information.

 

(21)

Marketable securities are short term in nature and primarily include investments in U.S. government securities, corporate debt securities and certificates of deposit.

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 the performance of the Company, 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 the Company’s ability to generate cash from operations. Both measures are an indication of the strength of the Company 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 the Company’s 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 the Company’s Credit Agreement. Noncompliance with the interest coverage ratio and leverage ratio covenants under the credit agreement could result in our lenders requiring the Company 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.

 

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Management uses Adjusted Cash Flow to evaluate its ability to generate cash and performance of the business and to evaluate the Company’s performance as compared to its 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.

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 Statement of Cash Flows: to add back (1) Proceeds from available for sale debt securities (Tecfidera milestone payments), which are cash inflows that management believes are derived from royalties and form part of our core business strategy, (2) Interest paid, net of interest received, (3) Development-stage funding payments that are intended to generate royalties in the future, (4) Payments for professional services, (5) Payments for rebates, and (6) Swap termination payments, and to deduct (1) Distributions to non-controlling interests and (2) Swap 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 Statement of Cash Flows: to add back (1) Proceeds from available for sale debt securities (Tecfidera milestone payments), (2) Interest paid, net of interest received and (3) Development-stage funding payments, and (4) Swap termination payments, and to deduct (1) Distributions to non-controlling interest and (2) Swap 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 Statement of Cash Flows: to add back (1) Proceeds from available for sale debt securities (Tecfidera milestone payments), (2) Development-stage funding paymentsupfront, and (3) Contributions from non-controlling interest- R&D, and to deduct (1) Distributions to non-controlling interest and (2) Investment in nonconsolidated affiliates. 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.

Reconciliations of Adjusted Cash Receipts, Adjusted EBITDA and Adjusted Cash Flow

 

                                                    For the three months
ended March 31,
 
                                                    (unaudited)  

($ in thousands)

  2019     Adjust
-ments
(6)
    Pro Forma  
2019
(unaudited)
          2018     2017     2016     2015     2020     2019  

Cash flow data (GAAP basis)

                   

Net cash provided by (used in):

                   

Operating activities

  $ 1,667,239     $ 6,079     $ 1,673,318       $ 1,618,317     $ 1,418,313     $ 1,482,595     $ 1,305,825     $ 471,104     $ 432,895  

Investing activities

    (2,116,142 )           303,424       (1,587,707     (605,932     64,287       (672,943     (1,317,172

Financing activities

    (1,191,626 )           (1,379,101     (123,254     (923,315     (6,746     542,524       (314,956

Net cash provided by operating activities (GAAP)(1)

    $ 1,667,239     $ 6,079     $ 1,673,318       $ 1,618,317     $ 1,418,313     $ 1,482,595     $ 1,305,825     $ 471,104     $ 432,895  

Adjustments:

                   

Tecfidera milestone payments (2)

    150,000       —         150,000         750,000       600,000       600,000       425,000       —         150,000  

Interest paid, net(2)

    234,828       (20,308     214,520         243,216       228,451       226,378       215,504       48,867       54,349  

Development-stage funding payments – ongoing(3)

    83,036       —         83,036         108,163       118,366       90,521       98,381       7,639       22,991