As filed with the Securities and Exchange Commission on June 11, 2020
Registration No. 333-238632
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3 to
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 Registrants 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.
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Arthur R. McGivern, Esq.
Edwin M. OConnor, 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
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Title of each class of securities to be registered |
Amount to be
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Proposed maximum offering price per share(2) |
Proposed maximum
aggregate
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Amount of registration fee(3) |
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Class A Ordinary Shares, par value $0.0001 per share |
80,500,000 | $28.00 | $2,254,000,000 | $292,569.20 | ||||
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(1) |
Includes 10,500,000 shares which the underwriters have the right to purchase to cover over-allotments. |
(2) |
Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933. |
(3) |
Previously paid. |
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.
The information in this prospectus is not complete and may be changed. Neither we nor the selling shareholders may 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 JUNE 11, 2020
PRELIMINARY PROSPECTUS
70,000,000 Shares
Royalty Pharma plc
Class A Ordinary Shares
We are offering 60,000,000 Class A ordinary shares. The selling shareholders identified in this prospectus are offering an additional 10,000,000 Class A ordinary shares. We will not receive any of the proceeds from the sale of Class A ordinary shares by the selling shareholders.
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 $25.00 and $28.00 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 59% and 41% of the ordinary shares of Royalty Pharma Holdings Ltd., respectively.
We have applied to have our Class A ordinary shares listed on the Nasdaq Global Select Market (Nasdaq) under the symbol RPRX.
Investing in our Class A ordinary shares involves risks. See Risk Factors beginning on page 22.
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) |
$ | $ | ||||||
Proceeds, before expenses, to the selling shareholders |
$ | $ |
(1) |
The underwriters may also exercise their option to purchase up to an additional 4,288,710 Class A ordinary shares from us and 6,211,290 Class A ordinary shares from the selling shareholders, 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 |
BBVA | DNB Markets | Scotiabank | TD Securities |
, 2020
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Security Ownership of Certain Beneficial Owners, Management and the Selling Shareholders |
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Enforceability of Civil Liabilities Under U.S. Federal Securities Laws and Other Matters |
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F-1 |
We, the selling shareholders 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, the selling shareholders 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: None of us, the selling shareholders nor the underwriters have 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 dealers obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
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Prior to the consummation of the Reorganization Transactions described under Organizational StructureReorganization 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 Managements Discussion and Analysis of Financial Condition and Results of OperationsUses 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 Biogens 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.
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.
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.
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 Companys 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 Companys 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 Companys 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 companys metric may not be directly comparable to anothers. 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 DataNon-GAAP Reconciliations.
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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 industrys leading therapies, including Imbruvica, Januvia, Kalydeco, Trikafta, Truvada, Tysabri and Xtandi. We fund innovation in the biopharmaceutical industry both directly and indirectlydirectly 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 three 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 (Imbruvica, Trodelvy, Tazverik, Xtandi), multiple sclerosis (Tecfidera, Tysabri) and migraine (Emgality, Nurtec ODT (rimegepant), vazegepant), among others. We evaluate an array of royalty acquisition opportunities on a continuous basis and expect to continue to make acquisitions in the ordinary course of our business. 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 three 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. Management believes that end market sales of the therapies in our portfolio are important drivers of our financial performance as a substantial portion of our royalties are based on end market sales. In addition, end market sales are a strong indicator of the importance of the therapies to both patients and the marketers. The following table provides an overview of our current portfolio of royalties:
Notes:
1. As reported by respective product marketers
2. Includes contributions from royalties on worldwide sales of Vertexs Orkambi and Symdeko
3. Includes contributions from other emtricitabine products including Atripla, Complera, Descovy, Emtriva, Genvoya, Odefsey, Stribild and Symtuza; royalties are received on the emtricitabine portion of sales only
4. Includes modest contributions from other DPP-IV products including Eucreas, Galvus, Glyxambi, Jentadueto, Kombiglyze, Nesina, Onglyza and Tradjenta
5. Royalty Pharma did not receive any royalty receipts for the first quarter of 2019
6. Crysvita acquired in December 2019
7. Excludes duplicate end-market sales where we have multiple royalties on the same product: Kombiglyze, Nesina, Onglyza and Soliqua
8. Other Growth Products include Alogliptin, Bosulif, Cimzia, Conbriza/Fablyn/Viviant, Emgality, Entyvio (acquired January 2020), Erleada, Farxiga/Onglyza, Prevymis (acquired April 2020), Lexiscan, Mircera, Myozyme, Priligy and Soliqua
9. Receipts from Tecfidera milestone payments are presented as Proceeds from available for sale debt securities on the Statement of Cash Flows
10. Other Mature Products include Alvimopan and Targretin, Exagen/Joncia, Prezista, Remicade, Retavase, Rotateq, Savella, Thalomid and TOBI
11. Depending on the results of Pfizers Phase III PENELOPE-B trial of Ibrance, we may be eligible to receive approval-based fixed milestone payments of $250 million.
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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.
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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. |
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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. |
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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 Vertexs 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. |
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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. |
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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 |
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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. |
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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. |
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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. |
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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 industrys 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.
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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. From 1996 to June 2020, we executed 11 of the 13 royalty transactions that occurred with an aggregate value of more than $500 million, representing estimated market share of more than 80% in this transaction size range. |
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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. As of June 11, 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). |
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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 |
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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. |
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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. |
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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.
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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. |
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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. |
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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 |
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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. |
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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:
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Academic Institutions, Research Hospitals and Not-for-ProfitsWe 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. |
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Small and Mid-Sized Biotechnology CompaniesWe 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. |
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Global Biopharmaceutical CompaniesWe 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.
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
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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.
Total Royalty
Acquisitions(1) |
Average Annual Royalty
Acquisitions(1) |
Estimated Royalty Market
Share(1) |
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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 the RP Holdings Class C Special Interest, 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 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
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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, assuming the sale of the number of shares set forth on the cover page of this prospectus. The diagram is provided for illustrative purposes only and does not represent all legal entities affiliated with our organizational structure.
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:
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the Exchange Offer Transactions; and |
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the execution of the Management Agreement with the Manager. |
We refer to these transactions collectively as the Reorganization Transactions.
Summary of the Offering Structure
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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. |
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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. |
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Investors in this offering will purchase our Class A ordinary shares. |
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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 holders of Class B shares only have limited rights to receive a distribution equal to their nominal value upon a liquidation, dissolution or winding up of the Company. However, the RP Holdings Class B Interests will be entitled to dividends and distributions. |
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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. |
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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 290,554,830 Class A ordinary shares representing 83% of the total outstanding Class A ordinary shares after giving effect to the offering. |
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As a result of the Reorganization Transactions and this offering, upon completion of this offering: |
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Our Class A ordinary shares will be held as follows: |
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70,000,000 shares (or 80,500,000 shares if the underwriters exercise in full their option to purchase additional Class A ordinary shares) by investors in this offering; and |
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280,554,830 shares (or 276,676,355 shares if the underwriters exercise in full their option to purchase additional Class A ordinary shares) by existing investors. |
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Our Class B shares (together with the same number of RP Holdings Class B Interests) will be held as follows: |
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244,828,150 shares by the Continuing Investors Partnerships. |
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The combined voting power in the Company will be as follows: |
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12% by investors in this offering (or 13% if the underwriters exercise in full their option to purchase additional Class A ordinary shares); and |
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88% by the Continuing Investors and the Continuing Investors Partnerships (or 87% 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. |
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The numbers above exclude 800,000 shares of our Class A ordinary shares reserved for future issuance under our 2020 Independent Director Equity Incentive Plan, which will become effective immediately upon the effective date of the registration statement of which this prospectus forms a part. |
See Risk FactorsRisks 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:
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sales risks of biopharmaceutical products on which we receive royalties; |
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the ability of the Manager to identify suitable assets for us to acquire; |
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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; |
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the assumptions underlying our business model; |
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our ability to successfully execute our royalty acquisition strategy; |
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our ability to leverage our competitive strengths; |
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actual and potential conflicts of interest with the Manager and its affiliates; |
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the ability of the Manager or its affiliates to attract and retain highly talented professionals; |
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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; |
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the effect of changes to tax legislation and our tax position; and |
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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
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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 |
60,000,000 shares. |
Class A ordinary shares offered by the selling shareholders |
10,000,000 shares. |
Option to purchase additional Class A ordinary shares |
We and the selling shareholders have granted the underwriters an option to purchase up to an additional 4,288,710 and 6,211,290 Class A ordinary shares, respectively, exercisable for 30 days after the date of this prospectus. |
Class A ordinary shares to be outstanding after this offering |
350,554,830 shares (or 357,176,355 shares if the underwriters exercise in full their option to purchase additional Class A ordinary shares from us and the selling shareholders). If all then outstanding RP Holdings Class B Interests were exchanged for newly issued Class A ordinary shares on a one-for-one basis, 595,382,980 Class A ordinary shares (or 599,671,690 shares if the underwriters option is exercised in full) would be outstanding. These numbers exclude 800,000 shares of our Class A ordinary shares that may be issued under our 2020 Independent Director Equity Incentive Plan, which will become effective immediately upon the effective date of the registration statement of which this prospectus forms a part. |
Class B shares to be outstanding after this offering |
244,828,150 shares. |
Voting power held by holders of Class A ordinary shares after giving effect to this offering |
59% (or 60% if the underwriters exercise in full their option to purchase additional Class A ordinary shares from us and the selling shareholders). |
Voting power held by holders of Class B shares after giving effect to this offering |
41% (or 40% if the underwriters exercise in full their option to purchase additional Class A ordinary shares from us and the selling shareholders). |
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 $1.52 billion or approximately $1.63 billion if the underwriters exercise their option to purchase additional Class A ordinary shares in full, assuming an initial public offering price of $26.50 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 $57.7 million (assuming no exercise of the underwriters option to purchase Class A additional shares). |
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We intend to use the net proceeds from the sale of our Class A ordinary shares to acquire royalties and for general corporate purposes. We will not receive any proceeds from the sale of Class A ordinary shares by the selling shareholders. See Use of Proceeds. |
We will not receive any proceeds from the sale of Class A ordinary shares by the selling shareholders. |
Reserved shares program |
At our request, the underwriters have reserved up to 5% of the Class A ordinary shares offered for sale to certain individuals associated with us, at the initial public offering price, in a reserved shares program. Individuals who purchase shares in the reserved shares program will be subject to a 180 day lock-up. Any reserved shares not purchased will be offered by the underwriters to the general public on the same basis as all other shares offered. See the Underwriting section of this prospectus for a complete description of the reserved shares program. |
Proposed symbol |
RPRX |
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. |
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 350,554,830 Class A ordinary shares are outstanding after this offering, we anticipate that the amount of our quarterly cash dividends will be $0.15 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 |
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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 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 ConsiderationsMaterial U.S. Federal Income Tax ConsiderationsTaxation of ShareholdersTaxable U.S. HoldersPassive 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 FactorsRisks Relating to Our BusinessWe 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 |
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subject to adjustment based on actual operating and personnel expenses of the Manager. See Certain Relationships and Related Party TransactionsManagement Agreement. |
Equity performance awards |
EPA Holdings, an affiliate of the Manager, holds the RP Holdings Class C Special Interest which entitles it to the Equity Performance Awards based on our performance. See Certain Relationships and Related Party TransactionsEquity 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 290,554,830 Class A ordinary shares representing 83% of the 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:
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the issuance of up to 4,288,710 Class A ordinary shares issuable upon exercise of the underwriters option to purchase additional Class A ordinary shares from us and the selling shareholders; and |
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the issuance of up to 244,828,150 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 60,000,000 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, Managements 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, |
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2019 | 2019 | 2018 | 2017 | 2016 | 2015 | 2020 | 2019 | |||||||||||||||||||||||||
Consolidated Results of Operations Data: |
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Income and other revenues: |
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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 | ||||||||||||||||||||||||
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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: |
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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 | ||||||||||||||||||||||||
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Operating income |
2,563,096 | 2,623,176 | 1,364,446 | 939,692 | 722,874 | 794,278 | 361,430 | 430,900 | ||||||||||||||||||||||||
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Net income attributable to controlling interest |
$ | 1,175,132 | $ | 2,348,535 | $ | 1,377,729 | $ | 1,210,025 | $ | 565,907 | $ | 581,426 | $ | 71,240 | $ | 367,444 | ||||||||||||||||
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As of/for the
period ended March 31, |
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($ in thousands) |
2019 | 2018 | 2017 | 2016 | 2015 | 2020 | ||||||||||||||||||
Consolidated Balance Sheet Data (at end of period): |
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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: |
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Net cash provided by (used in): |
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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 |
19
Pro
Forma(1)(2) |
Three months ended
March 31, |
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($ in thousands, except share-related
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2019 | 2019 | 2018 | 2017 | 2016 | 2015 | 2020 | 2019 | ||||||||||||||||||||||||
Other Financial Measures: |
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Royalty Receipts Growth Products |
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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
|
242,767 | 210,166 | 192,241 | 133,554 | 127,919 | 118,372 | 72,133 | 56,640 | ||||||||||||||||||||||||
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Total Royalty Receipts Growth Products |
$ | 1,883,481 | $ | 1,850,880 | $ | 1,401,291 | $ | 959,802 | $ | 805,756 | $ | 535,219 | $ | 522,252 | $ | 444,005 | ||||||||||||||||
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Royalty Receipts Mature Products |
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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
|
21,047 | 21,047 | 45,450 | 68,267 | 276,979 | 400,016 | 743 | 10,164 | ||||||||||||||||||||||||
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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 | ||||||||||||||||
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Distributions to non-controlling interest |
(525,804 | ) | (154,084 | ) | (268,693 | ) | (278,727 | ) | (321,795 | ) | (310,299 | ) | (161,387 | ) | (41,460 | ) | ||||||||||||||||
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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 | ||||||||||||||||
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Payments for operating and professional costs(6) |
(145,176 | ) | (88,524 | ) | (72,660 | ) | (101,180 | ) | (64,923 | ) | (70,834 | ) | (25,838 | ) | (17,705 | ) | ||||||||||||||||
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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 | ||||||||||||||||
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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 | | ||||||||||||||||||||||||
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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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Fully diluted shares outstanding |
595,382,980 |
20
(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 DataNon-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 DataNon-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.
21
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 industrys 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. For example, in January 2016, we partnered with Pfizer to provide up to $300 million in funding for Pfizers ongoing Phase III clinical trials, the PALLAS and PENELOPE-B trials, of Ibrance (palbociclib) for the adjuvant treatment of breast cancer. On May 29, 2020, Pfizer reported that the independent data monitoring committee for the PALLAS trial had concluded after the recent interim analysis that the PALLAS trial is unlikely to show a statistically significant improvement in the primary endpoint of invasive disease-free survival. 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.
22
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 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 candidates 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
23
liability claims, high fixed costs and an expansion of our operations and expense structure, thereby potentially decreasing our profitability. The diversion of our managements 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 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:
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our royalties may be used as collateral for our borrowings; |
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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; |
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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; |
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our ability to pay dividends to our shareholders may be restricted; |
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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 |
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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
24
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.
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 Managers 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.
25
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 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.
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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 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 three 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 products 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:
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effectiveness; |
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safety and side effect profile; |
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price, including third-party insurance reimbursement policies; |
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timing and introduction of the product; |
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effectiveness of marketing strategy and execution; |
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governmental regulation; |
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availability of lower-cost generics and/or biosimilars; |
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treatment innovations that eliminate or minimize the need for a product; and |
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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 marketers 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 products sales may not generate sufficient royalties, or the products sales may be suspended, and consequently, could adversely affect our business.
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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 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 licensees 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 licensees 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 licensors 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
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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 companys public shareholders. Multiple unsuccessful attempts to acquire new royalties could hurt our reputation, result in significant costs and waste the Managers 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
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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 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
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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.
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 FDAs 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,
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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 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 managements 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
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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.
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 partners 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.
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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.
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
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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 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 staffs 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 Managers 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
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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.
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 TransactionsEquity 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 TransactionsEquity 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 boards decisions with respect to our cash may result in no dividends to our shareholders. Furthermore, our boards 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
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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 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 Managers 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 subsidiarys 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 Indemnitees 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.
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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 Unions General Data Protection Regulation (GDPR), which took effect in May 2018, 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:
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a general decline in business activity; |
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the destabilization of the markets could negatively impact our partners in the biopharmaceutical industry and the sales of products generating our royalties; |
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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; |
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the potential negative impact on the health of our Managers highly qualified personnel, especially if a significant number of them are impacted; |
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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; |
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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 |
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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
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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 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 managements 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.
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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 Managers 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 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.
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Our structure will result in tax distributions to the owner of the RP Holdings Class C Special Interest.
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 the owner of the RP Holdings Class C Special Interest, 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 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 155,165,710 Class A ordinary shares or their transferees (including those holders of 126,222,615 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 SaleRegistration Rights. In addition, in connection with this offering, we intend to file a registration statement under the Securities Act covering all Class A ordinary shares issuable pursuant to our 2020 Independent Director Equity Incentive Plan. Subject to Rule 144 volume limitations applicable to affiliates, shares registered under any such registration statement may become eligible for sale after the date of this prospectus, except to the extent that the shares are subject to vesting conditions, lock-up agreements or other restrictions. 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 selling shareholders, 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 SaleLock-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.
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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 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:
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market conditions in the broader stock market in general, or in our industry in particular; |
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variations in our quarterly operating results or dividends to shareholders; |
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additions or departures of key management personnel at the Manager; |
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failure to meet analysts earnings estimates; |
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publication of research reports about our industry; |
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third-party healthcare reimbursement policies and practices; |
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litigation and government investigations; |
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changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business; |
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no results, or projected results, from marketers of products that generate our royalties; |
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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; |
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adverse market reaction to any indebtedness that we may incur or securities we may issue in the future; |
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changes in market valuations of similar companies or speculation in the press or investment community; |
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announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments; |
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litigation; |
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economic and political conditions or events; and |
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adverse publicity about the industries in which we participate or individual scandals. |
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 companys 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 managements 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 $15.57 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
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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 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 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 shareholders ability to bring a claim in a judicial 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
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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 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 expiring on May 31, 2025, 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
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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 expiring on May 31, 2025, 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 Kingdoms 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 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.
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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 ConsiderationsMaterial 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 managements 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 (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 managements 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. SarbanesOxley 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
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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 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.
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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 ConsiderationsMaterial 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. Holders 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 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 ConsiderationsMaterial U.S. Federal Income Tax ConsiderationsTaxation of ShareholdersTaxable U.S. HoldersPassive Foreign Investment Companies.
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Distributions that we pay to individual and other non-corporate 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.
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
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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 corporations 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 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 DTCs facilities or on transfers of book-entry interests in ordinary shares within DTCs 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.
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For further information about the U.K. stamp duty and SDRT implications of holding ordinary shares, please see the section entitled Material Tax ConsiderationsMaterial 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.
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 groups 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.
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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 groups effective rate.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions Prospectus Summary, Risk Factors, Managements 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:
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sales risks of biopharmaceutical products on which we receive royalties; |
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the ability of the Manager to locate suitable assets for us to acquire; |
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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; |
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the assumptions underlying our business model; |
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our ability to successfully execute our royalty acquisition strategy; |
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our ability to leverage our competitive strengths; |
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actual and potential conflicts of interest with the Manager and its affiliates; |
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the ability of the Manager or its affiliates to attract and retain highly talented professionals; |
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the effect of changes to tax legislation and our tax position; and |
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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 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, assuming the sale of the number of shares set forth on the cover page of this prospectus. The diagram is provided for illustrative purposes only and does not represent all legal entities affiliated with our organizational structure.
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 the Class C Special Interest in RP Holdings, which will entitle EPA Holdings to the Equity Performance Awards described under Certain Relationships and Related Party TransactionsEquity Performance Awards. While the RP Holdings Class B Interests and the RP Holdings Class C Special Interest 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 Interest 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 290,554,830 Class A ordinary shares representing 83% 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 ConsiderationsMaterial U.S. Federal Income Tax ConsiderationsTaxation of ShareholdersTaxable U.S. HoldersPassive 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:
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Our Class A ordinary shares will be held as follows: |
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70,000,000 shares (or 80,500,000 shares if the underwriters exercise in full their option to purchase additional Class A ordinary shares) by investors in this offering; and |
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280,554,830 shares (or 276,676,355 shares if the underwriters exercise in full their option to purchase additional Class A ordinary shares) by existing investors. |
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Our Class B shares (together with the same number of RP Holdings Class B Interests) will be held as follows: |
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244,828,150 shares by the Continuing Investors Partnerships. |
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The combined voting power in the Company will be as follows: |
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12% by investors in this offering (or 13% if the underwriters exercise in full their option to purchase additional Class A ordinary shares); and |
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88% by the Continuing Investors and the Continuing Investors Partnerships (or 87% if the underwriters exercise in full their option to purchase additional Class A ordinary shares). |
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The numbers above exclude 800,000 shares of our Class A ordinary shares that may be issued under our 2020 Independent Director Equity Incentive Plan, which will become effective immediately upon the effective date of the registration statement of which this prospectus forms a part. |
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We estimate that the net proceeds to us from the sale of our Class A ordinary shares in this offering will be approximately $1.52 billion, or approximately $1.63 billion if the underwriters exercise their option to purchase additional Class A ordinary shares from us in full, assuming an initial public offering price of $26.50 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. We will not receive any of the proceeds from the sale of the shares being offered by the selling shareholders. 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 $57.7 million (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.
We will not receive any proceeds from the sale of Class A ordinary shares by the selling shareholders.
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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 laws 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 350,554,830 Class A ordinary shares are outstanding after this offering, we anticipate that the initial amount of our quarterly cash dividends will be $0.15 per share.
We have historically paid quarterly cash distributions to our holders and we paid a cash distribution in the aggregate amount of $140.8 million on June 5, 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:
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general economic and business conditions; |
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our financial condition and operating results, including our cash position, our net income and our realizations on assets; |
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our strategic plans and prospects; |
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our business and asset acquisition opportunities; |
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working capital requirements and anticipated cash needs; |
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contractual restrictions and obligations, including restrictions pursuant to our new credit facility; |
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legal, tax and regulatory restrictions and considerations; |
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other constraints on the payment of dividends by us to our shareholders; and |
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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:
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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. |
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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. |
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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 TransactionsManagement 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. |
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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. |
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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. |
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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. |
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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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The following table sets forth our cash, cash equivalents and capitalization as of March 31, 2020:
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on a historical basis, and |
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on an as adjusted basis to reflect: (i) the sale by us of 60,000,000 Class A ordinary shares in this offering at an assumed initial public offering price of $26.50 per share, the midpoint of the range set forth on the cover page of this prospectus, representing the receipt of approximately $1.52 billion 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 (ii) exchanges, pursuant to agreements with the Continuing Investors Partnerships, under which certain of the Continuing Investors have agreed to exchange interests in the Continuing Investor Partnerships into an aggregate of 290,554,830 Class A ordinary shares shortly before or upon consummation of this offering, of which 10,000,000 shares will be offered by selling shareholders. |
This table should be read in conjunction with Organizational Structure, Use of Proceeds, Managements 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 This Offering |
|||||||
Cash and cash equivalents(1) |
$ | 624,367 | $ | 2,002,784 | ||||
Marketable securities |
567,980 | 567,980 | ||||||
|
|
|
|
|||||
Total long-term debt (including current portion) |
5,957,086 | $ | 5,957,086 | |||||
|
|
|
|
|||||
Class A ordinary shares, $0.0001 par value per share, 0 shares outstanding, actual and 350,554,830 shares outstanding, as adjusted |
| 35 | ||||||
Class B shares, $0.000001 par value per share, 0 shares outstanding, actual and 244,828,150 shares outstanding, as adjusted |
| 0 | ||||||
Additional paid-in capital |
| 2,397,642 | ||||||
Shareholders contributions |
2,553,001 | | ||||||
Retained earnings |
2,561,971 | 1,425,558 | ||||||
Non-controlling interest |
2,002,775 | 4,690,633 | ||||||
Accumulated other comprehensive income/(loss) |
49,212 | 31,508 | ||||||
Treasury interests |
(4,266 | ) | (4,266 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
7,162,693 | 8,541,110 | ||||||
|
|
|
|
|||||
Total capitalization |
$ | 13,119,779 | $ | 14,498,196 | ||||
|
|
|
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(1) |
As adjusted cash and cash equivalents reflects the cash distribution of $140.8 million that we paid on June 5, 2020. |
The figures in this table exclude 800,000 shares of our Class A ordinary shares that may be issued under our 2020 Independent Director Equity Incentive Plan, which will become effective immediately upon the effective date of the registration statement of which this prospectus forms a part.
A $1.00 increase (decrease) in the assumed initial public offering price of $26.50 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 $57.7 million, assuming that the number of shares offered by us, as set forth on the cover page
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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 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 $25.5 million, assuming no change in the assumed initial public offering price of $26.50 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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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 attributable to Continuing Investors as of March 31, 2020 was $5.13 billion, or $9.58 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 |
$ | 26.50 | ||||||
Pro forma net tangible book value per share as of March 31, 2020 |
$ | 9.58 | ||||||
Increase in pro forma net tangible book value per share attributable to investors in this offering |
$ | 1.35 | ||||||
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|
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Adjusted pro forma net tangible book value per share after this offering |
$ | 10.93 | ||||||
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|
|||||||
Dilution in adjusted pro forma net tangible book value per share to investors in this offering |
$ | 15.57 | ||||||
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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 $26.50 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 |
Average Price
per Ordinary Share |
||||||||||||||||||
Number | Percentage | Amount | Percentage | |||||||||||||||||
(in thousands) | ||||||||||||||||||||
Existing shareholders |
525,382,980 | 88 | % | $ | 5,129,862 | 73 | % | $ | 9.76 | |||||||||||
New investors |
70,000,000 | 12 | % | $ | 1,855,000 | 27 | % | $ | 26.50 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
595,382,980 | 100 | % | $ | 6,984,862 | 100 | % | $ | 11.73 | |||||||||||
|
|
|
|
|
|
|
|
|
|
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.
66
The number of Class A ordinary shares set forth in the table above is based on 350,554,830 Class A ordinary shares outstanding and does not reflect the issuance of up to 4,288,710 Class A ordinary shares issuable upon exercise of the underwriters option to purchase additional Class A ordinary shares from us and the selling shareholders or up to 800,000 Class A ordinary shares reserved for future issuance under our 2020 Independent Director Equity Incentive Plan, which will become effective immediately upon the effective date of the registration statement of which this prospectus forms a part.
67
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 60,000,000 Class A ordinary shares in this offering at an assumed initial public offering price of $26.50 per share, the midpoint of the range set forth on the cover page of this prospectus, representing the receipt of $1.52 billion 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 60,000,000 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 the RP Holdings Class C Special Interest) represented by RP Holdings
68
Class B Interests will be 41%. 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 40%. The unaudited pro forma consolidated financial information presented assumes no exercise by the underwriters of the option to purchase up to an additional 4,288,710 Class A ordinary shares from us and 6,211,290 Class A ordinary shares from the selling shareholders.
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 $10.4 million. Additionally, following the offering, we will incur costs associated with being a U.S. publicly traded company. Such costs will include new or increased expenses for such items as insurance, directors fees, accounting work, legal advice and compliance with applicable U.S. regulatory and stock exchange requirements, including costs associated with compliance with the Sarbanes-Oxley Act and periodic or current reporting obligations under the Exchange Act. No pro forma adjustments have been made to reflect such costs because they are not currently objectively determinable.
The unaudited pro forma consolidated financial statements and related notes should be read in conjunction with the information contained in Organizational Structure, Use of Proceeds, Capitalization, Selected Historical Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements of Old RPI, RPI and their subsidiaries and related notes thereto included elsewhere in this prospectus.
69
Unaudited Pro Forma Consolidated Statement of Comprehensive Income
For the year ended December 31, 2019
Year Ended December 31, 2019 | ||||||||||||||||||||||
Historical |
Pro Forma
(unaudited) |
|||||||||||||||||||||
Old RPI and
Subsidiaries |
Reorganization
Transactions |
Offering |
Royalty
Pharma plc |
|||||||||||||||||||
($ thousands, except share-related amounts) | ||||||||||||||||||||||
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) | (820,714 | ) | (c) | (1,400,018 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Net income/(loss) attributable to controlling interest |
$ | 2,348,535 | $ | (352,688 | ) | (a,b,c,f | ) | $ | (820,714 | ) | (c) | $ | 1,175,132 | |||||||||
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/(loss) |
12,348 | (6,189 | ) | (b) | | 6,159 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Comprehensive income/(loss) |
2,360,883 | (358,877 | ) | (a,b,c,f) | (820,714 | ) | (c) | 1,181,291 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Less: Other comprehensive income attributable to non-controlling interest |
| (1,083 | ) | (c) | (2,087 | ) | (c) | (3,170 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Comprehensive income/(loss) attributable to controlling interest |
$ | 2,360,883 | $ | (357,794 | ) | (a,b,c,f) | $ | (822,802 | ) | (c) | $ | 1,178,121 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Pro forma earnings per share: |
||||||||||||||||||||||
Basic |
| | | $ | 3.35 | (d) | ||||||||||||||||
Diluted |
| | | $ | 3.35 | (d) | ||||||||||||||||
Pro forma number of shares used in computing earnings per share: |
||||||||||||||||||||||
Basic |
| | | 350,554,830 | (d) | |||||||||||||||||
Diluted |
| | | 595,382,980 | (d) |
70
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/(loss) before tax |
109,096 | (5,912 | ) | (a,b,f) | | 103,184 | ||||||||||||||||
Income tax benefit (expense) |
| | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Consolidated net income/(loss) |
109,096 | (5,912 | ) | (a,b,f) | | 103,184 | ||||||||||||||||
Less: Net income attributable to non-controlling interest |
(37,856 | ) | (18,571 | ) | (a,b,c) | (19,227 | ) | (c) | (75,654 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Net income/(loss) attributable to controlling interest |
$ | 71,240 | $ | (24,482 | ) | (a,b,c,f) | $ | (19,227 | ) | (c) | $ | 27,531 | ||||||||||
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/(loss) |
56,791 | (4,066 | ) | (b) | | 52,725 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Comprehensive income/(loss) |
128,031 | (28,548 | ) | (a,b,c,f | ) | (19,227 | ) | (c) | 80,256 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Less: Other comprehensive (income)/loss attributable to non-controlling interest |
(9,672 | ) | 405 | (b) | (17,870 | ) | (c) | (27,138 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Comprehensive income/(loss) attributable to controlling interest |
$ | 118,359 | $ | (28,143 | ) | (a,b,c,f | ) | $ | (37,098 | ) | (c) | $ | 53,118 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||||||
Pro forma earnings per share: |
||||||||||||||||||||||
Basic |
| | | $ | 0.08 | (d) | ||||||||||||||||
Diluted |
| | | $ | 0.08 | (d) | ||||||||||||||||
Pro forma number of shares used in computing earnings per share: |
||||||||||||||||||||||
Basic |
| | | 350,554,830 | (d) | |||||||||||||||||
Diluted |
| | | 595,382,980 | (d) |
71
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 | $ | | $ | 1,378,417 | (e,i) | $ | 2,002,784 | |||||||||
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 | | 1,378,417 | (e,i) | 3,116,254 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
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 | $ | | $ | 1,378,417 | (e,i) | $ | 14,750,029 | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
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 | | (2,553,001 | ) | (g) | | ||||||||||||
Class A ordinary shares, $0.0001 par value, 0 shares outstanding, actual and 350,554,830 shares outstanding, as adjusted |
| | 35 | (j) | 35 | |||||||||||||
Class B shares, $0.000001 par value, 0 shares outstanding, actual and 244,828,150 shares outstanding, as adjusted |
| | 0 | (j) | 0 | |||||||||||||
Additional paid-in capital |
| | 2,397,642 | (g,h) | 2,397,642 | |||||||||||||
Retained earnings |
2,561,971 | | (1,136,413 | ) | (g,i) | 1,425,558 | ||||||||||||
Non-controlling interest |
2,002,775 | | 2,687,858 | (c,h) | 4,690,633 | |||||||||||||
Accumulated other comprehensive income (loss) |
49,212 | | (17,704 | ) | (c) | 31,508 | ||||||||||||
Treasury interests |
(4,266 | ) | | | (4,266 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total shareholders equity |
7,162,693 | | 1,378,417 | (c,g,h,i) | 8,541,110 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and shareholders equity |
$ | 13,371,612 | | $ | 1,378,417 | (c,g,h,i) | $ | 14,750,029 | ||||||||||
|
|
|
|
|
|
|
|
(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 |
72
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 TransactionsManagement 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 RPIs 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 49% of the economic interest of Old RPI (excluding the RP Holdings Class C Special Interest). |
The non-controlling interest from the Exchange Date relates to the following: (i) 18% ownership 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 balance of non-controlling interest as a percentage of total pro forma equity will be 55%. The total non-controlling interest balance consists of the following, as percentages of the total pro forma non-controlling interest balance at March 31, 2020: (i) 0.7% attributable to non-controlling interest holders of certain subsidiaries of Old RPI, (ii) 42% attributable to non-controlling interest holders of Old RPI held by the Legacy Investors Partnerships, (iii) 57% 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 TransactionsEquity Performance Awards.
The adjustments also reflect a reclassification from additional paid-in capital to non-controlling interest related to the net IPO proceeds attributable to the non-controlling interest held by the Class B shareholders (see footnote (h) herein) and a reclassification of $17.7 million from accumulated other comprehensive income attributable to the non-controlling interest held by the Class B shareholders.
73
(d) |
The basic and diluted pro forma earnings per Class A ordinary share represent net income attributable to controlling interest divided by a combination of Class A ordinary shares issued in this offering and Class A ordinary shares exchanged by the Continuing International Investors Partnership in exchange for their RP Holdings Class B Interests as described in Organizational Structure. Pro forma RP Holdings Class B interests of 244,828,150 were evaluated under the if-converted method for potential dilutive effects and were determined to be antidilutive. The table below presents the computation of pro forma basic and dilutive earnings per share (EPS) for the controlling interest. |
Earnings per Common Share ($ thousands, except share-related amounts) |
Pro Forma
Year Ended December 31, 2019 |
Pro Forma
Three Months Ended March 31, 2020 |
||||||
(unaudited) | ||||||||
Numerator: |
||||||||
Net income attributable to controlling interestbasic and diluted |
$ | 1,175,132 | $ | 27,531 | ||||
Denominator: |
||||||||
Weighted average Class A ordinary shares outstandingbasic and diluted |
350,554,830 | 350,554,830 | ||||||
Basic earnings per share |
$ | 3.35 | $ | 0.08 | ||||
Diluted earnings per share |
$ | 3.35 | $ | 0.08 |
(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 $26.50 per share (the midpoint of the estimated public offering price range set forth on the cover of this prospectus): |
Sources:
|
$1.59 billion gross cash proceeds to us from the offering of Class A ordinary shares. |
Uses:
|
We will use $70.8 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 partners 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 recognition of non-controlling interest of $2.69 billion as a result of the Reorganization Transactions, which is reflected as a reclassification of $1.05 billion and $995.6 million from Unitholders contributions and Retained earnings, respectively, to Non-controlling interest, and (ii) the reclassification of $1.50 billion from Unitholders contributions to Additional paid-in capital. |
74
(h) |
Reflects pro forma adjustments to additional paid-in capital as follows: |
Pro forma additional paid-in capital
($ thousands) |
As of
March 31, 2020 (unaudited) |
|||
Reclassification of historical Unitholders contribution (see note (g) above) |
$ | 1,503,149 | ||
Class A ordinary shares issued in this offering net of $0.0001 par value per share |
$ | 1,519,212 | ||
Reclassification of additional paid-in capital attributable to non-controlling interest held by Class B shareholders |
$ | (624,720 | ) | |
|
|
|||
Pro forma additional paid-in capital |
$ | 2,397,642 | ||
|
|
The amount shown for the issuance of ordinary shares in this offering is at an assumed initial public offering price of $26.50 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.
(i) |
Reflects the cash distribution of $140.8 million paid to the Continuing Investors on June 5, 2020. |
(j) |
Pursuant to agreements with the Continuing Investors Partnerships, certain of the Continuing Investors have agreed to exchange interests in the Continuing Investor Partnerships into an aggregate of 290,554,830 Class A ordinary shares shortly before or upon consummation of this offering, of which 10,000,000 shares will be offered by selling shareholders. The Class A shares of Royalty Pharma plc will be represented by 280,554,830 shares held by Continuing Investors and 70,000,000 shares held by new investors, including 60,000,000 in newly issued shares in the offering. The remaining investors in the Continuing Investors Partnerships who did not elect to exchange into Class A ordinary shares will therefore hold 244,828,150 newly issued Class B shares of Royalty Pharma plc. |
The Class A ordinary shares have a par value of $0.0001, resulting in an aggregate par value of $35,055. The Class B ordinary shares have a par value of $0.000001, resulting in an aggregate par value of $245.
75
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 Managements 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 |
(1,400,018 | ) | (112,884 | ) | (140,126 | ) | (133,155 | ) | (195,988 | ) | (177,282 | ) | (37,856 | ) | (28,650 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Net income attributable to controlling interest |
$ | 1,175,132 | $ | 2,348,535 | $ | 1,377,729 | $ | 1,210,025 | $ | 565,907 | $ | 581,426 | $ | 71,240 | $ | 367,444 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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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(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 |
79
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 Pfizers 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 Managements 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. |
80
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 | ||||||
|
|
|
|
|
|
81
(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 partners 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. |
82
(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 InstrumentsCredit 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 Companys 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 Companys 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 Companys 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,
83
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 and performance of the business and to evaluate the Companys 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 companys metric may not be directly comparable to anothers. 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 payments upfront, 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, |
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Cash flow data (GAAP basis) |
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Net cash provided by (used in): |
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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: |
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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 |
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For the three months
ended March 31, |
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2019 (unaudited) |
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Development-stage funding payments upfront(4) |
| | | 284,446 | | | | | | |||||||||||||||||||||||||||||||
Payments for operating costs and professional services |
88,524 | 56,652 | 145,176 | 72,535 | 74,681 | 64,923 | 70,834 | 25,838 | 17,705 | |||||||||||||||||||||||||||||||
Payments for rebates |
| | | 125 | 26,499 | | | | | |||||||||||||||||||||||||||||||
Swap termination payments |
| 35,448 | 35,448 | | | | | 35,448 | | |||||||||||||||||||||||||||||||
Distributions to non-controlling interests(2) |
(154,084 | ) | (371,720 | ) | (525,804 | ) | (268,693 | ) | (278,727 | ) | (321,795 | ) | (310,299 | ) | (161,387 | ) | (41,460 | ) | ||||||||||||||||||||||
Swap collateral posted or (received), net(2) |
45,270 | (45,270 | ) | | (2,957 | ) | 2,950 | (2,316 | ) | 2,316 | (45,252 | ) | 360 | |||||||||||||||||||||||||||
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Adjusted Cash Receipts (non-GAAP) |
$ | 2,114,813 | $(339,119) | $1,775,694 | $ | 2,805,152 | $ | 2,190,533 | $ | 2,140,306 | $ | 1,807,561 | $ | 382,257 | $ | 636,840 | ||||||||||||||||||||||||
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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: |
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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 | |||||||||||||||||||||||||||||||
Development-stage funding payments upfront(4) |
| | | 284,446 | | | | | | |||||||||||||||||||||||||||||||
Swap termination payments |
| 35,448 | 35,448 | | | | | 35,448 | | |||||||||||||||||||||||||||||||
Distributions to non-controlling interests(2) |
(154,084 | ) | (371,720 | ) | (525,804 | ) | (268,693 | ) | (278,727 | ) | (321,795 | ) | (310,299 | ) | (161,387 | ) | (41,460 | ) | ||||||||||||||||||||||
Swap collateral posted or (received), net(2) |
45,270 | (45,270 | ) | | (2,957 | ) | 2,950 | (2,316 | ) | 2,316 | (45,252 | ) | 360 | |||||||||||||||||||||||||||
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Adjusted EBITDA (non-GAAP) |
$ | 2,026,289 | $(395,771) | $1,630,518 | $ | 2,732,492 | $ | 2,089,353 | $ | 2,075,383 | $ | 1,736,727 | $ | 356,419 | $ | 619,135 | ||||||||||||||||||||||||
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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: |
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Tecfidera milestone payments(2) |
150,000 | | 150,000 | 750,000 | 600,000 | 600,000 | 425,000 | | 150,000 | |||||||||||||||||||||||||||||||
Development-stage funding payments upfront(4) |
| | | 284,446 | | | | | | |||||||||||||||||||||||||||||||
Contribution from non-controlling interest- R&D(2) |
| 19,348 | 19,348 | | | | | 1,260 | | |||||||||||||||||||||||||||||||
Distributions to non-controlling interests(2) |
(154,084 | ) | (371,720 | ) | (525,804 | ) | (268,693 | ) | (278,727 | ) | (321,795 | ) | (310,299 | ) | (161,387 | ) | (41,460 | ) | ||||||||||||||||||||||
Investment in non-consolidated affiliates(2)(5) |
(27,042 | ) | | (27,042 | ) | (24,173 | ) | (2,000 | ) | (8,722 | ) | (21,407 | ) | (13,142 | ) | (8,842 | ) | |||||||||||||||||||||||
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Adjusted Cash Flow (non-GAAP) |
$ | 1,636,113 | $(346,293) | $1,289,820 | $ | 2,359,897 | $ | 1,737,586 | $ | 1,752,078 | $ | 1,399,119 | $ | 297,835 | $ | 532,593 | ||||||||||||||||||||||||
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(1) |
Included in the $1.48 billion of Net cash provided by operating activities in 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. 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 collected in 2016, $154.4 million related to sales of DPP-IV products in 2016. The remaining amount included $126.8 million and $16.3 million related to sales of DPP-IV products during 2015 and 2014, respectively. |
(2) |
The table below shows the line item for each adjustment and the direct location for such line item on the Statement of Cash Flows. |
Reconciling adjustment |
Statement of Cash Flows classification |
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Tecfidera milestone payments |
Investing activities (presented as Proceeds from available for sale debt securities) |
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Investments in non-consolidated affiliates |
Investing activities |
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Distributions to non-controlling interests |
Financing activities |
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Interest paid, net |
Operating activities (Interest paid less Interest received) |
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Swap collateral posted or (received), net |
Operating activities (Swap collateral received less Swap collateral posted) |
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Contributions from non-controlling interest- R&D |
Financing activities |
(3) |
Our lenders consider all payments made to support research and development activities for products undergoing late stage development similar to asset acquisitions as these funds are expected to generate operational returns in the future. All development-stage funding paymentsongoing and upfrontrun through R&D funding expense in net income and are added back in aggregate to Net cash provided by operating activities to arrive at Adjusted EBITDA. As a result, Adjusted EBITDA captures the full add-back for R&D funding payments while Adjusted Cash Flow only reflects the add back for the upfront portion of development-stage funding payments due to the fact that development-stage funding payments ongoing are considered an ongoing business expense. |
(4) |
Because development-stage funding payments upfront are expensed immediately to operating expenses as R&D funding expense, i.e., not capitalized as an asset in the balance sheet in accordance with ASC 730-20, amounts paid by the Company for upfront R&D funding run through net income. Management considers upfront R&D payments made to counterparties to support research and development activities for products undergoing late stage development similar to asset acquisitions as these funds are expected to generate operational returns in the future. We made development-stage funding payments upfront in 2018 to acquire royalties on development-stage product candidates which include the following: |
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$175 million paid to Immunomedics in exchange for a royalty on Trodelvy, an unapproved product at the time, in addition to $6.4 million premium paid for Immunomedics common stock acquired in connection with the R&D funding agreement; and |
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$100 million paid to Biohaven in exchange for a royalty on Nurtec ODT and vazegepant, unapproved products at the time, in addition to the $3.0 million premium paid for Biohavens common stock acquired in connection with the R&D funding agreement. |
(5) |
We consider all payments to fund our operating joint ventures that are performing research and development activities for products undergoing late stage development similar to asset acquisitions as these funds are expected to generate operational returns in the future. As a result, amounts funded through capital calls by our equity method investees, the Avillion entities, are added back to Adjusted Cash Flow. |
(6) |
The unaudited pro forma selected non-GAAP financial data for the period ended December 31, 2019 present selected non-GAAP measures, which are supplemental measures to our GAAP financial measures, after giving effect to the Reorganization Transactions and the sale of Class A ordinary shares in this offering, as further described in Unaudited Pro Forma Financial Information. The unaudited pro forma selected non-GAAP financial data has been prepared by management and is based on the historical financial statements of Old RPI. The assumptions and adjustments to the selected non-GAAP financial data are described in the notes below. |
Net cash provided by operating activities. Refer to footnote (14) of the notes to the selected historical financial data above.
Interest paid, net. Reflects the repayment of the RPIFT senior secured credit facilities, the issuance of the New Term Loans. The terms of the New Term Loans are as follows:
Credit Facility |
Principal | Interest | Maturity | |||||||||
($ thousands) | ||||||||||||
RPI Intermediate FT Term Loan A-1 Facility |
$ | 3,200,000 | L + 150 bps | 2025 | ||||||||
RPI Intermediate FT Term Loan B-1 Facility |
$ | 2,840,000 | L + 175 bps | 2027 |
Payments for operating costs and professional services. Reflects the recognition of additional Operating and Personnel Payments of $56.6 million. 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 TransactionsManagement Agreement.
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Swap termination payments. Reflects the settlement of the interest rate swaps which were terminated in connection with the Exchange Offer Transactions.
Distributions to non-controlling interests. As a result of this offering and the Reorganization Transactions, we will initially own approximately 49% of the economic interest of Old RPI. Immediately following the completion of this offering, Royalty Pharma plcs ownership percentage held by non-controlling interest will be 55%. The adjustment to our non-GAAP measures in respect of Distributions to non-controlling interests relates solely to the impact of recognizing distributions to the non-controlling interest holders of Old RPI as follows: (i) less than 1% attributable to a non-controlling interest in Old RPI held by a prior legacy entity and (ii) 18% attributable to non-controlling interests in certain subsidiaries of Old RPI held by the Legacy Investors Partnerships.
Swap collateral posted (received), net. Reflects the settlement of the interest rate swaps to which collateral posted and received related to interest rate swaps hedging the prior Credit Facility of RPIFT extinguished in connection with the Reorganization Transactions.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying Notes to consolidated financial statements and Unaudited Pro Forma Financial Information. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Risk Factors or in other parts of this prospectus.
Prior to the consummation of the Reorganization Transactions described under Organizational StructureReorganization Transactions, in this prospectus Royalty Pharma plc, the Company, we, us and our refer to Old RPI and its controlled subsidiaries (i.e., RPIFT and RPI Acquisitions, which are 100% owned, and the Collection Trust, which is 80% owned by RPIFT and 20% owned by RPSFT). After the consummation of the Reorganization Transactions, in this prospectus Royalty Pharma plc, the Company, we, us and our refer to Royalty Pharma Investments 2019 ICAV. After the consummation of this offering, in this prospectus Royalty Pharma plc, 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.
Business Overview
We are the largest buyer of biopharmaceutical royalties and a leading funder of innovation across the biopharmaceutical industry. Since our founding in 1996, we have been pioneers in the royalty market, collaborating with innovators from academic institutions, research hospitals and not-for-profits through small and mid-cap biotechnology companies to leading global pharmaceutical companies. We have assembled a portfolio of royalties which entitles us to payments based directly on the top-line sales of many of the industrys leading therapies, including Imbruvica, Januvia, Kalydeco, Trikafta, Truvada, Tysabri and Xtandi. We fund innovation in the biopharmaceutical industry both directly and indirectlydirectly 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.
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 three 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 that each generated 2019 end-market sales of more than $1 billion, including seven therapies that each generated 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 CAGR of 11%.
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
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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 classify our royalty acquisitions by the approval status of the therapy at the time of acquisition:
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Approved Products We acquire royalties in approved products that generate predictable cash flows and may offer upside potential from unapproved indications. Since inception in 1996 and through 2019, we have deployed $12 billion of cash to acquire royalties on approved products. From 2012 through 2019, we have acquired $7.0 billion of royalties on approved products. |
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Development-Stage Product Candidates We acquire royalties on development-stage product candidates that have demonstrated strong clinical proof of concept. From 2012, when we began acquiring royalties on development-stage product candidates, through 2019, we have deployed $6.1 billion of cash to acquire royalties on development-stage product candidates. |
While we classify our acquisitions in these two broad segments, several of our acquisitions of royalties on approved products were driven by the long-term potential of these products in other, unapproved indications. Similarly, some of our royalty acquisitions in development-stage product candidates are for products that are approved in other indications.
We acquire royalties in a variety of ways that can be tailored to the needs of our partners. We classify our acquisitions according to the following structures:
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Third-party Royalties A royalty is the contractual right to a percentage of top-line sales from a licensees use of a product, technology or intellectual property. The majority of our current portfolio consists of royalties that had been previously created by other parties prior to our acquisition. |
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Synthetic / Hybrid Royalties A synthetic royalty is the contractual right to a percentage of top-line sales created by the developer and/or marketer of a therapy in exchange for funding. In many of our synthetic royalty acquisitions, we also make investments in the public equity of the company, where the main value driver of the company is the product on which we concurrently acquired a royalty. |
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R&D Funding We fund R&D, typically for large biopharmaceutical companies, in exchange for future royalties and/or milestones if the product or indication we are funding is approved. |
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M&A We acquire royalties in connection with mergers and acquisitions transactions, often from the buyers of biopharmaceutical companies when they dispose of the non-strategic assets of the target company following the closing of the acquisition. We also seek to partner with companies to acquire other biopharmaceutical companies that own significant royalties. We may also seek to acquire biopharmaceutical companies that have significant royalties or where we can create royalties in subsequent transactions. |
Background and Format of Presentation
Pursuant to the Exchange Offer Transactions which were consummated on February 11, 2020, 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 its wholly-owned subsidiary RPI Intermediate FT, owns an economic interest in 82% of Old RPI. Through its 82% indirect ownership of Old RPI, RPI is legally entitled to 82% of the economics of Old RPIs wholly-owned subsidiaries, RPIFT and RPI Acquisitions, and 82% of the 80% of the Collection Trust that is owned by RPIFT.
From the Exchange Date through the Legacy Date, RPI will participate proportionately with the Legacy Investors Partnerships in any new investment made by Old RPI. Following the Legacy Date, Old RPI will cease
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making new investments and each of Old RPI and the Legacy Investors Partnerships will become a legacy entity. Following the Legacy Date, we will make new investments through RPI. Immediately following this offering, we will be a holding company and our principal asset will be a controlling equity interest in RP Holdings, which will be the sole equity owner of RPI.
Following managements determination that a high degree of common ownership exists in RPI both before and after the Exchange Date, RPI recognized Old RPIs assets and liabilities at the carrying value reflected on Old RPIs balance sheet as of the Exchange Date. Old RPI is the predecessor of RPI and Royalty Pharma plc for financial reporting purposes. The references in the following discussion to the years ended December 31, 2019, 2018 and 2017, and for the multi-year period ending on December 31, 2019 refer to the financial results of Old RPI for the same periods.
Understanding Our Financial Reporting
In accordance with generally accepted accounting principles in the United States, or GAAP, most of the royalties we acquire are treated as investments in cash flow streams and are thus classified as financial assets. These investments have yield components that most closely resemble 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.
The preparation of our financial statements in this manner requires the use of estimates, judgments and assumptions that affect both our reported assets and liabilities and our income and revenue and expenses. The most significant judgments and estimates applied by management are associated with the measurement of income derived from our royalty assets classified as financial assets, including managements judgment in forecasting the expected future cash flows of the underlying royalties and the expected duration of the royalty asset. Our cash flow forecasts are generated and updated each reporting period by manually compiling sell-side equity research analysts consensus estimates for each of the products in which we own royalties. We then calculate our expected royalty cash flows using these consensus forecasts. In any given reporting period, any decline in the expected future cash flows associated with a royalty asset is recognized as a provision which is expensed through our income statement as a non-cash charge.
As a result of the non-cash charges associated with applying the effective interest method accounting methodology, our income statement activity in respect of many of our royalties can be volatile and unpredictable. 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 royalty asset on the 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 $1.30 billion by September 30, 2017, including non-cash expense of $743.2 million in 2016 related to this royalty asset. 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. While small reductions in the cumulative provision for the cystic fibrosis franchise were recognized in 2017 and 2018, there remained a $1.10 billion cumulative provision balance that was fully offset by a $1.10 billion credit to the provision in 2019 as a result of an increase in sell-side equity research analysts consensus forecasts associated with the Trikafta approval. This example illustrates the volatility caused by our accounting model. Therefore, management believes investors should not look to income from royalties and the associated provision for changes in future cash flows as a measure of our near-term financial performance or as a source for predicting future income or growth trends.
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Our operations have historically been financed primarily with cash flows generated by our royalties. Due to the nature of our accounting methodology for our royalties classified as financial assets, there is no direct correlation between our income from royalties and our royalty receipts. As noted above, income from such royalties is measured at amortized cost under the effective interest accounting methodology. Given the importance of cash flows to managements operation of the business and their predictability, management uses royalty receipts as the primary measure of our operating performance. Royalty receipts refer to the summation of the following line items from our GAAP 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.
In addition to analyzing our results on a GAAP basis, management also reviews our results on a non-GAAP basis. The closest comparable GAAP measure to each of the non-GAAP measures that management review is Net cash provided by operating activities. The key non-GAAP metrics we focus on are Adjusted Cash Receipts, Adjusted EBITDA and Adjusted Cash Flow, each of which is further discussed in Non-GAAP Results Analysis.
Adjusted Cash Receipts and Adjusted Cash Flow are used by management as key liquidity measures in the evaluation of our ability to generate cash from operations. Both measures are an indication of the strength of the Company and the performance of the business. Management uses Adjusted Cash Flow to compare its performance against non-GAAP adjusted net income used by companies in the biopharmaceutical industry. Adjusted EBITDA, which is derived from Adjusted Cash Receipts, is used by our lenders to assess our ability to meet our financial covenants.
Refer to Non-GAAP Reconciliations for additional discussion of managements use of non-GAAP measures as supplemental financial measures.
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Portfolio Overview
Our portfolio consists of royalties on more than 45 marketed therapies and three 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. The table below includes royalty receipts for the three months ended March 31, 2020 and 2019, and for the years ended December 31, 2019, 2018, 2017, grouped by Growth Products and Mature Products. Growth Products are defined as royalties with a duration expiring after December 31, 2020. We define all other royalties as Mature Products.
(1) |
The cystic fibrosis franchise includes the following approved products: Kalydeco, Orkambi, Symdeko and Trikafta. 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. Prior to this date, we only collected royalty receipts from the cystic fibrosis franchise equal to the residual royalty of 0-25%. |
(2) |
The HIV franchise includes the following approved products: Atripla, Truvada, Emtriva, Complera, Stribild, Genvoya, Descovy, Odefsey, Symtuza and Biktarvy. The HIV franchise is marketed by Gilead, Bristol-Myers Squibb and Merck & Co. |
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(3) |
Januvia, Janumet, Other DPP-IVs include the following approved products: Eli Lilly, Tradjenta, Onglyza, Kombiglyze, Galvus, Eucreas and Nesina. The Other DPP-IVs are marketed by Boehringer Ingelheim, AstraZeneca, Novartis and Takeda. |
(4) |
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. |
(5) |
Receipts from Tecfidera milestone payments are presented as Proceeds from available for sale debt securities on the Statement of Cash Flows. |
(6) |
Other Mature Products primarily include royalties on the following products: Prezista, Rotateq, Savella and Thalomid. |
Financial Overview
Financial highlights
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Net cash provided by operations totaled $471.1 million and $432.9 million for the three months ended March 31, 2020 and 2019, respectively. Net cash provided by operations totaled $1.67 billion, $1.62 billion and $1.42 billion for the years ended December 31, 2019, 2018 and 2017, respectively. Net cash provided by operations is the most comparable GAAP financial measure to the supplemental non-GAAP liquidity measures that follow. |
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Adjusted Cash Receipts (a non-GAAP metric) totaled $382.3 million and $636.8 million in the first three months of 2020 and 2019, respectively. Adjusted Cash Receipts totaled $2.11 billion, $2.81 billion and $2.19 billion in 2019, 2018 and 2017, respectively. |
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Adjusted EBITDA (a non-GAAP metric) totaled $356.4 million and $619.1 million for the three months ended March 31, 2020 and 2019, respectively. Adjusted EBITDA totaled $2.03 billion, $2.73 billion and $2.09 billion for the years ended December 31, 2019, 2018 and 2017, respectively. |
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Adjusted Cash Flow (a non-GAAP metric) totaled $297.8 million and $532.6 million for the three months ended March 31, 2020 and 2019, respectively. Adjusted Cash Flow totaled $1.64 billion, $2.36 billion and $1.74 billion for the years ended December 31, 2019, 2018 and 2017, respectively. |
Understanding Our Results of Operations
Immediately following this offering, Royalty Pharma plc will be a holding company whose principal asset is a controlling equity interest in RP Holdings, which will be the sole equity owner of RPI and will be included in our consolidated financial statements. We will report non-controlling interests related to four minority interests in our subsidiaries held by third parties.
1. |
The first minority interest is attributable to the Legacy Investors Partnerships 18% ownership interest in Old RPI. The value of this non-controlling interest will decline over time as the assets in Old RPI expire. See Organizational StructureReorganization Transactions. |
2. |
The second minority interest is attributable to the RP Holdings Class C Special Interest held by EPA Holdings described under Certain Relationships and Related Party TransactionsEquity Performance Awards. Income will not be allocated to this non-controlling interest until certain conditions are met, which we do not expect to occur for several years. |
3. |
The third minority interest is attributable to the RP Holdings Class B Interests held indirectly by the Continuing Investors, which represent a 41% ownership interest in RP Holdings and are exchangeable for Class A ordinary shares of Royalty Pharma plc. The value of this non-controlling interest will decline over time if the investors who indirectly own the RP Holdings Class B Interests exchange those shares for Class A ordinary shares of Royalty Pharma plc. See Description of Share Capital. |
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4. |
The fourth minority interest is attributable to a de minimis interest in the Collection Trust held by certain legacy investors as a result of a 2011 reorganization transaction that created a prior legacy entity. The value of this non-controlling interest will decline over time as the assets in the Collection Trust expire and is expected to be substantially eliminated by the end of 2022. |
The fourth non-controlling interest related to RPSFTs ownership in the Collection Trust is the only non-controlling interest that existed prior to the Reorganization Transactions and, therefore, exists in the historical financial statements for periods through December 31, 2019 discussed in this MD&A. The non-controlling interest related to the Legacy Investors Partnerships 18% ownership interest exists from the Exchange Date and is reflected in our financial statements for the first quarter of 2020. The other two non-controlling interests will be reflected in our future financial statements from and after the date of this Offering. All of the results of operations of RP Holdings, Old RPI and the Collection Trust will be consolidated into the financial statements of Royalty Pharma plc.
The historical consolidated statements of comprehensive income of Old RPI discussed herein and included elsewhere in this prospectus do not reflect the payments made to Pharmaceutical Investors, LP, the general partner of certain partnerships that had ownership interests in Old RPI because those payments were not expenses of Old RPI. Those payments were made by such partnerships, out of equity distributions by Old RPI to those Legacy Investors Partnerships.
Following the Reorganization Transactions, the Manager will be entitled to receive Operating and Personnel Payments while EPA Holdings will be entitled to receive Equity Performance Awards through its RP Holdings Class C Special Interest following the offering.
Equity Performance Awards owed to EPA Holdings will be recognized as an equity transaction when the obligation becomes due and will impact the income allocated to non-controlling interests related to the RP Holdings Class C Special Interest.
Total income and other revenues
Total income and other revenues is primarily comprised of income from our financial royalty assets, royalty revenue from our intangible royalty assets, and royalty income arising from successful commercialization of products developed through joint research and development funding arrangements. Most of our royalties on both approved products and development-stage product candidates are classified as financial assets as our ownership rights are generally passive in nature. In instances in which we acquire a royalty asset that does include more substantial rights or ownership of the underlying intellectual property, we classify such royalty assets as intangible assets.
The majority of our royalties are recorded as financial assets, for which we recognize interest income. Royalty revenue relates solely to revenue from our DPP-IV patent estate for which the patent rights have been licensed to various counterparties. For the three months ended March 31, 2020 and 2019, and for the years ended December 31, 2019, 2018, and 2017, the royalty payors accounting for greater than 10% of our total income and other revenues in any one year are shown in the table below:
Contribution to Total
income and other revenues for the year ended December 31, |
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Three months ended March 31,
(unaudited) |
Year ended December 31, | ||||||||||||||||||||
Royalty asset |
Royalty payor |
2020 | 2019 | 2019 | 2018 | 2017 | ||||||||||||||||
Cystic fibrosis franchise |
Vertex | 28 | % | 23 | % | 23 | % | 22 | % | 22 | % | |||||||||||
Imbruvica |
AbbVie |
20 | % | 19 | % | 19 | % | 17 | % | 17 | % | |||||||||||
HIV franchise |
Gilead |
13 | % | 14 | % | 14 | % | 11 | % | 11 | % | |||||||||||
Tysabri |
Biogen | 11 | % | 13 | % | 12 | % | 12 | % | 11 | % | |||||||||||
Humira |
AbbVie | | | | * | 14 | % |
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* |
Represents less than 10%. |
Income from financial royalty assets
Our royalty assets classified as financial assets represent investments in cash flow streams with yield components that most closely resemble loans measured at amortized cost under the effective interest method. We calculate the effective interest rate using forecasted expected cash flows to be received over the life of the royalty asset relative to the initial acquisition price. The accretable yield is accreted into income at the effective rate of return over the expected life of the assets, which is calculated at the end of each reporting period and applied prospectively. As changes in sell-side equity research analyst consensus estimates are updated on a quarterly basis, the effective rate of return changes. For example, if sell-side equity research analysts consensus forecasts increase, the yield to derive income on a royalty asset will increase and result in higher income for subsequent periods. Refer to Note 2 to our consolidated financial statements for additional information.
Variables affecting the recognition of interest income from financial royalty assets on individual products under the effective interest method include any one of the following: (1) additional acquisitions, (2) changes in expected cash flows of the underlying pharmaceutical products, derived primarily from sell-side equity research analysts consensus forecasts, (3) regulatory approval of additional indications which leads to new cash flow streams, (4) changes to the duration of the royalty (i.e., patent expiration date) and (5) amounts and timing of royalty receipts. Our royalties classified as financial assets are directly linked to sales of underlying pharmaceutical products whose life cycle typically peaks at a point in time, followed by declining sales trends due to the entry of generic competition, resulting in natural declines in the asset balance and periodic interest income over the life of our royalties. The recognition of income from royalties requires management to make estimates and assumptions around many factors, including those impacting the variables noted above.
Revenue from intangible royalty assets
Revenue from intangible royalty assets is derived from our Januvia, Janumet and other DPP-IV patents classified as intangible assets.
Other royalty income
Other royalty income primarily includes income from former royalties for which the asset balances have been fully depleted and royalty income from synthetic royalties arising out of research and development funding arrangements. Occasionally, a royalty asset may be depleted on an accelerated basis due to collectability concerns, which, if resolved, may result in future cash collections when no financial asset remains. Similarly, we may continue to collect royalties on a royalty asset beyond the estimated patent expiration date by which the financial asset was amortized in full. In each scenario where a financial asset no longer remains, income on such royalty asset is recognized as Other royalty income.
Research and development funding expense
R&D funding expense (R&D) consists of (1) upfront R&D payments we have made to counterparties to acquire royalties on development-stage product candidates and (2) amounts we incurred to jointly fund development-stage product candidates undergoing clinical trials with our partners in exchange for royalties if the products are successfully developed and commercialized. These expenditures relate to the activities performed by our counterparties to develop and test new products, to test existing products for treatment in new indications, and to ensure product efficacy and regulatory compliance prior to launch.
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Below is a summary of the R&D agreements in place and the associated R&D funding expense during the three months ended March 31, 2020 and 2019, and for the years ended 2019, 2018 and 2017:
(In thousands) |
Three months
ended March 31, (unaudited) |
Year ended December 31, | ||||||||||||||||||||||
Partner/
|
Product |
Current stage of development |
2020 | 2019 | 2019 | 2018 | 2017 | |||||||||||||||||
Immunomedics |
Trodelvy |
The FDA approved Trodelvy in April 2020 |
$ | | $ | | $ | | $ | 181,428 | $ | | ||||||||||||
Biohaven |
Nurtec ODT and vazegepant |
The FDA approved Nurtec ODT in February 2020 |
| | | 103,011 | | |||||||||||||||||
Pfizer |
Palbociclib / Ibrance |
In Phase III clinical trial for adjuvant breast cancer; approved for other indications |
| 18,520 | 62,796 | 99,265 | 80,071 | |||||||||||||||||
Other |
Various | Various | 7,639 | 4,471 | 20,240 | 8,905 | 37,795 | |||||||||||||||||
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Total R&D funding expense | $ | 7,639 | $ | 22,991 | $ | 83,036 | $ | 392,609 | $ | 117,866 | ||||||||||||||
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Provision for changes in expected cash flows from financial royalty assets
The provision for changes in expected future cash flows from financial royalty assets includes the following activity:
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the movement in the Cumulative allowance for changes in expected future cash flows, and |
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the movement in the allowance for credit losses, which is presented net within the non-current portion of Financial royalty assets, net balance on the consolidated balance sheets. |
The provision for changes in expected cash flows is the current period activity resulting from adjustments to the cumulative allowance for changes in expected cash flows, which is a contra balance sheet account linked to our Financial royalty assets, net balance on the consolidated balance sheet. As discussed above, income is accreted on our financial royalty assets using the effective interest method. As we update our forecasted cash flows on a periodic basis and recalculate the present value of the remaining future cash flows, any shortfall when compared to the carrying value of the royalty asset is recorded directly to the income statement through the line item Provision for changes in expected future cash flows. If, in a subsequent period, there is significant increase in expected cash flows or if actual cash flows are significantly greater than cash flows previously expected, we reduce the cumulative allowance previously established for a royalty asset for the incremental increase in the present value of cash flows expected to be collected. This results in a credit to provision expense.
Most of the same variables and managements estimates affecting the recognition of interest income on our financial royalty assets also impact the provision. In any period, we will recognize provision income (i.e., a credit to the provision) or expense as a result of the following factors: (1) changes in expected cash flows of the underlying pharmaceutical products, derived primarily from sell-side equity research analysts consensus forecasts, (2) regulatory approval of additional indications which leads to new cash flow streams, (3) changes to the duration of the royalty (i.e., patent expiration date) and (4) amounts and timing of royalty receipts.
Upon the adoption on January 1, 2020 of ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), we recorded a cumulative adjustment to Retained earnings of $192.7 million to recognize an allowance for credit losses on the portion of our portfolio of financial royalty assets that is subject to credit risk. The provision for changes in expected cash flows from financial royalty assets reflects the activity for the period that relates to the change in estimates applied to
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calculate the allowance for credit losses, namely any changes in the credit ratings of the marketers responsible for paying our royalties and changes in the underlying cash flow forecasts used in the effective interest model to measure income from our financial royalty assets.
General and administrative (G&A) expenses
G&A expenses includes Operating and Personnel Payments, bad debt expense, legal reserves and other expenses for professional services.
Beginning in 2020, we expect the Operating and Personnel Payments paid to our Manager to be significantly higher than they were in historical periods. Prior to the Reorganization Transactions, the Operating and Personnel Payments were fixed, growing at 5% per annum and not linked to any financial line item. Under the new Management Agreement effective from the Exchange Date, the Operating and Personnel Payment for RPI is calculated as 6.5% of the Adjusted Cash Receipts for each quarter and 0.25% of the GAAP value of our security investments as of the end of such quarter, adjusted to reflect the actual GAAP value of our security investments. The operating and personnel payments for Old RPI, an obligation of the Legacy Investors Partnerships as a noncontrolling interest in Old RPI and for which the expense is reflected in our consolidated statements of income, is payable in equal quarterly installments and increases by 5% annually on a compounded basis through the Legacy Date, after which it will be calculated as the greater of $1 million per quarter and 0.3125% of Royalty Investments (as defined therein). The expenses incurred in respect of the Operating and Personnel Payments are expected to comprise the most significant component of G&A expenses in 2020 and on an ongoing basis.
Equity in (earnings) loss of nonconsolidated affiliates
Legacy SLP Interest
In connection with the Exchange Offer, we acquired a new equity method investment in the form of a special limited partnership interest in the Legacy Investors Partnerships (the Legacy SLP Interest) in exchange for issuing shares in the Company. The Legacy SLP Interest entitles us to the equivalent of performance distribution payments that would have been paid to the general partner of the Legacy Investors Partnerships and a performance income allocation on a similar basis. The performance income allocation attributable to us is equal to the general partners former contractual rights to the income of the Legacy Investors Partnerships.
As the Legacy Investors Partnerships are no longer participating in investment opportunities, the value of the Legacy SLP Interest is expected to decline over time. As of the Exchange Date, our equity method investee, the Legacy Investors Partnerships, also owns a non-controlling interest in Old RPI.
The Avillion Entities
During 2014, we entered into an agreement with our equity method investee (Avillion I) to invest up to $46.0 million over three years to fund a portion of the costs of a pivotal Phase III study for Pfizers Bosulif to expand its label into front-line chronic myeloid leukemia. The FDA approved a supplemental New Drug Application (sNDA) for Pfizers bosutinib in December 2017, which triggered a series of contractual fixed payments from Pfizer to Avillion I over a 10-year period, which we recognize through receipt of distributions from nonconsolidated affiliates on the Statement of Cash Flows.
In 2018, we agreed to fund up to $105 million over multiple years to fund a portion of the costs for Phase III clinical trials of our equity method investee (Avillion II, or together with Avillion I, the Avillion Entities), who simultaneously entered into a co-development agreement with AstraZeneca to advance PT027 (the AZ asset) through a global clinical development program for the treatment of asthma in exchange for a series of deferred payments and success-based milestones.
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The business model of the Avillion Entities includes partnering with global biopharmaceutical companies to perform R&D in exchange for success-based milestones and/or royalties once products are commercialized.
Realized gain on available for sale debt securities
The realized gain on available for sale debt securities in prior years relates to the recognition of milestone payments earned on specified sales thresholds of Tecfidera. Royalty payments related to our investment in the Tecfidera earnout were structured in the form of a series of potential milestone payments to be received based on the sales of Tecfidera and Fumaderm as reported by Biogen. Our contractual arrangement expired when the final milestone was satisfied as of December 31, 2018, with the last milestone earned in 2018 and collected in 2019. As each milestone was recognized, the asset balance was decreased by the respective cost basis associated with that particular milestone. The allocated cost of each milestone was derived using a third-party analysis based on projected sales over time, the future competitive landscape, the strength of the patents underlying the product and the prevailing interest rate environment. The excess of the milestone value less the allocated cost of that milestone was recognized as a realized gain on available for sale debt securities in the income statement.
Other (income) expense, net
Other (income) expense, net primarily includes the unrealized gains or losses on our derivatives, the change in fair market value of our equity securities following the adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), on January 1, 2018, losses on extinguishment of debt, and interest income. Prior to January 1, 2018, unrealized gains or losses on our equity securities were recognized in accumulated other comprehensive income (i.e., did not flow through earnings).
Net income attributable to non-controlling interest
As of the Exchange Date, the non-controlling interest balance on the consolidated balance sheets includes a new non-controlling interest related to the ownership in Old RPI by the Legacy Investors Partnerships of approximately 18%. As the Legacy Investors Partnerships are no longer participating in investment opportunities of RPI, the value of this non-controlling interest is expected to decline over time.
The non-controlling interest prior to the Exchange Date, as discussed earlier in this MD&A, relates to RPSFTs 20% share of earnings in the Collection Trust, which is a consolidated subsidiary of Old RPI.
Following this offering, this line item will also include net income attributable to the RP Holdings Class B Interests held by the Continuing Investors Partnerships, and the Class C Special Interest held by EPA Holdings once certain conditions have been met.
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Results of Operations
For the three months ended March 31, 2020 and 2019, and for the years ended December 31, 2019, 2018 and 2017
The comparison of our historical results of operations for the three months ended March 31, 2020 and 2019 is as follows:
(In thousands) |
For the three months
ended March 31, (unaudited) |
Q1 2020 vs. Q1 2019 | ||||||||||||||
2020 | 2019 | |||||||||||||||
Income and other revenues: |
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Income from financial royalty assets |
$ | 462,844 | $ | 382,216 | $ | 80,628 | 21.1 | % | ||||||||
Revenue from intangible royalty assets |
34,983 | 43,246 | (8,263 | ) | (19.1 | %) | ||||||||||
Other royalty income |
3,052 | 9,421 | (6,369 | ) | (67.6 | %) | ||||||||||
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Total income and other revenues |
500,879 | 434,883 | 65,996 | 15.2 | % | |||||||||||
Operating expenses: |
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Research and development funding expense |
7,639 | 22,991 | (15,352 | ) | (66.8 | %) | ||||||||||
Provision for changes in expected cash flows from financial royalty assets |
88,012 | (50,033 | ) | 138,045 | (275.9 | %) | ||||||||||
Amortization of intangible royalty assets |
5,733 | 6,599 | (866 | ) | (13.1 | %) | ||||||||||
General and administrative expenses |
38,065 | 24,426 | 13,639 | 55.8 | % | |||||||||||
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Total operating expenses |
139,449 | 3,983 | 135,466 | 3,401.1 | % | |||||||||||
Operating income |
361,430 | 430,900 | (69,470 | ) | (16.1 | %) | ||||||||||
Other expenses (income): |
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Equity in loss/(earnings) of nonconsolidated affiliates |
9,074 | 5,529 | 3,545 | 64.1 | % | |||||||||||
Interest expense |
53,584 | 67,266 | (13,682 | ) | (20.3 | %) | ||||||||||
Other (income) expense, net |
189,676 | (37,989 | ) | 227,665 | (599.3 | %) | ||||||||||
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Total other (income) expenses, net |
252,334 | 34,806 | 217,528 | 625.0 | % | |||||||||||
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Consolidated net income |
109,096 | 396,094 | (286,998 | ) | (72.5 | %) | ||||||||||
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Less: Net income attributable to non-controlling interest |
(37,856 | ) | (28,650 | ) | (9,206 | ) | 32.1 | % | ||||||||
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Net income attributable to controlling interest |
$ | 71,240 | $ | 367,444 | $ | (296,204 | ) | (80.6 | %) | |||||||
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The comparison of our historical results of operations for the years ended December 31, 2019, 2018 and 2017 is as follows:
(In thousands) | Year ended December 31, | |||||||||||||||||||||||||||
2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||||||||||
Income and other revenues: |
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Income from financial royalty assets |
$ | 1,648,837 | $ | 1,524,816 | $ | 1,539,417 | $ | 124,021 | 8.1 | % | $ | (14,601 | ) | (0.9 | %) | |||||||||||||
Revenue from intangible royalty assets |
145,775 | 134,118 | 38,090 | 11,657 | 8.7 | % | 96,028 | 252.1 | % | |||||||||||||||||||
Other royalty income |
19,642 | 135,960 | 20,423 | (116,318 | ) | (85.6 | %) | 115,537 | 565.7 | % | ||||||||||||||||||
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Total income and other revenues |
1,814,254 | 1,794,894 | 1,597,930 | 19,360 | 1.1 | % | 196,964 | 12.3 | % | |||||||||||||||||||
Operating expenses: |
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Research and development funding expense |
83,036 | 392,609 | 117,866 | (309,573 | ) | (78.9 | %) | 274,743 | 233.1 | % | ||||||||||||||||||
Provision for changes in expected cash flows from financial royalty assets |
(1,019,321 | ) | (57,334 | ) | 400,665 | (961,987 | ) | 1,677.9 | % | (457,999 | ) | (114.3 | %) | |||||||||||||||
Amortization of intangible assets |
23,924 | 33,267 | 33,267 | (9,343 | ) | (28.1 | %) | | | |||||||||||||||||||
General and administrative expenses |
103,439 | 61,906 | 106,440 | 41,533 | 67.1 | % | (44,534 | ) | (41.8 | %) | ||||||||||||||||||
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Total operating expenses |
(808,922 | ) | 430,448 | 658,238 | (1,239,370 | ) | (287.9 | %) | (227,790 | ) | (34.6 | %) | ||||||||||||||||
Operating income |
2,623,176 | 1,364,446 | 939,692 | 1,258,730 | 92.3 | % | 424,754 | 45.2 | % | |||||||||||||||||||
Other expenses (income): |
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Equity in loss/(earnings) of nonconsolidated affiliates |
32,517 | 7,023 | (163,779 | ) | 25,494 | 363.0 | % | 170,802 | (104.3 | %) | ||||||||||||||||||
Interest expense |
268,573 | 279,956 | 247,339 | (11,383 | ) | (4.1 | %) | 32,617 | 13.2 | % | ||||||||||||||||||
Realized gain on available for sale debt securities |
| (419,481 | ) | (412,152 | ) | 419,481 | (100.0 | %) | (7,329 | ) | 1.8 | % | ||||||||||||||||
Other (income) expense, net |
(139,333 | ) | (20,907 | ) | (74,896 | ) | (118,426 | ) | 566.4 | % | 53,989 | (72.1 | %) | |||||||||||||||
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Total other (income) expense, net |
161,757 | (153,409 | ) | (403,488 | ) | 315,166 | (205.4 | %) | 250,079 | (62.0 | %) | |||||||||||||||||
Consolidated net income |
2,461,419 | 1,517,855 | 1,343,180 | 943,564 | 62.2 | % | 174,675 | 13.0 | % | |||||||||||||||||||
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Less: Net income attributable to non-controlling interest |
(112,884 | ) | (140,126 | ) | (133,155 | ) | 27,242 | (19.4 | %) | (6,971 | ) | 5.2 | % | |||||||||||||||
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Net income attributable to controlling interest |
$ | 2,348,535 | $ | 1,377,729 | $ | 1,210,025 | $ | 970,806 | 70.5 | % | $ | 167,704 | 13.9 | % | ||||||||||||||
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Total income and revenues
Income from financial royalty assets
Income from financial royalty assets by product for our top products is as follows, in order of contribution to income for the first three months of 2020:
(In thousands) |
For the three months
ended March 31, (unaudited) |
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2020 | 2019 |
Q1 2020 vs. Q1 2019
(unaudited) |
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Cystic fibrosis franchise |
$ | 140,031 | $ | 102,108 | $ | 37,923 | 37.1 | % | ||||||||
Imbruvica |
98,239 | 81,501 | 16,738 | 20.5 | % | |||||||||||
HIV franchise |
65,776 | 59,178 | 6,598 | 11.1 | % | |||||||||||
Tysabri |
56,276 | 56,725 | (449 | ) | (0.8 | %) | ||||||||||
Xtandi |
23,388 | 25,725 | (2,337 | ) | (9.1 | %) | ||||||||||
Promacta |
13,517 | 2,830 | 10,687 | 377.6 | % | |||||||||||
Other |
65,617 | 54,149 | 11,468 | 21.2 | % | |||||||||||
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Total income from financial royalty assets |
$ | 462,844 | $ | 382,216 | $ | 80,628 | 21.1 | % | ||||||||
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Income from financial royalty assets by product for our top products is as follows, in order of contribution to 2019 income:
(In thousands) | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||||||||||||||
Cystic fibrosis franchise |
$ | 422,618 | $ | 400,375 | $ | 351,682 | $ | 22,243 | 5.6 | % | $ | 48,693 | 13.8 | % | ||||||||||||||
Imbruvica |
349,210 | 298,740 | 269,848 | 50,470 | 16.9 | % | 28,892 | 10.7 | % | |||||||||||||||||||
HIV franchise |
253,837 | 197,211 | 175,837 | 56,626 | 28.7 | % | 21,374 | 12.2 | % | |||||||||||||||||||
Tysabri |
226,554 | 213,929 | 175,613 | 12,625 | 5.9 | % | 38,316 | 21.8 | % | |||||||||||||||||||
Xtandi |
99,933 | 106,567 | 117,360 | (6,634 | ) | (6.2 | %) | (10,793 | ) | (9.2 | %) | |||||||||||||||||
Letairis |
90,299 | 22,261 | 50,010 | 68,038 | 305.6 | % | (27,749 | ) | (55.5 | %) | ||||||||||||||||||
Humira |
| 163,886 | 223,547 | (163,886 | ) | (100.0 | %) | (59,661 | ) | (26.7 | %) | |||||||||||||||||
Other |
206,386 | 121,847 | 175,520 | 84,539 | 69.4 | % | (53,673 | ) | (30.6 | %) | ||||||||||||||||||
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Total income from financial royalty assets |
$ | 1,648,837 | $ | 1,524,816 | $ | 1,539,417 | $ | 124,021 | 8.1 | % | $ | (14,601 | ) | (0.9 | %) | |||||||||||||
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Three months ended March 31, 2020 and 2019
Income from financial royalty assets increased by $80.6 million in the first quarter of 2020 compared to the same period of the prior year, primarily driven by strong performance of the cystic fibrosis franchise following the prior year approval of Trikafta as well as strong performance of Imbruvica. Additionally, we recorded a full quarter of income for Promacta in 2020, which was a new asset acquired during the first quarter of 2019.
Years ended December 31, 2019 and 2018
Income from financial royalty assets increased by $124.0 million, or 8.1%, in 2019 compared to 2018 primarily due to increased income from the following royalty assets: Imbruvica, HIV franchise, cystic fibrosis franchise, Letairis, Promacta and Emgality, the latter two of which were newly acquired in 2019. Imbruvica, the HIV and cystic fibrosis franchises generated increased income as a result of strong performance of the franchise products. We extended the duration of our Letairis royalty as a result of new information, which resulted in increased income from Letairis for the year. Partially offsetting the increase in income from financial royalty assets was a significant decline in income related to Humira, which expired in 2018.
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Years ended December 31, 2018 and 2017
Income from financial royalty assets remained relatively consistent during 2018 compared to 2017 due to various factors. In 2018, increased royalty income from our royalties on Imbruvica of $28.9 million, the HIV franchise of $21.4 million, and the cystic fibrosis franchise of $48.7 million was largely offset by lower income from our Humira and Remicade royalties of $59.7 million and $47.8 million, respectively, that expired during the year. Income from royalties on Imbruvica and the HIV franchise increased due to strong product growth. We also recognized increased income for royalties on the cystic fibrosis franchise products of $48.7 million due to stronger performance of the franchise and a partial reversal of the cumulative allowance on this royalty asset in the year. In addition, we only received up to 25% of the royalties through the second quarter of 2018 due to a pre-existing capped royalty to be repaid first by the Cystic Fibrosis Foundation, as the royalty seller, which led to a growing asset balance and interest income accruing at a higher rate for a portion of 2018.
The patents covering our royalties on Humira and Remicade expired in June and September of 2018, respectively. Due to managements concerns around collectability beyond 2017 in connection with the litigation between the marketer and patent owners, we did not recognize any interest income for Remicade in 2018 after the asset was fully depleted. As a result, interest income from our Remicade royalty asset declined by $47.8 million in 2018 compared to 2017. Remicade royalties received during 2018 were recorded as Other royalty income through the contractual royalty term.
Revenue from intangible royalty assets
Three months ended March 31, 2020 and 2019
Revenue from intangible royalty interests declined by $8.3 million in the first quarter of 2020 compared to the prior year period primarily due to the Januvia, Janumet and other DPP-IV royalties approaching maturity.
Years ended December 31, 2019 and 2018
Revenue from intangible royalty interests increased $11.7 million, or 8.7%, due to a full year of royalties earned on the Januvia/Janumet products marketed by Merck & Co. In 2018, we only earned royalties on the last three quarters following the expiration of the Merck & Co. holiday period from the 2016 Merck Settlement discussed below.
Years ended December 31, 2018 and 2017
Revenue from intangible royalty assets increased by $96.0 million, or 252.1%, in 2018 compared to 2017, primarily due to the reinstatement of Januvia royalties in 2018. In 2016, we entered into a contractual amendment to our license agreement and a settlement with Merck & Co. (the Merck Settlement) that provided for a cumulative catch-up payment for past-due royalties on Januvia and Janumet products between 2014 and 2016 of $297.5 million in exchange for a five-quarter payment holiday that began in January 2017. The payment holiday ended March 31, 2018 and we began recognizing royalty revenue again from the Januvia/Janumet products for the quarter ended June 30, 2018.
Other royalty income
Three months ended March 31, 2020 and 2019
Other royalty income of $3.1 million in 2020 primarily relates to Soliqua, whereas royalty income in the comparative period included income primarily from Soliqua and Remicade, which has expired.
Years ended December 31, 2019, 2018 and 2017
Other royalty income of $19.6 million in 2019 primarily included income from our final royalties on Remicade and royalty income from Soliqua, the product arising from our R&D co-funding arrangement with Sanofi, on which we are entitled to royalties indefinitely.
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Other royalty income of $136.0 million in 2018 primarily included income from our Remicade and Prezista royalties of $93.7 million and $35.6 million, respectively.
Other royalty income of $20.4 million in 2017 primarily included $13.2 million related to our Prezista royalty that was recognized in Other royalty income after the financial asset was depleted in the second quarter of 2017.
Research and development funding expense
Three months ended March 31, 2020 and 2019
R&D funding expense declined in the first three months of 2020 as compared to the same period of the prior year as a result of satisfying our funding commitments in 2019 under our agreement with Pfizer.
Years ended December 31, 2019 and 2018
R&D funding expense decreased by $309.6 million, or 78.9%, in 2019 compared to 2018, primarily due to the Immunomedics and Biohaven acquisitions that occurred in 2018, which resulted in upfront development-stage funding expense of $181.4 million and $103.0 million, respectively, in 2018, compared to no upfront development-stage funding expense in 2019.
Years ended December 31, 2018 and 2017
R&D funding expense increased $274.7 million, or 233.1%, in 2018 compared to 2017 primarily due to two upfront R&D funding agreements entered into during 2018. In 2018, we acquired from Immunomedics a tiered, sales-based royalty on Trodelvy, which was at the time a development-stage product candidate for use in triple-negative breast cancer and other forms of cancer, in exchange for an up-front payment of $175 million for R&D funding and a payment of $75 million for Immunomedics common stock. The Immunomedics common stock was acquired at a premium of $6.4 million, resulting in total R&D funding expense recognized for this arrangement of $181.4 million in 2018. Also in 2018, we acquired royalty rights on global sales of Nurtec ODT and vazegepant, which were at the time development-stage product candidates for the treatment and prevention of acute migraine, from Biohaven for $100 million up front, and a payment of $50 million for Biohavens common stock, acquired at a premium to market value. The Biohaven common stock was acquired at a premium of $3.0 million resulting in total R&D funding expense recognized for this arrangement of $103.0 million in 2018.
The development-stage funding payments and the excess of the amounts paid over the market value for the stock on the dates of purchase were treated as R&D expense in our consolidated income statement.
Provision for changes in expected cash flows from financial royalty assets
The breakdown of our provision for changes in expected cash flows includes the
(1) |
provision for credit losses, and |
(2) |
income and expense activity for financial royalty assets whose cash flow forecasts have changed from the prior period. |
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As the latter activity is a combination of income and expense items, the provision breakdown by product, exclusive of the provision for credit losses, is as follows, based on the largest contributors to each year or periods income or expense:
(In thousands)
Product |
Q1 2020
(unaudited) |
Product |
Q1 2019
(unaudited) |
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Tysabri |
$ | 57,405 | Xtandi | $ | (14,979 | ) | ||||
Crysvita |
34,499 | Alogliptin | (12,712 | ) | ||||||
Imbruvica |
34,247 | Cystic fibrosis franchise | (12,066 | ) | ||||||
Promacta |
14,785 | Tysabri | (11,911 | ) | ||||||
Xtandi |
(102,032 | ) | Lyrica | (6,835 | ) | |||||
Other |
(32,850 | ) | Other | 8,470 | ||||||
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Total provision, exclusive of provision for credit losses |
$ | 6,054 | Total provision, exclusive of provision for credit losses | $ | (50,033 | ) | ||||
Provision for credit losses |
81,958 | Provision for credit losses | | |||||||
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Total provision |
$ | 88,012 | Total provision | $ | (50,033 | ) | ||||
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(In thousands)
Product |
2019 |
Product |
2018 |
Product |
2017 | |||||||||||
Cystic fibrosis franchise | $ | (1,101,675 | ) |
Imbruvica |
(45,577 | ) | Xtandi | $ | 187,187 | |||||||
Tysabri |
(66,451 | ) |
Tysabri |
(43,355 | ) | Tysabri | 181,595 | |||||||||
Emgality |
38,262 |
Cystic fibrosis franchise |
(40,287 | ) | Nesina | 56,211 | ||||||||||
Soliqua |
42,002 |
Letairis |
(31,888 | ) |
Imbruvica |
45,577 | ||||||||||
Xtandi | 76,568 |
Xtandi |
63,442 | Cystic fibrosis franchise | (30,422 | ) | ||||||||||
Other | (8,027 | ) |
Other |
40,331 | Other | (39,483 | ) | |||||||||
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Total provision | $ | (1,019,321 | ) | Total provision | $ | (57,334 | ) | Total provision | $ | 400,665 | ||||||
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Three months ended March 31, 2020 and 2019
In connection with the adoption of ASU 2016-13 on January 1, 2020, we recognized a provision for credit losses of $82.0 million in the first three months of 2020, for which we did not have comparable activity in the prior year period. The primary drivers of the current period provision expense relate to the increase in financial royalty asset and credit rating of associated marketers.
In the first quarter of 2020, we recorded provision expense of $6.1 million for changes in expected cash flows in comparison to a provision credit of $50.0 million for the same period of the prior year. Increases to the provision for Tysabri, Crysvita and Imbruvica were primarily driven by declines in sell-side equity research analysts consensus forecasts. Offsetting the provision expense was a large reversal of the cumulative allowance for Xtandi due to an increase in consensus forecasts.
In the first quarter of 2019, we recorded provision income primarily due to increased sell-side equity research analysts consensus forecasts for Xtandi, the cystic fibrosis franchise, and Tysabri.
Years ended December 31, 2019 and 2018
The provision for changes in expected cash flows resulted in a credit of $1.02 billion in 2019 compared to a credit of $57.3 million in 2018. The credit to provision expense was primarily due to the full reversal of the remaining provision recorded against the cystic fibrosis franchise as a result of the approval of the Vertex triple combination therapy, Trikafta, in October 2019. Upon the approval, we began including sell-side equity research
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analysts consensus forecasts for Trikafta in the consensus forecasts for the franchise and also extended the duration of our expected cash flows from the cystic fibrosis franchise to reflect the longer patent duration of Trikafta.
Years ended December 31, 2018 and 2017
The provision for changes in expected cash flows resulted in a credit of $57.3 million in 2018 compared to provision expense of $400.7 million in 2017. We recognized a large provision for Tysabri in late 2017 as sell-side equity research analysts anticipated a decline in Tysabri sales from competitor drug Ocrevus. This decline, while consistent with managements expectations at the time of our February 2017 acquisition, resulted in provision expense for the period. However, Tysabri sales did not decline as quickly as sell-side equity research analysts expected and a subsequent increase in sell-side equity research analyst consensus forecasts resulted in partial reversals of the cumulative allowance throughout the first nine months of 2018, and provision income of $43.4 million for 2018 compared to provision expense of $181.6 million recorded in 2017. We recorded provision income of $31.9 million for Letairis due to the delayed entry of generics that was initially expected in the third quarter of 2018, which caused a partial reversal of a previously recognized cumulative provision against this asset. While the cystic fibrosis asset generated provision income in 2018 and 2017, this was primarily the result of variability in the consensus forecasts during both years and not representative of any significant underlying driver in franchise product sales.
Throughout 2017, we recorded significant provision expense for Xtandi as consensus forecasts for future years dropped significantly in 2017, contributing to declines in analyst consensus compared to forecasts from prior periods. Product sales and sell-side equity research analyst consensus forecasts improved in 2018, resulting in a partial reversal of the cumulative allowance in late 2018, and net expense of $63.4 million for the year. Finally, the cumulative allowance for Imbruvica was fully reversed in the first half of 2018 due to an increase in sell-side equity research analyst consensus forecasts that management believes stems from strong product growth.
G&A expenses
Three months ended March 31, 2020 and 2019
G&A expenses increased $13.6 million in the first quarter of 2020 compared to the same period of the prior year, primarily as a result of increased cost of professional services incurred in connection with the Reorganization Transactions and in preparation for our initial public offering.
Years ended December 31, 2019 and 2018
G&A expenses increased $41.5 million, or 67.1%, during 2019 compared to 2018, primarily due to a $26.4 million increase in costs for consulting and professional services related to our Reorganization Transactions. In addition, the 2018 reversal of an $8.7 million legal reserve from a dispute related to one of our DPP-IV products contributed to the increase year over year in 2019.
In the future, we expect G&A expenses to be significantly higher than it was in historical periods due to higher Operating and Personnel Payment as calculated under the new Management agreement following the Reorganization Transactions.
Years ended December 31, 2018 and 2017
G&A expenses decreased $44.5 million, or 41.8%, during 2018 compared to 2017. The decline in 2018 G&A expenses is primarily due to bad debt expense of $1.0 million in 2018, compared to $34.7 million of expense recognized in 2017 in connection with DPP-IV rebates during the Merck & Co. payment holiday period. In 2018 and 2017, we made payments to Merck & Co. in connection with chargebacks for over-payments of royalties received for DPP-IV product sales in prior periods. These chargebacks arose from rebates on Januvia
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and Janumet collected by Merck & Co. during its royalty payment holiday period that Merck & Co. subsequently deducted from our royalty-eligible net sales, which were zero during the holiday period. These rebate chargebacks invoiced throughout the holiday period were treated as bad debt expense and recorded within G&A expenses as management had no visibility into the timing of rebate receipts or Merck & Co.s historical rebate recognition by quarter.
Equity in loss/(earnings) of nonconsolidated affiliates
Three months ended March 31, 2020 and 2019
In connection with the Exchange Offer, we acquired the Legacy SLP Interest valued at $303.7 million in exchange for issuing shares in the Company. During the three months ended March 31, 2020, we recorded equity in earnings of $3.2 million attributable to our income allocation in the Legacy Investors Partnerships.
Equity in earnings of the Avillion Entities was consistent between the first three months of 2020 and 2019 as expected.
Years ended December 31, 2019, 2018 and 2017
Equity in loss of nonconsolidated affiliates was not material in 2019 or in 2018.
On December 19, 2017, our equity method investee, Avillion I, announced that the FDA approved a supplemental New Drug Application for Pfizers Bosulif (bosutinib) in chronic myeloid leukemia. Under the terms of its co-development agreement with Pfizer, Avillion I recognized a gain in 2017 on the sale of its asset to Pfizer based on the present value of a series of guaranteed fixed annual payments due from Pfizer over a 10-year period. Prior to Avillion Is R&D asset sale to Pfizer in 2017, it had been performing R&D and incurring net losses which translated to our recognition of equity in losses from nonconsolidated affiliates in prior years.
Interest expense
Three months ended March 31, 2020 and 2019
Interest expense declined $13.7 million in the first quarter of 2020 as compared to the same period of the prior year as a result of the Reorganization Transactions and subsequent refinancing of RPIFTs prior credit facilities. Our subsidiary issued $6.0 billion of new debt in February of 2020 at lower interest rates. Refer to the Liquidity and Sources of Capital section within this MD&A for additional discussion of our new credit facilities.
Years ended December 31, 2019, 2018 and 2017
Interest expense remained relatively consistent between 2019 and 2018, as expected.
Interest expense increased $32.6 million, or 13.2%, in 2018 compared to 2017 due to the issuance of a $1.1 billion Senior Secured Term Loan B to partially finance the acquisition of Tysabri in early 2017. Interest expense in 2017 reflected only three quarters of interest on the larger balance of debt outstanding, while 2018 included a full year of interest expense on the incremental debt issuance.
Realized gain on available for sale debt securities
Years ended December 31, 2019, 2018 and 2017
Our contractual agreement in respect of Tecfidera milestones was satisfied as of December 31, 2018 and therefore we did not record any realized gains on available for sale debt securities in 2019. Four Tecfidera milestones were triggered in 2018, compared to five milestones in 2017. Tecfidera milestones totaling $600 million and $750 million were met in each of 2018 and 2017 with associated cost bases of $180.5 million and $337.8 million, respectively.
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Other (income) expense, net
Three months ended March 31, 2020 and 2019
Other expense was $189.7 million in the first quarter of 2020 compared to other income of $38.0 million in the first quarter of 2019. We recorded unrealized losses on securities and warrants in the first quarter of 2020 of $186.6 million primarily due to equity market declines primarily related to the impact of the COVID-19 pandemic. In the prior year period, we recorded $27.9 million in unrealized gains.
Years ended December 31, 2019, 2018 and 2017
Other income was $139.3 million in 2019 and was primarily comprised of the movement in fair market value of equity securities acquired in 2019. As part of our transaction with Epizyme in November 2019, we acquired common stock and warrants with an initial fair value of $87.8 million. By the end of 2019, the market value of the common stock and warrants of Epizyme had increased by $107.0 million to $194.8 million. We also recorded unrealized gains of $67.0 million for the increases in market value of our investment in common stock movements of Immunomedics and Biohaven, compared to unrealized losses of $12.3 million in the prior year for movement in market value of the same securities. Finally, we recognized an unrealized loss on our interest rate swaps compared to unrealized gains in the prior year due to adverse movements in the LIBOR curve.
In 2018, we adopted ASU 2016-01, which resulted in the recognition of $13.9 million in unrealized losses on equity securities in earnings. Unrealized gains and losses on equity securities were previously recorded as a component of accumulated other comprehensive income. This loss was offset by increased interest income compared to prior periods due to carrying a significantly larger cash and cash equivalents balance over the year, on which we earned interest.
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, equal to the excess cash received over the net carrying value of the financial asset. The gain on the sale of our royalty asset was recorded in other (income) expense, net in 2017.
Net income attributable to non-controlling interest
Three months ended March 31, 2020 and 2019
As of the Exchange Date, a new non-controlling interest exists related to the ownership in Old RPI by the Legacy Investors Partnerships of approximately 18%. During the first three months of 2020, we recorded income attributable to the Legacy Investors Partnerships of $12.9 million.
During the first three months of 2020 and 2019, we recorded income attributable to RPSFT of $24.9 million and $28.7 million, respectively. Income attributable to RPSFT is expected to continue to decline as the assets held by the Collection Trust mature.
Years ended December 31, 2019, 2018 and 2017
Net income attributable to RPSFT declined by $27.2 million, or 19.4%, in 2019 compared to 2018, primarily due to declines in expired and maturing royalty assets held by the Collection Trust.
Net income attributable to RPSFT increased by $7.0 million, or 5.2%, during 2018 compared to 2017, primarily from the reinstatement of the Merck & Co. royalty payment on the DPP-IV products Januvia and Janumet, which are owned by the Collection Trust. This increase in royalty revenue in 2018 was partially offset by declines in expired and maturing royalties and a decline in G&A expenses in 2018 primarily due to bad debt expense previously recorded for Januvia and Janumet royalties in 2017.
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Key developments relating to our portfolio in 2017-2020
The key developments impacting our cash receipts and income and revenue from our royalty interests are discussed below:
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Xtandi. In July 2018, the FDA approved an sNDA for Xtandi, broadening the approval in castration-resistant prostate cancer to include men with non-metastatic castration-resistant prostate cancer. In December 2019, the FDA approved an additional sNDA for Xtandi for the treatment of men with metastatic castration-sensitive prostate cancer. |
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Erleada. In September 2019, the FDA approved an sNDA for Erleada for the treatment of men with metastatic castration-sensitive prostate cancer. |
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Cystic fibrosis franchise. In May 2017, the FDA approved Kalydeco to treat cystic fibrosis in people ages two and older who have one of 23 residual function mutations in the cystic fibrosis transmembrane conductance regulator (CFTR) gene. In August 2017, the FDA approved Kalydeco to treat cystic fibrosis in people ages two and older who have one of five residual function mutations that result in a splicing defect in the CFTR gene. |
In February 2018, the FDA approved Symdeko to treat cystic fibrosis in people ages 12 years and older who have two copies of the F508del mutation or one mutation that is responsive to Symdeko. In June 2019, the FDA approved an sNDA for Symdeko to cystic fibrosis patients six years of age and older with two copies of the F508del mutation or one copy of a responsive mutation. In November 2018, the EMA granted Marketing Authorization for Symkevi to treat cystic fibrosis in people aged 12 and older who either have two copies of the F508del mutation or one copy of the F508del mutation and a copy of one of 14 residual function mutations.
In October 2019, Trikafta, the Vertex triple combination therapy, received FDA approval for the treatment of cystic fibrosis in people ages 12 years and older who have at least one F508del mutation of the cystic fibrosis transmembrane conductance regulator (CFTR) gene. This approval significantly expands the addressable market that can be treated with Vertexs cystic fibrosis products, all of which we are entitled royalties on, and also increases the duration of our royalty to 2037.
In November 2019, Vertex announced that it reached an agreement with Frances Economic Committee of Health Care Products (CEPS) for a national reimbursement deal of Orkambi. As a result, we experienced a reduction in our royalty receipts in 2020 of $41 million, to reflect a true-up related to prior periods where we collected royalties on sales in France of Orkambi at a higher selling price. In October 2019, Vertex announced that it reached an agreement with National Health Service England, where eligible patients will receive access to Orkambi and Symkevi, and access to Kalydeco will be expanded.
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Imbruvica. In August 2017, Imbruvica became the first FDA-approved treatment specifically for adults with chronic graft-versus-host-disease after failure of one or more lines of systemic therapy. In August 2018, the FDA approved Imbruvica in combination with rituximab as the first non-chemotherapy combination regimen for patients with Waldenströms Macroglobulinemia (WM). In January 2019, the FDA approved Imbruvica in combination with obinutuzumab as the first non-chemotherapy anti-CD20 combination regimen for treatment-naïve chronic lymphocytic leukemia (CLL) patients. In August 2019, the EMA broadened the label for Imbruvica to include two new uses: in combination with obinutuzumab in adult patients with previously untreated CLL and in combination with rituximab for the treatment of adult patients with WM. In November 2019, AbbVie submitted an sNDA to the FDA for Imbruvica in combination with rituximab for treatment-naïve younger adults with CLL. |
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Soliqua. In February 2019, the FDA approved the expanded use of Soliqua to include patients with type 2 diabetes who are uncontrolled on oral antidiabetic medicines. |
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Bosulif. On December 19, 2017, Avillion announced that the FDA approved an sNDA for Pfizers Bosulif (bosutinib). Avillion is eligible to receive fixed payments from Pfizer based on this approval over a 10-year |
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period. We received our first annual distribution of $39.4 million from Avillion in the first quarter of 2018 and our second annual distribution of $14.1 million in the first quarter of 2019, reflected as Distributions from nonconsolidated affiliates on the Statement of Cash Flows. |
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Tazverik. In December 2019, the Oncologic Drugs Advisory Committee of the FDA voted in favor of the benefit-risk profile of tazemetostat as a treatment for patients with metastatic or locally advanced epithelioid sarcoma (ES), not eligible for curative surgery. On January 23, 2020, the FDA granted accelerated approval of Tazverik (tazemetostat) in ES. |
In addition, in December 2019 Epizyme submitted an NDA to the FDA for accelerated approval of tazemetostat for the treatment of patients with relapsed or refractory follicular lymphoma (rrFL), both with or without EZH2 activating mutations, who have received at least two prior lines of systemic therapy.
In February 2020, the FDA accepted Epizymes regulatory submission for accelerated approval of Tazverik in rrFL and set a Prescription Drug User Fee Act (PDUFA) in June 2020.
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Trodelvy. In December 2019, Immunomedics announced the resubmission of the biologics licensing application seeking accelerated approval of sacituzumab govitecan for the treatment of patients with metastatic triple-negative breast cancer who have received at least two prior therapies for metastatic disease in December 2019. This resubmission followed the receipt of a complete response letter from the FDA in January 2019. |
In April 2020, Immunomedics announced that the FDA granted accelerated approval of Trodelvy (sacituzumab govitecan-hziy) for the treatment of patients with metastatic triple-negative breast cancer (TNBC) who have received at least two prior therapies for metastatic disease. Trodelvy is the first antibody-drug conjugate (ADC) approved by the FDA specifically for TNBC.
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Nurtec ODT. Biohaven submitted two New Drug Applications (NDAs) to the FDA for two formulations of rimegepant in the second quarter of 2019 using a priority review voucher to expedite the regulatory review period. In February 2020, Biohaven announced that the FDA approved Nurtec ODT (rimegepant) for the acute treatment of migraine in adults. |
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Ibrance. On May 29, 2020, Pfizer reported that the independent data monitoring committee for the PALLAS trial had concluded after the recent interim analysis that the PALLAS trial is unlikely to show a statistically significant improvement in the primary endpoint of invasive disease-free survival. |
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Tecfidera. We continued collecting milestone receipts quarterly throughout 2018; however, our contractual agreement covering our milestones on cumulative sales of Tecfidera ended in 2018, and therefore receipts from Tecfidera ceased after the final milestone was collected in the first quarter of 2019. |
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Humira. The patents covering our royalties on Humira expired in June 2018. |
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Remicade. The patents covering our royalties on Remicade expired in September 2018. |
Non-GAAP Financial Results
In addition to analyzing our results on a GAAP basis, management also reviews our results on a non-GAAP basis. There is no direct correlation between income from financial royalty assets and royalty receipts due to the nature of the accounting methodology applied for classified as financial assets. Further, income from financial royalty assets and the provision for changes in expected cash flows related to these financial royalty assets can be volatile and unpredictable. As a result, management places importance on royalty receipts as they are predictable and we use them as a measure of our operating performance. Refer to Selected Historical Financial DataNon-GAAP Reconciliations for additional discussion of managements use of non-GAAP measures as supplemental financial measures.
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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 by royalty asset: (i) Cash collections from royalty assets (financial assets and intangible assets), (ii) Other royalty cash collections, (iii) Distributions from non-consolidated affiliates and (iv) Proceeds from available for sale debt securities; less Distributions to non-controlling interest. Adjusted Cash Receipts is most directly comparable to the GAAP measure of Net cash provided by operating activities.
Adjusted EBITDA and Adjusted Cash Flow are similar non-GAAP liquidity measures that are both most closely comparable to the GAAP measure, Net cash provided by operating activities. Adjusted EBITDA is important to our lenders and is defined under the credit agreement Adjusted Cash Receipts less payments for operating and professional costs. Operating and professional costs are comprised of Payments for operating costs and professional services and Payments for rebates from the Statement of Cash Flows.
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, and plus (1) Contributions from non-controlling interest- R&D, all directly reconcilable to the Statement of Cash Flows.
Adjusted Cash Receipts and Adjusted Cash Flow are used by management as key liquidity measures in the evaluation of our ability to generate cash from operations. Both measures are an indication of the strength of the Company and the performance of the business. Management also uses Adjusted Cash Flow to compare its performance against non-GAAP adjusted net income used by companies in the biopharmaceutical industry. Adjusted EBITDA, as derived from Adjusted Cash Receipts, is used by our lenders to assess our ability to meet our financial covenants.
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The table below includes the royalty receipts for the first three months of 2020 and 2019, and for the years ended December 31, 2019, 2018, and 2017 by royalty for our Growth Products and Mature Products, as defined in Portfolio Overview above, and the year-over-year variance. Refer to Selected Historical Financial Data for further discussion of the line items below.
($ in thousands) |
For the three months
ended March 31, (unaudited) |
Q1 2020 vs. Q1 2019 | ||||||||||||||
2020 | 2019 | |||||||||||||||
Growth Products |
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Cystic fibrosis franchise |
$ | 99,403 | $ | 106,939 | $ | (7,536 | ) | (7.0 | %) | |||||||
Tysabri |
83,807 | 82,635 | 1,172 | 1.4 | % | |||||||||||
Imbruvica |
77,709 | 61,102 | 16,607 | 27.2 | % | |||||||||||
HIV franchise |
83,887 | 76,383 | 7,504 | 9.8 | % | |||||||||||
Januvia, Janumet, Other DPP-IVs |
34,788 | 32,738 | 2,050 | 6.3 | % | |||||||||||
Xtandi |
34,777 | 27,568 | 7,209 | 26.1 | % | |||||||||||
Promacta |
35,748 | | 35,748 | | ||||||||||||
Tazverik |
| | | | ||||||||||||
Crysvita |
| | | | ||||||||||||
Other Growth Products (1) |
72,133 | 56,640 | 15,493 | 27.4 | % | |||||||||||
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Total Royalty Receipts Growth Products |
$ | 522,252 | $ | 444,005 | $ | 78,247 | 17.6 | % | ||||||||
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Mature Products |
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Tecfidera (2) |
$ | | $ | 150,000 | $ | (150,000 | ) | (100.0 | %) | |||||||
Lyrica |
6,087 | 29,605 | (23,518 | ) | (79.4 | %) | ||||||||||
Letairis |
14,562 | 38,459 | (23,897 | ) | (62.1 | %) | ||||||||||
Remicade |
| 6,068 | (6,068 | ) | (100.0 | %) | ||||||||||
Humira |
| | | | ||||||||||||
Other Mature Products (3) |
743 | 10,164 | (9,421 | ) | (92.7 | %) | ||||||||||
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Total Royalty Receipts Mature Products |
$ | 21,392 | $ | 234,296 | $ | (212,904 | ) | (90.9 | %) | |||||||
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Distributions to non-controlling interest |
(161,387 | ) | (41,460 | ) | (119,927 | ) | 289.3 | % | ||||||||
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Adjusted Cash Receipts (non-GAAP) |
$ | 382,257 | $ | 636,841 | $ | (254,584 | ) | (40.0 | %) | |||||||
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Payments for operating and professional costs (4) |
(25,838 | ) | (17,705 | ) | (8,133 | ) | 45.9 | % | ||||||||
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Adjusted EBITDA (non-GAAP) |
$ | 356,419 | $ | 619,136 | $ | (262,717 | ) | (42.4 | %) | |||||||
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Development-stage funding payments ongoing |
(7,639 | ) | (22,991 | ) | 15,352 | (66.8 | %) | |||||||||
Interest paid, net |
(48,867 | ) | (54,349 | ) | 5,482 | (10.1 | %) | |||||||||
Swap collateral (posted) or received, net |
45,252 | (360 | ) | 45,612 | (12,670.0 | %) | ||||||||||
Swap termination payments |
(35,448 | ) | | (35,448 | ) | | ||||||||||
Investment in nonconsolidated affiliates |
(13,142 | ) | (8,842 | ) | (4,300 | ) | 48.6 | % | ||||||||
Contributions from non-controlling interest- R&D |
1,260 | | 1,260 | | ||||||||||||
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Adjusted Cash Flow (non-GAAP) |
$ | 297,835 | $ | 532,594 | $ | (234,759 | ) | (44.1 | %) | |||||||
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The table below includes the royalty receipts for 2019, 2018, and 2017 by royalty.
($ in thousands) | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||||||
Growth Products |
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Cystic fibrosis franchise |
$ | 424,741 | $ | 224,214 | $ | 37,340 | $ | 200,527 | 89.4 | % | $ | 186,874 | 500.5 | % | ||||||||||||||
Tysabri |
332,816 | 338,697 | 263,790 | (5,881 | ) | (1.7 | %) | 74,907 | 28.4 | % | ||||||||||||||||||
Imbruvica |
270,558 | 209,171 | 149,376 | 61,387 | 29.3 | % | 59,795 | 40.0 | % | |||||||||||||||||||
HIV franchise |
262,939 | 224,321 | 185,515 | 38,618 | 17.2 | % | 38,806 | 20.9 | % | |||||||||||||||||||
Januvia, Janumet, Other DPP-IVs |
143,298 | 106,689 | 103,250 | 36,609 | 34.3 | % | 3,439 | 3.3 | % | |||||||||||||||||||
Xtandi |
120,096 | 105,958 | 86,977 | 14,138 | 13.3 | % | 18,981 | 21.8 | % | |||||||||||||||||||
Promacta |
86,266 | | | 86,266 | | | | |||||||||||||||||||||
Tazverik |
| | | | | | | |||||||||||||||||||||
Crysvita | | | | | | | | |||||||||||||||||||||
Other Growth Products (1) |
210,166 | 192,241 | 133,554 | 17,925 | 9.3 | % | 58,687 | 43.9 | % | |||||||||||||||||||
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Total Royalty Receipts Growth Products |
$ | 1,850,880 | $ | 1,401,291 | $ | 959,802 | $ | 449,589 | 32.1 | % | $ | 441,489 | 46.0 | % | ||||||||||||||
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Mature Products |
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Tecfidera (2) |
150,000 | $ | 750,000 | $ | 600,000 | $ | (600,000 | ) | (80.0 | %) | $ | 150,000 | 25.0 | % | ||||||||||||||
Lyrica |
128,246 | 126,916 | 124,126 | 1,330 | 1.0 | % | 2,790 | 2.2 | % | |||||||||||||||||||
Letairis |
112,656 | 130,078 | 123,178 | (17,422 | ) | (13.4 | %) | 6,900 | 5.6 | % | ||||||||||||||||||
Remicade |
6,068 | 121,055 | 138,488 | (114,987 | ) | (95.0 | %) | (17,433 | ) | (12.6 | %) | |||||||||||||||||
Humira |
| 499,055 | 455,399 | (499,055 | ) | (100.0 | %) | 43,656 | 9.6 | % | ||||||||||||||||||
Other Mature Products (3) |
21,047 | 45,450 | 68,267 | (24,403 | ) | (53.7 | %) | (22,817 | ) | (33.4 | %) | |||||||||||||||||
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Total Royalty Receipts Mature Products |
$ | 418,017 | $ | 1,672,554 | $ | 1,509,458 | $ | (1,254,537 | ) | (75.0 | %) | $ | 163,096 | 10.8 | % | |||||||||||||
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Distributions to non-controlling interest |
(154,084 | ) | (268,693 | ) | (278,727 | ) | 114,609 | (42.7 | %) | 10,034 | (3.6 | %) | ||||||||||||||||
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Adjusted Cash Receipts (non-GAAP) |
$ | 2,114,813 | $ | 2,805,152 | $ | 2,190,533 | $ | (690,339 | ) | (24.6 | %) | $ | 614,619 | 28.1 | % | |||||||||||||
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Payments for operating and professional costs (4) |
(88,524 | ) | (72,660 | ) | (101,180 | ) | (15,864 | ) | 21.8 | % | 28,520 | (28.2 | %) | |||||||||||||||
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Adjusted EBITDA (non-GAAP) |
$ | 2,026,289 | $ | 2,732,492 | $ | 2,089,353 | $ | (706,203 | ) | (25.8 | %) | $ | 643,139 | 30.8 | % | |||||||||||||
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Development-stage funding payments ongoing |
(83,036 | ) | (108,163 | ) | (118,366 | ) | 25,127 | (23.2 | %) | 10,203 | (8.6 | %) | ||||||||||||||||
Interest paid, net |
(234,828 | ) | (243,216 | ) | (228,451 | ) | 8,388 | (3.4 | %) | (14,765 | ) | 6.5 | % | |||||||||||||||
Swap collateral (posted) or received, net |
(45,270 | ) | 2,957 | (2,950 | ) | (48,227 | ) | (1,630.9 | %) | 5,907 | (200.2 | %) | ||||||||||||||||
Investment in nonconsolidated affiliates |
(27,042 | ) | (24,173 | ) | (2,000 | ) | (2,869 | ) | 11.9 | % | (22,173 | ) | 1,108.7 | % | ||||||||||||||
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Adjusted Cash Flow (non-GAAP) |
$ | 1,636,113 | $ | 2,359,897 | $ | 1,737,586 | $ | (723,784 | ) | (30.7 | %) | $ | 622,311 | 35.8 | % | |||||||||||||
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(1) |
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, the Lexiscan, Mircera, Myozyme, Nesina, Priligy and Soliqua. Other Growth Products also include contributions from the Legacy SLP Interest. |
(2) |
Receipts from our Tecfidera milestone payments are presented as Proceeds from available for sale debt securities on the Statement of Cash Flows. |
(3) |
Other Mature Products primarily include royalties on the following products: Prezista, Rotateq, Savella and Thalomid. |
(4) |
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. |
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Adjusted Cash Receipts (non-GAAP)
Three months ended March 31, 2020 and 2019
Adjusted Cash Receipts declined by $254.6 million in the first quarter of 2020 compared to the same period of 2019 primarily as a result of a decline in royalty receipts related to Mature Products, the most significant of which was Tecfidera. Cash receipts from our Growth Products increased by $78.2 million in the first quarter of 2020 compared to the same period of 2019, driven primarily by the performance of Imbruvica, the 2019 acquisition of Promacta, and 2020 acquisitions including Entyvio and the Legacy SLP Interest, both of which are included in Other Growth Products. Below we discuss the key drivers of royalty receipts from our Growth Products.
Growth Products
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Cystic fibrosis franchise Royalty receipts from the cystic fibrosis franchise, which includes Kalydeco, Orkambi, Symdeko and Trikafta, all approved for patients with certain mutations causing cystic fibrosis, declined by $7.5 million in the first quarter of 2020 compared to the same period of 2019, primarily driven by a clawback adjustment related to Vertexs agreement with the French Authorities for a national reimbursement deal for Orkambi, partially offset by continued growth in Trikafta, the newest franchise product. In the future, we expect the approval of Trikafta to be an important component of future growth in our cystic fibrosis franchise. |
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Tysabri Royalty receipts from Tysabri, which is marketed by Biogen for the treatment of multiple sclerosis, remained consistent period over period. |
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Imbruvica Royalty receipts from Imbruvica, which is marketed by AbbVie and Johnson & Johnson for the treatment of blood cancers and chronic graft versus host disease, increased by $16.6 million in the first quarter of 2020 compared to the same period of 2019, driven by continued penetration in patients with chronic lymphocytic leukemia. |
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HIV franchise Royalty receipts from the HIV franchise, which is based on products marketed by Gilead that contain emtricitabine, including Biktarvy, Genvoya, Symtuza and Truvada, among others, increased by $7.5 million in the first quarter of 2020 compared to the same period of 2019. This increase was driven by strong performance of Biktarvy, offset by decreases in sales of other combination products and decreased royalties on sales outside the United States. |
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Januvia, Janumet, Other DPP-IVs Royalty receipts from the DPP-IVs for type 2 diabetes, which includes Januvia and Janumet, both marketed by Merck & Co., remained consistent period over period. |
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Xtandi Royalty receipts from Xtandi, which is marketed by Pfizer and Astellas for the treatment of prostate cancer, increased by $7.2 million in the first quarter of 2020 compared to the same period of 2019, driven by demand in metastatic castration-resistant prostate cancer and non-metastatic castration-resistant prostate cancer. |
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Promacta Royalty receipts from Promacta, which is marketed by Novartis for the treatment of chronic immune thrombocytopenia and aplastic anemia, were $35.7 million in the first quarter of 2020. We acquired the Promacta royalty in March 2019 and recorded no royalty receipts for Promacta in the first quarter of 2019. |
Mature Products
The declines in our royalty receipts from Mature Products were primarily related to Tecfidera. Our contractual agreement covering our milestones on cumulative sales of Tecfidera up to $20 billion ended in 2018 and therefore, receipts from Tecfidera ceased after the final milestone was collected in the first quarter of 2019. We also saw declines in receipts from Lyrica and Letairis.
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Distributions to Non-Controlling Interests
Distributions to non-controlling interests increased by $119.9 million in the first quarter of 2020 compared to the same period of 2019, which negatively impacts Adjusted Cash Receipts. This increase is due to the additional 18% contractual non-controlling interest held by the Legacy Investors Partnerships that arose in the Exchange Offer. The distributions to Legacy Investors Partnerships was partially offset by a decline in royalty assets held by the Collection Trust, driven by the maturation of several royalties due to RPSFT, including Humira and Remicade.
2019 vs 2018
Adjusted Cash Receipts declined by $690.3 million in 2019 compared to 2018 primarily as a result of a decline in royalty receipts related to Mature Products, specifically Tecfidera. Our Growth Products increased by $449.6 million in 2019 compared to 2018, driven by the cystic fibrosis franchise, Imbruvica and Promacta, a royalty we acquired in 2019. Below we discuss the key drivers of royalty receipts from our Growth Products.
Growth Products
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Cystic fibrosis franchise Royalty receipts from the cystic fibrosis franchise increased by $200.5 million in 2019 compared to 2018, driven by continued growth of Symdeko. In addition, 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. For the first three quarters of 2018, we only collected cash receipts from the cystic fibrosis franchise equal to the residual royalty of 25%. |
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Tysabri Royalty receipts from Tysabri declined by $5.9 million in 2019 compared to 2018, driven by competition from new products approved to treat multiple sclerosis. Despite increased competition, Tysabri has shown resilience, highlighting the important role Tysabri plays in the multiple sclerosis treatment paradigm. |
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Imbruvica Royalty receipts from Imbruvica increased by $61.4 million in 2019 compared to 2018, driven by continued penetration in patients with chronic lymphocytic leukemia. |
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HIV franchise Royalty receipts from the HIV franchise increased by $38.6 million in 2019 compared to 2018. This increase was driven by strong performance of Truvada and Biktarvy in the United States, offset by decreases in sales of other combination products and decreased royalties on sales outside the United States. |
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Januvia, Janumet, Other DPP-IVs Royalty receipts from the DPP-IVs increased by $36.6 million in 2019 compared to 2018, driven by increased royalties from Januvia and Janumet. As part of the Merck Settlement, we agreed to forgo royalties on Januvia and Janumet for a period that expired in the quarter ending March 31, 2018. The increase reflects a full year of royalty receipts from Januvia and Janumet in 2019, compared to only a partial year of royalty receipts in 2018. |
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Xtandi Royalty receipts from Xtandi increased by $14.1 million in 2019 compared to 2018, driven by demand in metastatic castration-resistant prostate cancer and non-metastatic castration-resistant prostate cancer. |
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Promacta Royalty receipts from Promacta were $86.3 million in 2019. We acquired the Promacta royalty in March 2019 and recorded no royalty receipts for Promacta in 2018. |
Mature Products
The declines in our royalty receipts from Mature Products were primarily related to Tecfidera, Humira and Remicade. As sales-based performance targets that trigger our milestones on Tecfidera were met, we continued collecting $150 million in milestone receipts quarterly throughout 2018, with a double milestone collected in the
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first quarter of 2018. Our contractual agreement covering our milestones on cumulative sales of Tecfidera up to $20 billion ended in 2018 and therefore, receipts from Tecfidera ceased after the final milestone was collected in the first quarter of 2019. We recorded receipts from Tecfidera of $150 million in 2019 compared to $750 million in 2018, a reduction of $600 million. Our Humira and Remicade royalties also matured in June and September 2018, respectively, resulting in a reduction in royalty receipts of $499.1 million and $115.0 million, respectively, compared to 2018.
Distributions to Non-Controlling Interests
Distributions to non-controlling interests decreased by $114.6 million in 2019 compared to 2018, which impacts Adjusted Cash Receipts. This decrease reflects a decline in royalty assets held by the Collection Trust, driven by the maturation of several royalties due to RPSFT, including Humira and Remicade.
2018 vs 2017
Adjusted Cash Receipts increased by $614.6 million in 2018 compared to 2017 primarily as a result of a $441.5 million increase in royalty receipts from Growth Products, driven by the cystic fibrosis franchise, Tysabri, and Imbruvica, and a $150.0 million increase in milestone payments from Tecfidera, a Mature Product. Below we discuss the key drivers of royalty receipts from our Growth Products.
Growth Products
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Cystic fibrosis franchise Royalty receipts from the cystic fibrosis franchise increased by $186.9 million in 2018 compared to 2017, driven by growth of Symdeko. 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. For the first three quarters of 2018, we only collected cash receipts from the cystic fibrosis franchise equal to the residual royalty of 25%. |
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Tysabri Royalty receipts from Tysabri increased by $74.9 million in 2018 compared to 2017, driven by a full year of royalty receipts in 2018 compared to only three quarters of royalty receipts in 2017. We acquired our royalty on Tysabri late in the first quarter of 2017. |
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Imbruvica Royalty receipts from Imbruvica increased by $59.8 million in 2018 compared to 2017, driven by continued growth from approvals in additional indications. |
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HIV franchise Royalty receipts from the HIV franchise increased by $38.8 million in 2018 compared to 2017. This increase was driven by a strong launch of Biktarvy in the United States and performance of Truvada, offset by decreasing royalties on sales outside the United States. |
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Xtandi Royalty receipts from Xtandi increased by $19.0 million in 2018 compared to 2017, driven by demand in metastatic castration-resistant prostate cancer and non-metastatic castration-resistant prostate cancer. |
Mature Products
The increase in our royalty receipts from Mature Products were primarily related to Tecfidera, as a result of collecting five milestone payments of $150.0 million each in 2018 compared to four milestone payments of $150.0 million each in 2017.
Distributions to Non-Controlling Interests
Distributions to non-controlling interests decreased by $10.0 million in 2018 compared to 2017, which impacts Adjusted Cash Receipts. This decrease reflects the maturity of the Remicade royalty held by the Collection Trust, partially offset by the increased performance of the HIV franchise, also held by the Collection Trust.
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Adjusted EBITDA (non-GAAP)
Three months ended March 31, 2020 and 2019
Adjusted EBITDA declined by $262.7 million in the first quarter of 2020 compared to the same period of 2019, also as a result of the factors noted above in Adjusted Cash Receipts (Non-GAAP). In addition, payments for operating and professional costs, the only adjustment between Adjusted Cash Receipts and Adjusted EBITDA, increased in 2020 as a result of higher costs for professional services in connection with the Reorganization Transactions and preparation for our initial public offering.
2019 vs 2018
Adjusted EBITDA declined by $706.2 million in 2019 compared to 2018 also as a result of the factors noted above in Adjusted Cash Receipts (Non-GAAP). Payments for operating and professional costs, the only adjustment between Adjusted Cash Receipts and Adjusted EBITDA, increased in 2019 as a result of higher costs for professional services in connection with the Reorganization Transactions and preparation for our initial public offering.
2018 vs 2017
Adjusted EBITDA increased by $643.1 million in 2018 compared to 2017 also as a result of the factors noted above in Adjusted Cash Receipts (Non-GAAP). Payments for operating and professional costs, the only adjustment between Adjusted Cash Receipts and Adjusted EBITDA, declined in 2018 as a result of a decrease in payments made in connection with the Merck & Co. rebating issue during the holiday period.
Adjusted Cash Flow (non-GAAP)
Three months ended March 31, 2020 and 2019
Adjusted Cash Flow declined by $234.8 million in the first quarter of 2020 compared to the same period of 2019 primarily for the same reasons noted above in Adjusted Cash Receipts (Non-GAAP). In 2020, we paid $35.5 million to terminate our interest rate swaps executed in connection with the Reorganization Transactions, which was offset by the return of collateral, lower ongoing development stage funding payments and lower interest payments on our new credit facilities.
2019 vs 2018
Adjusted Cash Flow declined by $723.8 million in 2019 compared to 2018 for the same reasons noted above. Adjusted Cash Flow is also impacted by development-stage funding payments ongoing, which declined slightly in 2019 as co-funding arrangements are coming to an end, and offset by a large net swap collateral posted in 2019 as compared to prior year due primarily to adverse movements in the LIBOR curve.
2018 vs 2017
Adjusted Cash Flow increased by $622.3 million in 2018 compared to 2017 for the same reasons noted above. Adjusted Cash Flow is also impacted by development-stage funding payments ongoing, which declined slightly in 2018 as co-funding arrangements are no longer ramping up, and investments in non-consolidated affiliates, which increased in 2018 as a result of new investments entered into in 2018 with the Avillion Entities.
Investments Overview
Ongoing investment in new royalties is fundamental to the long-term prospects of our business. New investments provide a source of growth for our royalty receipts, supplementing growth within our existing portfolio and offsetting declines for products in our portfolio that have lost market exclusivity. We evaluate an array of royalty acquisition opportunities on a continuous basis and expect to continue to make acquisitions in the
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ordinary course of our business. Our team has established a strong track record of identifying, evaluating and investing in royalties tied to leading products across therapeutic areas and treatment modalities. We invest in approved products and development-stage product candidates that have generated robust proof of concept data. We invest in these therapies through the purchase of royalties, by making hybrid investments and by acquiring businesses with significant existing royalty assets or the potential for the creation of such assets.
During the first quarter of 2020, we invested $170.1 million in royalties and related assets, including two new investments. From 2012 through 2019, we have invested $13.0 billion in royalties and related assets, with annual cash investment ranging from a low of $458.2 million in 2015 to a high of $3.9 billion in 2014. This reflects an average of $1.6 billion of cash deployed for investments per year from 2012 through 2019. While volatility exists in the quantum of our new acquisitions on a year-to-year basis due to the unpredictable timing of new investment opportunities, we have consistently deployed significant amounts of cash when measured over multi-year periods. Our approach is rooted in a highly disciplined evaluation process that is not dictated by a minimum annual investment threshold.
Included below is a table of investment activity over each of the last eight years based on the type of investment at the acquisition date. Amounts presented in the table below reflect cash paid at the acquisition date; any associated contractual payments are reflected in the period in which the cash was paid.
($ in thousands) | ||||||||||||||||||||||||||||||||||||
Average | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||||||||||||||
Approved / marketed royalties |
$ | 869,533 | $ | 1,848,711 | $ | 269,554 | $ | 2,200,480 | $ | 1,197,210 | $ | 337,882 | $ | 468,427 | $ | 510,000 | $ | 124,000 | ||||||||||||||||||
Development-stage royalties(1)(2) |
757,643 | 445,699 | 569,592 | 220,093 | 99,242 | 120,285 | 3,428,530 | 391,287 | 786,417 | |||||||||||||||||||||||||||
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Totals |
$ | 1,627,176 | $ | 2,294,410 | $ | 839,146 | $ | 2,420,573 | $ | 1,296,452 | $ | 458,167 | $ | 3,896,957 | $ | 901,287 | $ | 910,417 | ||||||||||||||||||
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Number of new investments(3) |
4 | 8 | 7 | 3 | 2 | 1 | 6 | 2 | 4 |
(1) |
Development-stage royalties include: direct R&D funding arrangements and funding arrangements executed through our joint venture partnership with the Avillion Entities, investments in development-stage product candidates, and investments in securities primarily made in connection with royalty acquisitions from the seller. |
(2) |
In 2014, acquisitions of development-stage royalties included $3.3 billion for the acquisition of royalties on the cystic fibrosis franchise. At the time of the investment, Kalydeco was the only approved product in the franchise, while the vast majority of the value of our investment was tied to development-stage product candidates. |
(3) |
Excludes continued investments in development-stage product candidates, i.e., funding paid over time, and subsequent tranches of an accelerated royalty. |
Summary of royalty acquisition activity
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In the second quarter of 2020, we acquired a royalty on Prevymis, an approved product to prevent cytomegalovirus (CMV) infection in stem cell transplants, from AiCuris Anti-infective Cures GmbH in exchange for an upfront payment of $220 million. |
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In the first quarter of 2020, we acquired a royalty on Entyvio, an approved product for the treatment of ulcerative colitis and Crohns disease, from The General Hospital Corporation in exchange for an upfront payment of $86.6 million. |
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In the fourth quarter of 2019, we agreed to pay $320 million to acquire from Ultragenyx Pharmaceutical, Inc. a royalty on the European sales of Crysvita, an approved product for the treatment of XLH, a rare genetic orphan disease that has a profound impact on bone development in adults and children, subject to certain caps. |
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|
In the fourth quarter of 2019, we agreed to pay up to $330 million to purchase a royalty owned by Eisai Co., Ltd (Eisai), on future worldwide sales outside Japan of Tazerik (tazemetostat), a novel targeted therapy in late-stage clinical development with the potential to be approved in several cancer indications. We acquired a portion Eisais future worldwide royalties on net sales by Epizyme of Tazerik outside Japan, for an upfront payment of $110 million plus up to an additional $220 million for the remainder of the royalty upon FDA approval of Tazverik for certain indications. The FDA approved Tazverik in January 2020 for epithelioid sarcoma and in the first quarter of 2020, at which time we recognized a liability for the second tranche payment of $110 million due in November 2020. |
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In the fourth quarter of 2019, we made a $100 million investment in Epizyme. In exchange for an upfront payment of $100 million, we received (1) shares of Epizyme common stock, (2) a warrant to purchase an additional 2.5 million shares of Epizyme common stock at $20 per share over a three-year term and (3) Epizymes royalty on sales of Tazverik in Japan payable by Eisai. We also lowered Epizymes royalty on Tazverik above certain sales thresholds and granted Epizyme an 18-month put option to sell an additional $50 million of its common stock to RPIFT at then-prevailing prices, not to exceed $20 per share. Epizyme exercised its put option on December 30, 2019, which resulted in Epizyme issuing RPIFT 2.5 million shares on settlement in February 2020. |
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In the first quarter of 2019, we entered into a preferred share purchase agreement with Biohaven through which we purchased $125 million in preferred shares and may be required to purchase up to an additional $75 million in preferred shares at Biohavens option, providing us with a fixed return on redemption of two times our investment on FDA approval of Biohavens pipeline product, Nurtec ODT (rimegepant), for migraine treatment. The FDA approved Nurtec ODT (rimegepant) for the acute treatment of migraine in adults in February 2020. |
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In the first quarter of 2019, we acquired the following: (1) a royalty on Promacta, an approved product for the treatment of chronic immune thrombocytopenia and aplastic anemia, from Ligand in exchange for an upfront payment of $827 million, (2) a royalty on Eli Lillys Emgality, an approved product for the treatment of migraine, from Atlas Ventures and Orbimed for $260 million and (3) a royalty on Johnson & Johnsons Erleada, an approved product for the treatment of prostate cancer, from the Regents of the University of California for $105.4 million and potential future milestones. |
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In 2018, we acquired (1) from Zealand Pharma, future royalty streams and $85 million of potential commercial milestones on Sanofis Lixisenatide franchise in exchange for $205 million up front, (2) from Biohaven, rights to future cash flows on Nurtec ODT and vazegepant, development-stage product candidates, in exchange for $100 million in up-front R&D funding and a payment of $50 million for Biohavens common stock and (3) from Immunomedics, a tiered, sales-based royalty on Trodelvy, which was at the time a development-stage product candidate, in exchange for an up-front payment of $175 million for R&D funding and a payment of $75 million for Immunomedics common stock, acquired at a premium. |
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In 2017, we successfully acquired royalties on (1) Tysabri from Perrigo in exchange for $2.2 billion cash up front and potential future milestones, for which we subsequently paid a $250 million milestone payment to Perrigo in the first quarter of 2019 and for which we may owe a $400 million contingent milestone payment to Perrigo in the first quarter of 2021, based upon the achievement of certain conditions, (2) omecamtiv mecarbil from Cytokinetics in exchange for $100 million, including $10 million of equity in the company and (3) Onglyza, Farxiga and related diabetes products marketed by AstraZeneca, in exchange for payments made to BMS between 2018 and 2020 structured as an accelerated royalty. |
Liquidity and Capital Resources
Overview
Our primary source of liquidity is cash provided by operations. For the three months ended March 31, 2020 and 2019, we generated $471.1 million and $432.9 million, respectively, in cash provided by operations. For the
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year ended December 31, 2019, we generated $1.67 billion in cash provided by operations. For the year ended December 31, 2018, we generated $1.62 billion in cash provided by operations. We believe that our existing capital resources and cash provided by operations will continue to allow us to meet our operating and working capital requirements, to fund planned strategic acquisitions and research and development funding arrangements, and to meet our debt service obligations for the foreseeable future. We have historically operated at a low level of fixed operating costs. Our primary cash operating expenses after this offering, other than research and development funding commitments, will include interest expense, our Operating and Personnel Payments, and legal and professional fees.
We have access to substantial sources of funds at numerous banks worldwide and we may, from time to time, seek additional capital through a combination of additional debt or equity financings. Our ability to satisfy our working capital needs, debt service and other obligations, and to comply with the financial covenants under our financing agreements depends on our future operating performance and cash flow, which are in turn subject to prevailing economic conditions and other factors, many of which are beyond our control.
We have historically funded our acquisition program through free cash flow, equity contributions and debt. Our low operating costs coupled with a lack of capital expenditures and low taxes have contributed to our strong financial profile, resulting in high operating leverage and high conversion of our Adjusted Cash Receipts to Adjusted Cash Flow. We expect to continue funding our current and planned operating costs (excluding acquisitions) principally through our cash flow from operations and our acquisition program through cash flow and issuances of equity and debt. In the past, we have supplemented our available cash and cash equivalents on hand with attractive debt capital to fund certain strategic acquisitions.
As of March 31, 2020, we had total long-term debt outstanding of $5.96 billion. As of December 31, 2019 and 2018, we had total long-term debt outstanding of $6.24 billion and $6.52 billion, respectively. In February 2020, in connection with the Exchange Offer Transactions, we repaid our outstanding debt held by RPIFT in full and issued new long-term debt at RPI Intermediate FT.
Cash flows
The following table summarizes our cash flow activities:
For the three months
ended March 31, (unaudited) |
Year Ended December 31, | |||||||||||||||||||
2020 | 2019 | 2019 | 2018 | 2017 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Cash provided by (used in): |
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Operating activities |
$ | 471,104 | $ | 432,895 | $ | 1,667,239 | $ | 1,618,317 | $ | 1,418,313 | ||||||||||
Investing activities |
$ | (672,943 | ) | $ | 1,317,172 | (2,116,142 | ) | 303,424 | (1,587,707 | ) | ||||||||||
Financing activities |
$ | 542,524 | $ | (314,956 | ) | (1,191,626 | ) | (1,379,101 | ) | (123,254 | ) |
Analysis of Cash Flow Changes between the Years Ended December 31, 2019, 2018 and 2017
Operating activities
Q1 2020 v Q1 2019
Cash provided by operating activities increased by $38.2 million in the first quarter of 2020 compared to the same period of the prior year. The primary driver was an increase in royalty receipts of $15.3 million and $23.4 million increase in cash related to the termination of our swaps and interest paid under the refinanced credit facilities.
2019 vs 2018
Cash provided by operating activities increased by $48.9 million in 2019 compared to 2018, primarily as a result of a smaller amount of upfront payments related to development stage funding. In the prior year, we paid
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$284.4 million to acquire royalties on development-stage product candidates of Biohaven and Immunomedics. Partially offsetting this impact of these reduced payments in the current year was a reduction of $179.6 million on cash collections from royalty assets and other royalty cash collections primarily due to the expiration of royalties on Humira and Remicade. The declines in Mature Products were partially offset by increases in cash collections from royalties primarily on the Cystic fibrosis franchise, Promacta, Imbruvica, and the HIV franchise, as discussed in Adjusted Cash Receipts (Non-GAAP). We also posted collateral of $45.6 million in 2019 related to our interest rate swaps compared to $0.5 million in 2018 as a result of unfavorable movements in LIBOR.
2018 vs 2017
Cash provided by operating activities increased $200.0 million in 2018 compared to 2017, primarily due to increased cash collections on our royalty assets classified as financial assets. Compared to 2017, royalty receipts on the cystic fibrosis franchise and Tysabri increased by $261.8 million in aggregate as a result of receiving 100% of the royalties on cystic fibrosis franchise products from the third quarter of 2018, after a pre-existing priority debt tranche was repaid in full by the Cystic Fibrosis Foundation, and reflected a full year of royalty receipts on Tysabri compared to a partial year in 2017, when the royalty asset was acquired. Royalty receipts from Imbruvica and the HIV franchise also increased by $98.6 million in aggregate in 2018, as a result of strong sales growth. We received our first distribution from Avillion I in 2018, following the sale of its asset to Pfizer in exchange for a series of guaranteed fixed annual payments. Partially offsetting the increase cash collections on royalty assets was a $284.4 million increase in upfront development-stage funding payments due to the 2018 funding agreements with Immunomedics and Biohaven.
Investing activities
Q1 2020 v Q1 2019
Cash used in investing activities declined by $644.2 million in the first quarter of 2020 compared to the same period of the prior year, primarily due to increased acquisition activity in the prior year period. We acquired one new royalty interest in the first quarter of 2020 compared to three in the first quarter of 2019. We also paid the Tysabri milestone in the first quarter of 2019. The decline in investing activities in the first quarter of 2020 was partially offset by purchases of marketable securities, which we did not have in the comparative period.
2019 vs 2018
Cash used in investing activities in 2019 was $2.12 billion, compared to cash provided by investing activities of $303.4 million in 2018. In 2019, we made several acquisitions of financial royalty assets, totaling $1.97 billion, including the $250.0 million Tysabri milestone we paid to Perrigo. We also spent $213.0 million on investments in securities and warrants in 2019, compared to $152.8 million in 2018. As our Tecfidera agreement came to an end with the last milestone earned in December 31, 2018, we collected cash receipts on Tecfidera of $150 million in 2019 compared to $750 million for 2018.
2018 vs 2017
Cash provided by investing activities in 2018 was $303.4 million compared to cash used in investing activities in 2017 of $1.59 billion. The increase was primarily due to the $2.2 billion use of cash for the acquisition of our royalty asset on Tysabri in 2017. Due to the classification of Tecfidera as an available for sale debt security, proceeds from the satisfaction of each Tecfidera milestone contributed positively to our cash provided by investing activities. We received five milestone payments from Tecfidera in 2018 at $150 million each, compared to four milestones in 2017. The lower volume of investment activity in 2018 coupled with the higher Tecfidera milestone receipts resulted in cash inflows from investing activities. We expect that typical years in the future will include cash outflows from investing activities.
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Financing activities
Q1 2020 v Q1 2019
In the first quarter of 2020, we had cash provided by financing activities as opposed to cash used by financing activities in the comparative period. The repayment of RPIFTs outstanding debt in February 2020, including through amounts contributed by a non-controlling interest, and subsequent debt issuance resulted in net proceeds of $870.8 million. This was offset by a $119.9 million increase in distributions to non-controlling interest in the first quarter of 2020 due to the new contractual non-controlling interest held by the Legacy Investors Partnerships that arose in the Reorganization Transactions.
2019 vs 2018
Cash used in financing activities in 2019 declined by $187.5 million in 2019 compared to 2018, primarily due to decreases in distributions to noncontrolling interests and to unitholders. Distributions to non-controlling interest declined as products held by the Collection Trust are maturing.
2018 vs 2017
Cash used in financing activities in 2018 increased $1.26 billion in 2018 compared to 2017, primarily as a result of $1.1 billion in proceeds in 2017 from the issuance of long-term debt in connection with the acquisition of Tysabri.
Historical Royalty Receipts
The table below reflects royalty receipts from 2009 through 2014.
(in thousands) | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||||||
Royalty receipts |
$ | 656,803 | $ | 783,438 | $ | 1,046,990 | $ | 1,310,203 | $ | 1,493,739 | $ | 1,763,621 |
Sources of Capital
As of March 31, 2020, our cash and cash equivalents totaled $624.4 million. As of December 31, 2019 and 2018, our cash and cash equivalents totaled $283.7 million and $1.92 billion, respectively. We intend to fund short-term and long-term financial obligations as they mature through cash and cash equivalents, sales of short-term marketable securities, future cash flows from operations or the issuance of additional debt. Our ability to generate cash flows from operations, issue debt or enter into financing arrangements on acceptable terms could be adversely affected if there is a material decline in the sales of the underlying pharmaceutical products in which we hold royalties, deterioration in our key financial ratios or credit ratings, or other material unfavorable changes in business conditions. Currently, we believe that we have sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support our growth objectives.
Borrowings
New Senior Secured Credit Facilities
On February 11, 2020, in connection with the Exchange Offer Transactions (discussed earlier in this MD&A) and using funds contributed by RPI Intermediate FT and the Legacy Investors Partnerships, RPIFT repaid its outstanding debt and accrued interest, and terminated all outstanding interest rate swaps. RPI Intermediate FT, as borrower, entered into a term loan credit agreement (the Credit Agreement) with Bank of America, N.A., as administrative agent, the lenders party thereto from time to time and the other parties thereto. The new senior secured credit facilities contained in the Credit Agreement consist of a term loan A (Tranche A-1) and term loan B (Tranche B-1) in the amounts of $3.20 billion and $2.84 billion, respectively. Tranche A-1 has an interest rate of 1.50% above LIBOR and matures in February 2025. Tranche B-1 has an interest rate of 1.75% above LIBOR matures in February 2027. See Description of Material Indebtedness.
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We had the following indebtedness outstanding at March 31, 2020, and at December 31, 2019 and 2018:
Maturity |
Spread over
LIBOR(1) |
As of March 31,
(unaudited) |
As of December 31, | |||||||||||||||||
2020 | 2019 | 2018 | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||
New RPI Intermediate FT Senior Secured Credit Facilities: |
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Term Loan A Facility |
2/2025 | 150 bps | $ | 3,160,000 | $ | | $ | | ||||||||||||
Term Loan B Facility |
2/2027 | 175 bps | 2,832,900 | | | |||||||||||||||
RPIFT Senior Secured Credit Facilities: |
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Term Loan B Facility |
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Tranche B-6 |
3/2023 | 200 bps | | 4,123,000 | $ | 4,267,000 | ||||||||||||||
Term Loan A Facility |
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Tranche A-4 |
5/2022 | 150 bps | | 2,150,000 | 2,300,000 | |||||||||||||||
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Total senior secured debt |
5,992,900 | 6,273,000 | 6,567,000 | |||||||||||||||||
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Loan issuance costs |
(4,148 | ) | (1,691 | ) | (2,284 | ) | ||||||||||||||
Original issue discount |
(31,666 | ) | (33,187 | ) | (45,384 | ) | ||||||||||||||
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Total long-term debt, including current portion |
5,957,086 | 6,238,122 | 6,519,332 | |||||||||||||||||
Less: Current portion of long-term debt |
(182,128 | ) | (281,984 | ) | (281,436 | ) | ||||||||||||||
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Total long-term debt |
$ | 5,774,958 | $ | 5,956,138 | $ | 6,237,896 | ||||||||||||||
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(1) |
Borrowings under our senior secured credit facilities bear interest at a rate equal to LIBOR plus an applicable margin. |
RPIFT Senior Secured Credit Facilities (the Old Credit Facility)
The Old Credit Facility was issued by our wholly-owned subsidiary, RPIFT, and was investment grade rated. RPIFT used interest rate swap agreements to fix a portion of its floating rate debt. In February 2020, in connection with the Exchange Offer Transactions, the Old Credit Facility was repaid in full and new long-term debt was issued by RPI Intermediate FT.
Uses of Capital
Acquisitions of royalties
We acquire product royalties in a variety of ways that can be tailored to the needs of our partners. We classify our product royalty acquisitions by the following structures:
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Third-party Royalties A royalty is the contractual right to a percentage of top-line sales from a licensees use of a product, technology or intellectual property. The majority of our current portfolio consists of third-party royalties. |
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Synthetic / Hybrid Royalties A synthetic royalty is the contractual right to a percentage of top-line sales created by the owner of a therapy in exchange for funding. In many of our synthetic royalties, we also make investments in the public equity of the company, where the main value driver of the company is the product for which we concurrently acquired a royalty. |
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R&D Funding We fund R&D, typically for large biopharmaceutical companies, in exchange for future royalties and/or milestones if the product or indication we are funding is approved. |
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M&A - We acquire royalties in connection with M&A transactions, often from the buyers of biopharmaceutical companies when they dispose of the non-strategic assets of the target company |
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following the closing of the acquisition. We also seek to partner with companies to acquire other biopharmaceutical companies that own significant royalties. We may also seek to acquire biopharmaceutical companies that have significant royalties or where we can create royalties in subsequent transactions. |
Distributions to Shareholders/Unitholders
In the three months ended March 31, 2020, we made distributions of $141.8 million. For the years ended December 31, 2019, 2018, 2017 and in the three months ended March 31, 2019, Old RPI made distributions of $739.3 million, $814.4 million, $735.2 million, and $197.7 million, respectively. See Dividend Policy for a description of our dividend policy after this offering.
Debt service
In connection with our new Credit Agreement, we have substantial debt service requirements, including required annual amortization payments and payments for interest expense. As of March 31, 2020, we are required to repay the term loans under RPI Intermediate FTs senior secured credit facilities over the next five years and thereafter as follows:
(in thousands) | Term Loan Amortization | |||||||||||
Year | Tranche A-1 | Tranche B-1 | Total | |||||||||
Remainder of 2020 |
$ | 120,000 | $ | 21,300 | $ | 141,300 | ||||||
2021 |
160,000 | 28,400 | 188,400 | |||||||||
2022 |
160,000 | 28,400 | 188,400 | |||||||||
2023 |
160,000 | 28,400 | 188,400 | |||||||||
2024 |
160,000 | 28,400 | 188,400 | |||||||||
Thereafter |
2,400,000 | 2,698,000 | 5,098,000 | |||||||||
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Total (1) |
$ | 3,160,000 | $ | 2,832,900 | $ | 5,992,900 |
(1) |
Excludes discount on long-term debt of $31.7 million and loan issuance costs of $4.1 million, which are amortized through interest expense over the life of the underlying debt obligations. |
Commitments, Contingencies and Guarantees
We are currently involved in certain legal proceedings arising in the ordinary course of business and, as required, accrue an estimate of the probable costs for resolution of those claims for which the occurrence of loss is probable and the amount can be reasonably estimated. In general, estimates are developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings. Please refer to BusinessLegal Proceedings.
Certain acquisition agreements provide for future contingent payments to the seller based on the financial performance of the related pharmaceutical product generally over a multi-year period. Payments under these agreements generally become due and payable upon achievement of certain development, regulatory or commercial milestones. For example, the acquisition of both our Tysabri and Xtandi royalties included contingent purchase price payments based on timing of certain sales thresholds of the underlying products. Amounts related to these contingent milestone payments are not considered contractual obligations as they are contingent on the successful completion of certain commercial milestones.
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The table below summarizes our contractual obligations at December 31, 2019 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods.
Payments due by period | ||||||||||||||||||||
Total | < 1 year | 1-3 years | 3-5 years | > 5 years | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Long-term debt: |
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Senior secured credit facility scheduled principal payments(1) |
$ | 6,040,000 | $ | 188,400 | $ | 376,800 | $ | 376,800 | $ | 5,098,000 | ||||||||||
Scheduled interest payments(1) |
1,114,268 | 175,593 | 379,098 | 355,075 | 204,502 | |||||||||||||||
Funding commitments(2) |
302,284 | 258,547 | 28,737 | 8,000 | 7,000 | |||||||||||||||
Operating and Personnel Payments(3) |
17,102 | 17,102 |
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See
footnote 3 |
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See
footnote 3 |
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See
footnote 3 |
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Total(4) |
$ | 7,473,654 | $ | 639,642 | $ | 784,635 | $ | 739,875 | $ | 5,309,502 | ||||||||||
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(1) |
Scheduled principal payments reflect the amortization schedule under the New Senior Secured Credit Facilities. With the termination of all interest rate swaps in connection with the Reorganization Transactions in February 2020, all long-term debt bears interest at variable rates. Interest payments on floating rate debt are estimated using interest rates in effect at December 31, 2019. |
(2) |
Funding commitments include amounts we are contractually obligated to fund in respect of R&D funding arrangements with our development partners and committed capital related to our equity method investment in the Avillion entities. As our committed capital requirements are based on phases of development, the completion of which is highly uncertain, only the capital required to fund the current stage of development is included in the above table. |
Excluded is the potential future funding commitment of up $110.0 million related to the third tranche of the Eisai funding arrangement, for which the obligation is not triggered until certain contingencies are resolved. Also excluded is the second tranche funding related to our Biohaven Preferred Shares. |
(3) |
Historically, the Operating and Personnel Payments for Old RPI are payable in advance in quarterly installments, increasing by 5% annually on a compounded basis. |
After completion of the Reorganization Transactions, a new Management Agreement became effective in February 2020. Under the Management Agreement, RPI will pay quarterly Operating and Personnel Payments in respect of operating and personnel expenses to the Manager or its affiliates equal to 6.5% of the Adjusted Cash Receipts for such quarter and 0.25% of the GAAP value of our security investments, including equity securities and derivative financial instruments, as of the end of such quarter. Commitments shown above relate solely to the Operating and Personnel Payments payable in respect of the first quarter of 2020. Because the fee is variable and based on projected cash receipts, no amounts are fixed beyond the amount paid for the first quarter of 2020. |
(4) |
Excluded from the table are amounts related to various obligations with no specific contractual commitment or maturity, including any future obligations related to the settlement of our interest rate swap agreements. |
Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain development, regulatory approval or commercial milestones.
Other off-balance sheet arrangements
We do not have relationships with structured finance or special purpose entities that were established to facilitate off-balance sheet arrangements. Therefore, we are not exposed to any financing, liquidity, market or credit risk that may arise if we had engaged in such relationships. We consolidate variable interest entities when we are the primary beneficiary.
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Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses. Certain of these policies are considered critical as they have the most significant impact on the Companys financial condition and results of operations and require the most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain. On an ongoing basis, we evaluate our estimates that are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of expenses that are not readily apparent from other sources. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our most critical accounting policies relate to our royalties and the full descriptions can be found in Note 2 to the consolidated financial statements. Similarly, the most significant judgments and estimates applied by management are associated with the measurement of our royalty assets classified as financial assets. The application of the prospective approach to measure income from our financial royalty assets requires managements judgment in forecasting the expected future cash flows of the underlying royalties. These estimates and judgments arise because of the inherent uncertainty in predicting future events.
Income and provision recognition from royalty assets classified as financial assets can be impacted by managements assumptions around (1) product growth rates and sales trends in outer years, (2) the geographical allocation of annual sales data from sell-side equity research analysts models, (3) product and pricing mix for franchised products, (4) the strength of patent protection, including anticipated entry of generics, and (5) estimates of the duration of the royalty. The amounts and duration of forecasted expected future cash flows are largely influenced by sell-side equity research analyst coverage, commercial performance of the product and the royalty duration.
For example, based on the level of detail in sell-side equity research analyst models, management may be required to apply assumptions to the sales forecasts to estimate the quarterly and geographical allocation from annual sales projections and, for franchised products, to estimate the product mix and pricing mix, or to exclude from projections sales forecasts for development-stage product candidates or indications. When royalty-bearing pharmaceutical products have no coverage, limited sell-side equity research analyst coverage or where sell-side equity research analyst estimates are not available for the full term of our royalty, particularly for the later years in a products life, management uses reasonable judgment to make assumptions about the growth or decline in the sales of these products based on historical data, publicly available information for the marketer, industry data and market trends, and managements own expertise.
The royalty duration is important for purposes of accurately measuring interest income over the life of a financial royalty. In making assumptions around the royalty duration for terms that are not contractually fixed, management considers the strength of existing patent protection, expected entry of generics, geographical exclusivity periods and potential patent term extensions tied to the underlying product. It is common for royalty durations to expire earlier or later than anticipated due to unforeseen positive or negative developments over time, including with respect to the granting of patents and patent term extensions, the invalidation of patents, litigation between the party controlling the patents and third party challengers of the patents, the ability of third parties to design around or circumvent valid patents, the granting of regulatory exclusivity periods or extensions, timing for the arrival of generic or biosimilar competitor products, changes to legal or regulatory regimes affecting intellectual property rights or the regulation of pharmaceutical products, product life cycles, and industry consolidations.
A shortened royalty term can result in a reduction in the effective interest rate, a decline in income from financial royalty assets significant reductions in royalty payments compared to expectations, or a permanent
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impairment. Changes in sell-side equity research analyst consensus forecasts directly impact future interest income and recognition of any provision income or expense in the same manner.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements for additional information on recently issued accounting standards.
Quantitative and Qualitative Disclosures about Market Risk
Market Risk
We are subject to certain risks which may affect our results of operations, cash flows and fair values of assets and liabilities, including volatility in foreign currency exchange rates, interest rate movements. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because our cash equivalents are primarily held in short-term money market funds and the nature of our marketable securities is generally short-term. Although we currently do not have any interest rate swaps or foreign currency forward contracts in place, we have historically managed the impact of foreign currency exchange rate and interest rate risk through various financial instruments, and derivative instruments. We only use derivatives strategically to hedge existing interest rate exposure and to minimize volatility in cash flow and earnings arising from our exposure to foreign currency risk. We do not enter into derivative instruments for trading or speculative purposes. The counterparties to these contracts are all major financial institutions.
Foreign Currency Exchange Risk
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. The current portion of Financial royalty assets, net and Accrued royalty receivable account for the most common types of transactional exposure. Because we are entitled to royalties on worldwide sales for various products, there is an underlying exposure to foreign currency as the marketer converts payment amounts from local currencies to U.S. dollars using a quarterly average exchange rate. Therefore, cash received may differ from the estimated receivable based on fluctuations in currency. In addition, certain products pay royalties in currencies other than U.S. dollars, which also creates foreign currency risk primarily with respect to the Euro, Canadian Dollar, Swiss Franc and Japanese Yen, as our functional and reporting currency is the U.S. dollar. To manage foreign currency exchange risk, we periodically utilize non-deliverable forward exchange contracts. We do not currently have any foreign exchange contracts in place.
Interest Rate Risk
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. As of March 31, 2020, we held cash and cash equivalents of $624.4 million, of which $257.1 million was cash, $332.6 million was invested in commercial paper and certificates of deposit and $34.7 million was invested in interest-bearing money market funds. We also held $568.0 million in marketable securities at March 31, 2020 invested in U.S. government securities, corporate debt securities and certificates of deposit.
As of December 31, 2019, we had cash and cash equivalents of $283.7 million, of which $19.9 million was cash, $41.5 million was invested in commercial paper and certificates of deposit and $222.3 million was invested in interest-bearing money market funds. In addition, as of December 31, 2019 we had $57.0 million invested in
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U.S. government securities and certificates of deposit. As of December 31, 2018, we had cash and cash equivalents of $1.92 billion, of which $1.82 billion was invested in interest-bearing money market funds, which have maturities of less than 90 days. We held no marketable securities as of December 31, 2018.
The objectives of our investment policy are the preservation of capital and fulfillment of liquidity needs. In order to maximize income without assuming significant market risk, we maintain our excess cash and cash equivalents in money market funds and marketable securities, largely composed of investment grade, short to intermediate term fixed income and debt securities. Because of the short term maturities of our cash equivalents and the short term nature of our marketable securities, we do not believe that a decrease in interest rates would have any material negative impact on the fair value of our cash equivalents or marketable securities.
Our debt portfolio is managed on a consolidated basis and management makes financing decisions to achieve the lowest cost of debt capital and to maximize portfolio objectives. As of December 31, 2019, 33% of our debt was effectively fixed with a total weighted average interest rate of 3.69% across the portfolio. As of December 31, 2018, 44% of our debt was effectively fixed with a total weighted average interest rate of 4.07% across the portfolio. Assuming the current level of borrowings, a 25 basis-point adverse movement in LIBOR would have increased annual interest expense by $10.4 million and $9.2 million for the year ended December 31, 2019 and 2018, respectively. In connection with the Reorganization Transactions, we terminated all of our interest rate swaps and currently do not have in place any derivative hedging our debt.
In addition, it is expected that LIBOR will be phased out by the end of 2021. The Alternative Reference Rates Committee of the Federal Reserve Board has identified the Secured Overnight Financing Rate (SOFR) as the preferred alternative to LIBOR. As our Senior Secured Credit Facilities utilize LIBOR as a factor in determining the applicable interest rate, the expected discontinuation and transition may require us to renegotiate certain terms of the agreement to replace LIBOR with a new reference rate, which could increase the cost of servicing our debt and have an adverse effect on our results of operations and cash flows.
Credit and Counterparty Risk
We have credit risks that are generally related to the counterparties with which we do business. We are subject to credit risk from our royalty assets, our receivables and our derivative contracts. The majority of our royalty assets and receivables arise from contractual royalty agreements that pay royalties on the sales of underlying pharmaceutical products in the United States, Europe and the rest of the world, with concentrations of credit risk limited due to the broad range of marketers responsible for paying royalties to us and the variety of geographies from which our royalties on product sales are derived. The products in which we hold royalties are marketed by leading biopharmaceutical industry participants, including, among others, AbbVie, Amgen, Bristol-Myers Squibb, Celgene, Gilead Sciences, Johnson & Johnson, Lilly, Merck & Co., Pfizer, Novartis, Biogen-Idec, Roche/Genentech and Vertex. The individual marketers making up the largest balance of our current portion of Financial royalty assets, net were Vertex as of March 31, 2020, Biogen as of December 31, 2019 and Vertex as of December 31, 2018, accounting for 24%, 18% and 23%, respectively. Refer to Understanding Our Results of Operations within this MD&A for a discussion of the marketers or royalty payors accounting for greater than 10% of our total income and other revenues for the years ended December 31, 2019, 2018, and 2017, and for the periods ended March 31, 2020 and 2019.
We monitor the financial performance and creditworthiness of the counterparties to our royalty agreements and to our derivative contracts so that we can properly assess and respond to changes in their credit profile. To date, we have not experienced any significant losses with respect to the collection of income or revenue on our royalty assets or on the settlement of our derivative contracts. Of the $2.1 billion and $2.9 billion of nominal interest rate swaps agreements in effect at December 31, 2019 and 2018, the maximum exposure with any single counterparty accounted for 29% and 31% of our total interest rate swap portfolio, respectively. If a counterparty becomes bankrupt, or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding.
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DESCRIPTION OF MATERIAL INDEBTEDNESS
Senior Secured Credit Facilities
On February 11, 2020, RPI Intermediate FT, as borrower, entered into a term loan credit agreement (the Credit Agreement) with Bank of America, N.A., as administrative agent, the lenders party thereto from time to time and the other parties thereto. The facility is secured by collateral of RPI Intermediate FT and the other loan parties thereunder, including (i) all existing and after-acquired assets of RPI Intermediate FT and any guarantor that becomes a party to the Credit Agreement, (ii) a first priority security interest over the beneficial ownership interest of RPI Intermediate FT, (iii) 100% of RPI Intermediate FTs proportional beneficial ownership interest of Old RPI and (iv) certain other equity interests to the extent acquired by RPI Intermediate FT after the closing date of the Credit Agreement, or to the extent held by any guarantor that becomes a party to the Credit Agreement, in each case subject to customary exclusions as set forth in the Credit Agreement. The collateral does not include any assets of Old RPI or any of its subsidiaries. The maturity dates and interest rates applicable to certain tranches of term loans under the Credit Agreement are described in Managements Discussion and Analysis of Financial Condition and Results of OperationsSources of CapitalNew Senior Secured Credit Facilities. The interest rate on the Tranche A-1 term loan is 1.50% above LIBOR, and the Tranche A-1 term loan will mature in February 2025. The interest rate on the Tranche B-1 term loan is 1.75% above LIBOR, and the Tranche B-1 term loan will mature in February 2027.
The Credit Agreement contains covenants that, among other things, restrict our ability to make certain distributions, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates or make investments. The Credit Agreement also contains customary events of default. We may voluntarily prepay in whole or in part the outstanding principal amounts of term loans under our Credit Agreement at any time prior to the maturity dates, with certain voluntary prepayments that may be subject to a customary prepayment premium governed by the Credit Agreement.
Financial Covenants
The Credit Agreement contains financial covenants requiring us to maintain (i) a Consolidated Leverage Ratio at or below 4.00 to 1.00 (or at or below 4.50 to 1:00 following a Qualifying Material Acquisition) of Consolidated Funded Debt to Consolidated EBITDA (each as defined and calculated with the ratio level and certain adjustments as set forth in the Credit Agreement) and (ii) a Consolidated Coverage Ratio at or above 2.50 to 1.00 of Consolidated EBITDA minus Consolidated Capital Expenditures to Consolidated Charges (each as defined and calculated with certain adjustments as set forth in the Credit Agreement).
Management believes that Adjusted EBITDA is important in analyzing our liquidity because it is the key component of certain material covenants contained within our credit agreement and it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. As of June 11, 2020, we were in compliance with all of these covenants. Adjusted EBITDA for the quarter ended March 31, 2020 was $356.4 million. Our Consolidated Leverage Ratio, defined as total funded indebtedness divided by Consolidated EBITDA for the most recent four consecutive fiscal quarters then ended, was 3.66x at March 31, 2020.
Amortization of Term Loans
We are required to repay the term loans under RPI Intermediate FTs senior secured credit facilities over five years as follows:
(in thousands) | Term loan amortization | |||||||||||
Year | Tranche A-1 | Tranche B-1 | Total | |||||||||
2020 |
$ | 160,000 | $ | 28,400 | $ | 188,400 | ||||||
2021 |
160,000 | 28,400 | 188,400 | |||||||||
2022 |
160,000 | 28,400 | 188,400 | |||||||||
2023 |
160,000 | 28,400 | 188,400 | |||||||||
2024 |
160,000 | 28,400 | 188,400 |
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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 industrys leading therapies, including Imbruvica, Januvia, Kalydeco, Trikafta, Truvada, Tysabri and Xtandi. We fund innovation in the biopharmaceutical industry both directly and indirectlydirectly 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 three 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 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 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
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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 in leading biopharmaceutical therapies. In our first decade of operations, we acquired royalties in 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 (Imbruvica, Trodelvy, Tazverik, Xtandi), multiple sclerosis (Tecfidera, Tysabri) and migraine (Emgality, Nurtec ODT (rimegepant), vazegepant), among others. We evaluate an array of royalty acquisition opportunities on a continuous basis and expect to continue to make acquisitions in the ordinary course of our business. 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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Our Portfolio
Our current portfolio includes royalties on more than 45 commercial products and three 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. Management believes that end market sales of the therapies in our portfolio are important drivers of our financial performance as a substantial portion of our royalties are based on end market sales. In addition, end market sales are a strong indicator of the importance of the therapies to both patients and the marketers. The following table provides an overview of our current portfolio of royalties:
Notes:
1. As reported by respective product marketers
2. Includes contributions from royalties on worldwide sales of Vertexs Orkambi and Symdeko
3. Includes contributions from other emtricitabine products including Atripla, Complera, Descovy, Emtriva, Genvoya, Odefsey, Stribild and Symtuza; royalties are received on the emtricitabine portion of sales only
4. Includes modest contributions from other DPP-IV products including Eucreas, Galvus, Glyxambi, Jentadueto, Kombiglyze, Nesina, Onglyza and Tradjenta
5. Royalty Pharma did not receive any royalty receipts for the first quarter of 2019
6. Crysvita acquired in December 2019
7. Excludes duplicate end-market sales where we have multiple royalties on the same product: Kombiglyze, Nesina, Onglyza and Soliqua
8. Other Growth Products include Alogliptin, Bosulif, Cimzia, Conbriza/Fablyn/Viviant, Emgality, Entyvio (acquired January 2020), Erleada, Farxiga/Onglyza, Prevymis (acquired April 2020), Lexiscan, Mircera, Myozyme, Priligy and Soliqua
9. Receipts from Tecfidera milestone payments are presented as Proceeds from available for sale debt securities on the Statement of Cash Flows
10. Other Mature Products include Alvimopan and Targretin, Exagen/Joncia, Prezista, Remicade, Retavase, Rotateq, Savella, Thalomid and TOBI
11. Depending on the results of Pfizers Phase III PENELOPE-B trial of Ibrance, we may be eligible to receive approval-based fixed milestone payments of $250 million.
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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 generated end-market sales of more than $1 billion, including seven therapies that each generated end-market sales of more than $3 billion. This represents more than three times the estimated median number of blockbuster therapies marketed by the top 15 global biopharmaceutical companies by sales. The therapies within our royalty portfolio are marketed by leading global biopharmaceutical companies for whom these products are important sources of revenue. Given the marketers significant focus on and investment in these products, they are motivated to invest substantial resources in driving continued sales growth. The significant number of blockbuster products in our portfolio reflects our ability to consistently identify and acquire royalties on therapies that address major unmet patient needs and that have the potential to generate significant end-market revenues. The graphic below highlights our exposure to industry-leading blockbuster products compared to the median of the top 15 global biopharmaceutical companies by sales.
Industry Leading Exposure to Blockbuster Products with 2019 Estimated End Market Sales over $1Bn
1. |
Royalty Pharma receives royalties on emtricitabine sales only |
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. These therapies are delivered to patients across both primary and specialty care settings. As shown below, in the year ended December 31, 2019, while the top five therapies accounted for 56% of 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. In addition, the contribution of our top three and five royalties to our 2019 royalty receipts, at 41% and 56%, respectively, are in-line with the median contributions of the top three and five selling therapies to total revenues across the largest 15 global biopharmaceutical companies. The royalties in our portfolio entitle us to payments based directly on the top-line sales of the associated therapies, rather than the profits of these therapies. As such, the diversification of our profits directly reflects the diversification of our royalty receipts, rather than varying levels of product-level profitability, as would typically be expected within a biopharmaceutical company. The graphic below shows the diversification within our 2019 cash royalty receipts by product, therapeutic area and marketer.
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2019 Royalty Receipts By
Product (1) |
2019 Royalty Receipts By
Therapeutic Area (1) |
2019 Royalty Receipts By
Marketer (1) |
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|
|
|
Notes: |
|
1. |
Excludes receipts from Tecfidera milestone payments, which are presented as Proceeds from available for sale debt securities on the Statement of Cash Flows. |
2. |
Comprised of royalty receipts from Truvada, Genvoya, Biktarvy and several other emtricitabine products. |
3. |
Comprised of royalty receipts from Januvia, Janumet and several other DPP-IVs. |
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 Vertexs 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. In addition to royalties in marketed therapies, our portfolio also includes royalties on three development-stage product candidates, all of which are currently in Phase III clinical trials or awaiting regulatory approval.
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, we have 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. Of the 22 therapies in our portfolio that each have 2019 end-market sales of more than $1 billion, approximately half of those therapies were acquired since the end of 2011. Based on our portfolio as of June 2013, we estimated that we would generate royalty receipts of $0.3 billion in 2019. However, through successful new royalty acquisitions and outperformance of existing products, we were able to generate royalty receipts of $2.3 billion and Adjusted Cash Receipts of $2.1 billion in 2019.
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The chart below compares the royalties in our portfolio related to therapies with end-market sales of more than $1 billion as of the end of 2011, the end of 2015 and today. The significant number of new blockbusters in our current portfolio reflects our consistent ability to replenish our portfolio with leading biopharmaceutical assets.
Consistent Record of Building and Refreshing Portfolio with Blockbuster Products |
(1) |
Royalty Pharma receives royalties on emtricitabine sales only. |
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. For example, at the time of our acquisition in 2006, consensus forecasts for worldwide Humira sales for 2010 were $3.7 billion. In 2010, actual reported sales for the year were $6.5 billion and the product reached peak sales of approximately $20 billion in 2018. In 2012 when we acquired our initial interest in the earn-out payments related to Tecfidera from Fumapharm AG, consensus forecasts for worldwide Tecfidera sales for 2015 were $1.6 billion. In 2015, actual reported sales for the year were $3.6 billion and in 2019 reported sales were $4.4 billion. When we acquired our Imbruvica royalty rights from Quest Diagnostics in 2013, consensus forecasts for worldwide Imbruvica sales for 2018 were $2.7 billion. In 2018, actual reported sales for the year were $4.5 billion and Imbruvica is currently expected to achieve sales of approximately $10 billion by 2024. Lastly, at the time of our acquisition in 2014, consensus forecasts for Vertexs cystic fibrosis franchise in 2024 were approximately $6.5 billion, primarily driven by expectations for Orkambi. Sales results for the franchise underperformed relative to street consensus in the near-term, but following approval of Trikafta, sales for the franchise are now expected to reach nearly $9 billion by 2024.
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 cash flow 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. In addition, we intend to pay a dividend to our shareholders, which we intend to grow over time, and to pay down debt following new acquisitions as is required to maintain our targeted investment grade credit rating profile. We believe that our unique and highly efficient business model, our proven track record of cash flow generation and our clear capital allocation priorities position us to generate significant ongoing 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. However, the industry also faces a number of challenges, including the risks associated with early-stage drug discovery, growing drug development costs and high fixed manufacturing and marketing infrastructure costs. As a result, most biopharmaceutical companies focus on a limited number of core therapeutic areas and treatment modalities where they have strong research and development expertise or an existing commercial presence.
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. There has been a dramatic acceleration of medical research in recent years, leading to a better understanding of the molecular origins of disease and the identification of new potential targets for therapeutic intervention. This has created research and development opportunities for new drugs on which we can ultimately acquire royalties. Technological innovation has led to the creation of number of new treatment modalities, expanding the ways in which unmet medical needs can be addressed. New biopharmaceutical companies have been created at a significant pace over recent years, with a total of more than 180 biotechnology companies completing initial public offerings in the United States between 2015 and 2019, more than any other industry sector. These new companies, along with existing biopharmaceutical companies, have significant capital needs that can be met through the non-dilutive sale of existing or synthetic royalties. Significant industry competition, particularly within attractive therapeutic areas, rewards companies that can rapidly execute broad clinical development programs, making access to capital at the significant scale that we can provide a key differentiator. The significant pace of innovation, resulting from these industry trends, is reflected in FDA drug approval rates, which reached an all-time high in 2018. These new drug approvals grow the universe of drugs in which we can acquire royalties. Within the distributed industry model of drug development, there is the potential for multiple royalties to be created from each new drug that reaches the market. As a result of our significant scale and highly flexible business model, we believe that we are uniquely positioned to capitalize on these compounding growth drivers to grow our royalty receipts and create long-term value for our shareholders. The graphic below summarizes these growth drivers.
Multiple Compounding Tailwinds Driving Growth for Royalty Pharma
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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, extending from research institutions through small and mid-cap biotechnology companies to leading global biopharmaceutical companies. We believe our broad reach positions us to capitalize on the significant ongoing innovation across the biopharmaceutical ecosystem. 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.
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 our $18 billion of acquisitions of biopharmaceutical royalties and related assets. In total, our team has over 100 years of experience investing in biopharmaceutical royalties. Our team comes from leading institutions such as Bank of America, Citi, Davis Polk & Wardwell, Evercore ISI, Gibson Dunn, Goodwin Procter, Goldman Sachs, J.P. Morgan, Lazard, McKinsey, Morgan Stanley, Sanofi and Wyeth Pharmaceuticals. Our team has an extensive network of relationships across pharmaceutical and biotech companies, universities, research institutions, and foundations which it uses to identify and source attractive acquisition opportunities. We believe the depth of our teams expertise enables us to achieve continued success in the application of our differentiated business model.
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 1996 there have been over 250 biopharmaceutical royalty transactions, representing an aggregate transaction value of approximately $36 billion of cash. We are the leader within the space, having executed transactions with an aggregate transaction value of $18 billion of cash. We estimate this to represent an estimated market share of more than 50% by value. 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%. Over recent years, we have extended our market share relative to our
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competitors. Between 2004 and 2011 we executed transactions with an aggregate value of $5.1 billion of cash, representing market share of more than 40%. From 2012 through the first quarter of 2020, we executed over 25 transactions with an aggregate value of $13.2 billion of cash, representing market share of approximately 60%.
Given the scale of our business relative to our competitors, we have a particularly strong leadership position within large royalty transactions. Since 1996, there have been 13 transactions with an aggregate value of more than $500 million each. From 1996 to June 2020, we executed 11 of the 13 royalty transactions, for a total aggregate transaction value of $13 billion of cash and estimated market share of more than 80%, in this transaction size range. The charts below show our market share since 1996 across all transaction sizes and in royalty transactions with an aggregate value of more than $500 million. As a long tenured pioneer in the royalty asset class and the clear market leader, we have established an unmatched level of experience and credibility that further enhances our ability to acquire royalties that provide exposure to leading biopharmaceutical therapies.
Royalty Market by Estimated Acquiror Share
Total Transaction Value Since 1996 | Transaction Value of Deals >$500MM Since 1996 | |||
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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. As of May 15, 2020, we had an aggregate of $6.0 billion of secured credit facilities in place with a blended cost of 1.8%, based on LIBOR. This compelling cost of debt is made possible by the significant scale and diversification of our business. We also have a well-established track record with banks and other institutional debt investors, having raised a total of $42.4 billion in the term loan markets since issuing our first rated term debt in 2007. Our successful history in the debt markets, which provides an important source of funding, gives us deep access to low cost capital. This funding source provides us with significant capacity for future acquisitions and provides the potential for significant ongoing shareholder value creation, by delivering shareholders returns in excess of our overall cost of capital. We believe it provides a meaningful competitive advantage relative to our peers.
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. The majority of biopharmaceutical companies focus on a limited number of core therapeutic areas and treatment modalities where they have strong research and development expertise or an existing commercial presence. In contrast, our model is agnostic to both therapeutic area and treatment modality, and allows us to acquire royalties on the most innovative and high potential therapies across the biopharmaceutical industry, including multiple drugs per therapeutic class. In the
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early 2000s, we first identified TNF inhibitors as an exciting class with enormous growth potential and later made investments in Humira, Remicade and Cimzia. This approach mirrors our acquisitions in other high growth opportunities, such as HIV (Biktarvy, Genvoya, Prezista, Truvada), multiple sclerosis (Tecfidera, Tysabri), diabetes (Farxiga, Janumet, Januvia, Onglyza), prostate cancer (Erleada, Xtandi) and migraine (Emgality, Nurtec ODT (rimegepant), vazegepant).
We acquire royalties in a number of ways including by acquiring existing royalties, acquiring new synthetic royalties and by funding R&D in exchange for future royalties. During the early years of our business, we focused our acquisitions on royalties in approved biopharmaceutical products. However, as we grew and diversified our business, we began acquiring royalties on development-stage product candidates that had demonstrated strong clinical proof of concept. These development-stage transactions have broadened our landscape of potential opportunities and have enabled us to acquire royalties in a less competitive environment where we are able to leverage our both our scientific expertise and financial strength. From 2012 through the first quarter of 2020, we acquired royalties on development-stage product candidates for a total transaction value of $6.1 billion of cash. Products underlying $5.6 billion of these acquisitions have already been approved, leaving us with $0.2 billion of total cash transaction value associated with products that are still in development. In recent years, we have also increased the scope of our investments beyond royalties to include additional assets such as equity investments and the acquisition of businesses with significant royalty assets. 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.
Royalty Acquisitions by Approval Status | Royalty Acquisitions by Approval Status | |
2012 Q1 2020 (At Acquisition) | 2012 Q1 2020 (Current) |
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Includes Epizyme equity investment; Tazverik not yet approved in Japan |
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Includes Ibrance R&D funding; depending on the results of Pfizers Phase III PENELOPE-B trial of Ibrance, we may be eligible to receive approval-based fixed milestone payments of $250 million |
We seek to provide a win-win solution for our partners. In our transactions with our partners across the biopharmaceutical ecosystem, we aim to create favorable outcomes for all parties involved. 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. Examples of the benefits our transactions provide for our partners include:
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Academic institutions, research hospitals and charitable foundations / not-for-profits: We provide monetization of significant royalty assets, which can facilitate the diversification of the endowments or asset portfolios of these institutions and/or provide funds for the support of ongoing scientific research or major capital projects. |
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Biotech and other small/mid-cap companies: We provide non-dilutive and other forms of capital in exchange for existing or new synthetic royalties on approved products or development-stage product candidates, while allowing our partners to retain operational control of their therapies. This capital can be used for the ongoing development and/or commercialization of the product portfolios within these companies. We can provide financing at a scale that allows companies to accelerate development programs by conducting simultaneous clinical trials that would otherwise have been conducted sequentially due to financing constraints. We believe our capital can also provide valuable external validation for emerging companies. |
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Global biopharmaceutical companies: We provide non-dilutive capital to fund the development of specific products and/or indications. This capital often facilitates development activities that would not otherwise have taken place due to research budget constraints at these companies. In addition, we enable our partners to monetize non-strategic passive royalties, freeing up capital for core business reinvestment. |
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. We take a systematic approach to sourcing and monitoring opportunities, which enables us to efficiently identify potential new assets and to then move rapidly through discussions with partners. We often monitor therapeutic areas or specific products that we believe are attractive for many years in order to be positioned to act quickly when investment opportunities arise. As a result, we have been able to acquire royalties on many of the most attractive drug classes or therapeutic areas over the past three decades. For example, when we began discussions with the Cystic Fibrosis Foundation, in 2014 regarding the potential sale of its royalty on Vertexs cystic fibrosis franchise, we were able to conduct diligence, negotiate terms, arrange $2.7 billion of financing and close the transaction in approximately four weeks due to the strength of our team and acquisition process. Building upon this extensive experience, in 2019, we reviewed more than 200 potential new royalty transactions and completed a total of seven of these. These figures reflect both our broad funnel of opportunities as well as the disciplined approach to capital deployment that we take when making new acquisitions.
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. This is reflected in the rate of new molecular entity and original biologic approvals by the FDA, which has increased from an average of approximately 23 per year during the period from 2000 to 2010 to 51 per year during the period from 2017 to 2019. 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
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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. From 2012 through the first quarter of 2020, we acquired royalties on development-stage product candidates for a total transaction value of $6.1 billion of cash. Products underlying $5.6 billion of these acquisitions have already been approved, leaving us with $0.2 billion of total cash transaction value associated with products that are still in development. The significant proportion of our development-stage product candidate acquisitions which have already been approved reflects our ability to consistently identify development-stage product candidates with attractive risk-reward profiles.
Further expand our market opportunity by acquiring royalties in connection with M&A transactions. We acquire royalties in connection with M&A transactions, often from the buyers of biopharmaceutical companies when they dispose of the non-strategic assets of the target company following the closing of the acquisition. As a result of out-licensing or other transactions, many biopharmaceutical companies own royalties on approved therapies or development-stage product candidates. In biopharmaceutical acquisitions, the focus of an acquirer is typically on strategic assets over which the target has operational control, rather than on passive financial assets such as royalties, leading may acquirors of biopharmaceutical companies to dispose of the royalties acquired with the strategic asset. Over the past five years, there has been an average of more than $220 billion per year of biopharmaceutical merger and acquisition activity. We also seek to partner with biopharmaceutical companies to acquire other biopharmaceutical companies that own significant royalties. Given our significant financial resources, including our public equity currency, our deep experience in royalty acquisitions and our proven transaction capabilities, we believe that we are the ideal partner for strategic acquirers in such situations. We may also seek to acquire biopharmaceutical companies that have significant royalties or with products that could be out-licensed to create a royalty.
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. Our recent multi-party transaction with Eisai and Epizyme, in which we acquired Eisais rights to worldwide, ex-Japan royalties on Tazverik, acquired Epizymes rights to Japan royalties on Tazverik and acquired publicly traded equity in Epizyme, highlights this opportunity.
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 team work, 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. We will also continue to recruit and develop talented team members who will supplement our existing employees.
Biopharmaceutical Industry Overview
Significant Industry Growth Supported by Unprecedented Innovation
The global biopharmaceutical industry is a large and growing market. 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%, 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,
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including population growth, increasing life expectancy and the growth of the middle classes in emerging markets. The number of people in the world aged 60 or over will reach nearly 2.1 billion by 2050, according to projections by the United Nations, up from less than 1 billion today. Increasing economic affluence, coupled with healthcare reforms to expand access to medical treatments in key developing regions, is expected to increase demand for healthcare treatments and biopharmaceutical products. The chart below shows projected worldwide prescription drug sales between 2019 and 2024.
Projected Prescription Drug Sales 2019E 2024E
Source: EvaluatePharma
A dramatic acceleration of medical research in recent years has led to a better understanding of the molecular origins of disease and the identification of new potential targets for therapeutic intervention. This has created research and development opportunities for new drugs. Technological innovation has also led to the creation of new treatment modalities, including ribonucleic acid (RNA), based therapies, cell therapies and gene therapies that are expected to drive significant growth over the coming years. This innovation is supported by significant investment in research and development by a broad range of institutions, including the National Institutes of Health (NIH), universities and hospitals, biotechnology companies and large global biopharmaceutical companies. In total, an estimated $300 billion was invested in biopharmaceutical research and development in 2019, including approximately $200 billion by the biopharmaceutical industry and $100 billion in additional investments by government, academic and research institutions, including the NIH. The biopharmaceutical sector is the highest contributor to global R&D spend, contributing approximately 19% of global R&D, which is significantly higher than other industries, including computer hardware (16%), consumer discretionary (16%), industrials (12%), software (9%), semiconductors (9%), communication (7%) and materials (5%).
At the same time, the funding required to develop innovative new biopharmaceutical therapies has increased, with the average development cost of a newly-approved drug currently exceeding $1.4 billion. These development costs are putting pressure on the research budgets of the large global biopharmaceutical companies and increasing the level of funding required by development-stage biotechnology companies.
The significant pace of biopharmaceutical innovation and growing cost of drug development has been reflected in the level of capital markets activity that has been observed over recent years. Between 2015 and 2019, more than $170 billion has been raised by biotechnology companies in the U.S. public capital markets. This includes $21 billion raised by companies across more than 180 initial public offerings, reflecting an average of 36 IPOs of biotechnology companies per year over the last five years. By comparison, the technology sector has seen an average of approximately 34 IPOs annually, and no other sector has seen an average of 15 or more IPOs annually over the same period. There are now approximately 500 public biotechnology companies in the U.S. with a market capitalization of less than $20 billion.
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Increased innovation within the biopharmaceutical industry is also reflected in FDA approval rates, which have accelerated over recent years. FDA approvals reached an all-time high in 2018 with 59 novel drugs and biologics approved. Over the past 15 years, the average number of NDA and BLA approvals for novel small molecule and biologic drugs, also referred to as new molecular entities, or NMEs, has increased by approximately 40% over each five year period. Between 2015 and 2019, the average number of annual NME approvals was 44, up from 32 between 2010 and 2014 and 22 between 2005 and 2009. Additionally, the average number of total NDA and BLA approvals, which include both the approval of new therapies as well as the approval of new indications for already approved therapies, continues to grow with an average of 330 approvals annually between 2016 and 2018, an increase of approximately 50% compared to the period between 2000 and 2010.
The significant ongoing growth and capital needs of the biopharmaceutical market provides a substantial tailwind for our business. In addition to driving the growth of our addressable market, it is also significantly expanding the universe of potential partners with which we can make investments as well as increasing the total amount of capital required for the ongoing development of biopharmaceutical pipelines broadly. Given our leadership position within the biopharmaceutical royalty sector, we believe that we are well-positioned to continue to capitalize on these long-term growth trends.
The Role of Royalties in the Development of Biopharmaceuticals
The increasing complexity of drug development has changed the traditional model of the fully integrated pharmaceutical company which conducts all activities, from early-stage research, through clinical development, to commercialization, in-house. An industry model has emerged in which universities and other academic institutions focus on basic research and license technology to companies for further development. A biotechnology company may in-license technology from universities, add value through applied research and early-stage clinical development and then either commercialize the product, once approved, or out-license the enhanced technology or development-stage product candidate to a large biopharmaceutical company for late-stage clinical development and commercialization.
Royalties play a vital role in this decentralized model of drug discovery and development. When technologies, development-stage product candidates or approved therapies are transferred from one entity to another, a royalty is often created as compensation for the seller. A single drug can generate several royalties, reflecting the contributions of multiple stakeholders in the development process, including, for example, an academic inventor and a small biotechnology company that performed early scientific and development work for a drug that is ultimately commercialized by a multinational pharmaceutical company. The graphic below highlights the distributed model of drug development, and shows how multiple royalties can be created as potential new therapies move through the development value chain.
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Royalty Creation is Intrinsic To The Distributed Model of Drug Development
The Creation of Synthetic Royalties
Biotechnology companies require large amounts of capital to fund their operations given the significant cost of drug development and commercialization. This capital has historically been raised in the form of private and public equity, as well as convertible debt for later stage companies. Alternatively, companies have out-licensed their assets in order to secure funding in the form of upfront payments and other consideration from partners. However, equity capital has a number of drawbacks, including shareholder dilution, inconsistent availability due to the volatility of the public markets, limited scale and high cost. In addition, the out-licensing of assets to raise capital leads to a loss of operational control of the associated assets.
This significant need for capital, coupled with a frequent preference to retain ownership and operational control of key assets, has increasingly led to biotechnology companies raising capital by creating and selling royalties on existing products within their portfolios, known as synthetic royalties. This form of capital raising provides companies with a number of advantages over traditional sources of funding, including a lack of shareholder dilution, a lower cost relative to equity capital, and the ability to maintain operational control of assets. While synthetic royalties have historically been a limited contributor to overall biotechnology capital raising, we believe they have become a topic of significant interest to the boards and management teams of many biotechnology companies. As a result, we believe that synthetic royalties are emerging as a major source of capital for biopharmaceutical companies and will be an important driver of our growth over the coming years.
The Opportunity for Royalty Pharma across the Biopharmaceutical Ecosystem
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:
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Academic Institutions, Research Hospitals and Not-for-ProfitsAcademia has long been a source of innovation for the biopharmaceutical industry, conducting basic research which results in new technologies that are licensed to companies for further development. As a result, these institutions often receive royalties on development-stage product candidates or approved products. If these therapies are, |
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or are expected to be, highly successful, these royalties can grow to represent a significant portion of an institutions total assets. These institutions therefore often look to monetize such royalties in order to facilitate the diversification of their asset portfolios and/or to provide funds for the support of ongoing scientific research or major capital projects. |
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Small and Mid-Sized Biotechnology CompaniesCompanies within the biopharmaceutical industry continue to require significant capital to fund research, develop pipelines and commercialize products. For example, unprofitable publicly listed U.S. biotechnology companies are expected to require a total of greater than $70 billion in capital over the next three years. While equity has historically been the primary capital source for cash flow negative biotechnology companies, this source of capital is expensive, particularly if a company believes their equity does not reflect the true future prospects of their business. In addition, companies may not be able to access the full funding required for their development programs in a single equity offering, which can lead to a financing overhang and/or the staging of clinical programs to match available capital. As a result, royalty financing is emerging as an important source of non-dilutive financing. |
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Global Biopharmaceutical CompaniesGiven the increasing cost of developing new therapies, large global biopharmaceutical companies face significant pressures in managing their research budgets while at the same time investing in new therapies that will address patient needs and grow their revenues. As a result, these companies will grant economics such as synthetic royalties in exchange for sharing the cost of a clinical trial, efficiently managing R&D expense. In addition, as a result of acquisitions and other transaction activities, large biopharmaceutical companies often end up owning passive royalties on therapies being developed or commercialized by other parties. These royalties are typically viewed as non-strategic financial assets that can be monetized to provide funds that can be redeployed for other strategic activities. |
Our Approach
We are a leading funder of innovation across the biopharmaceutical industry and the partner of choice for royalty collaborations. 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 have a strong base of institutional knowledge of important therapeutic areas and key industry trends. 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.
We take a disciplined approach in assessing opportunities and seek to acquire exposure to therapies based on the following key product characteristics:
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Clinically validated: therapies that have received regulatory approval or have strong clinical proof-of-concept data that gives us confidence in the clinical and commercial profile. |
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High unmet need: therapies that address areas of significant unmet medical need that also represent large commercial opportunities. |
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Significant benefits to patients: therapies that have potential to disrupt or significantly enhance the treatment paradigm for patients and physicians based on compelling clinical data. |
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Unique competitive positioning: therapies that are well-positioned to be leaders in their respective categories and are expected to maintain a competitive advantage in the long-term. |
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Growth potential: therapies where we see strong long-term potential, based on our in-depth evaluation and in-house expertise. |
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Strong marketer: therapies marketed by biopharmaceutical companies that have the resources, capabilities and commitment to successfully develop them and maximize their commercial potential. |
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IP: therapies that have strong patent portfolios and offer durable, long-term cash flows. |
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Attractive value proposition: therapies that we believe provide value-add to the healthcare system. |
Our focus is to create significant long-term value for our shareholders by acquiring both approved and development-stage product candidates through a variety of structures. In evaluating these acquisition opportunities, we focus on the following financial characteristics:
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Long duration cash flows: we prioritize long-duration assets over short-duration assets that may boost near-term financial performance. The durability of our cash flows also allows us to add leverage to our portfolio, enhancing returns and providing capital that we can use to acquire additional assets. |
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Attractive risk-adjusted returns: we focus on generating attractive returns on our investments on a risk-adjusted basis. We do not target the same return for all assets and evaluate opportunities across the risk spectrum. |
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Growth and scale: we seek assets that are accretive to our long-term growth profile and additive to our overall scale. |
We conduct extensive due diligence when evaluating potential new opportunities. We have end-to-end capabilities that span clinical and commercial analysis, valuation and transaction structuring. We have a highly focused and experienced team that conducts proprietary primary market research, forms its own views on the clinical and commercial outlook for the product, and builds its own financial models, allowing us to generate direct insights and allowing us to take significant accountability and ownership for our investments. We invest significant time and resources across all levels of the organization, including senior leadership, in the evaluation of potential opportunities.
Classification of Our Royalty Acquisitions
Royalty Acquisitions by Approval Status
We classify our royalty acquisitions by the approval status of the therapy at the time of acquisition:
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Approved ProductsWe acquire royalties in approved products that generate predictable cash flows and may offer upside potential from unapproved indications. Since inception in 1996 and through 2019, we have deployed $12 billion of cash to acquire royalties on approved products. From 2012 through 2019, we acquired $7.0 billion of royalties on approved products. |
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Development-Stage Product CandidatesWe acquire royalties on development-stage product candidates that have demonstrated strong clinical proof of concept. From 2012 through 2019, when we began acquiring development-stage product candidates, we have deployed $6.1 billion of cash to acquire royalties on development-stage product candidates. |
While we classify our acquisitions in these two broad segments, several of our acquisitions of royalties on approved products were driven by the long-term potential of these products in other, unapproved indications. For example, when we first acquired our royalty asset in Humira in 2006, we classified it as an approved investment. At the time, it was approved for the treatment of rheumatoid arthritis, psoriatic arthritis and ankylosing spondylitis and was generating approximately $2 billion in global sales. Since then, Humira has been approved for many other indications and achieved global sales of over $20 billion in 2018.
Similarly, some of our royalty acquisitions in development-stage product candidates are for products that are approved in other indications. For example, when we acquired the cystic fibrosis franchise for $3.3 billion in 2014, the only approved product was Kalydeco, which was only approved for use in approximately 5% of cystic
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fibrosis patients and sold approximately $370 million in 2013. Given that the vast majority of the value of our investment was attributable to development-stage product candidates, we classified this as a development-stage product candidate acquisition. Since 2014, three other combination products have been approved, and now the cystic fibrosis franchise addresses approximately 90% of cystic fibrosis patients. In 2019, the cystic fibrosis franchise generated total revenues of $4.0 billion and is expected to generate more than $8.9 billion in 2024.
Royalty Acquisition by Structure
We acquire royalties in a variety of ways that can be tailored to the needs of our partners. We classify our acquisitions according to the following structures.
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Third-party RoyaltiesA royalty is the contractual right to a percentage of top-line sales from a licensees use of a product, technology or intellectual property. The majority of our current portfolio consists of royalties that had been previously created by other parties prior to our acquisition. Examples of our key growth products that were acquired through third party royalties include the cystic fibrosis franchise, the HIV franchise, Xtandi, Promacta and Crysvita. |
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Synthetic / Hybrid RoyaltiesA synthetic royalty is the contractual right to a percentage of topline sales created by the developer and/or marketer of a therapy in exchange for funding. In many of our synthetic royalty acquisitions, we also make investments in the equity of the company, where the main value driver of the company is the product on which we concurrently acquired a royalty. Examples of our key growth products that were acquired through synthetic / hybrid royalties include Tazverik, Nurtec, Trodelvy, and omecamtiv mecarbil. |
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R&D FundingWe fund R&D, typically for large biopharmaceutical companies, in exchange for future royalties and/or milestones if the product or indication we are funding is approved. Examples of our products that were acquired through R&D Funding include Bosulif and Soliqua. |
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M&AWe acquire royalties in connection with M&A transactions, often from the buyers of biopharmaceutical companies when they dispose of the non-strategic assets of the target company following the closing of the acquisition. We also seek to partner with companies to acquire other biopharmaceutical companies that own significant royalties. We may also seek to acquire biopharmaceutical companies that have significant royalties or where we can create royalties in subsequent transactions. Examples of our key growth products that were acquired in connection with M&A transactions include Tysabri, Imbruvica, and Januvia/Janumet. |
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Annual Royalty Acquisitions Made Over Time
Since inception in 1996 through 2019, we have deployed cash to acquire a total of $18 billion in biopharmaceutical royalties, representing more than 50% of all royalty-based acquisitions. From 2012 through 2019, we acquired $13.0 billion in royalties and related assets, with annual cash investment ranging from a low of $458.2 million in 2015 to a high of $3.9 billion in 2014. This reflects an average of $1.6 billion of new royalty acquisitions per year from 2012 through 2019. While our investment pace is uneven from year to year due to the unpredictable timing of new royalty acquisition opportunities, we have consistently invested significant amounts of cash when measured over multi-year periods. Our approach is rooted in a highly disciplined evaluation process that is not driven by a minimum annual capital deployment threshold. For example, in 2018, we invested $839 million in cash for royalties of and finished the year with $1.9 billion in cash. In 2019, we invested $2.3 billion in cash for royalties and finished the year with $283.7 million in cash. Being patient and selective is a hallmark of our disciplined investment process and a key driver of our success.
Annual Cash Deployed For Royalty Acquisitions From 2012 Through 2019
Summary of 2017 - 2019 Royalty Acquisition Activity
In 2019, we deployed $2.3 billion of cash and acquired royalties on therapies and development-stage product candidates including Crysvita from Ultragenyx, Tazverik from Eisai and Epizyme, Promacta from Ligand, Emgality from Atlas Ventures and Orbimed and Erleada from the Regents of the University of California.
In 2018, we deployed $0.8 billion of cash and acquired royalties on therapies and development-stage product candidates including the Lixisenatide franchise from Zealand Pharma, Nurtec ODT and vazegepant from Biohaven and Trodelvy from Immunomedics. Additionally, in connection with the royalty acquisitions, we made equity investments in Biohaven and Immunomedics.
In 2017, we deployed $2.4 billion of cash and acquired royalties on therapies and development-stage candidates including Tysabri from Perrigo, omecamtiv mecarbil from Cytokinetics and Onglyza, Farxiga and related diabetes therapies marketed by AstraZeneca from Bristol Myers Squibb. Additionally, in connection with the acquisition of royalties on omecamtiv mecarbil, we made an equity investment in Cytokinetics.
Select Examples of Our Royalty Acquisitions
We have a consistent and long-standing track record of identifying and acquiring royalties on market-leading therapies, at significant scale and under accelerated timelines. We believe that we differentiate ourselves
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by offering creative and customized transaction structures that benefit all counterparties. The following are select examples across various times in our history which demonstrate our ability to navigate scale, speed and complexity in multiple transaction scenarios:
Acquisition of the Cystic Fibrosis Foundations Royalty Asset on Vertex Pharmaceuticals Cystic Fibrosis Franchise
In November 2014, we acquired the Cystic Fibrosis Foundations royalties on worldwide sales of Vertexs cystic fibrosis franchise for $3.3 billion. Vertexs cystic fibrosis franchise is comprised of a combination of therapies that now address approximately 90% of patients with the disease. The Cystic Fibrosis Foundation (CFF) played an integral role in the funding of research for this portfolio and, in turn, was entitled to a royalty on worldwide sales of certain cystic fibrosis (CF) therapies developed by Vertex. We first invested in CF in 1999 when we acquired a royalty on Novartis TOBI, an inhalable antibiotic. Over the following decade, we closely tracked developments in the space while fostering an active dialogue with key stakeholders, including the CFF given its leadership role in early-stage clinical funding for CF therapies. In 2008, when Vertexs first CF therapy (Kalydeco) achieved promising initial Phase II data, we approached the CFF to discuss their royalty asset. Although discussions did not progress, we continued to closely monitor developments in the CF clinical landscape and more specifically on Vertexs portfolio while also maintaining an active dialogue with the CFF. In 2014, after positive Phase III data for another Vertex CF therapy (Orkambi), we again engaged with the CFF.
In 2014, the vast majority of the value of the CFFs royalty was attributable to development-stage product candidates in Vertexs CF pipeline. In addition, the CFF had entered into two prior capped royalty transactions that meant that the CFF was entitled to no cash flow from its royalty for two years and only modest cash flow in years three and four. Acquiring and financing the CFF royalty transaction would have been very challenging for any counterparty that did not have our level of financial resources and experience. Based on our experience and prior relationship with the foundation, we believed that we had a strong understanding of the CFFs objectives and concerns for a potential transaction. Based on this, we structured a transaction to allow for the CFF to share in future upside above a specified sales threshold.
Our deep understanding of the CF market and of the development-stage product candidates in Vertexs portfolio allowed us to gain high conviction about executing a transaction of this unprecedented scale, for an asset with no cash flow and significant clinical, regulatory and commercial risk remaining, all within a short execution window. At the time of the deal, the $3.3 billion transaction was approximately four times the size of our largest royalty transaction to date and more than 10 times larger than any individual royalty transaction executed by one of our competitors. We were able to quickly agree on terms with the CFF, and our deep capital markets experience allowed us to secure a $2.7 billion loan that enabled us to close the acquisition in a matter of weeks. Our unparalleled scale and execution experience in the royalty sector, coupled with our rigorous, but streamlined, internal processes enabled us to provide the CFF with a high degree of deal certainty despite the complexities of the transaction.
The liquidity provided by our transaction enabled the CFF to expand its efforts to develop new lifesaving therapies, ensure that the best possible care and patient programs are available for patients with CF and their families, and pursue new opportunities to one day develop a lifelong, permanent cure for the disease. Research and medical funding at the organization has more than doubled over the past seven years from $87 million in 2012 to approximately $220 million in 2019, with the number of research awards and supported CF clinical trials also more than doubling over the same period. These grants were used to fund 64 clinical trials in 2019, up from 28 in 2012. Since our royalty acquisition in 2014 when only Kalydeco was approved, three more royalty-bearing products in Vertexs portfolio have been approved (Orkambi, Symdeko and Trikafta), expanding the eligible CF population for Vertex therapies from approximately 5% of patients to approximately 90% of patients today, and extending the estimated duration of our royalties through 2037, 23 years after our initial royalty acquisition.
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Three-Way Royalty and Equity Transaction with Epizyme and Eisai Relating to Tazverik
In November 2019, we acquired Eisais royalties on future worldwide sales of Epizymes oral EZH2 inhibitor, Tazverik, outside Japan for a total of up to $330 million. Concurrently, we paid $100 million to Epizyme in exchange for Epizyme common stock, Epizymes royalty on sales of Tazverik in Japan payable by Eisai, and warrants to purchase $50 million of additional common stock. We also lowered Epizymes royalty on Tazverik above certain sales thresholds and granted Epizyme a put option to sell an additional $50 million of common stock to us, which it has since exercised. In connection with the transaction, our CEO joined the Board of Directors at Epizyme. We believe that Tazverik, which was approved by the FDA for epithelioid sarcoma in January 2020, has the potential to be an important therapy in multiple types of cancer.
Due to a previous licensing agreement, Epizyme owed a royalty to Eisai on worldwide sales of Tazverik outside of Japan, and received a royalty from Eisai on future Japan sales. Having access to detailed due diligence on Tazverik from our Epizyme equity transaction greatly facilitated our purchase of Eisais royalty. We structured the purchase of its Tazverik royalty as an upfront payment of $110 million, plus up to an additional $220 million upon FDA approval for certain indications.
We believe that this transaction demonstrates our differentiated ability to access attractive opportunities from our network and create innovative structures to meet the needs of multiple stakeholders. Our access to in-depth due diligence at Epizyme gave us a high level of conviction to purchase a royalty asset in Tazverik ahead of FDA approval and common equity of Epizyme. Our creative transaction structure provided win-win solutions for both Eisai and Epizyme. We facilitated Eisais monetization of a passive financial asset and we helped Epizyme lower the royalty owed on sales of Tazverik, while supporting their clinical and commercial investments. In turn, we gained unique exposure to a first-in-class therapy with blockbuster sales potential via multiple royalties and an equity investment.
Acquisition of Memorial Sloan-Kettering Cancer Centers Neupogen/Neulasta Royalty
In 2004 and 2005, we acquired Memorial Sloan-Kettering Cancer Centers (MSKCC) royalty asset in Amgens Neupogen/Neulasta, a stimulant of white blood cell production that is used to reduce the risk of infection for cancer patients receiving various forms of chemotherapy, for a total of $405 million. These blockbuster marketed therapies were in the early stages of a transition from Neupogen to the longer-lasting version, Neulasta. MSKCC is a leading cancer research center, and at the time was preparing to expand its footprint and build the largest research center in New York City. However, the illiquid Neupogen/Neulasta royalty asset relative to MSKCCs total endowment represented a significant percentage of total endowment assets. Under the agreements with Royalty Pharma, MSKCC sold 80% of its interest in U.S., European and certain other foreign royalties across two separate transactions for upfront cash payments totaling $405 million, which provided the organization access to the capital required to build the new facility. In addition, as part of the agreement, MSKCC made an equity investment in Royalty Pharma and remains an equity investor 15 years later.
Through our creative and customized transaction structuring, MSKCC received immediate cash to fund a significant capital project to benefit patients, retained some exposure to Neupogen/Neulastas commercial performance, and became an investor in Royalty Pharma, giving MSKCC exposure to a diversified portfolio of market-leading therapies that would provide it with ongoing cash flows for more than 20 years after the Neupogen/Neulasta royalties expired. We added a market-leading cancer treatment to our portfolio and added a prominent industry participant as an investor in our Company.
Our Portfolio
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. Our current portfolio includes more than 45 commercial products and three development-stage product candidates.
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Commercial Products
The key royalties in our portfolio related to marketed products include the ones listed below. Descriptions of estimated royalty expiration dates are based on managements estimated patent expiry dates (which may include estimated patent term extensions) or estimates of the dates on which the royalties otherwise expire and are based on each products key geographies; duration may differ in other geographies. Royalty expiration dates can change due to patent, regulatory, commercial or other developments. In addition, the royalties in our portfolio are subject to the underlying contractual agreements from which they arise and may be subject to reductions or other adjustments in accordance with the terms of such agreements.
Cystic fibrosis franchise
Our cystic fibrosis franchise consists of our right to receive royalty payments on the sale of various products marketed by Vertex Pharmaceuticals for use in the treatment of cystic fibrosis, including Kalydeco (ivacaftor), Orkambi (lumacaftor and ivacaftor), Symdeko (tezacaftor and ivacaftor) and Trikafta (elexacaftor/ivacaftor/tezacaftor). In October 2019, Trikafta received FDA approval for the treatment of cystic fibrosis in people ages 12 years and older who have an F508del mutation. Trikafta is also currently under review by the EMA. Together, Vertexs cystic fibrosis franchise represents the leading treatments for cystic fibrosis, providing a treatment option for approximately 90% of cystic fibrosis patients.
We added the cystic fibrosis franchise to our portfolio in November 2014. We estimate that our royalties on Kalydeco will expire in 2027, on Orkambi will expire in 2030, on Symdeko will expire in 2031-2033 and on Trikafta will expire in 2037. Total global end market sales for our cystic fibrosis franchise during 2019 were approximately $4.0 billion and we generated $425 million in related royalty receipts over the same period. Global end market sales of the cystic fibrosis franchise are projected to grow to approximately $8.9 billion in 2024, according to EvaluatePharma.
Tysabri
Tysabri (natalizumab) is a monoclonal antibody marketed by Biogen for the treatment of relapsing forms of multiple sclerosis, including clinically isolated syndrome, relapsing-remitting disease and active secondary progressive disease. Tysabri competes in the high efficacy segment of the multiple sclerosis market, often reserved for patients with aggressive disease at onset and patients who have failed front-line therapies.
We added Tysabri to our portfolio in February 2017. Our right to receive royalties is perpetual. Total global end market sales for Tysabri during 2019 were approximately $1.9 billion and we generated $333 million in related royalty receipts over the same period. Global end market sales of Tysabri are projected to be approximately $1.6 billion in 2024, according to EvaluatePharma.
Imbruvica
Imbruvica (ibrutinib) is a small molecule Brutons tyrosine kinase inhibitor marketed by AbbVie and Janssen / Johnson & Johnson that is approved for the treatment of various B-cell cancers, including chronic lymphocytic leukemia (CLL), mantle cell lymphoma, Waldenstrom macroglobulinemia (a type of non-Hodgkin lymphoma) and marginal zone lymphoma, as well as the treatment of chronic graft-versus-host disease. Imbruvica is being studied in additional ongoing trials, with a recent sNDA filed to expand the label to include the combination with Rituxan (rituximab) for first-line treatment of patients with CLL who are 70 years old or younger.
We added Imbruvica to our portfolio in July 2013. We estimate that our royalties will expire in 2027-2029. Total global end market sales for Imbruvica during 2019 were $5.7 billion and we generated $271 million in related royalty receipts over the same period. Global end market sales of Imbruvica are projected to grow to approximately $10.0 billion in 2024, according to EvaluatePharma.
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HIV franchise
Our HIV franchise consists of our right to receive royalty payments on the sale of various products, including Atripla, Biktarvy, Complera, Descovy, Emtriva, Genvoya, Odefsey, Stribild, Symtuza and Truvada, which have been approved for the treatment and prevention of human immunodeficiency virus infection and acquired immune deficiency syndrome (HIV). Gilead is the marketer for the products in our HIV franchise.
We added the HIV franchise to our portfolio starting in July 2005. We estimate that our royalties will expire in 2021. Total global end market sales for the products in our HIV franchise during 2019 were approximately $16.4 billion and we generated $263 million in related royalty receipts over the same period.
Januvia, Janumet, other DPP-IVs
Our interests in DPP-IV inhibitors consist of our right to receive royalty payments on the sale of various products, including Januvia (sitagliptin) / Janumet (sitagliptin and metformin); Onglyza (saxagliptin) / Kombiglyze (saxagliptin and metformin); Qtern (dapagliflozin and saxagliptin); Galvus (vildagliptin) / Eucreas (vildagliptin and metformin); Tradjenta (linagliptin) / Jentadueto (linagliptin and metformin); and Nesina (alogliptin), which have been approved for the treatment of Type 2 diabetics in substitution of, or in addition to, insulin therapy. Merck is the marketer for Januvia / Janumet; AstraZeneca is the marketer for Onglyza / Kombiglyze; AstraZeneca is the marketer of Qtern; Novartis is the marketer for Galvus / Eucreas; Boehringer Ingelheim and Eli Lilly are the marketers for Tradjenta / Jentadueto; and Takeda is the marketer for Oseni, Kazano and Nesina.
We added the DPP-IV inhibitors to our portfolio in June 2011. Our royalties on Januvia and Janumet will expire in 2022 and we estimate that our royalties on the other DPP IVs will expire in 2020-2022. Total global end market sales for the DPP-IV inhibitors during 2019 were approximately $9.4 billion and we generated $143 million in related royalty receipts over the same period.
Xtandi
Xtandi (enzalutamide) is an oral, small molecule androgen receptor inhibitor marketed by Pfizer and Astellas for the treatment of prostate cancer. Xtandi was approved in 2012 for metastatic prostate cancer patients who failed chemotherapy, in 2014 for the treatment of pre-chemotherapy metastatic prostate cancer, in 2018 for the treatment of non-metastatic prostate cancer and in 2019 for the treatment of metastatic castration-sensitive prostate cancer. Xtandi is under review by the EMA for the treatment of patients with hormone-sensitive metastatic prostate cancer. Additionally, Xtandi is currently undergoing a Phase III trial for the treatment of patients with biochemically-recurrent high-risk non-metastatic hormone-sensitive prostate cancer with data expected in 2020.
We added Xtandi to our portfolio in March 2016. We estimate that our royalties will expire in 2027-2028. Total global end market sales for Xtandi during 2019 were approximately $3.5 billion and we generated $120 million in related royalty receipts over the same period. Global end market sales of Xtandi are projected to grow to approximately $4.8 billion in 2024, according to EvaluatePharma.
Promacta
Promacta is an oral, small molecule activator of the thrombopoietin receptor used to increase the number of platelets in the blood, marketed by Novartis for the treatment of chronic immune thrombocytopenia and aplastic anemia.
We added Promacta to our portfolio in March 2019. We estimate that our royalties will expire in 2025-2027. Total global end market sales for Promacta during 2019 were approximately $1.4 billion and we generated $86 million in related royalty receipts over the same period. Global end market sales of Promacta are projected to be approximately $1.0 billion in 2024, according to EvaluatePharma.
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Tazverik
Tazverik (tazemetostat) is a first-in-class, oral EZH2 inhibitor marketed by Epizyme approved for the treatment of epithelioid sarcoma. Tazverik was approved for the treatment of epithelioid sarcoma in the United States in January 2020. Tazverik is also being studied in additional ongoing trials, with a recent NDA filed to expand the label to include the treatment of patients with relapsed or refractory follicular lymphoma. The FDA has set a PDUFA target action date of June 18, 2020 for this indication.
We added Tazverik to our portfolio in November 2019. We estimate that our royalties will expire in 2034-2036. Global end market sales of Tazverik are projected to grow to approximately $0.6 billion in 2024, according to EvaluatePharma.
Crysvita
Crysvita (burosumab) is a monoclonal antibody against fibroblast growth factor 23 marketed by Ultragenyx and Kyowa Kirin that is approved for the treatment of X-linked hypophosphatemia (XLH), a rare genetic orphan disease that impacts bone development in adults and children.
We added a royalty on Crysvita sales in Europe to our portfolio in December 2019. Our royalties expire when we receive aggregate royalties equal to 1.9 times our purchase price if that happens prior to December 31, 2030, and otherwise when we receive aggregate royalties of 2.5 times our purchase price. We estimate that our royalties will expire in 2033-2036. Total global end market sales in Europe for Crysvita during 2019 were approximately $81 million. Global end market sales of Crysvita are projected to grow to approximately $1.2 billion in 2024, according to EvaluatePharma.
Nurtec ODT
Nurtec ODT is an oral, small molecule calcitonin gene-related peptide (CGRP) receptor antagonist marketed by Biohaven Pharmaceuticals for the acute treatment of migraine. Nurtec ODT is also currently undergoing a Phase III trial for the prevention of migraine, with data expected in the first quarter of 2020.
We added Nurtec ODT to our portfolio in June 2018. We estimate that our royalties will expire in 2034-2036. Global end market sales of Nurtec ODT are projected to grow to approximately $0.9 billion in 2024, according to EvaluatePharma.
Trodelvy
Trodelvy is a novel, first-in-class antibody-drug conjugate for various solid cancers, including metastatic triple-negative breast cancer.
We added Trodelvy to our portfolio in January 2018. Our right to receive royalties is perpetual. Global end market sales of sacituzumab govitecan are expected to grow to approximately $1.4 billion in 2024, according to EvaluatePharma.
Development-Stage Product Candidates
The key royalties and other related assets in our portfolio are based on the following development-stage product candidates. These development-stage product candidates have not yet been approved, and therefore have not generated any royalties (and we have not generated any related royalty receipts) to date.
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Vazegepant
Vazegepant is an intranasal, small molecule CGRP receptor antagonist in clinical development by Biohaven Pharmaceuticals for the acute treatment and prevention of migraine. Vazegepant reported positive top-line results in a pivotal Phase 2/3 study for the acute treatment of migraine in December 2019 and Biohaven announced in March 2020 that vazegepant will advance into a Phase 3 clinical trial.
We added vazegepant to our portfolio in June 2018. We estimate that our royalties will expire in 2034-2036.
Omecamtiv mecarbil
Omecamtiv mecarbil is an oral, small molecule cardiac myosin activator in Phase III clinical development by Amgen and Cytokinetics for the treatment of heart failure with reduced ejection fraction. Omecamtiv mecarbil is the subject of a comprehensive Phase III clinical trials program comprised of GALACTIC-HF, a large, Phase III global cardiovascular outcomes study, and METEORIC-HF, a Phase III clinical trial designed to evaluate the effect of treatment with omecamtiv mecarbil compared to placebo on exercise capacity. Omecamtiv mecarbil is expected to be approved in the United States in 2022.
We added omecamtiv mecarbil to our portfolio in 2017. We estimate that our royalties will expire in 2032-2033.
PT027
PT027 is an investigational fixed dose combination of the inhaled corticosteroid, budesonide, and albuterol, a short-acting beta-2 agonist for the treatment of asthma.
In 2018, we agreed to fund up to approximately $105 million over multiple years to fund a portion of the costs for Phase III clinical trials of Avillion II, who simultaneously entered into a co-development agreement with AstraZeneca to advance PT027 through a global clinical development program in exchange for a series of deferred payments and success-based milestones.
Ibrance
Ibrance (palbociclib) is an oral, small molecule cyclin-dependent kinase 4/6, inhibitor marketed by Pfizer. Ibrance was approved by the FDA in 2015 for the treatment of metastatic hormone receptor positive breast cancer. The PENELOPE-B Phase III trial is ongoing, with results expected in the second half of this year.
In January 2016, we partnered with Pfizer to provide up to $300 million in funding for the ongoing Phase III clinical trials, the PALLAS and PENELOPE-B trials, of Ibrance (palbociclib) for the adjuvant treatment of breast cancer.
On May 29, 2020, Pfizer reported that the independent data monitoring committee for the PALLAS trial had concluded after the recent interim analysis that the PALLAS trial is unlikely to show a statistically significant improvement in the primary endpoint of invasive disease-free survival. The PENELOPE-B trial is ongoing with results expected in the second half of this year. If the PENELOPE-B trial, which is studying Ibrance (palbociclib) in a higher risk group of patients who receive chemotherapy prior to surgery, is successful and upon approval of Ibrance in the United States or certain major markets in the European Union based on the PENELOPE-B trial, we will be entitled to receive approval-based fixed milestone payments of $250 million.
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The table below provides a summary of the estimated royalty expiration and the royalty rates for our key products:
Product |
Estimated Royalty Expiration(1) |
Royalty Rate(5) |
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Cystic fibrosis franchise | 2037(2) | For combination therapies, sales are allocated equally to each of the active pharmaceutical ingredients; tiered royalty ranging from single digit to sub-teen percentages on annual worldwide net sales of ivacaftor, lumacaftor and tezacaftor, and mid-single digit percentages on annual worldwide net sales of elexacaftor; 50% of royalties on annual worldwide net sales above $5.8 billion are shared with the Cystic Fibrosis Foundation | ||
Tysabri | Perpetual | Contingent payments of 18% on annual worldwide net sales up to $2.0 billion and 25% on annual worldwide net sales above $2.0 billion | ||
Imbruvica | 2027-2029 | Tiered royalties in the mid-single digits on annual worldwide net sales | ||
HIV franchise | 2021(3) | Royalties in the single digit percentages on annual worldwide net sales varying by product depending on contribution of emtricitabine to the total | ||
Januvia and Janumet | 2022 | Royalties in the low single digit percentages on annual worldwide net sales | ||
Xtandi | 2027-2028 | Royalties slightly less than 4% on annual worldwide net sales | ||
Promacta | 2025-2027 | Tiered royalty ranging from 4.7% to 9.4% on annual worldwide net sales | ||
Tazverik | 2034-2036 | Royalties in the mid-teen percentages on annual worldwide net sales, stepping down on annual worldwide net sales above certain sales thresholds | ||
Crysvita | 2033-2036(4) | 10% royalty on EU, UK and Switzerland annual worldwide net sales | ||
Trodelvy | Perpetual | 4.15% royalty on annual worldwide net sales up to $2 billion, declining stepwise based on sales tiers to 1.75% on annual worldwide net sales above $6 billion | ||
Nurtec ODT and Vazegepant |
2034-2036 | 2.1% royalty on annual worldwide net sales up to $1.5 billion; 1.5% royalty on annual worldwide net sales above $1.5 billion | ||
Omecamtiv mecarbil | 2032-2033 | 4.5% royalty on annual worldwide net sales | ||
PT027 | 2030(6) | Tiered royalties in the low-single digits on annual worldwide net sales (7) |
(1) |
Dates shown are based on managements estimated patent expiry dates (which may include estimated patent term extensions) or estimates of the dates on which the royalties otherwise expire and are based on each products key geographies; duration may differ in other geographies. Royalty expiration dates can change due to patent, regulatory, commercial or other developments. |
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(2) |
Year shown represents Trikafta; estimated royalty expiration for Kalydeco is 2027, for Orkambi is 2030, and for Symdeko is 2031-2033. |
(3) |
Represents the patent expiration date in the United States, as patents outside the United States have expired. |
(4) |
Royalties expire when we receive aggregate royalties equal to 1.9 times our purchase price if that happens prior to December 31, 2030, and otherwise when we receive aggregate royalties of 2.5 times our purchase price. |
(5) |
The royalties in our portfolio are subject to the underlying contractual agreements from which they arise and may be subject to reductions or other adjustments in accordance with the terms of such agreements. |
(6) |
AstraZeneca is entitled to certain buyout rights which, if exercised, would result in earlier expiration. |
(7) |
Represents the portion of the royalties owed to Avillion II attributable to our minority ownership stake in Avillion II. |
There can be no assurance that patents covering the products generating our royalties will expire when expected. Any reduction in the expected patent term or any other expected period in which we are entitled to receive royalties may have a material adverse impact on our financial condition and results of operation. See Risk FactorsRisks Relating to Our Business for further information.
Our History
Our business was founded in 1996 by Pablo Legorreta, a pioneer in the funding of innovation in the biopharmaceutical sector. Since our inception, Royalty Pharma has been a leader in establishing royalties as a new asset class within the biopharmaceutical sector. Over the 24 years of our history, we have acquired a total of $18 billion in biopharmaceutical royalties, which we estimate to represent a market share of more than 50%. 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.
Since our founding, 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.
Key Periods of Our History
The key periods of our history are summarized below:
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1996 to 2003Equity Only: During this initial period of our operations, we pioneered the creation of the biopharmaceutical royalty asset class, educating both investors and owners of royalty assets on the potential benefits of our business model. In this early phase, we acquired $0.3 billion of royalties related exclusively to approved biopharmaceutical products using expensive private equity capital. Our average total annual royalty acquisitions from 1996 to 2003 were less than $50 million per year and our market share by total transaction value was greater than 25%. |
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2004 to 2011Use of Leverage: In 2004, we converted to an evergreen business which enabled us to use returns generated from our investments to fund new royalty acquisitions, meaningfully growing our business over time. In addition, we began to utilize a securitized debt facility to fund our acquisitions, which significantly reduced our overall cost of capital. In 2007, we converted this securitization facility |
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into a syndicated term loan facility, further reducing our cost of capital. During this period, we acquired $5.1 billion of royalties, again, exclusively related to approved biopharmaceutical products. Our average total annual royalty acquisitions from 2004 to 2011 were $650 million and our market share by total transaction value was greater than 40%. |
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2012 to CurrentUse of Leverage with Expanded Investment Scope: By 2012, our significant scale and diversification facilitated an expansion of the scope of our investing activities to include acquisitions of royalties related to development-stage product candidates, R&D funding agreements in which we provided capital for clinical trials in exchange for future royalties, and the partnering with other companies in the acquisition of businesses with significant royalty assets. During this period, Royalty Pharma acquired $13.4 billion of both approved and development-stage royalties across a range of structures. Our market share by total transaction value was approximately 60%. Our average annual royalty acquisitions from 2012 to 2019 were $1.6 billion. |
The graphic below provides additional detail on the scale of our royalty acquisitions and market share across these three phases of our history.
Total Royalty Acquisitions(1) |
Average Annual Royalty Acquisitions(1) |
Estimated Royalty Market Share(1) |
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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 Next Step in Our Evolution
We believe that an initial public offering is an important next step in the continued evolution of our business that will enable us to further extend our leadership position and to reinforce our position as the partner of choice for the funding of innovation. As a public company, we believe that we can realize a number of significant benefits, including:
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Deeper access to equity capitalWe will have increased access to equity capital for new royalty acquisitions via access to the public equity markets. We will be able to raise new equity, if required, via follow-on offerings that can be conducted in a highly time-efficient manner. |
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Increased acquisition capacityOur access to the deep public equity markets will further increase our ability to secure new royalty acquisitions. This will enable us to extend our leadership position in the acquisition of large royalties, and will facilitate additional types of acquisitions, such as those of companies with significant royalty assets. |
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Broadened shareholder baseWe believe that our leadership position in biopharmaceutical royalties, coupled with our significantly increased liquidity, will help attract a broader universe of investors than we are currently able to access as a private entity. |
Corporate Responsibility
We are the largest buyer of biopharmaceutical royalties and a leading funder of innovation across the biopharma industry. We play an important role in providing capital to the biopharma ecosystem and thereby positively impact human health. Our responsibility to stakeholders is based around three key areas: integrity (maintaining the highest ethical standards), culture (promoting an inclusive and diverse workforce) and taking responsibility (being a responsible citizen). We do not directly conduct biopharma R&D or manufacture or market the biopharmaceutical assets in which we participate, and thus our environmental impact is minimal. Despite the passive nature of our business, we strive to invest in novel therapies that address unmet patient needs and to support ethical business practices that drive innovation, competition, and patient choice.
Integrity
Royalty Pharma maintains the highest standards of integrity and trust in our role as investors and partners to the biopharma industry. This is recognized in our market-leading position and the high esteem with which we believe we are held in the industry. We conduct thorough diligence and monitoring with all of our investment positions. The biopharmaceutical companies and academic and non-profit institutions with which we work typically have well-developed and transparent environmental, social and governance (ESG) policies, which seek to benefit wider society through sustainable and ethical business practices.
Culture
A diverse, talented and motivated workforce is essential to maintain Royal Pharmas competitive advantages and to successfully execute our business strategy. We consider it highly important to strive for an appropriate gender balance: currently approximately 60% of our workforce are women. We take employee engagement and retention very seriously and are proud that on average our workforce has been employed with Royalty Pharma for approximately 7 years. We are committed to our employees health, well-being and job satisfaction and to ensuring that people find purpose in their careers. Opportunities for career enhancement and progression are regularly reviewed.
Responsibility
Royalty Pharma is committed to good corporate citizenship and actively supports the work of a number of patient advocacy groups and medical research foundations, including the American Heart Association, the Alliance for Lupus Research, Children of Bellevue, the Melanoma Research Alliance, the National Multiple Sclerosis Society and the Prostate Cancer Foundation. Over one-third (by value) of the transactions we have completed since our founding have been with leading academic and non-profit institutions. By partnering with these institutions, Royalty Pharma has provided capital which has been used to further scientific research (for example with the Cystic Fibrosis Foundation) or to help fund capital projects. Royalty Pharmas commitment to responsibility starts with its Chief Executive Officer who is a founding member of Boston Childrens Hospital Medical Research Council and serves on the Board of Governors of the New York Academy of Sciences, as well as the Boards of Trustees of Rockefeller University, the Hospital for Special Surgery, the Pasteur Foundation (the U.S. affiliate of the French Institute Pasteur) and the Open Medical Institute. Mr. Legorreta was the founder and is currently Honorary Chairman of Alianza Médica para la Salud, a non-profit dedicated to enhancing the quality of health care in Latin America by providing doctors and healthcare providers with continued education opportunities. Since its foundation in 2010, AMSA has provided over 500 scholarships to Mexican and Latin American doctors and healthcare providers to study abroad. Mr. Legorreta is also a founding member of Mount Sinais new Institute for Health Equity Research, newly created in part as a response to the health inequities
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made apparent by COVID-19. These diverse organizations are united in their quest to advance science, the careers of scientists and human health around the globe.
The Manager
The Manager is an investment adviser registered with the SEC under the U.S. Investment Advisers Act of 1940. In connection with this offering, we will enter into a new management agreement with the Manager pursuant to which it delegates discretion to make substantially all day-to-day decisions subject to oversight by our board of directors. The Manager will provide such adequate information and reports to the Company as the Company considers appropriate in order to exercise effective oversight of the Managers actions pursuant to the Management Agreement, to monitor and manage the risks to which the Company is exposed, and to assess the Managers performance. 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. The Manager will also enter into a management agreement with RPI with respect to decisions relating to acquisition of royalties by RPI. The Manager (or an affiliate of the Manager) will receive a quarterly Operating and Personnel Payment in cash pursuant to the Management Agreement. See Certain Relationships and Related Party TransactionsManagement Agreement for a description of the terms of the Management Agreement, including the Managers Operating and Personnel Payment, and see Management for information regarding the management team of the Manager. In addition, EPA Holdings, an affiliate of the Manager, is entitled to quarterly equity distributions from RP Holdings based on our performance.
Competition
We face competition from other entities that acquire biopharmaceutical royalties, including competitors to the Manager that are in the similar business of acquiring biopharmaceutical royalties. There are a limited number of suitable and attractive acquisition opportunities available in the market. Therefore, competition to acquire such assets is intense. The Manager is subject to competition from other potential royalty buyers, including from the companies that market the products on which royalties are paid, financial institutions and other entities. These potential royalty buyers may be larger and better capitalized than us. The Manager may not be able to identify and obtain a sufficient number of asset acquisition opportunities to invest the full amount of capital that may be available to us. There can be no assurance that we will continue to acquire biopharmaceutical products and companies that hold biopharmaceutical royalties that are acceptable to us.
The products that provide the basis for the cash flows of the biopharmaceutical products in which we invest are also subject to intense competition. The biopharmaceutical industry is a highly competitive and rapidly evolving industry. The length of any products commercial life cannot be predicted. There can be no assurance that one or more products will not be rendered obsolete or non-competitive by new products or improvements made to existing products, either by the current marketer of such products or by another marketer. 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 serve as the security or other support for the payments due under the biopharmaceutical products that we hold.
Competitive factors affecting the market position and success of each product include:
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effectiveness; |
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safety and side effect profile; |
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price, including third-party insurance reimbursement policies; |
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timing and introduction of the product; |
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efficacy of marketing strategy; |
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governmental regulation; |
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availability of lower-cost generics and/or biosimilars; |
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treatment innovations that eliminate or minimize the need for a product; and |
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product liability claims. |
If a product for which we have a royalty receivable or other interest is rendered obsolete or non-competitive by new products, including generics and/or biosimilars, or improvements on existing therapies or governmental or regulatory action, such developments could have a material adverse effect on the ability of the payor with respect to a biopharmaceutical asset to make payments to us, and consequently could materially adversely affect our business, financial condition and results of operations. If additional side effects or complications are discovered with respect to a product, and such products market acceptance is impaired or it is withdrawn from the market, continuing payments with respect to biopharmaceutical products, including royalty payments and payments of interest on and repayment of the principal, relating to such product may not be made on time or at all.
Employees
Our directors and executive officers will manage our operations and activities. However, we do not currently have any employees or any officers other than our executive officers. Pursuant to the Management Agreement with the Manager, the Manager will perform corporate and administration services for us. Please see Certain Relationships and Related Party Transactions.
As of December 31, 2019, the Manager and its affiliates had 35 employees. None of these employees are represented by labor unions or covered by any collective bargaining agreement. We believe that the Managers relations with its employees are satisfactory.
Properties
Our executive offices are located at 110 East 59th Street, New York, NY 10022, and are provided by the Manager. We believe that our office facilities are suitable and adequate for our business as it is contemplated to be conducted.
Legal Proceedings
From time to time, we or the Manager may be a party to various claims, charges and litigation matters arising in the ordinary course of business. Management and legal counsel regularly review the probable outcome of such proceedings. While we cannot feasibly predict the outcome of these matters with certainty, we believe, based on examination of these matters, experience to date and discussions with counsel, that the ultimate liability, individually or in the aggregate, will not have a material adverse effect on our business, financial condition or results of operations or cash flows.
U.S. Investment Company Act Status
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
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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, according to certain SEC staff interpretations, generally may be available to an issuer who invests 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 ICA Exception Qualifying Assets and not to issue any redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates.
In a no-action letter, dated August 13, 2010, to Royalty Pharma, our predecessor, the SEC staff promulgated an interpretation that royalties 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.
As the parent of one or more subsidiaries that rely on Section 3(c)(5)(A), we currently are excepted from registration as an investment company based on Section 3(a)(1)(C) and/or Section 3(c)(6) of the U.S. Investment Company Act. 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). For a subsidiary to be majority-owned, a parent entity must own a majority of the voting securities of the applicable security. 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 staffs no-action letter such that royalties 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 no longer qualifying 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.
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Executive Officers and Directors
The following table sets forth information regarding our executive officers and directors:
Name |
Age |
Position |
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Pablo Legorreta | 56 | Chief Executive Officer, Director & Chairman of the Board | ||
Terrance Coyne |
38 |
Executive Vice President & Chief Financial Officer | ||
Christopher Hite |
53 |
Executive Vice President & Vice Chairman | ||
George Lloyd |
61 |
Executive Vice President, Investments & General Counsel | ||
James Reddoch |
50 |
Executive Vice President, Research & Investments | ||
Bonnie Bassler | 58 | Director | ||
Errol De Souza | 66 | Director | ||
William Ford | 58 | Director | ||
M. Germano Giuliani | 48 | Director | ||
Greg Norden | 62 | Director | ||
Rory Riggs | 66 | Director |
Executive Officers
Pablo Legorreta has been our Chief Executive Officer and director since inception. Previously, Mr. Legorreta was an investment banker at Lazard Frères in Paris and New York. Mr. Legorreta is also a co-founder of Pharmakon Advisors, a leading provider of debt capital to the biopharmaceutical industry. Mr. Legorreta serves on several boards including the New York Academy of Sciences, Rockefeller University, Brown University, the Hospital for Special Surgery, Pasteur Foundation (the U.S. affiliate of the French Institute Pasteur), Open Medical Institute, Park Avenue Armory, Epizyme, Inc., ITB-Med Pharmaceuticals, Nefro Health and ProKidney, LLC. Mr. Legorreta was the founder and is currently Honorary Chairman of Alianza Médica para la Salud, a non-profit dedicated to enhancing the quality of health care in Latin America by providing doctors and healthcare providers with continued education opportunities. Since its foundation in 2010, AMSA has provided over 500 scholarships to Mexican and Latin American doctors and healthcare providers to study abroad. Mr. Legorreta received a degree in industrial engineering from Universidad Iberoamericana in Mexico City. Mr. Legorreta was selected to serve on our board of directors because his extensive experience in the biopharmaceutical industry provides valuable industry knowledge, expertise and insight.
Terrance Coyne joined RP Management in 2010. He serves as our Executive Vice President & Chief Financial Officer. Previously, Mr. Coyne was a biotechnology equity research associate, and then a senior analyst at JP Morgan; and a biotechnology equity research associate at Rodman & Renshaw. Mr. Coyne began his career at Wyeth Pharmaceuticals. Mr. Coyne received a B.S. in business administration from La Salle University and an M.B.A. from La Salle University.
Christopher Hite joined RP Management in March 2020. Mr. Hite serves as our Executive Vice President & Vice-Chairman. Previously, Mr. Hite was Vice Chairman and Global Head of Healthcare at Citibank, where he worked from 2008 to 2020, and Global Head of Healthcare Investment Banking at Lehman Brothers. Mr. Hite serves on the board of directors of Acceleron Pharma Inc. and is a member of the FasterCures Board, a center of the Milken Institute. Mr. Hite received a B.S. from Lehigh University and a J.D./M.B.A. from the University of Pittsburgh.
George Lloyd joined RP Management in 2011 after representing Royalty Pharma Investments on all royalty acquisition transactions since 2006. Mr. Lloyd serves as our Executive Vice President, Investments & General Counsel. Previously, Mr. Lloyd was a partner at Goodwin Procter LLP in Boston, MA, and an associate at Davis Polk & Wardwell LLP in New York, NY and Paris. Mr. Lloyd received an A.B. from Princeton University and a J.D. from New York University Law School.
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James Reddoch, Ph.D. joined RP Management in July 2008. Dr. Reddoch serves as our Executive Vice President, Research & Investments. Previously, Dr. Reddoch was Managing Director and Head of Healthcare Equity Research at Friedman Billings Ramsey, and a biotechnology equity research analyst at Banc of America Securities and CIBC World Markets Corp. (now Oppenheimer & Co.). Dr. Reddoch received a B.A. from Furman University and a Ph.D. in Biochemistry and Molecular Genetics from the University of Alabama at Birmingham. He was a postdoctoral fellow at the Yale University School of Medicine.
Management Team of the Manager
In addition to Messrs. Legorreta, Coyne, Hite, Lloyd and Reddoch, set forth below is information regarding the key employees of the Manager as of the consummation of this offering.
Molly Chiaramonte, Ph.D. joined RP Management in 2008. Dr. Chiaramonte serves as RP Managements Senior Vice President, Research & Investments. Previously, Dr. Chiaramonte was a biotechnology equity research associate at Jefferies & Company and a post-doctoral fellow in the Department of Biochemistry and Molecular Genetics at the University of Colorado Health Sciences Center. Dr. Chiaramonte received a B.A. in mathematics, from Providence College; an M.A. in mathematics from the University of Colorado; and a Ph.D. in chemistry (Biochemistry Program) from the University of Colorado.
Marshall Urist, M.D., Ph.D. joined RP Management in 2013. Dr. Urist serves as RP Managements Senior Vice President, Research & Investments. Previously, Dr. Urist worked at Morgan Stanley in equity research, most recently as Executive Director and as a senior biotechnology analyst. Earlier at Morgan Stanley, he covered the life science tools and diagnostics sectors, where he was recognized in Institutional Investors All-America Research Team. Dr. Urist graduated from Johns Hopkins University and holds an M.D. and a Ph.D. from Columbia University.
Directors (who are not Executive Officers)
Bonnie Bassler, Ph.D. has been a member of our board of directors since June 2020. Dr. Bassler currently serves in several roles at Princeton University, including, Chair of the Department of Molecular Biology since 2013, associated faculty member of the Department of Chemistry since 2010, Investigator at the Howard Hughes Medical Institute since 2005, Professor in the Department of Molecular Biology since 1994, and associate faculty member of the Princeton Environmental Institute since 1996. Previously, Dr. Bassler served as the Director of the Council on Science and Technology at Princeton University from July 2008 to June 2013. Dr. Bassler has served as a board member of Kaleido Biosciences, Inc. since 2018, as a board member of Regeneron Pharmaceuticals, Inc. since 2016, and as a Trustee of the Alfred P. Sloan Foundation since 2014, and previously served as a board member of Sanofi from November 2014 to September 2016. Dr. Bassler served as a board member of the American Association for the Advancement of Science from January 2012 to December 2016. She was a member of the National Science Board from January 2010 until May 2016. Dr. Bassler has been elected to the National Academy of Sciences, the National Academy of Medicine, and the Royal Society, among other honorific organizations. She received a B.S. in biochemistry from the University of California-Davis and a Ph.D. in biochemistry from the John Hopkins University. Dr. Bassler was selected to serve on our board of directors because of her experience, qualifications, attributes and skills, including her extensive experience in scientific research roles at elite universities.
Errol De Souza has been a member of our board of directors since June 2020 and was a member of the Investment Committee of Royalty Pharma from 2008 to June 2020. Dr. De Souza is the Executive Chairman of Bionomics Ltd. and has served in this role since 2018. Previously, Dr. De Souza held various management positions at companies including President, CEO & Director at Biodel from 2010-2016, Founder, Executive Vice President of R&D and Director at Neurocrine Biosciences from 1992-1998, President, CEO & Director at Synaptic Pharmaceutical Corp from 2002-2003, and Senior Vice President & Head of US R&D at Hoechst Marion Roussel and Aventis Pharmaceuticals (now Sanofi) from 1998-2002. Dr. De Souza serves or has served on several editorial boards and National Institutes of Health committees as well as on the board of directors of several private and
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public companies. Dr. De Souza has a B.A. in physiology from the University of Toronto and a Ph.D. in neuroendocrinology from the University of Toronto and was a postdoctoral fellow in neuroscience at The Johns Hopkins University School of Medicine. Dr. De Souza was selected to serve on our board of directors because of his deep expertise in the life sciences field and his extensive management and board experience.
William Ford has been a member of our board of directors since June 2020 and was a member of the Investment Committee of Royalty Pharma from February to June 2020. Mr. Ford is the Chief Executive Officer of General Atlantic, a position he has held since 2007 and where he has worked since 1991. Mr. Ford also serves on the board of BlackRock Inc. Mr. Ford has served on boards, including Tory Burch, First Republic Bank, NYSE Euronext, E*TRADE, Priceline, and NYMEX. Mr. Ford serves on the board of IHS Markit, Bytedance (Toutiao), Rockefeller University as Chairman, on the Amherst College Endowment Investment Committee, on the board of Tsinghua Universitys School of Economics and Management as an advisory member, on the board of overseers and managers for Memorial Sloan Kettering Cancer Center, on the board of the National Committee on United States-China Relations, on the steering committee for the CEO Action for Diversity and Inclusion initiative, as the co-chair of the Partnership for New York City, on the New York State Life Sciences Advisory Board, and on the advisory board of the United Nations Economic Commission for Africas Initiative on Digital Identification for Africa. Mr. Ford holds a BA in Economics from Amherst College and an MBA from the Stanford Graduate School of Business. Mr. Ford was selected to serve on our board of directors because of his extensive management and board experience.
M. Germano Giuliani has been a member of our board of directors since June 2020 and was a member of the Investment Committee of Royalty Pharma from 2000 to June 2020. Since 2015, Mr. Giuliani has been an entrepreneur. Previously, he served as the chief financial officer, chairman and chief executive officer of Giuliani SpA. Mr. Giuliani serves or has served on several boards including Giuliani SpA, Recordati SpA Nogra Group SA, HBM Healthcare Investment AG, Fair Med Healthcare AG, Jukka LLC USA, NGR (MONACO) SAM, SAM LAnse du Portier, SCA Anse du Portier, NGR Luxembourg SA, GISEV Group Lux SA, and Mosaix Ventures LLP USA. Mr. Giuliani has a degree in economics and commerce from the Catholic University of the Sacred Heart in Milan, Italy. Mr. Giuliani was selected to serve on our board of directors because of his extensive board and management experience.
Greg Norden has been a member of our board of directors since June 2020 and was a member of the Investment Committee of Royalty Pharma from 2014 to June 2020. From 1989 to 2010, Mr. Norden held various senior positions at Wyeth/American Home Products, including most recently as Chief Financial Officer. Mr. Norden started his career with Arthur Andersen & Company working with multinational public and private companies in the life sciences, financial services and consumer packaged goods industries. Mr. Norden currently serves on the boards of Zoetis, Univision and NanoString Technologies. Mr. Norden previously served on the boards of Human Genome Sciences, WelchAllyn, Entasis Therapeutics and Lumara Health. Mr. Norden was selected to serve on our board of directors because of his financial expertise and substantial experience as an executive in the biopharmaceutical industry.
Rory Riggs has been a member of our board of directors since June 2020 and was a member of the Investment Committee of Royalty Pharma from 2000 to June 2020. Mr. Riggs co-founded Royalty Pharma Investments in 1996 and has served as the chairman of its investment committee since 2003. Mr. Riggs founded Syntax & Locus Analytics in 2010 and serves as its CEO. Mr. Riggs was President of Biomatrix from 1995 to 2000. Mr. Riggs serves or has served on several boards including Fibrogen, Cibus, Sugen, Intra-cellular Therapies and Biomatrix. Mr. Riggs has a B.A. from Middlebury College and an MBA from Columbia University. Mr. Riggs was selected to serve on our board of directors because of his valuable knowledge and experience in our industry and his extensive board experience.
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Board Composition
Structure
Our board consists of six members. At each annual general meeting of the shareholders, all of the directors will (subject to any need to maintain a minimum board quorum) automatically retire and may stand for reelection. The term of the directors will expire upon the next annual general meeting, or as otherwise provided by our Articles of Association.
Our Articles of Association, which will be effective in connection with this offering, provide that the number of our directors shall be fixed from time to time by a resolution of the majority of our board of directors. In addition to any power of removal conferred by our Articles of Association, our shareholders have the statutory right to remove directors by calling a general meeting of the shareholders by special notice and passing an ordinary resolution to that effect.
We do not have a fixed policy as to whether the chairman of the board should be an independent director and believe that our board of directors should maintain the flexibility to select the chairman and reorganize the leadership structure, from time to time, based on the criteria that is in our best interests and the best interests of our shareholders at such times.
Presently, Mr. Legorreta serves as the chairman of our board of directors, and also serves as Chief Executive Officer. We believe that Mr. Legorretas history with Old RPI, familiarity with our business and extensive knowledge of the financial services and life sciences industries in particular qualify him to serve as the chairman of our board of directors. We believe that we are best served through this existing leadership structure, as Mr. Legorretas relationship with the Manager provides an effective bridge and encourages an open dialogue between management and our board of directors, ensuring that both groups act with a common purpose.
Our board of directors does not currently have a designated lead independent director. We are aware of the potential conflicts that may arise when a non-independent director is chairman of the board. Our corporate governance policies include regular meetings of the independent directors in executive session without the presence of interested directors and management, the establishment of an audit committee comprised solely of independent directors and the appointment of a chief compliance officer, with whom the independent directors will meet regularly without the presence of interested directors and other members of management, for administering our compliance policies and procedures.
We recognize that different board leadership structures are appropriate for companies in different situations. We will re-examine our corporate governance policies on an ongoing basis to ensure that they continue to meet our needs.
Our board of directors performs its risk oversight function primarily through the audit committee, which reports to the entire board of directors and will be comprised solely of independent directors. As described below in more detail under Committees of the Board of Directors, the audit committee assists our board of directors in fulfilling its risk oversight responsibilities. The audit committees risk oversight responsibilities include overseeing our accounting and financial reporting processes, our system of internal controls regarding finance and accounting, and audits of our financial statements.
We recognize that different board roles in risk oversight are appropriate for companies in different situations. We will re-examine the manner in which the board administers its oversight function on an ongoing basis to ensure that it continues to meet our needs.
Director Independence
Under applicable Nasdaq rules, a director will qualify as independent if our board of directors affirmatively determines that he or she has no material relationship with us (either directly or as a partner,
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stockholder or officer of an organization that has a relationship with us). Ownership of a significant amount of our Class A ordinary shares, by itself, does not constitute a material relationship. Because Mr. Legorreta is our Chief Executive Officer, our board of directors has determined that he does not qualify as an independent director.
The applicable rules and regulations of Nasdaq require us to have a majority of independent directors within one year of the date our Class A ordinary shares are listed on Nasdaq. Our board has determined that each of Ms. Bassler and Messrs. De Souza, Ford and Norden meet the categorical standards described above, that none of these directors has a material relationship with us and that each of these directors is independent under the applicable rules of Nasdaq.
Committees of the Board of Directors
Audit Committee
The audit committee will operate pursuant to a charter to be approved by our board of directors. The charter will set forth the responsibilities of the audit committee, which will include selecting our independent registered public accounting firm, reviewing with such independent registered public accounting firm the planning, scope and results of their audit of our financial statements, pre-approving the fees for services performed, reviewing with the independent registered public accounting firm the adequacy of internal control systems, reviewing our annual financial statements and periodic filings and receiving our audit reports and financial statements. The audit committee also will establish guidelines and make recommendations to our board of directors regarding the valuation of our assets. Upon completion of this offering, the audit committee will be composed of Messrs. De Souza, Ford and Norden, each of whom will be considered independent under the rules of Nasdaq and Mr. Norden will serve as chairman of the audit committee. In addition, our board of directors has determined that Mr. Norden is an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act of 1933, as amended (the Securities Act). In compliance with Nasdaq listing requirements, a majority of the members of the audit committee will be independent directors within 90 days of the date our Class A ordinary shares are listed on Nasdaq and all of the members of the audit committee will be independent directors within one year of the listing date.
Compensation Committee
Upon completion of this offering, our compensation committee will be comprised of Messrs. De Souza, Norden and Ford, and Mr. Ford will be chairman of the committee. Our compensation committee will be authorized to, among other matters:
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evaluate the performance of the Manager; |
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review the compensation and fees payable to the Manager under the Management Agreement; |
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determine from time to time the remuneration for our independent directors; |
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ensure appropriate leadership development and succession planning is in place; and |
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prepare the report of the compensation committee that the rules of the SEC require to be included in our annual meeting proxy statement. |
Our executive officers are not directly compensated by us and, as a result, the Compensation Committee does not produce and/or review and report on executive compensation practices.
The applicable rules and regulations of Nasdaq require us to have one independent compensation committee member upon the closing of this offering, a majority of independent members within 90 days of the date our Class A ordinary shares are listed on Nasdaq and all independent compensation committee members within one year of the listing date.
Upon the listing of our Class A ordinary shares on Nasdaq, the compensation committee will operate under a written charter, which the compensation committee will review and evaluate at least annually.
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Nominating and Corporate Governance Committee
Upon completion of this offering, our nominating and corporate governance committee will be comprised of Messrs. De Souza, Norden and Ford. Mr. De Souza will be the chairman of the committee. Our nominating and corporate governance committee is authorized to, among other matters:
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identify and nominate candidates for election to the board of directors; |
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review and recommend the compensation arrangements for certain members of our board of directors; |
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develop and recommend to the board of directors a set of corporate governance principles applicable to our company; and |
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oversee the evaluation of our board of directors. |
The applicable rules and regulations of Nasdaq require us to have one independent nominating and corporate governance committee member upon the closing of this offering, a majority of independent members within 90 days of the date our Class A ordinary shares are listed on Nasdaq and all independent nominating and corporate governance committee members within one year of the listing date.
Upon the listing of our Class A ordinary shares on Nasdaq, the nominating and corporate governance committee will operate under a written charter, which the nominating and corporate governance committee will review and evaluate at least annually.
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee has at any time been an employee of ours. Our named executive officers do not serve as a member of another entitys board of directors or compensation committee that has one or more executive officers serving as a member of our board of directors or compensation committee.
Code of Business Conduct and Ethics
Prior to the consummation of this offering, we will adopt a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. Upon the consummation of this offering, the code of business conduct and ethics will be available on our website. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website.
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Director Compensation
We have not yet paid any compensation to our directors. Following completion of this offering, we intend to pay our independent directors according to our Independent Director Compensation Policy, described further below. Affiliated directors, however, will not be separately compensated by us. All members of the board of directors will be reimbursed for reasonable costs and expenses incurred in attending meetings of our board of directors.
Independent Director Compensation Policy
We have adopted a policy for compensation of our independent directors subject to completion of this offering. Under this policy, each independent director other than an affiliated director serving on the board to represent the interests of a significant investor will receive an annual cash retainer of $150,000 and an annual equity award with a grant date value of $250,000 in recognition of his or her service to the board. Each such annual equity award will be granted upon the closing of this offering and in connection with each annual meeting and would vest upon the directors continued service through our annual meeting for the following year. In addition, under this policy, each new unaffiliated independent director would receive an initial equity award with a grant date value of $100,000 at the commencement of his or her service on our board of directors. This policy does not provide for any additional annual cash retainer for service as a chairperson or member of any standing committee of our board or any fee for attendance of board or committee meetings.
At this time the policy does not contemplate any additional compensation for a lead independent director. We plan to consider appropriate compensation in the event that a director is appointed to this position.
Director IPO Grants
Subject to completion of this offering, we intend to grant an additional equity award to each of Dr. De Souza and Mr. Norden in recognition of their extensive past services to the Old RPI board and continued service on our board. Each such award will consist of restricted stock units with respect to our Class A common shares with a value of $1,000,000 based on the per-share price of such shares in this offering and will vest at our next annual meeting.
Named Executive Officers
We consider the following officers of Royalty Pharma and the Manager as our named executive officers:
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Pablo Legorreta, Chief Executive Officer of Royalty Pharma and the Manager; |
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Terrance Coyne, Executive Vice President & Chief Financial Officer of Royalty Pharma and the Manager; |
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Christopher Hite, Executive Vice President & Vice Chairman of Royalty Pharma and the Manager (Mr. Hite joined the Manager in March 2020); |
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George Lloyd, Executive Vice President, Investments & General Counsel of Royalty Pharma and the Manager; and |
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James Reddoch, Ph.D. Executive Vice President, Research & Investments, of Royalty Pharma and the Manager. |
All of our named executive officers are employees of the Manager, and provide all of their services to Royalty Pharma under the Management Agreement between us and the Manager. Although Mr. Hite did not join Royalty Pharma and the Manager before the end of 2019, we include him among our named executive officers here in order to provide a more complete picture of the individuals responsible for management of Royalty Pharma. Because we are a newly-formed entity that had no operations prior to this offering, we did not have any other executive officers in 2019.
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In accordance with our Management Agreement, each of our named executive officers devotes a substantial portion of his time to us, although none of them provides services exclusively to us.
Compensation Discussion & Analysis
Each of our named executive officers is compensated for his services to us by the Manager and does not receive any compensation directly from us. We do not reimburse the Manager or any of its affiliates for the compensation of any of our named executive officers and do not make any decisions regarding the amount or nature of this compensation. For a description of our obligations to pay the Operating and Personnel Payment to the Manager under the Management Agreement, please refer to the section entitled Certain Relationships and Related Party TransactionsManagement Agreement.
The following is a brief description of the compensation provided to our named executive officers by the Manager.
Elements of Compensation
Management Fee
As the sole member of the Manager, Mr. Legorreta is entitled to a share of the Managers profits less expenses. The Managers revenues for 2019 include the management fee paid by us under the Management Agreement with the Manager.
Base Salary
The Manager pays each of our named executive officers other than Mr. Legorreta a base salary.
Annual Bonus
Each of our named executive officers other than Mr. Legorreta participates in the Managers annual cash bonus plan, which provides each participant with an annual cash bonus opportunity in an amount to be determined by Mr. Legorreta in his sole discretion.
Performance Awards
During 2019, all of our named executive officers (other than Mr. Hite, who joined the Manager in March 2020) were granted beneficial interests in the carried interest held by Pharmaceutical Investors, LP in royalties acquired by Old RPI in 2019. We refer to these grants of beneficial interests in this carried interest as Performance Awards. We consider these awards to have a zero fair value as of the date of grant.
In addition, all of our named executive officers other than Mr. Hite held Performance Awards in 2019 that were granted in prior years. Each Performance Award vests upon continued service over a period of four to five years beginning on the date of grant.
Each Performance Award represented a percentage interest in the net profits realized by Old RPI on acquisitions of royalties. The actual amount of any carried interest distributions to any named executive holder was thus a function of the profitability of the royalties we acquired. Accordingly, the Manager believes that each grant of a Performance Award to an executive officer aligns the interests of the officer with those of our shareholders by closely aligning the officers compensation with the long-term performance of our business.
Distributions in respect of a Performance Award are determined on the basis of the awards percentage participation in the net profits realized on an acquired royalty. The percentage participation of each named
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executive officer under a Performance Award with respect to each royalty acquisition varies from time to time and from acquisition to acquisition based on many factors, including the named executive officers contribution to the royalty acquisition transaction.
Conversion of Performance Awards Into Limited Partnership Interests Exchangeable for Class A Ordinary Shares
In February 2020, in connection with the Exchange Offer Transactions described in Reorganization Transactions and the U.S. listing above, Pharmaceutical Investors, L.P. contributed all of its carried interest in Old RPI to the Continuing US Investors Partnership in exchange for limited partnership interests in that entity. As a result of this exchange, each of the Performance Awards held by our named executive officers was converted into limited partnership interests in the Continuing US Investors Partnership. Because limited partnership interests in the Continuing US Investors Partnership are exchangeable into our Class A ordinary shares, we believe this change has further served to align the interests of our named executive officers with those of our shareholders.
Mr. Legorreta has agreed with the Company to retain and not sell before February 2025 80% of the limited partnership interests resulting from the exchange of Performance Awards as described above. Our Board of Directors has agreed to consider waiving this restriction for important life events or where this restriction would otherwise impose a hardship. Messrs. Coyne, Lloyd and Reddoch have agreed with the Manager to retain and not sell before February 2025 80% of the limited partnership interests resulting from the exchange of Performance Awards as described above. Our Manager has agreed to consider waiving this restriction for important life events or where this restriction would otherwise impose a hardship.
Summary Compensation Table
The following table provides summary information concerning the compensation of our named executive officers for 2019.
Name and Principal Position |
Year |
Salary
($) (1) |
Bonus
($) (2) |
All Other
Compensation ($) (3) |
Total
($) (4) |
|||||||||||||||
Pablo Legorreta Chief Executive Officer |
2019 | | | 28,545,792 | 28,545,792 | |||||||||||||||
Terrance Coyne Executive Vice President & Chief Financial Officer |
2019 | 425,625 | 1,500,000 |
|
|
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1,925,625 | |||||||||||||
Christopher Hite (5) Executive Vice President & Vice Chairman |
2019 | | | | | |||||||||||||||
George Lloyd Executive Vice President & General Counsel |
2019 | 682,500 | 1,500,000 |
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|
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2,182,500 | |||||||||||||
James Reddoch, Ph.D. Executive Vice President, Research and Investments |
2019 | 682,500 | 1,400,000 |
|
|
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2,082,500 |
(1) |
Reflects salary paid by the Manager to each named executive officer for services in 2019. |
(2) |
Reflects bonuses paid by the Manager under the Managers discretionary annual cash bonus program for services in 2019. |
(3) |
Reflects, in Mr. Legorretas case, earnings as sole member of the Manager from payment of the management fee from Royalty Pharma to the Manager after deduction of the Managers expenses. |
(4) |
Each of our named executive officers received Performance Awards during 2019. Each Performance Award amounted to a percentage interest in the net profits to be realized on royalties acquired by Old RPI in 2019. We consider these awards to have a fair value of zero on the date of grant and consequently we have not included any amount of compensation for awards granted in 2019 in this Summary Compensation Table disclosure. |
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(5) |
Mr. Hite joined Royalty Pharma and the Manager in March 2020 and performed no services for Royalty Pharma or the Manager in 2019. |
Grants of Plan-Based Awards
The Manager did not make any grants of cash incentive plan awards in 2019. Performance Awards were granted to our named executive officers in 2019, but we consider these awards to have a fair value of zero as of the date of grant.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information on the carried interests held by each of our named executive officers as of December 31, 2019.
Performance Awards | ||||
Name |
Market Value of Securities
Underlying Outstanding Performance Awards (1) ($) |
|||
Pablo Legorreta |
$ | 746,694,880 | ||
Terrance Coyne |
69,506,325 | |||
Christopher Hite (2) |
| |||
George Lloyd |
98,770,589 | |||
James Reddoch, Ph.D. |
106,358,655 |
(1) |
Represents an estimate of the aggregate net present value as of December 31, 2019 of each named executive officers Performance Awards in Pharmaceutical Investors, LP as described under Performance Awards. This estimate has been prepared using the same methods used by Old RPI to value its royalties. Each Performance award represents a percentage participation in the net profits realized on an acquired royalty. |
(2) |
Mr. Hite did not perform services for Royalty Pharma or the Manager in 2019 and thus did not hold any Performance Awards or other equity awards relating to Royalty Pharma as of December 31, 2019. |
Potential Payments upon Termination or Change in Control
The Manager maintains a separation pay plan that provides for an unspecified amount of separation pay upon a qualifying termination of employment, such as in connection with a reduction of force, job elimination or voluntary acceptance of a Manager-initiated termination. Each of the named executive officers would be eligible to participate in this benefit in the absence of an individual employment or separation pay agreement.
Non-Competition and Non-Solicitation Agreements
Each of our named executive officers is party to a non-competition and non-solicitation agreement with the Manager under which he has agreed that for 18 months following termination of employment for any reason, he will not compete with the Manager or solicit the services of any person who is then an employee of Royalty Pharma or solicit any investor or potential investor in Royalty Pharma.
Management Agreement
We will enter into the Management Agreement with the Manager prior to the closing of this offering pursuant to which the Manager will receive a separate Operating and Personnel Payment for its provision of advisory and management services to our royalty business. To the extent that the Manager outsources any of its functions we will pay the fees associated with such functions on a direct basis without profit to the Manager. See Certain Relationships and Related Party TransactionsManagement Agreement.
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Indemnification Agreements
We expect that we and the Manager, as appropriate, will enter into indemnification agreements (or deed poll indemnities) with or as to each of the named executive officers and its other officers and directors, as well as with individuals serving as directors or officers of its subsidiaries, providing for the indemnification of, and advancement of expenses to, these persons to the fullest extent permitted by law. See Certain Relationships and Related Party TransactionsIndemnification of Directors and Officers.
Related Party Transaction Policy
Our audit committee will review any potential related party transactions referred to it by our board of directors, including consideration of affiliated transaction restrictions applicable to royalty acquisition decisions of the Manager, acting as our advisor, and royalty acquisitions by us after the initial public offering that involve certain of our affiliates, including the Manager, or funds advised by them. See Certain Relationships and Related Party TransactionsReview, Approval or Ratification of Transactions with Related Parties.
2020 Independent Director Equity Incentive Plan
In connection with the offering, we expect our board of directors and our stockholders to approve our 2020 Independent Director Equity Incentive Plan (the 2020 EIP), which will become effective upon the effectiveness of the registration statement, of which this prospectus forms a part.
Eligibility, Awards and Administration
The 2020 EIP provides for the grant of the following types of awards to independent directors of the Company: (i) market value options; (ii) share appreciation rights; (iii) restricted stock / restricted stock unit awards; (iv) performance awards (awards subject to performance conditions) and (v) other share-based awards.
For purposes of the 2020 EIP, a director is considered independent if he or she (i) is not a full- or part-time officer or employee of the Company, the Manager or any affiliate or subsidiary of either; (ii) is independent for purposes service on the Board within the meaning of the listing rules of Nasdaq; and (iii) was not appointed to the Board by the exercise of a power of appointment by a shareholder of the Company.
Subject to the terms of the 2020 EIP, awards can be granted in respect of our Class A ordinary shares, American Depositary Shares (ADSs), cash or a combination thereof. References in this section to our Class A ordinary shares will be deemed references to ADSs, as applicable.
The 2020 EIP is administered by the Compensation Committee unless the Compensation Committee designates one or more directors as a subcommittee who may act for the Compensation Committee if necessary. The Board may also choose to administer the 2020 EIP itself.
Limitation on Awards
Subject to adjustment, the aggregate number of shares available for issuance under the 2020 EIP will not exceed 800,000 Class A ordinary shares.
Share Options.
Nonstatutory share options may be granted under the 2020 EIP pursuant to stock option agreements adopted by the Compensation Committee. The committee determines the exercise price for a share option, within the terms and conditions of the 2020 EIP, provided that the exercise price of a share option cannot be less than the fair market value of our Class A ordinary shares on the date of grant. Share options vest at the rate specified by
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the committee. The committee determines the term of share options granted under the 2020 EIP, up to a maximum of 10 years. The committee shall also determine the time or times at which a share option may be exercised in whole or in part, the methods by which, and the forms in which payment of the exercise price with respect to share options may be made or deemed to have been made, including cash, Class A ordinary shares, other property, net settlement (including broker-assisted cashless exercise) or any combination thereof, with any such payment having a fair market value on the exercise date equal to the relevant exercise price.
Share Appreciation Rights.
Share Appreciation Rights (SARs) may be granted under the 2020 EIP pursuant to SAR agreements adopted by the Compensation Committee, either alone or in connection with other awards granted under the plan. The exercise price per Class A ordinary share under a SAR shall be determined by the committee, but will not be less than the fair market value of a Class A ordinary share on the date of grant. The term of each SAR shall be fixed by the committee but shall not exceed 10 years from the date of grant. The committee shall also determine the time or times at which a SAR may be exercised or settled in whole or in part.
Upon the exercise of a SAR, the Company shall pay to the recipient an amount equal to the number of Class A ordinary shares subject to the SAR multiplied by the excess, if any, of the per-share fair market value of such shares on the exercise date over the exercise price of such SAR. The Company shall pay such excess in cash, in Class A ordinary shares valued at fair market value, or any combination thereof, as determined by the Compensation Committee.
Restricted Share and Restricted Share Units.
Awards of restricted shares and restricted share units or RSUs may be granted under the 2020 EIP pursuant to a restricted share or RSU agreement adopted by the Compensation Committee. The committee shall determine the vesting schedule, whether any award of restricted shares or RSUs is entitled to dividends or dividend equivalents, voting rights or any other rights. With respect to RSUs, the committee shall determine the delivery schedule and the form or forms (including cash, shares or other property) in which payment may be made.
Performance Awards.
Performance awards may be granted under the 2020 EIP and may be denominated as a cash amount, a number of shares or a combination thereof. Performance awards may be earned upon achievement or satisfaction of performance conditions specified by the Compensation Committee. The committee may specify that any other type of award shall constitute a performance award by conditioning the right to exercise the award or have it settled, and the timing thereof, upon achievement or satisfaction of performance conditions. The committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions. Subject to the terms of the 2020 EIP, the committee may determine the length of any performance period, the goals to be achieved during any such period, the amount of any performance award and the amount of any payment or transfer to be made based on satisfaction of such goals. A performance award relating to shares shall not provide for the payment of any dividend (or dividend equivalent) with respect to those shares prior to the time at which such award (or a portion thereof), is earned.
Performance criteria may be measured on an absolute (e.g., plan or budget) or relative basis, and may be established on a corporate-wide basis or with respect to one or more business units, divisions, subsidiaries or business segments. Relative performance may be measured against a group of peer companies, a financial market index or other acceptable objective and quantifiable indices. If the Compensation Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which the Company conducts its business, or other events or circumstances render the performance objectives unsuitable, the committee may modify the minimum acceptable level of achievement, in whole or in part, as the
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committee deems appropriate and equitable. Performance objectives may be adjusted for material items not originally contemplated in establishing the performance target for items resulting from discontinued operations, extraordinary gains and losses, the effect of changes in accounting standards or principles, acquisitions or divestitures, changes in tax rules or regulations, capital transactions, restructuring, nonrecurring gains or losses or unusual items. Performance measures may vary from award to award, and from participant to participant, and may be established on a stand-alone basis, in tandem or in the alternative. The committee shall have the power to impose such other restrictions on awards as it may deem necessary or appropriate to ensure that such awards satisfy all requirements of any applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations.
Other Share-Based Awards.
The Compensation Committee is authorized, subject to limitations under applicable law, to grant such other awards under the 2020 EIP that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, our Class A ordinary shares or factors that may influence the value of such shares. The committee shall determine the terms and conditions of such Awards.
Leavers
Unvested awards will usually lapse on termination of service (including voluntary departure) save for potentially different good leaver treatment. The effect of a participants termination of service on outstanding awards, including whether the awards may be exercised, settled, vested, paid or forfeited, will be determined by the Compensation Committee and may be set forth in the participants award agreement.
Certain Transactions
In the event of certain corporate transactions, including a change of control, the Compensation Committee may determine the appropriate treatment of an award, which may include (but is not limited to) it vesting in full, being settled in cash or being varied or replaced so as to relate to other assets (including shares in another company).
The number and type of securities subject to award and any exercise price may also be adjusted for various events that may affect the value of ordinary shares or ADSs and for changes in applicable laws, regulations or accounting principles.
Amendment and Termination
The Board may amend, alter, suspend, discontinue or terminate the 2020 EIP or any portion thereof at any time, subject to shareholder approval where required by applicable law or the rules of the stock market or exchange, if any, on which the shares are principally quoted or traded.
However, no such Board action that would materially adversely affect participants rights under an outstanding award may be taken without such participants consent, except to the extent that such action is made to cause the 2020 EIP to comply with applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations or to impose any recoupment provisions on any awards in accordance with the 2020 EIP.
No award may be granted under the 2020 EIP after the earliest to occur of: (i) the tenth anniversary of the effective date of the 2020 EIP; provided that to the extent permitted by the listing rules of any stock exchange on which we are listed, such ten-year term may be extended indefinitely so long as the maximum number of shares available for issuance under the 2020 EIP have not been issued; (ii) the maximum number of shares available for issuance under the 2020 EIP have been issued; and (iii) the termination of the 2020 EIP by our Board.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
We describe below transactions and series of similar transactions, during our last three fiscal years or currently proposed, to which we were a party or will be a party, in which:
|
the amounts involved exceeded or will exceed $120,000; and |
|
any of our directors, executive officers or beneficial holders of more than 5% of any class of our capital stock had or will have a direct or indirect material interest. |
Other than as described below, there have not been, nor are there any currently proposed, transactions or series of similar transactions meeting this criteria to which we have been or will be a party other than compensation arrangements, which are described where required under ManagementBoard Structure and Compensation of Directors and Executive Compensation.
The forms of the agreements described in this section are filed as exhibits to the registration statement of which this prospectus forms a part, and the following descriptions are qualified by reference thereto.
Management Agreement
We have no personnel of our own. Historically our business has been managed by the Manager and following this offering will continue to be managed by the Manager pursuant to the Management Agreement. Under the Management Agreement, the Manager will manage the existing assets of our business and source and evaluate new royalty acquisitions.
Advisory Team
Our advisory team for purposes of the Management Agreement currently consists of a team of experienced management personnel, as detailed in Management.
None of the Managers advisory professionals receives any direct compensation from us in connection with the management of our assets. Mr. Legorreta, through his ownership interests in the Manager, is entitled to a portion of any profits earned by the Manager, which includes the Operating and Personnel Payment payable to the Manager under the terms of the Management Agreement, less expenses incurred by the Manager in performing its services under the Management Agreement.
Conflicts of Interest
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. Executives of Manager will be subject to a non-compete agreement following termination of their employment with the Manager, and 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.
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. 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,
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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 November 2017, we purchased from Bristol-Myers Squibb, (BMS), a percentage of BMSs future royalties on worldwide sales of Onglyza, Farxiga, and related diabetes products marketed by AstraZeneca, in exchange for installment payments to BMS over time. In December 2017, we sold 50% of the royalty to BioPharma Credit, in exchange for BioPharma Credits agreement to pay 50% of the installment payments owed by us to BMS.
Operating and Personnel Payment
Under the Management Agreement, we will pay a quarterly fee (the Operating and Personnel Payment) in respect of operating and personnel expenses to the Manager or its affiliates equal to 6.5% of the Adjusted Cash Receipts for such quarter from royalty investments and 0.25% of the GAAP mark-to-market value of security investments, including equity securities and derivative financial instruments, as of the end of such quarter, which the Manager is entitled to receive regardless of whether we realize any gains on the security investments when sold.
Under the Management Agreement, the Operating and Personnel Payment will be payable quarterly in advance as of the first business day of each fiscal quarter. The Company, RP Holdings and RP Holdings subsidiaries, including RPI, will have no personnel of their own. The Operating and Personnel Payment is intended to fund operating and personnel expenses of the Manager and its affiliates, including EPA Holdings. The Operating and Personnel Payment payable to the Manager is based on a fixed percentage of Adjusted Cash Receipts and will not be subject to subsequent adjustment based on actual operating and personnel expenses of the Manager and its affiliates.
The Manager will be responsible for 50% of all broken deal expenses as an offset against the Operating and Personnel Payment. Once an investment opportunity is approved by the board of directors, the Manager will not be responsible for any broken deal expenses relating to such investment opportunity.
Duration and Termination
The Management Agreement will be approved by our board of directors prior to the closing of this offering. 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 nonrenewal 180 days prior the expiration of the initial term or renewal term. During the initial term and each renewal term, the Management Agreement may only be terminated for Cause (as defined below). A termination of the Management Agreement will automatically lead to the removal of the Manager as the manager of RPI and EPA Holdings as the general partner of the Continuing Investors Partnerships. In such event, the Company shall be entitled to designate a new general partner for the Continuing Investors Partnerships.
The board of directors will have the right to terminate the appointment of EPA Holdings and the Manager following (i) a determination of Cause, by a court or governmental body of competent jurisdiction in a final judgement or (ii) an admission of Cause, by EPA Holdings or the Manager. In the event that Mr. Legorreta commits an act constituting Cause, such action would be imputed to EPA Holdings and the Manager so long as Mr. Legorreta is acting as chief executive officer of the Company, otherwise any act of Mr. Legorretas will not be imputed to EPA Holdings or the Manager. Any act constituting Cause committed by any other executive of EPA Holdings or the Manager would not be imputed to EPA Holdings or the Manager and may be cured by EPA Holdings and the Manager by termination of such employee.
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In the event of a termination for Cause of Mr. Legorreta or any other executive of EPA Holdings or the Manager, Mr. Legorreta or such executive, as the case may be, would forfeit his or her share of Equity Performance Awards (as defined below in Equity Performance Awards) on any investments made by the RPI Group during the two-year period prior to such termination and would also be required to reimburse the Company for any losses incurred by the Company as a result of such Cause event.
Except as provided above, EPA Holdings interest in Equity Performance Awards in respect of investments made after the Exchange Date and prior to any termination of the Management Agreement (with or without Cause) would continue following such termination.
Cause will exist where (i) EPA Holdings, the Manager or an executive of EPA Holdings or the Manager (including Mr. Legorreta) (each an Applicable Party) has committed (or in the case of Applicable Parties who are executives, caused EPA Holdings or the Manager to commit) a material breach of the governing documents of the Company, the limited partnership agreement of the Continuing US Investors Partnership or the Continuing International Investors Partnership, or the Management Agreement; (ii) an Applicable Party has committed (or in the case of Applicable Parties who are executives, caused EPA Holdings or the Manager to commit) willful misconduct in connection with the performance of his or its duties under the terms of the governing documents of the Company, the limited partnership agreement of the Continuing US Investors Partnership or the Continuing International Investors Partnership, or the Management Agreement, (iii) there is a declaration of bankruptcy by the Applicable Party and (iv) there is a determination by any court with proper jurisdiction that an Applicable Party has committed an intentional felony or engaged in any fraudulent conduct, in each such case of clauses (ii) and (iv) which has a material adverse effect on the business, assets or condition (financial or otherwise) or prospects of the RPI Group and its affiliates (taken as a whole).
The Manager and its affiliates would be subject to a 12-month non-compete following any termination of the Management Agreement by us for Cause, or nonrenewal by the Manager.
The Management Agreement will contain a succession plan for Mr. Legorreta.
Indemnification
The Management Agreement will provide that, to the fullest extent permitted by law, the Company will indemnify each of 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) 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 Indemnitees 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.
Equity Performance Awards
The Company will be subject to Equity Performance Awards (as defined below) determined on a Portfolio-by-Portfolio basis. Investments made during each two-year period will be grouped together as separate portfolios (each, a Portfolio). The first Portfolio commenced on the Exchange Date and will end on December 31, 2021.
Subject to the three conditions listed below and applicable law, at the end of each fiscal quarter, EPA Holdings will be entitled to a distribution from RP Holdings in respect of each Portfolio equal to 20% of the Net
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Economic Profit (defined as the aggregate cash receipts for all new portfolio investments in such Portfolio less Total Expenses (defined as interest expense, operating expense and recovery of acquisition cost in respect of such Portfolio)) for such Portfolio for the applicable measuring period (the Equity Performance Awards). The Equity Performance Awards will be allocated and paid by RP Holdings to EPA Holdings as the holder of the RP Holdings Class C Special Interest. The Equity Performance Awards will be payable in RP Holdings Class B Interests that will be exchanged upon issuance for Class A ordinary shares of the Company. The number of Class A ordinary shares of the Company payable shall be based on a 10-day trailing VWAP ending 2 days prior to the payment date. EPA Holdings may also receive a periodic cash advance in respect of the RP Holdings Class C Special Interest to the extent necessary for EPA Holdings or any of its beneficial owners to pay when due any income tax imposed on it or them as a result of it holding such RP Holdings Class C Special Interest, calculated using an assumed tax rate. To the extent EPA Holdings receives any such periodic cash advance, the amount of the RP Holdings Class B Interests received by EPA Holdings will be reduced by the amount of such periodic cash advance.
EPA Holdings will not be entitled to Equity Performance Awards on any Net Economic Profit derived from investments made by Old RPI prior to the Exchange Date and contributed to the RPI Group in the Exchange Offer Transactions. Such investments of Old RPI will be in a separate Portfolio (the Old RPI Portfolio).
On any quarterly equity distribution date, the Equity Performance Awards payable will be subject to each of the following three conditions:
Condition One: Cumulative Net Economic Profit for such Portfolio for all periods prior to the relevant quarterly determination date is positive. Cumulative Net Economic Profit is positive if the aggregate cash receipts for all investments in a Portfolio for all prior periods is greater than the Total Expenses allocated to such for all prior periods.
Condition Two: The aggregate projected cash receipts, as determined on a basis consistent with the effective interest method used in our GAAP financial statements, for all investments in such Portfolio for all periods commencing after such quarterly determination date are equal to or greater than one hundred and thirty-five percent (135%) of the projected Total Expenses for all investments in such Portfolio through the expected termination dates of all investments in such Portfolio.
Condition Three: The aggregate projected cash receipts, as determined on a basis consistent with the effective interest method used in our GAAP financial statements, for all investments in all Portfolios, other than the Old RPI Portfolio, for all periods commencing after such quarterly determination date are equal to or greater than one hundred and thirty-five percent (135%) of the projected Total Expenses for all of the Portfolios through the termination or disposition dates of all investments in all of the Portfolios, other than the Old RPI Portfolio.
The Equity Performance Awards are structured on a portfolio-by-portfolio basis, with portfolios based on two-year periods, to mitigate the risk that Equity Performance Awards are paid on a profitable investment even though, in the aggregate, the investments made over a two year period are not profitable. The three conditions above are also intended to reduce the risk that Equity Performance Awards are payable at a time when our portfolio of investments is not performing well overall.
We do not currently expect any material Equity Performance Awards to be payable until the late 2020s.
IPO Contingent Appreciation Interest
In connection with the consummation of the Exchange Offer Transactions, the Continuing Investors Partnerships issued to EPA Holdings a special limited partnership interest (the IPO Contingent Appreciation Interest) which may result in the transfer of a number of limited partnership interests in the Continuing Investors Partnerships from the Continuing Investors to EPA Holdings if the trading price of our Class A ordinary shares
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attains specified levels during the three year period after the expiration of the underwriter lock-up agreement. If so transferred, these limited partnership interests will be exchangeable for RP Holdings Class B Interests that in turn will be exchangeable for Class A ordinary shares of the Company.
The IPO Contingent Appreciation Interest will only affect the Continuing Investors ownership of the Continuing Investor Partnerships and will not affect the number of our outstanding ordinary shares or have a dilutive effect on investors that purchase Class A ordinary shares in this offering.
The IPO Contingent Appreciation Interest is intended to incentivize the management team of the Manager to complete an initial public offering and to maximize the trading price performance of the Company subsequent to the initial public offering.
The effect of the IPO Contingent Appreciation Interest will be to transfer from the Continuing Investors to EPA Holdings limited partnership interests in the Continuing Investor Partnerships exchangeable for up to 32,231,740 Class A ordinary shares of the Company, or up to 9.2% of the total outstanding Class A ordinary shares of the Company following the completion of the offering, calculated on a fully diluted basis.
RP Holdings Articles
As a result of the Reorganization Transactions, we will be the sole owner of the RP Holdings Class A Interests, which have the sole voting power in RP Holdings (subject to certain exceptions as described herein), and as a result we will have the right to appoint the board of directors of RP Holdings and therefore control the business and affairs of RP Holdings, and through RP Holdings and its subsidiaries, including RPI, conduct our business. The board of directors of RP Holdings will determine when dividends will be paid to the shareholders of RP Holdings and the amount of any such dividends (subject to the requirements with respect to the dividends paid to EPA Holdings in respect of its RP Holdings Class C Special Interest for the purpose of tax distributions as described above). If RP Holdings pays a dividend, such dividend will be paid to us and the Continuing Investors Partnerships, pro rata and pari passu in accordance with our respective ownership of RP Holdings Class A Interests and RP Holdings Class B Interests. As holder of the RP Holdings Class A Interests, we will also have the ability to direct the board of directors of RP Holdings to recommend dividends in accordance with the terms of the RP Holdings Articles to the extent lawful.
Registration Rights Agreements
Certain of our shareholders, including M. Germano Guiliani, will be provided with unlimited piggyback and twice annual demand registration rights and our directors and named executive officers will be provided with unlimited piggyback registration rights subject to customary limitations and restrictions. See Class A Ordinary Shares Eligible for Future SaleRegistration Rights.
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 290,554,830 Class A ordinary shares representing 83% of the total outstanding Class A ordinary shares after giving effect to the offering.
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Director Appointment Agreement
We have entered into an agreement (the Director Appointment Agreement) with M. Germano Giuliani. The terms of the Director Appointment Agreement generally provide that if and so long as (a) the ordinary shares of the Company owned by M. Germano Giuliani and his affiliates represent at least 5% of the outstanding ordinary shares (on an aggregate basis treating the Class A ordinary shares and Class B shares of the Company as a single class) and (b) M. Germano Giuliani maintains voting control over at least 5% of the outstanding ordinary shares (on an aggregate basis treating the Class A ordinary shares and Class B shares of the Company as a single class), then M. Germano Giuliani, subject to the approval of our nominating and corporate governance committee and applicable law, will be re-nominated as part of the Companys slate of directors at its next two annual meetings following this offering. Such nomination commitment is subject to M. Germano Giulianis agreement, on behalf of himself and his controlled affiliates, that for so long as he serves on the board of directors, he will (i) vote all ordinary shares of the Company owned or controlled by him and his affiliates in favor of the Companys slate of directors, (ii) comply with customary public company standstill provisions and (iii) refrain from making transfers of ordinary shares of the Company to any purchaser who, following such transfer, would own 5% or more of the outstanding ordinary shares of the Company.
Mr. Giuliani serves as a member of our board of directors.
Review, Approval or Ratification of Transactions with Related Parties
In connection with this offering, we have adopted a policy that our executive officers, directors, nominees for election as a director, beneficial owners of 5% or more of our ordinary shares and any members of the immediate family of any of the foregoing persons are not permitted to enter into a related party transaction with us without the approval or ratification of a designated committee of our board of directors (which will initially be the audit committee) or other committee designated by our board of directors made up solely of independent directors. Any request for us to enter into a transaction with an executive officer, director, nominee for election as a director, beneficial owner of 5% or more of our ordinary shares or any member of the immediate family of any of the foregoing persons, in which the amount involved exceeds $120,000 and such person would have a direct or indirect interest, must be presented to our audit committee or other committee of independent directors for review to determine whether the related party involved has a direct or indirect material interest in the transaction and whether the proposed transaction is on arms-length terms. In reviewing any such proposal, our audit committee or other committee of independent directors are to consider the relevant facts of the transaction, including the risks, costs and benefits to us and whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances.
In addition, under the Companies Act certain transactions with directors and their connected parties will require the approval of shareholders.
Indemnification of Directors and Officers
We generally will indemnify the following persons, to the fullest extent permitted by law, from and against all losses, claims, damages, liabilities, joint or several, expenses (including legal fees and expenses), judgments, fines, penalties, interest, settlements or other amounts on an after tax basis: any director or officer, any director or officer who is or was serving at our request as a director, officer, employee, member, partner, tax matters partner, agent, fiduciary or trustee of another person, any person who is named in the registration statement of which this prospectus forms a part as being or about to become a director or a person performing similar functions and any person the board of directors in its sole discretion designates as an indemnitee, which includes the members of the board of directors of RP Holdings. We have agreed to provide this indemnification unless there has been a final and non-appealable judgment by a court of competent jurisdiction determining that these persons acted in bad faith or engaged in fraud or willful misconduct, subject to the limitations set forth in the following paragraph. We have also agreed to provide this indemnification for criminal proceedings, subject to the limitations set forth in the following paragraph. Any indemnification under these provisions will only be out of our assets.
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The U.K. Companies Act renders void an indemnity for a director against any liability that would otherwise attach to that director in connection with any negligence, default, breach of duty or breach of trust in relation to the company of which he is a director. Furthermore, any provision that purports to oblige a company to indemnify (directly or indirectly) a director of that company or an associated company from any liability that would otherwise attach to that director in connection with any negligence, default, breach of duty or breach of trust in relation to the company of which he is a director is void other than with respect to certain permitted indemnity obligations in connection with the provision of insurances, qualifying third party indemnities and qualifying pension scheme indemnities.
We may also purchase insurance against liabilities asserted against and expenses incurred by persons for our activities, regardless of whether we would have the power to indemnify the person against such liabilities.
In addition, we will enter into indemnification agreements with each of our directors. The indemnification agreements will provide our directors with contractual rights to indemnification, expense advancement and reimbursement, to the fullest extent permitted by law. We will also indemnify such persons to the extent they serve at our request as directors, officers, employees or other agents of any other entity, to the fullest extent permitted by law.
180
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND THE SELLING SHAREHOLDERS
The following tables set forth information regarding beneficial ownership of our ordinary shares as of June 3, 2020, by:
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each person, or group of affiliated persons, known by us to own beneficially more than 5% of any class of our share capital; |
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each of the directors and the named executive officers individually; |
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all directors and our executive officers as a group; and |
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each selling shareholder. |
The numbers of Class A ordinary shares and Class B shares beneficially owned and percentages of beneficial ownership before this offering that are set forth below are based on the number of shares and RP Holdings Class B Interests to be issued and outstanding prior to this offering after giving effect to the Reorganization Transactions. See Organizational Structure. The numbers of Class A ordinary shares and Class B shares beneficially owned and percentages of beneficial ownership after this offering that are set forth below are based on (a) the number of shares and RP Holdings Class B Interests to be issued and outstanding immediately after this offering (after giving effect to the exchange of RP Holdings Class B Interests held by certain limited partners of the Continuing Investors Partnerships into Class B shares upon consummation of this offering) and (b) an assumed initial public offering price of $26.50 per share (the midpoint of the range set forth on the cover page of this prospectus).
The amounts and percentages of Class A ordinary shares and Class B shares beneficially owned are reported on the basis of the rules and regulations of the SEC governing the determination of beneficial ownership of securities. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of such security, or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days, including those Class A ordinary shares issuable pursuant to the Exchange Agreement. See Certain Relationships and Related Party TransactionsExchange Agreement. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities.
181
Unless otherwise noted below, the address of the persons listed on the table is c/o Royalty Pharma plc, 110 East 59th Street, New York, NY 10022. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all Class A ordinary shares.
The following table assumes the underwriters option to purchase additional shares of Class A ordinary shares is not exercised.
Class A Ordinary Shares Beneficially Owned (1)(2)(3) | Class B Shares Beneficially Owned(1)(2)(3) |
Combined
Voting Power |
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Before this
Offering |
Number of
Class A Shares Offered |
After this
Offering |
Before this
Offering |
After this
Offering |
Before this
Offering |
After this
Offering |
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Name of Beneficial
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Number | Percent | Number | Percent | Number | Percent | Number | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||
5% Equity Holders |
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Continuing US Investors Partnership |
| | | | | 217,113,795 | 88.68 | % | 217,113,795 | 88.68 | % | 40.55 | % | 36.47 | % | |||||||||||||||||||||||||||||
Continuing International Investors Partnership |
| | | | | 27,714,355 | 11.32 | % | 27,714,355 | 11.32 | % | 5.18 | % | 4.65 | % | |||||||||||||||||||||||||||||
Adage Capital Management L.P. (4) |
43,015,330 | 14.80 | % | | 43,015,330 | 12.27 | % | 3,355,130 | 1.37 | % | 3,355,130 | 1.37 | % | 8.66 | % | 7.79 | % | |||||||||||||||||||||||||||
Nogra Group SICAF - SIF S.A. (5) |
46,316,170 | 15.94 | % | | 46,316,170 | 13.21 | % | 3,612,590 | 1.48 | % | 3,612,590 | 1.48 | % | 9.33 | % | 8.39 | % | |||||||||||||||||||||||||||
Directors and Named Executive Officers |
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Pablo Legorreta (6) |
241,810 | 0.08 | % | | 241,810 | * | 60,632,920 | 24.77 | % | 60,632,920 | 24.77 | % | 11.37 | % | 10.22 | % | ||||||||||||||||||||||||||||
Terrance Coyne (7) |
23,270 | 0.01 | % | | 23,270 | * | 4,174,270 | 1.70 | % | 4,174,270 | 1.70 | % | * | * | ||||||||||||||||||||||||||||||
Christopher Hite (8) |
| | | | | | | | | | | |||||||||||||||||||||||||||||||||
George Lloyd (9) |
262,760 | 0.09 | % | | 262,760 | * | 6,901,250 | 2.82 | % | 6,901,250 | 2.82 | % | 1.34 | % | 1.20 | % | ||||||||||||||||||||||||||||
James Reddoch (10) |
25,030 | 0.01 | % | | 25,030 | * | 6,607,800 | 2.70 | % | 6,607,800 | 2.70 | % | 1.24 | % | 1.11 | % | ||||||||||||||||||||||||||||
Bonnie Bassler |
| | | | | | | | | | | |||||||||||||||||||||||||||||||||
William Ford (11) |
| | | | | 29,148,620 | 11.91 | % | 29,148,620 | 11.91 | % | 5.44 | % | 4.90 | % | |||||||||||||||||||||||||||||
Errol De Souza |
| | | | | 539,150 | * | 539,150 | * | * | * | |||||||||||||||||||||||||||||||||
Greg Norden |
| | | | | 155,940 | * | 155,940 | * | * | * | |||||||||||||||||||||||||||||||||
M. Germano Giuliani (12) |
12,554,660 | 4.32 | % | | 12,554,660 | 3.58 | % | 728,320 | * | 728,320 | * | 2.48 | % | 2.23 | % | |||||||||||||||||||||||||||||
Rory Riggs (13) |
| | | | | 15,416,240 | 6.30 | % | 15,416,240 | 6.30 | % | 2.88 | % | 2.59 | % | |||||||||||||||||||||||||||||
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All executive officers and directors as a group (ten persons) |
13,107,530 | 4.51 | % | | 13,107,530 | 3.74 | % | 124,304,510 | 50.77 | % | 124,304,510 | 50.77 | % | 25.67 | % | 23.08 | % | |||||||||||||||||||||||||||
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Selling Shareholders |
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SIF Investment Company Ltd. |
20,129,220 | 6.93 | % | 872,053 | 19,257,167 | 5.49 | % | 1,570,050 | * | 1,570,050 | * | 4.05 | % | 3.50 | % | |||||||||||||||||||||||||||||
Agape Fiduciary GmbH |
12,450,995 | 4.29 | % | 493,483 | 11,957,512 | 3.41 | % | 1,162,825 | * | 1,162,825 | * | 2.54 | % | 2.20 | % | |||||||||||||||||||||||||||||
Groton Restricted Fund LP |
97,620 | 0.03 | % | 60,217 | 37,403 | * | 6,226,433 | 2.54 | % | 6,226,433 | 2.54 | % | 1.18 | % | 1.05 | % | ||||||||||||||||||||||||||||
Susannah Gray |
1,000,000 | 0.34 | % | 616,854 | 383,146 | * | 4,788,526 | 1.96 | % | 4,788,526 | 1.96 | % | 1.08 | % | * | |||||||||||||||||||||||||||||
CHTE Private Equities, LLC |
1,500,000 | 0.52 | % | 925,281 | 574,719 | * | 3,868,359 | 1.58 | % | 3,868,359 | 1.58 | % | 1.00 | % | * | |||||||||||||||||||||||||||||
DFL Investing, Inc. |
1,300,000 | 0.45 | % | 801,910 | 498,090 | * | 3,679,540 | 1.50 | % | 3,679,540 | 1.50 | % | * | * | ||||||||||||||||||||||||||||||
Canadian Commercial Workers Industry Pension Plan Trust Fund |
5,677,230 | 1.95 | % | 2,831,379 | 2,845,851 | * | 442,810 | * | 442,810 | * | 1.14 | % | * |
182
Class A Ordinary Shares Beneficially Owned (1)(2)(3) | Class B Shares Beneficially Owned(1)(2)(3) |
Combined
Voting Power |
||||||||||||||||||||||||||||||||||||||||||
Before this
Offering |
Number of
Class A Shares Offered |
After this
Offering |
Before this
Offering |
After this
Offering |
Before this
Offering |
After this
Offering |
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Name of Beneficial
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Number | Percent | Number | Percent | Number | Percent | Number | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||
Rophar LLC |
600,000 | 0.21 | % | 370,112 | 229,888 | * | 2,744,828 | 1.12 | % | 2,744,828 | 1.12 | % | * | * | ||||||||||||||||||||||||||||||
Atlantic Security Bank |
2,420,270 | 0.83 | % | 13,885 | 2,406,385 | * | 188,780 | * | 188,780 | * | * | * | ||||||||||||||||||||||||||||||||
Grandchildrens Trust Holdings LLC |
400,000 | 0.14 | % | 246,742 | 153,258 | * | 2,012,518 | * | 2,012,518 | * | * | * | ||||||||||||||||||||||||||||||||
Dupont Trading Limited |
1,076,110 | 0.37 | % | 135,708 | 940,402 | * | 83,940 | * | 83,940 | * | * | * | ||||||||||||||||||||||||||||||||
Webster, Mrak And Blumberg PSP |
846,120 | 0.29 | % | 53,450 | 792,670 | * | 66,000 | * | 66,000 | * | * | * | ||||||||||||||||||||||||||||||||
Trust B UAD 11/5/74 FBO Beverly Sackler |
220,890 | 0.08 | % | 136,257 | 84,633 | * | 747,293 | * | 747,293 | * | * | * | ||||||||||||||||||||||||||||||||
The ABM Irrevocable Trust |
100,000 | 0.03 | % | 61,685 | 38,315 | * | 738,315 | * | 738,315 | * | * | * | ||||||||||||||||||||||||||||||||
Trustees Of Boston University |
1,604,410 | 0.55 | % | 981,526 | 622,884 | * | 125,140 | * | 125,140 | * | * | * | ||||||||||||||||||||||||||||||||
Thoroughbred Management Inc. |
627,680 | 0.22 | % | 61,685 | 565,995 | * | 48,960 | * | 48,960 | * | * | * | ||||||||||||||||||||||||||||||||
The University Of Connecticut Foundation, Inc. |
759,730 | 0.26 | % | 252,602 | 507,128 | * | 59,260 | * | 59,260 | * | * | * | ||||||||||||||||||||||||||||||||
Pictet Private Equity Investors SA |
651,150 | 0.22 | % | 144,332 | 506,818 | * | 50,790 | * | 50,790 | * | * | * | ||||||||||||||||||||||||||||||||
Eric M. Hecht Revocable Trust |
250,000 | 0.09 | % | 154,214 | 95,786 | * | 384,886 | * | 384,886 | * | * | * | ||||||||||||||||||||||||||||||||
Accumulus Fund, L.P. |
50,000 | 0.02 | % | 30,843 | 19,157 | * | 390,387 | * | 390,387 | * | * | * | ||||||||||||||||||||||||||||||||
MLM B Holdings LLC |
420,070 | 0.14 | % | 259,122 | 160,948 | * | 193,708 | * | 193,708 | * | * | * | ||||||||||||||||||||||||||||||||
Ampex Retirement Master Trust |
555,320 | 0.19 | % | 339,720 | 215,600 | * | 43,310 | * | 43,310 | * | * | * | ||||||||||||||||||||||||||||||||
James S. And Maria Rielly |
150,000 | 0.05 | % | 92,528 | 57,472 | * | 150,102 | * | 150,102 | * | * | * | ||||||||||||||||||||||||||||||||
Convex Management & Co. Limited |
102,870 | 0.04 | % | 34,205 | 68,665 | * | 8,020 | * | 8,020 | * | * | * | ||||||||||||||||||||||||||||||||
The University Of Connecticut Foundation, Inc. (As Agent For The University Of Connecticut) |
30,360 | 0.01 | % | 10,098 | 20,262 | * | 2,370 | * | 2,370 | * | * | * | ||||||||||||||||||||||||||||||||
Grace Church School |
32,600 | 0.01 | % | 20,109 | 12,491 | * | 2,540 | * | 2,540 | * | * | * |
183
The following table assumes the underwriters option to purchase additional shares of Class A ordinary shares is exercised in full.
Class A Ordinary Shares Beneficially Owned(1)(2)(3) | Class B Shares Beneficially Owned(1)(2)(3) |
Combined
Voting Power |
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Before this
Offering |
Number of
Class A Shares Offered |
After this
Offering |
Before this
Offering |
After this
Offering |
Before this
Offering |
After this
Offering |
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Name of Beneficial
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Number | Percent | Number | Percent | Number | Percent | Number | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||
5% Equity Holders |
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Continuing US Investors Partnership |
| | | | | 214,780,980 | 88.57 | % | 214,780,980 | 88.57 | % | 40.12 | % | 35.82 | % | |||||||||||||||||||||||||||||
Continuing International Investors Partnership |
| | | | | 27,714,355 | 11.43 | % | 27,714,355 | 11.43 | % | 5.18 | % | 4.62 | % | |||||||||||||||||||||||||||||
Adage Capital Management LP(4) |
43,015,330 | 14.69 | % | | 43,015,330 | 12.04 | % | 3,355,130 | 1.38 | % | 3,355,130 | 1.38 | % | 8.66 | % | 7.73 | % | |||||||||||||||||||||||||||
Nogra Group SICAF-SIF S.A.(5) |
46,316,170 | 15.81 | % | | 46,316,170 | 12.97 | % | 3,612,590 | 1.49 | % | 3,612,590 | 1.49 | % | 9.33 | % | 8.33 | % | |||||||||||||||||||||||||||
Directors and Named Executive Officers |
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Pablo Legorreta(6) |
241,810 | 0.08 | % | | 241,810 | 0.07 | % | 60,632,920 | 25.00 | % | 60,632,920 | 25.00 | % | 11.37 | % | 10.15 | % | |||||||||||||||||||||||||||
Terrance Coyne(7) |
23,270 | * | | 23,270 | * | 4,174,270 | 1.72 | % | 4,174,270 | 1.72 | % | * | * | |||||||||||||||||||||||||||||||
Christopher Hite(8) |
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George Lloyd(9) |
262,760 | * | | 262,760 | * | 6,901,250 | 2.85 | % | 6,901,250 | 2.85 | % | 1.34 | % | 1.19 | % | |||||||||||||||||||||||||||||
James Reddoch(10) |
25,030 | * | | 25,030 | * | 6,607,800 | 2.72 | % | 6,607,800 | 2.72 | % | 1.24 | % | 1.11 | % | |||||||||||||||||||||||||||||
Bonnie Bassler |
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William Ford(11) |
| | | | | 29,148,620 | 12.02 | % | 29,148,620 | 12.02 | % | 5.44 | % | 4.86 | % | |||||||||||||||||||||||||||||
Errol De Souza |
| | | | | 539,150 | * | 539,150 | * | * | * | |||||||||||||||||||||||||||||||||
Greg Norden |
| | | | | 155,940 | * | 155,940 | * | * | * | |||||||||||||||||||||||||||||||||
M. Germano Giuliani(12) |
12,554,660 | 4.29 | % | | 12,554,660 | 3.51 | % | 728,320 | * | 728,320 | * | 2.48 | % | 2.22 | % | |||||||||||||||||||||||||||||
Rory Riggs(13) |
| | | | | 15,416,240 | 6.36 | % | 15,416,240 | 6.36 | % | 2.88 | % | 2.57 | % | |||||||||||||||||||||||||||||
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All executive officers and directors as a group (ten persons) |
13,107,530 | 4.48 | % | | 13,107,530 | 3.67 | % | 124,304,510 | 51.26 | % | 124,304,510 | 51.26 | % | 25.67 | % | 22.91 | % | |||||||||||||||||||||||||||
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Selling Shareholders |
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SIF Investment Company Ltd. |
20,129,220 | 6.87 | % | 1,413,710 | 18,715,510 | 5.24 | % | 1,570,050 | * | 1,570,050 | * | 4.05 | % | 3.38 | % | |||||||||||||||||||||||||||||
Agape Fiduciary GmbH |
12,450,995 | 4.25 | % | 800,000 | 11,650,995 | 3.26 | % | 1,162,825 | * | 1,162,825 | * | 2.54 | % | 2.14 | % | |||||||||||||||||||||||||||||
Groton Restricted Fund LP |
97,620 | * | 97,620 | | | 6,189,030 | 2.55 | % | 6,189,030 | 2.55 | % | 1.17 | % | 1.03 | % | |||||||||||||||||||||||||||||
Susannah Gray |
1,000,000 | * | 1,000,000 | | | 4,405,380 | 1.82 | % | 4,405,380 | 1.82 | % | 1.01 | % | * | ||||||||||||||||||||||||||||||
CHTE Private Equities, LLC |
1,500,000 | * | 1,500,000 | | | 3,293,640 | 1.36 | % | 3,293,640 | 1.36 | % | * | * | |||||||||||||||||||||||||||||||
DFL Investing, Inc. |
1,300,000 | * | 1,300,000 | | | 3,181,450 | 1.31 | % | 3,181,450 | 1.31 | % | * | * | |||||||||||||||||||||||||||||||
Atlantic Security Bank |
2,420,270 | * | 22,510 | 2,397,760 | * | 188,780 | * | 188,780 | * | * | * | |||||||||||||||||||||||||||||||||
Rophar LLC |
600,000 | * | 600,000 | | | 2,514,940 | 1.04 | % | 2,514,940 | 1.04 | % | * | * | |||||||||||||||||||||||||||||||
Grandchildrens Trust Holdings LLC |
400,000 | * | 400,000 | | | 1,859,260 | * | 1,859,260 | * | * | * | |||||||||||||||||||||||||||||||||
Canadian Commercial Workers Industry Pension Plan Trust Fund |
5,677,230 | 1.94 | % | 4,590,030 | 1,087,200 | * | 442,810 | * | 442,810 | * | 1.14 | % | * | |||||||||||||||||||||||||||||||
Dupont Trading Limited |
1,076,110 | * | 220,000 | 856,110 | * | 83,940 | * | 83,940 | * | * | * |
184
Class A Ordinary Shares Beneficially Owned | Class B Shares Beneficially Owned |
Combined
Voting Power |
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Before this
Offering |
Number of
Class A Shares Offered |
After this
Offering |
Before this
Offering |
After this
Offering |
Before this
Offering |
After this
Offering |
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Name of Beneficial
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Number | Percent | Number | Percent | Number | Percent | Number | Percent | Percent | Percent | ||||||||||||||||||||||||||||||||||
Webster, Mrak And Blumberg PSP |
846,120 | * | 86,650 | 759,470 | * | 66,000 | * | 66,000 | * | * | * | |||||||||||||||||||||||||||||||||
The ABM Irrevocable Trust |
100,000 | * | 100,000 | | | 700,000 | * | 700,000 | * | * | * | |||||||||||||||||||||||||||||||||
Trust B UAD 11/5/74 FBO Beverly Sackler |
220,890 | * | 220,890 | | | 662,660 | * | 662,660 | * | * | * | |||||||||||||||||||||||||||||||||
Thoroughbred Management Inc. |
627,680 | * | 100,000 | 527,680 | * | 48,960 | * | 48,960 | * | * | * | |||||||||||||||||||||||||||||||||
Pictet Private Equity Investors SA |
651,150 | * | 233,980 | 417,170 | * | 50,790 | * | 50,790 | * | * | * | |||||||||||||||||||||||||||||||||
The University Of Connecticut Foundation, Inc. |
759,730 | * | 409,500 | 350,230 | * | 59,260 | * | 59,260 | * | * | * | |||||||||||||||||||||||||||||||||
Accumulus Fund, L.P. |
50,000 | * | 50,000 | | | 371,230 | * | 371,230 | * | * | * | |||||||||||||||||||||||||||||||||
Eric M. Hecht Revocable Trust |
250,000 | * | 250,000 | | | 289,100 | * | 289,100 | * | * | * | |||||||||||||||||||||||||||||||||
Trustees Of Boston University |
1,604,410 | * | 1,591,180 | 13,230 | * | 125,140 | * | 125,140 | * | * | * | |||||||||||||||||||||||||||||||||
James S. And Maria Rielly |
150,000 | * | 150,000 | | | 92,630 | * | 92,630 | * | * | * | |||||||||||||||||||||||||||||||||
Convex Management & Co. Limited |
102,870 | * | 55,450 | 47,420 | * | 8,020 | * | 8,020 | * | * | * | |||||||||||||||||||||||||||||||||
Ampex Retirement Master Trust |
555,320 | * | 550,730 | 4,590 | * | 43,310 | * | 43,310 | * | * | * | |||||||||||||||||||||||||||||||||
MLM B Holdings LLC |
420,070 | * | 420,070 | | | 32,760 | * | 32,760 | * | * | * | |||||||||||||||||||||||||||||||||
The University Of Connecticut Foundation, Inc. (As Agent For The University Of Connecticut) |
30,360 | * | 16,370 | 13,990 | * | 2,370 | * | 2,370 | * | * | * | |||||||||||||||||||||||||||||||||
Grace Church School |
32,600 | * | 32,600 | | | 2,540 | * | 2,540 | * | * | * |
* |
Indicates beneficial ownership of less than 1%. |
(1) |
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 290,554,830 Class A ordinary shares representing 83% of the total outstanding Class A ordinary shares after giving effect to the offering. See Certain Relationships and Related Party TransactionsExchange Agreement. |
(2) |
Following the Reorganization Transactions, the Continuing Investors will indirectly own RP Holdings Class B Interests and a corresponding number of Class B shares held by the applicable Holders Partnership and will be entitled to one vote for each Class B share held by them. |
(3) |
Represents percentage of voting power of the Class A ordinary shares and Class B shares voting together as a single class. See Description of Share Capital. |
(4) |
Reflects shares held by Adage Capital Management, L.P., which are held through Adage Capital Partners, LP, a Delaware limited partnership (the Fund). Adage Capital Partners, GP, LLC (ACPGP), serves as the general |
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partner of the Fund and as such has discretion over the portfolio of securities beneficially owned by the Fund. Adage Capital Advisors, LLC, a Delaware limited liability company (ACA), is managing member of ACPGP and directs ACPGPs operations. Robert Atchinson and Phillip Gross are the managing members of ACPGP and ACA and general partners of the Fund. Robert Atchinson and Phillip Gross disclaim beneficial ownership of the reported securities except to the extent of their pecuniary interest therein. The address of ACPGP is 200 Clarendon St. 52nd Floor, Boston, MA 02116. |
(5) |
Reflects shares held by Nogra Group SICAF SIF GG Strategic (GG Strategic) and Nogra Group SICAF SIF MGG Strategic (MGG Strategic, and together with GG Strategic, the Nogra Funds), sub-funds managed and administered by Nogra Group SICAF - SIF S.A. (Nogra Group), a closed-ended investment entity organized under the laws of the Grand Duchy of Luxembourg. A board of directors consisting of Giammaria Giuliani, Achille G. Severgnini, Marco Sterzi and Franco Toscano has voting and dispositive power over the securities managed by Nogra Group. Each member of the board disclaims beneficial ownership over such shares. Nogra Group is owned by the GG Trust, of which Giammaria Giuliani is the beneficiary, and the MGG Trust (together with the GG Trust, the Trusts), of which M. Germano Giuliani, the brother of Giammaria Giuliani, is the beneficiary. The GG Trust is the 100% economic owner of the shares held by GG Strategic, and the MGG Trust is the 100% economic owner of the shares held by MGG Strategic. Each of Giammaria Giuliani and M. Germano Giuliani disclaim beneficial ownership over the shares beneficially owned by the Nogra Funds. The trustee of each of the Trusts is GISEV Trustees Limited. The protector of each of the Trusts is Achille G. Severgnini, who has the power to remove and replace the trustee of each the Trusts. The address of Nogra Group is 18, Avenue de la Porte Neuve, L-2227 Luxembourg. |
(6) |
Represents shares owned by Mr. Legorreta and by a family vehicle controlled by Mr. Legorreta. Mr. Legorreta has agreed with the Company to retain and not sell before February 2025 certain of his interests in Continuing Investors Partnerships exchangeable into approximately 37,432,416 Class A ordinary shares. Our Board of Directors has agreed to consider waiving this restriction for important life events or where this restriction would otherwise impose a hardship. Mr. Legorreta has pledged interests in Continuing Investors Partnership, exchangeable for 58,107,710 Class A ordinary shares pursuant to a pledge agreement to secure a loan made to Mr. Legorreta by an affiliate of one of the underwriters. Excludes shares beneficially owned by Mr. Legorretas spouse. |
(7) |
Represents shares owned by Mr. Coyne and by a family vehicle controlled by Mr. Coyne. Mr. Coyne has agreed with our Manager to retain and not sell before February 2025 certain of his interests in Continuing Investors Partnerships that are exchangeable into 3,251,928 Class A ordinary shares. Our Manager has agreed to consider waiving this restriction for important life events or where this restriction would otherwise impose a hardship. Excludes shares beneficially owned by Mr. Coynes spouse. |
(8) |
Does not include 625,000 Class B shares granted to Mr. Hite that do not vest within sixty days. |
(9) |
Represents shares owned by Mr. Lloyd and by family vehicles controlled by Mr. Lloyd. Mr. Lloyd has agreed with our Manager to retain and not sell before February 2025 certain of his interests in Continuing Investors Partnerships that are exchangeable into 4,573,096 Class A ordinary shares. Our Manager has agreed to consider waiving this restriction for important life events or where this restriction would otherwise impose a hardship. Mr. Lloyd has pledged interests in Continuing Investors Partnerships exchangeable for 5,967,070 Class A ordinary shares pursuant to a pledge agreement to secure a loan made to Mr. Lloyd by an affiliate of one of the underwriters. |
(10) |
Represents shares owned by Mr. Reddoch and by a family vehicle controlled by Mr. Reddoch. Mr. Reddoch has agreed with our Manager to retain and not sell before February 2025 certain of his interests in Continuing Investors Partnerships that are exchangeable into 4,851,184 Class A ordinary shares. Our Manager has agreed to consider waiving this restriction for important life events or where this restriction would otherwise impose a hardship. |
(11) |
Consists of interests in RP US Partners 2019, LP held by General Atlantic (RP) Collections, LLC (GA RP Collections) exchangeable for 26,673,850 Class A ordinary shares. Mr. Ford is employed by an entity affiliated with GA RP Collections. The members of GA RP Collections that share beneficial ownership of the interests held by GA RP Collections are indirectly held by the following General Atlantic investment funds, (the GA Funds): General Atlantic Partners AIV-1 A, L.P. (GAP AIV-1 A), General Atlantic Partners AIV-1 B, L.P. (GAP AIV-1 B), GAP Coinvestments CDA, L.P. (GAPCO CDA), GAP Coinvestments III, LLC (GAPCO III), GAP Coinvestments IV, L.P. (GAPCO IV) and GAP Coinvestments V, LLC (GAPCO V). General Atlantic (SPV) GP, LLC (GA SPV) is the sole non-member manager of GA RP Collections. The general partner of GAP AIV-1 A and GAP AIV-1 B is General Atlantic GenPar, L.P. (GA GenPar). The general partner of GA GenPar is General Atlantic LLC (GA LLC). GA LLC is the sole member of GA SPV, the managing member of GAPCO III, GAPCO IV and GAPCO V and the general partner of GAPCO CDA. There are eight members of the management committee of GA LLC (the GA Management Committee). Mr. Ford is a member of the GA Management Committee and is Chief Executive Officer and a Managing Director of GA LLC. GA LLC, GA |
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GenPar, GA SPV, GAP AIV-1 A, GAP AIV-1 B, GAPCO III, GAPCO IV, GAPCO V, GAPCO CDA (collectively, the GA Group) are a group within the meaning of Rule 13d-5 of the Securities Exchange Act of 1934, as amended. Each of the members of the GA Management Committee disclaims ownership of the ordinary shares except to the extent he or she has a pecuniary interest therein. In addition, Steamboat Park Investments, LLC (SPI) and Madison Park Capital, LLC (MPC), two other U.S. based entities within the General Atlantic private equity group, directly and indirectly hold interests exchangeable for 2,474,770 Class A ordinary shares in the Company. Mr. Ford has a private membership interest in SPI and MPC as an individual and through a family vehicle, and is an officer and a member of the Board of Managers of each of SPI and MPC. Mr. Ford disclaims ownership of such ordinary shares except to the extent he has a pecuniary interest therein. The business address of Mr. Ford, the GA Group, SPI and MPC is c/o General Atlantic Service Company, L.P., 55 East 52nd Street, 33rd Floor, New York, NY 10055. |
(12) |
Reflects 9,077,140 shares held directly by Skyeline Management Ltd and 3,477,520 shares held directly by Avara Management Ltd. Skyeline Management Ltd is wholly-owned by Avara Management Ltd. Avara Management Ltd is wholly-owned by M. Germano Giuliani. This amount excludes 23,390,000 Class A ordinary shares and 1,824,380 Class B shares owned by Nogra Group SICAF-SIF S.A. MGG Strategic Compartment, which is owned by a trust of which Mr. Giuliani is the beneficiary. Mr. Giuliani has no investment or voting power over such shares. Mr. Giuliani disclaims beneficial ownership over the shares beneficially owned by Nogra Group. |
(13) |
Represents shares owned by Mr. Riggs and 8,683,560 shares held by New Ventures Select, LLC, New Ventures I, LLC and New Ventures III, LLC. Mr. Riggs has voting and investment control with respect to the shares held by New Ventures Select, LLC, New Ventures I, LLC and New Ventures III, LLC. Mr. Riggs has pledged interests in Continuing Investors Partnerships exchangeable for 4,352,670 Class A ordinary shares pursuant to a pledge agreement to secure a loan made to Mr. Riggs by an affiliate of one of the underwriters. |
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The following description is a summary of our share capital as specified in our Articles of Association, which will be adopted in connection with this offering. You are encouraged to read the Articles of Association in their entirety. This summary does not purport to be complete and the statements in this summary are qualified in their entirety by reference to, and are subject to, the detailed provisions of our Articles of Association and the U.K. Companies Act.
Capital Structure
Issued Share Capital
Immediately prior to the closing of this offering, we will have two classes of voting shares: Class A and Class B, each of which has one vote per share. The Class A ordinary shares 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. We will also have in issue 50,000 Class R redeemable shares, which shall not entitle the holder to voting or dividend rights, and deferred shares, which shall not entitle the holder to voting or dividend rights. The purpose of the Class R redeemable shares was to ensure Royalty Pharma Limited had sufficient sterling denominated share capital at the time it was re-registered as a public limited company, as required by the U.K. Companies Act. The Class R redeemable shares may be redeemed at some future point following closing of this offering in order to leave the Company with only U.S. dollar denominated share capital. Any such redemption would be at nominal value.
Immediately prior to the closing of this offering, our issued and outstanding share capital will be $29,593 and £50,000 divided into 290,554,830 Class A ordinary shares with a nominal value of $0.0001 per share, 244,828,150 Class B shares with a nominal value of $0.000001 per share, 50,000 Class R redeemable shares with a nominal value of £1 per share, two deferred shares with a nominal value of $1.00 per share and 290,554,830 deferred shares with a nominal value of $0.000001 per share.
The board of directors is expected to be granted an authority from our shareholders prior to the consummation of this offering to allot and issue new Class A ordinary shares and other shares, and to grant rights to subscribe for or to convert any security into new Class A ordinary shares or other shares, up to a maximum aggregate nominal amount (i.e., par value) of $300,000, for a period expiring (unless previously renewed, varied or revoked by the Company in general meeting) on May 31, 2025. Renewal of such authorization is expected to be sought at least once every five years, and possibly more frequently. This authority will be in addition to authorities to allot and issue new Class A ordinary shares in exchange for RP Holdings Class B Interests and in connection with this offering. The rights and restrictions to which the Class A ordinary shares are subject are prescribed by our Articles of Association.
Class A Ordinary Shares
Voting rights. The holders of Class A ordinary shares are entitled to one vote per share on all matters to be voted upon by the shareholders other than with respect to matters that require a separate class vote in accordance with applicable law.
Dividend rights. Subject to preferences that may be applicable, the holders of Class A ordinary shares are entitled to receive ratably such dividends, if any, as may be approved from time to time by the board of directors out of funds legally available therefor. See Dividend Policy.
Rights upon liquidation. In the event of liquidation, dissolution or winding up of Royalty Pharma the holders of Class A ordinary shares are entitled to share ratably in all assets remaining after payment of liabilities.
Class B Shares
Voting rights. The holders of Class B shares are entitled to one vote per share on all matters to be voted other than with respect to matters that require a separate class vote in accordance with applicable law.
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Dividend rights. The holders of Class B shares do not have any rights to receive dividends.
Rights upon liquidation. The holders of Class B shares only have limited rights to receive a distribution equal to their nominal value upon a liquidation, dissolution or winding up of Royalty Pharma, following the prior payment of the nominal capital paid up or credited as paid up on each Class A ordinary share as well as an amount of $10,000,000 on each Class A ordinary share upon such liquidation, dissolution or winding up.
Dividends
Under English law, the Company may only pay dividends out of profits available for that purpose. The Companys profits available for distribution are its 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 the Companys distributable reserves is a cumulative calculation. The Company 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 assets to less than that aggregate.
Our Articles of Association will authorize our board of directors to approve interim dividends without shareholder approval to the extent that the approval of such dividends appears justified by profits. Our board of directors may also recommend a final dividend to be approved and declared by the shareholders at an annual general meeting and may direct that the payment be made by distribution of assets, shares or cash. No dividend may exceed the amount recommended by the board of directors. See Dividend Policy.
Our Articles of Association will also permit a scrip dividend scheme under which the board of directors may offer any holders of Class A ordinary shares the right to elect to receive Class A ordinary shares, credited as fully paid, instead of cash in respect of the whole (or some part determined by the board of directors) all or any dividend subject to certain terms and conditions set out in our Articles of Association.
The entitlement to a dividend lapses if unclaimed for 12 years.
Requisitioning Shareholder Meetings
If any shareholder requests, in accordance with the provisions of the U.K. Companies Act, us to (a) call a general meeting for the purposes of bringing a resolution before the meeting, or (b) give notice of a resolution to be proposed at a general meeting, such request must among other things (in addition to any other statutory requirements):
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set forth the name and address of the requesting person and equivalent details of any person associated with it or him (in the manner contemplated by our Articles of Association), together with details of all interests held by it or him (and their associated persons) in us; |
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if the request relates to any business the member proposes to bring before the meeting, set forth a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, the text of the proposal (including the complete text of any proposed resolutions) and, in the case of any proposal to amend our Articles of Association, the complete text of the proposed amendment; |
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set forth, as to each person (if any) whom the shareholder proposes to nominate for appointment to the board of directors, all information that would be required to be disclosed by us in connection with the election of directors, and such other information as we may require to determine the eligibility of such proposed nominee for appointment to the board. |
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Quorum for General Meetings
Our Articles of Association will provide that no business shall be transacted at any general meeting unless a quorum is present.
The necessary quorum for a general meeting is the shareholders who together represent at least one-third of the voting rights of our voting shares entitled to vote at the meeting, present in person or by proxy, save that if only one shareholder is entitled to attend and vote at the general meeting, one qualifying shareholder present at the meeting and entitled to vote is a quorum.
Voting Rights
Under the Articles of Association, each holder of Class A ordinary shares or Class B shares is entitled to one vote for each ordinary share that he or she holds as of the record date for the meeting. Neither English law nor any of our constituent documents places limitations on the right of nonresident or foreign owners to vote or hold ordinary shares.
The voting at a general meeting must be taken by poll. Subject to any relevant special rights or restrictions attached to any shares, on a poll taken at a general meeting, each qualifying shareholder present in person or by proxy (or, in the case of a corporation, a corporate representative) and entitled to vote on the resolution has one vote for every Class A ordinary share or Class B share held by such shareholder.
An ordinary resolution must be approved by a simple majority, and a special resolution approved by at least 75%, of shareholders attending and voting, whether in person or by proxy.
Amendment to our Articles of Association
Under English law, shareholders may amend the articles of association of a company by special resolution. However, certain provisions of our Articles of Association require a higher threshold of shareholder approval or satisfaction of other procedures before such provision or provisions can be varied.
The article in our Articles of Association which requires voting at a general meeting to be taken on a poll may only be removed, amended or varied by resolution of the shareholders passed unanimously.
General Meetings and Notices
An annual general meeting must be called by not less than 21 clear days notice (i.e., excluding the date of receipt or deemed receipt of the notice and the date of the meeting itself). At least seven clear days notice is required for any adjourned meeting, and such meeting must be held not less than 14 days but not more than 28 days after adjournment at such time and place specified for the purpose in the notice calling the meeting or as decided by the chairman of the meeting.
The notice of a general meeting must be given to the shareholders (other than any who, under the provisions of the Articles of Association or the terms of allotment or issue of shares, are not entitled to receive notice), to the board of directors and to the auditors. Under English law, we are required to hold an annual general meeting of our shareholders within six months from the day following the end of our financial year. Subject to the foregoing, a general meeting may be held at a time and place determined by the board of directors.
Under English law, our board of directors must convene such a meeting once it has received requests to do so from shareholders representing at least 5% of the paid up share capital of the Company as carries voting rights at general meetings (excluding any paid-up capital held as treasury shares).
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Under our Articles of Association, a general meeting may also be called if the Company has fewer than two directors and the director (if any) is unable or unwilling to appoint sufficient directors to make up a quorum or to call a general meeting to do so. In such case, two or more shareholders may call a general meeting (or instruct the secretary to do so) for the purpose of appointing one or more directors.
Winding Up
In the event of a voluntary winding up of the Company, the liquidator may, with the sanction of a special resolution of the Company and any other sanction required by law, subject to the U.K. Insolvency Act of 1986, after applying the Companys property to satisfy the Companys liabilities, divide among the holders of Class A ordinary shares of the Company the whole or any part of the assets of the Company, whether they consist of property of the same kind or not, and vest the whole or any part of the assets in trustees upon such trusts for the benefit of the holders of Class A ordinary shares of the Company as the liquidator, with such sanction, may determine. No shareholder of the Company shall be compelled to accept any assets upon which there is a liability.
On a return of capital on a liquidation, reduction of capital or otherwise, the surplus assets of the Company available for distribution among the holders of Class A ordinary shares shall be applied pro rata (rounded to the nearest whole number).
Rights of Pre-Emption on New Issues of Shares
Under the U.K. Companies Act, the allotment of equity securities (except pursuant to an employees share scheme and as bonus shares) that are to be paid for wholly in cash must be offered first to the existing holders of equity securities in proportion to the respective nominal amounts (i.e., par values) of their holdings on the same or more favorable terms, unless a special resolution to the contrary has been passed or the articles of association otherwise provide disapplication from this requirement (which disapplication can be for a maximum of five years after which shareholders approval would be required to renew the disapplication). Equity securities means ordinary shares or rights to subscribe for, or convert securities into, ordinary shares where ordinary shares means shares other than shares that, with respect to dividends and capital, carry a right to participate only up to a specified amount in a distribution. In relation to the Company, equity securities will therefore include the Class A ordinary shares, and all rights to subscribe for or convert securities into such shares.
The board of directors is expected to be granted authority from our shareholders prior to the consummation of this offering to allot and issue new Class A ordinary shares and other shares and to grant rights to subscribe for or to convert any security into new Class A ordinary shares or other shares, up to a maximum aggregate nominal amount (i.e., par value) of $300,000 for a period expiring (unless previously renewed, varied or revoked by the Company in general meeting) on May 31, 2025. Renewal of such authorization is expected to be sought at least once every five years, and possibly more frequently.
Disclosure of Ownership Interests in Shares
Section 793 of the U.K. Companies Act gives us the power to require persons whom we know have, or whom we have reasonable cause to believe have, or within the previous three years have had, an interest in any shares of the Company to disclose specified information regarding those shares. Failure to provide the information requested within the prescribed period (or knowingly or recklessly providing false information after the date the notice is sent) can result in criminal or civil sanctions being imposed against the person in default.
Under our Articles of Association, if any of our shareholders, or any other person appearing to be interested in the shares of the Company held by such shareholder, has been duly served with a notice under section 793 and fails to give us the information required by such notice or has made a statement which is false or inadequate in a
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material particular, then our board of directors may, in its absolute discretion at any time by notice, withdraw voting rights and place restrictions on the rights to receive dividends and refuse to register a transfer of such shares.
Alteration of Share Capital/Share Repurchases
Subject to the provisions of the U.K. Companies Act, and without prejudice to any relevant special rights attached to any class of shares, we may, from time to time, among other things:
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increase our share capital by allotting and issuing new shares in accordance with our Articles of Association and any relevant shareholder resolution; |
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consolidate all or any of our share capital into shares of a larger nominal amount (i.e., par value) than the existing shares; |
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subdivide any of our shares into shares of a smaller nominal amount (i.e., par value) than its existing shares; or |
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redenominate our share capital or any class of share capital |
The Company may not consolidate, divide, subdivide or redenominate any class of ordinary shares without consolidating, dividing, subdividing or redenominating (as the case may be) the other classes of voting shares.
English law prohibits us from purchasing our own shares unless such purchase has been approved by our shareholders. Shareholders may approve two different types of such share purchases: on-market share purchases or off-market share purchases. On-market purchases may only be made on a recognised investment exchange, which does not include Nasdaq, which is the only exchange on which the Companys shares will be traded. In order to purchase our own shares, as a Company listed on Nasdaq, we must therefore obtain the approval of our shareholders for an off-market purchase (on the basis of a specific purchase agreement with a financial intermediary) to acquire shares that are traded on Nasdaq. This requires our shareholders to pass an ordinary resolution approving an off-market purchase, where such approval may be for a maximum period of five years. In relation to an off-market purchase, we may not acquire our own shares until the terms of the contract pursuant to which the purchase(s) are to be made have been authorized by our shareholders.
Transfer and Registration of Shares
Our Articles of Association allow shareholders to transfer all or any of their shares by instrument of transfer in writing in any usual form or in any other form which our board of directors may approve.
The instrument of transfer must be executed by or on behalf of the transferor and (in the case of a transfer of a share that is not fully paid) by or on behalf of the transferee. Our Articles of Association also permit transfer of shares in uncertificated form by means of a relevant electronic system.
We may not charge a fee for registering the transfer of a share.
Our board of directors may, in its absolute discretion, refuse to register a transfer of shares in certificated form if it is not fully paid (provided that the refusal does not prevent dealings in the shares from taking place on an open and proper basis) or is with respect to a share on which we have a lien and sums in respect of which the lien exists are payable and are not paid within 14 clear days after due notice has been sent. If our board of directors refuses to register a transfer of a share, it shall notify the transferor of the refusal and the reasons for it as soon as practicable and in any event within two months after the date on which the instrument of transfer was lodged with us (in the case of a transfer of a share in certificated form) or the instructions to the relevant system received. Any instrument of transfer which our board of directors refuses to register shall (except in the case of fraud) be returned to the person lodging it when notice of the refusal is sent.
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Computershare Trust Company, N.A. will act as our transfer agent and registrar. The share register reflects only registered owners of our Class A ordinary shares, Class B shares, Class R redeemable shares and deferred shares. Registration in the Companys share register will be determinative of ownership of shares of the Company. A shareholder who holds shares beneficially will not be the holder of record of such shares. Instead, the clearance service or depositary (for example, Cede & Co, as nominee for the Depository Trust Company, or DTC, or GTU Ops, Inc., as nominee for Computershare Trust Company, N.A.) or other nominee will be the holder of record of those shares. Accordingly, a transfer of shares from a person who holds such shares beneficially to a person who holds such shares beneficially through a clearance service or depositary or other nominee will not be registered in the Companys official share register, as the depositary or other nominee will remain the record holder of any such shares.
In the event that the Company notifies one or both of the parties to a share transfer that it believes stamp duty or stamp duty reserve tax is required to be paid in connection with a transfer of shares of the Company, if the parties to the transfer have an instrument of transfer duly stamped to the extent required and then provide such instrument of transfer to the Companys share registrar, the buyer will be registered as the legal owner of the relevant shares on the official share register, subject to our rights with respect to the disclosure of interests in our shares.
Annual Accounts and Independent Auditor
Under English law, a quoted company, which includes a company whose equity share capital is admitted to dealing on Nasdaq, must deliver to the Registrar of Companies a copy of:
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the companys annual accounts; |
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the directors remuneration report; |
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the directors report; |
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a strategic report; |
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the auditors report on those accounts, on the auditable part of the directors remuneration report, on the directors report and the strategic report. |
The annual accounts and reports must be presented to the shareholders at a general meeting (although a vote is not mandatory in respect of such documents). Our individual accounts must be prepared in accordance with U.K. GAAP or IFRS as adopted by the European Union and our consolidated group accounts must be prepared in accordance with U.K. GAAP, IFRS as adopted by the European Union, or U.S. GAAP for our first two financial years. In addition, for public reporting purposes we will prepare consolidated financial statements in accordance with U.S. GAAP. Under our Articles of Association, copies of the annual accounts and reports for that financial year must be sent to every shareholder, every debenture holder and every person entitled to receive notice of general meetings at least 21 clear days before the date of the meeting at which copies of the documents are to be presented. Our Articles of Association provide that any documents to our shareholders may be distributed in electronic form or by making them available on a website, as long as shareholders have agreed that such may be sent or supplied in that form.
As an English company with no applicable exemptions from the audit requirements under the U.K. Companies Act and applicable law, we must appoint an independent auditor to audit the annual accounts of the Company. The auditor of a public company may be appointed by ordinary resolution at the general meeting of the company at which the companys annual accounts are laid. Directors can also appoint auditors at any time before the companys first accounts meeting, after a period of exemption or to fill a casual vacancy.
The remuneration of an auditor is fixed by our shareholders by ordinary resolution or in a manner that our shareholders by ordinary resolution determine.
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Liability of Directors and Officers
Under English law, any provision that purports to exempt a director of a company (to any extent) from any liability that would otherwise attach to him in connection with any negligence, default, breach of duty or breach of trust in relation to the company is void.
Takeover Provisions
Regulation of Takeover Bids
Upon completion of this offering and given that the current intention of management is not for central management and control to be within the United Kingdom (or the Channel Islands or the Isle of Man), we do not currently envisage that the Takeover Code will apply to an offer for the Company. It is possible that in the future circumstances could change that may cause the Takeover Code to apply to us. The Takeover Code provides a framework within which takeovers of companies subject to it are conducted. In particular, the Takeover Code contains certain rules in respect of mandatory offers. Under Rule 9 of the Takeover Code, if a person:
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acquires an interest in out shares that, when taken together with shares in which persons acting in concert with such person are interested, carries 30% or more of the voting rights of our shares; or |
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who, together with persons acting in concert with such person, is interested in shares that in the aggregate carry not less than 30% and not more than 50% of the voting rights in the company acquires additional interest in shares that increase the percentage of shares carrying voting rights in which that person is interested, |
the acquirer, and, depending on the circumstances, its concert parties, would be required (except with the consent of the Takeover Panel) to make a cash offer for our outstanding shares at a price not less than the highest price paid for any interests in the shares by the acquirer or its concert parties during the previous 12 months.
Under English law, an offeror for the Company that has acquired (i) not less than 90% in value of; and (ii) not less than 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.
Share Issues in the Context of an Acquisition
Our Articles of Association provide the board of directors with the power to establish a rights plan and to grant rights to subscribe for our shares pursuant to a rights plan where, in the opinion of the board of directors, acting in good faith, in the context of an acquisition or potential acquisition of 15% or more of our issued voting shares, to do so would improve the likelihood that:
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an acquisition process is conducted in an orderly manner; |
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all our shareholders are treated equally and fairly and in a similar manner; |
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an optimum price is achieved for our Class A ordinary shares; |
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the board of directors would have time to gather relevant information and pursue appropriate strategies; |
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the success of Royalty Pharma would be promoted for the benefit of our shareholders as a whole; |
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the long term interests of Royalty Pharma, our shareholders and business would be safeguarded; and/or |
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Royalty Pharma would not suffer serious economic harm. |
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Our Articles of Association further provide that the board of directors may, in accordance with the terms of a rights plan, determine to (i) allot shares pursuant to the exercise of rights or (ii) exchange rights for our shares, where in the opinion of the board of directors acting in good faith, in the context of an acquisition or potential acquisition of 15% or more of our issued voting shares, to do so is necessary in order to prevent:
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the use of abusive tactics by any person in connection with such acquisition; |
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unequal treatment of shareholders; |
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an acquisition which would undervalue Royalty Pharma; |
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harm to the prospects of the success of Royalty Pharma for the benefit of its shareholder as a whole; and/or |
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serious economic harm to the prospects of Royalty Pharma, |
or where to do so is otherwise necessary to safeguard the long term interests of Royalty Pharma, our shareholders and our business.
Under the Takeover Code, the board of a public company incorporated under the laws of England and Wales is constrained from implementing such defensive measures. However, as discussed above, these measures are included in our Articles of Association as the Takeover Code is not expected to apply to us and these measures are included commonly in the constitution of U.S. companies.
These provisions will apply for so long as we are not subject to the Takeover Code.
Corporate Governance
Our Articles of Association allocate authority over the day-to-day management of us to our board of directors. Our board of directors may then delegate any of its powers, authorities and discretions (with power to sub-delegate) to any committee, consisting of such person or persons (whether directors or not) as it thinks fit, but regardless, our board of directors will remain responsible, as a matter of English law, for the proper management of our affairs. Committees may meet and adjourn as they determine proper. Unless otherwise determined by the board of directors, the quorum necessary for the transaction of business at any committee meeting shall be a majority of the members of such committee then in office unless the committee shall consist of one or two members, in which case one member shall constitute a quorum.
Choice of Forum/Governing Law
The rights of holders of our ordinary shares will be governed by the laws of England and Wales.
Our Articles of Association 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, for which the U.S. federal district courts will be the exclusive forum. As a company incorporated in England and Wales, the choice of the courts of England and Wales as our exclusive forum for resolving all shareholder complaints, other than complaints arising under the Securities Act and the Exchange Act, allows us to more efficiently and affordably respond to such actions, and provides consistency in the application of the laws of England and Wales to such actions. Similarly, we have selected the U.S. federal district courts as our exclusive forum for resolving shareholder complaints arising under the Securities Act and the Exchange Act in order to more efficiently and affordably respond to such claims. This choice of forum also provides both us and our shareholders with a forum that is familiar with and regularly reviews cases involving U.S. securities law. Although we believe this choice of forum benefits us by providing increased consistency in the application of U.S. securities law for the specified types of action, it may have the effect of discouraging lawsuits against our directors and officers. Any person or entity purchasing or otherwise acquiring any interest in our ordinary shares will be deemed to have notice of and consented to the provisions of
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our Articles of Association, including the exclusive forum provision. However, it is possible that a court could find our forum selection provision to be inapplicable or unenforceable. See Risk FactorsRisks Related to this Offering and Ownership of Our Ordinary SharesOur Articles of Association to be effective in connection with this offering will provide 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.
Legal Name; Formation
Our current legal and commercial name is Royalty Pharma plc, and we were incorporated under the laws of England and Wales on February 6, 2020 as a private limited company (registration number 12446913) and re-registered as a public limited company on April 22, 2020.
Stock Exchange Listing
We have applied to list our Class A ordinary shares on Nasdaq under the symbol RPRX. Currently, there is no established public trading market for our Class A ordinary shares.
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CLASS A ORDINARY SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our Class A ordinary shares. We cannot predict the effect, if any, that future sales of Class A ordinary shares, or the availability for future sale of Class A ordinary shares, will have on the market price of our Class A ordinary shares prevailing from time to time. The sale of substantial amounts of our Class A ordinary shares in the public market, or the perception that such sales could occur, could harm the prevailing market price of our Class A ordinary shares.
Upon the consummation of this offering, we will have 350,554,830 Class A ordinary shares (or 357,176,355 Class A ordinary shares if the underwriters exercise their option to purchase additional shares in full) outstanding. Of these shares, the 70,000,000 shares sold in this offering (or 80,500,000 Class A ordinary shares if the underwriters exercise their option to purchase additional shares in full) will be freely tradable without further restriction or registration under the Securities Act, except any shares held by our affiliates, as that term is defined in Rule 144 under the Securities Act, and shares purchased by our executive officers and business associates in the reserved shares program described below and in Underwriting. In the absence of registration under the Securities Act, shares held by affiliates may only be sold in compliance with the limitations of Rule 144 described below or another exemption from the registration requirements of the Securities Act. As defined in Rule 144, an affiliate of an issuer is a person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the Company. Upon the completion of this offering, approximately 280,554,830 of our issued and outstanding Class A ordinary shares (or 276,676,355 shares if the underwriters exercise their option to purchase additional shares in full), will be deemed restricted securities, as that term is defined under Rule 144, and would also be subject to the lock-up period noted below.
In addition, at our request, an affiliate of BofA Securities Inc. has reserved up to 5% of the Class A ordinary shares offered for sale pursuant to this prospectus for sale to certain individuals associated with us in a reserved shares program. Any of these reserved shares purchased will be subject to a 180-day lock-up restriction. Accordingly, the number of shares freely transferable upon completion of this offering will be reduced by the number of reserved shares purchased and there will be a corresponding increase in the number of shares that become eligible for sale after 180 days from the date of this prospectus.
In addition, in connection with this offering, we intend to file a registration statement under the Securities Act covering all Class A ordinary shares issuable pursuant to our 2020 Independent Equity Incentive Plan. Subject to Rule 144 volume limitations applicable to affiliates, shares registered under any such registration statement will become eligible for sale after 180 days from the date of this prospectus, except to the extent that the shares are subject to vesting or other contractual restrictions.
In addition, upon the consummation of the offering, the Continuing Investors will beneficially own through the Continuing Investors Partnerships an aggregate of 244,828,150 RP Holdings Class B Interests (which constitute all RP Holdings Class B Interests) and all of our Class B shares through the Continuing Investors Partnerships. 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). 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. Our Class A ordinary shares issuable to the Continuing Investors upon an exchange of RP Holdings Class B Interests would be considered restricted securities, as that term is defined under Rule 144.
Restricted securities may be sold in the public market only if they qualify for an exemption from registration under Rule 144 under the Securities Act, which is summarized below, or any other applicable exemption under the Securities Act, or pursuant to a registration statement that is effective under the Securities Act. The holders of
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approximately 244,828,150 of our Class B shares (or 242,495,335 shares if the underwriters exercise their option to purchase additional Class A ordinary shares in full and giving effect to the use of the net proceeds therefrom) (on an assumed as-exchanged basis) will be entitled to dispose of their shares following the expiration of the initial 180-day underwriter lock-up period pursuant to the holding period, volume and other restrictions of Rule 144. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC are entitled to waive these lock-up provisions at their discretion prior to the expiration dates of such lock-up agreements.
Registration Rights
Upon completion of this offering, the holders of 155,165,710 Class A ordinary shares or their transferees (including those holders of 126,222,615 RP Holdings Class B Interests exchangeable for Class A ordinary shares pursuant to the Exchange Agreement), will be entitled to various rights with respect to the registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares purchased by affiliates. We will not be required to register such Class A ordinary shares if an exemption from the registration requirements of the U.S. Securities Act is available with respect to the number of Class A ordinary shares desired to be sold.
Pursuant to the Registration Rights Agreement, at any time following the date that is 180 days after the closing of this offering, certain affiliates of Old RPI, may require us to file a registration statement with the SEC registering the offer and sale of a specified number of Class A ordinary shares and our directors and named executive officers will be provided with unlimited piggyback registration rights, subject to limitations on the number of requests for registration that can be made in any twelve-month period as well as customary cutbacks at the discretion of the underwriters. We are obligated to pay all expenses incidental to any registration of Class A ordinary shares, excluding underwriting discounts and commissions. Except as described below, the Manager and its affiliates may sell their Class A ordinary shares in private transactions at any time, subject to compliance with applicable laws.
Lock-Up Arrangements
We, all of our directors, our executive officers, the selling shareholders, the Manager, certain employees of the Manager and the Continuing Investors Partnerships (which hold all of our Class B shares and all RP Holdings Class B Interests exchangeable for Class A ordinary shares) have agreed, subject to certain exceptions, not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Class A ordinary shares or any securities convertible into or exercisable or exchangeable for Class A ordinary shares for a period of 180 days after the date of this prospectus, without the prior written consent of J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC. See Underwriting for more information.
During the 180 days after the date of this prospectus, holders of limited partnership interests in the Continuing Investors Partnerships will be restricted from transferring Class A ordinary shares as a result of the foregoing lock-up arrangements and the terms of the Exchange Agreement. In addition, during the lockup-period such holders are prohibited by the terms of the Continuing Investors Partnerships limited partnership agreements from offering, pledging, selling, contracting to sell, selling any option or contract to purchase, purchasing any option or contract to sell, granting any option, right or warrant to purchase, or otherwise transferring or disposing of, directly or indirectly, or entering into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Class A ordinary shares or any securities convertible into or exercisable or exchangeable for Class A ordinary shares.
Immediately following the consummation of this offering, shareholders subject to lock-up agreements will hold 525,382,980 shares of our Class A ordinary shares (assuming all RP Holdings Class B Interests are
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exchanged for Class A ordinary shares and a corresponding number of our Class B shares are redesignated as deferred shares), representing approximately 88% of our then-issued and outstanding Class A ordinary shares (or 519,171,690 Class A ordinary shares, representing approximately 87% of our then-issued and outstanding Class A ordinary shares if the underwriters exercise their option to purchase Class A ordinary additional shares in full and giving effect to the use of the net proceeds therefrom, in each case excluding shares that will be purchased pursuant to the reserved share program described in Underwriting and subject to a lock-up.).
Rule 144
In general, a person (or persons whose shares are aggregated) who has beneficially owned restricted Class A ordinary shares for at least six months would be entitled to sell such securities, provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Persons who have beneficially owned restricted Class A ordinary shares for at least six months but who are our affiliates at the time of, or any time during the 90 days preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three month period only a number of securities that does not exceed the greater of either of the following:
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1% of the number of Class A ordinary shares then outstanding, which will equal approximately 3,508,334 shares immediately after this offering, assuming no exercise of the underwriters option to purchase additional Class A ordinary shares; or |
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the average weekly trading volume of our Class A ordinary shares on Nasdaq during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale; |
provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Such sales both by affiliates and by non-affiliates must also comply with the manner of sale, current public information and notice provisions of Rule 144 to the extent applicable.
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This summary discusses the material U.K. tax considerations and the material U.S. federal income tax considerations related to the purchase, ownership and disposition of our Class A ordinary shares as of the date hereof. This discussion, to the extent that it states matters of U.K. and U.S.federal tax law or legal conclusions and subject to the qualifications herein, represents the opinion of Akin Gump Strauss Hauer & Feld LLP and Akin Gump LLP. Such opinion is based in part on facts described in this prospectus and on various other factual assumptions, representations and determinations. Any alteration or incorrectness of such facts, assumptions, representations or determinations could adversely affect such opinion. However, opinions of counsel are not binding upon HMRC or the IRS or any court, and HMRC or the IRS may challenge the conclusions herein and a court may sustain such a challenge.
Material U.K. Tax Considerations
The following is a general summary of material U.K. tax considerations relating to the ownership and disposal of Class A ordinary shares. The comments set out below are based on current U.K. tax law as applied in England and Wales, and our understanding of HM Revenue & Customs (HMRC), practice (which may not be binding on HMRC) as at the date of this summary, both of which are subject to change, possibly with retrospective effect. They are intended as a general guide and apply to you only if you are a U.S. Holder (as defined in the section below). This summary only applies to you if you are not resident in the U.K. for U.K. tax purposes and do not hold Class A ordinary shares for the purposes of a trade, profession, or vocation that you carry on in the U.K. through a branch, agency, or permanent establishment in the U.K. and if you hold ordinary shares as an investment for U.K. tax purposes and are not subject to special rules (including anti-avoidance rules). It assumes that we do not (and will not at any time) derive 75% or more of our qualifying asset value, directly or indirectly, from U.K. land, and that we are and remain solely resident in the U.K. for tax purposes.
This summary does not address all possible tax consequences relating to an investment in Class A ordinary shares. In particular it does not cover the U.K. inheritance tax consequences of holding Class A ordinary shares. This summary is for general information only and is not intended to be, nor should it be considered to be, legal or tax advice to any particular investor. Holders of Class A ordinary shares are strongly urged to consult their tax advisers in connection with the U.K. tax consequences of their investment Class A in ordinary shares.
U.K. taxation of dividends
We will not be required to withhold amounts on account of U.K. tax at source when paying a dividend in respect of Class A ordinary shares. U.S. Holders who are not resident in the U.K., who are not temporarily non-residents for U.K. tax purposes and who hold their Class A ordinary shares as an investment and not in connection with any trade carried on by them will not be subject to U.K. tax in respect of any dividends. No U.K. tax credit will attach to any dividend paid to U.S. Holders.
U.K. taxation of capital gains
An individual U.S. Holder who is not resident in the U.K. and who is not temporarily non-resident for U.K. tax purposes will not be liable to U.K. capital gains tax on capital gains realized on the disposal of his or her Class A ordinary shares unless such holder carries on a trade, profession or vocation in the U.K. through a branch or agency in the U.K. to which the ordinary shares are attributable.
An individual U.S. Holder of Class A ordinary shares who is temporarily non-resident for U.K. tax purposes will, in certain circumstances, become liable to U.K. tax on capital gains in respect of gains realized while he or she was not resident in the U.K..
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A corporate holder of Class A ordinary shares that is a U.S. Holder will not be liable for U.K. corporation tax on chargeable gains realized on the disposal of ordinary shares unless it carries on a trade in the U.K. through a permanent establishment to which the Class A ordinary shares are attributable.
Stamp Duty and SDRT
The following statements are intended as a general guide to the current U.K. stamp duty and SDRT position, and apply regardless of whether or not a shareholder is resident or domiciled in the U.K. It should be noted that certain categories of persons, including market makers, brokers, dealers, and other specified market intermediaries, are entitled to exemption from stamp duty and SDRT in respect of purchases of securities in specified circumstances.
General rules
As a general rule, no stamp duty or SDRT is payable on an issuance of shares in a U.K. company, but transfers of shares in a U.K. company will generally attract a stamp duty or SDRT charge equal to 0.5% of the consideration for the shares.
Depositary arrangements and clearance services
Special rules apply where ordinary shares are issued or transferred to, or to a nominee or agent for, either a person whose business is or includes issuing depositary receipts within section 67 or section 93 Finance Act 1986 or a person providing a clearance service within section 70 or section 96 of the Finance Act 1986, under which stamp duty or SDRT may be charged at a higher rate of 1.5%. However, where a clearance service has made and maintained an election under section 97A Finance Act 1986, the 1.5% charge will not apply as transfers of ordinary shares into and within that clearance service would then be subject to stamp duty or SDRT at the normal 0.5% rate. We understand that HMRC regards DTC as a clearance service for these purposes and that no relevant election under section 97A(1) has been made.
However, on the basis of recent case law, HMRC has confirmed that it will no longer seek to impose stamp duty or SDRT at the rate of 1.5% on issues of U.K. shares to depositary receipt issuers and clearance systems, or on transfers of such shares to such issuers and systems where those transfers are integral to the raising of capital by a company. However, HMRCs view is that the relevant case law does not have any impact upon the transfer (on sale or otherwise than on sale) of shares or securities to depositary receipt systems or clearance services that are not an integral part of an issue of share capital and so the 1.5% SDRT or stamp duty charge will continue to apply to such transfers and therefore if ordinary shares are withdrawn from the facilities of DTC, a charge to stamp duty or SDRT at 1.5% may arise on a subsequent redeposit of ordinary shares into the facilities of DTC.
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 facilities of DTC cannot be transferred into the DTC system until the transferor of the ordinary shares has first delivered the Class A 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 Class A 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 the depositary in funds 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.
It should also be noted that the 1.5% charge for all issues of shares into depositary receipt systems and clearance services remains as a provision of U.K. statute and that the removal of the 1.5% charge is based upon the provisions of EU law. There is therefore a risk that this could be affected by the U.K.s decision to leave the EU and the expiry of any related transitional or implementation period. The 2017 Autumn Budget included a statement that the government will not reintroduce the 1.5% charge on the issue of shares (and transfers integral
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to capital raising) into clearance services following the U.K.s exit from the EU, but the charge will remain as a provision of U.K. statute. To the extent that U.K. law is changed, including as a result of the U.K.s decision to leave the EU, restrictive measures may be taken in relation to trading in the Companys shares. Specific professional advice should be sought before incurring a 1.5% stamp duty or SDRT charge in any circumstances.
Transfers of Class A ordinary shares within a clearance system or depositary receipt system should not result in a charge to stamp duty or SDRT in the U.K. provided that there is no written instrument of transfer and no election is, or has been, made by the clearance system under section 97A Finance Act 1986.
Transfers of Class A ordinary shares within a clearance system where an election has been made by the clearance system under section 97A Finance Act 1986 will generally be subject to SDRT (rather than stamp duty) at a rate of 0.5% of the amount or value of the consideration.
The transfer on sale of Class A ordinary shares (outside the facilities of a clearance service such as DTC) by a written instrument of transfer will generally be liable to U.K. stamp duty at the rate of 0.5% (rounded up to the nearest £5) of the amount or value of the consideration for the transfer. The purchaser normally pays the stamp duty.
An agreement to transfer Class A ordinary shares (outside the facilities of a clearance service such as DTC) will generally give rise to a liability on the purchaser to SDRT at the rate of 0.5% of the amount or value of the consideration, but where an instrument of transfer is executed and duly stamped before the expiry of a period of six years beginning with the date of that agreement, (i) any SDRT that has not been paid ceases to be payable, and (ii) any SDRT that has been paid may be recovered from HMRC, generally with interest.
A share buy-back by the Company of Class A ordinary shares will give rise to stamp duty at the rate of 0.5% of the consideration payable by the Company, and such stamp duty will be paid by the Company.
Material U.S. Federal Income Tax Considerations
This summary discusses the material U.S. federal income tax considerations related to the purchase, ownership and disposition of our Class A ordinary shares as of the date hereof. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the Code), its legislative history, existing and proposed Treasury regulations thereunder, published rulings and court decisions, all as currently in effect and all subject to change at any time, possibly with retroactive effect. The discussion of the holders tax consequences addresses only those persons that acquire their ordinary shares in this offering, and may not apply to all categories of investors, some of which may be subject to special rules under the Code, including, but not limited to:
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banks or other financial institutions; |
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real estate investment trusts; |
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persons holding Class A ordinary shares as part of a hedging, integrated or conversion transaction or straddle; |
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traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; |
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U.S. tax-exempt investors, including charitable remainder unit trusts; |
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common trust funds; |
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insurance companies; |
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dealers and other investors that do not own their Class A ordinary shares as capital assets; |
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partnerships or other entities classified as partnership for U.S. federal income tax purposes; |
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investors whose functional currency for U.S. federal income tax purposes is not the U.S. dollar; and |
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investors who are deemed to own 10% or more of our stock by vote or value. |
This discussion is necessarily general and does not discuss all aspects of U.S. federal income tax, including the effect of the U.S. federal alternative minimum tax, or U.S. federal estate and gift tax, or any state, local or foreign tax laws to a holder of Class A ordinary shares. The actual tax consequences of the purchase and ownership of Class A ordinary shares will vary depending on your circumstances.
Taxation of Our Company
Tax Classification of Royalty Pharma plc for U.S. Federal Income Tax Purposes
Our Class A ordinary shares are being issued by Royalty Pharma plc, an English public limited company incorporated under the laws of England and Wales. Pursuant to the Code and applicable Treasury regulations, an entity which is organized as a public limited company in the United Kingdom will generally be classified for U.S. federal tax purposes as a foreign corporation.
U.S. Federal Income Taxation of the Company
We believe that our activities, as conducted through our subsidiaries, and as currently contemplated, will not constitute being engaged in the conduct of a trade or business within the United States, although there can be no assurance the IRS will not successfully assert that we are engaged in the conduct of a trade or business within the United States. Because we believe that we will not be engaged in the conduct of a trade or business within the United States, we do not expect to be subject to United States federal income tax, except as described below.
The determination as to whether we are engaged in the conduct of a trade or business within the United States is factual in nature and must be made annually. Neither the Code nor the applicable Treasury regulations provide a general definition of what constitutes being engaged in the conduct of a trade or business within the United States, and the limited case law on the subject does not provide definitive guidance. The case law that exists generally provides that a foreign corporation will be treated as engaged in the conduct of a trade or business within the United States if it regularly and continuously carries out business activities in the United States. In addition, if any lower-tier partnership or other flow-through entity for U.S. federal income tax purposes in which we hold an interest (such as our subsidiaries) were deemed to be engaged in the conduct of a trade or business within the United States, we will be considered to be so engaged by way of attribution.
If deemed to be engaged in the conduct of a trade or business within the United States, including due to the activities conducted through our subsidiaries, Royalty Pharma plc generally would become subject to United States federal income tax on our taxable income treated as effectively connected to such trade or business and such income would be taxed at regular U.S. corporate rates. In addition, Royalty Pharma plc would potentially become subject to United States branch profits tax on its earnings and profits that are both effectively connected with our trade or business in the United States, with certain adjustments, and deemed repatriated out of the United States. The highest marginal United States federal income tax rates currently are 21% for a corporations effectively connected income and 30% for the branch profits tax. 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.
While we do not expect to be engaged in the conduct of a trade or business within the United States or subject to U.S. taxation in that regard, we will be subject to United States federal withholding tax on certain fixed or determinable annual or periodical gains, profits and income, such as royalties from sources within the United States, unless reduced or eliminated under an applicable tax treaty or provision of the Code. Generally, this tax is imposed by withholding 30% of the payments, or deemed payments, that are subject to this tax. We expect that our subsidiaries will be eligible for benefits under the U.S.-Ireland income tax treaty, and, under that treaty, will
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not be subject to any U.S. withholding taxes on U.S.-source royalty payments, but no assurance can be given in that regard. See Risk FactorsRisks Relating to TaxationWe 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 for further information regarding the risk that we may not be entitled to treaty benefits.
Taxation of Shareholders
The following is a summary of the material U.S. federal income tax consequences that will apply to you if you are a U.S. Holder of Class A ordinary shares.
Taxable U.S. Holders
For purposes of this discussion, a U.S. Holder is a beneficial holder of our Class A ordinary shares that is for U.S. federal income tax purposes:
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an individual citizen or resident of the United States; |
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a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any state thereof or the District of Columbia; |
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an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
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a trust which either (i) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (ii) has a valid election in effect under applicable Treasury regulations to be treated as a United States person. |
A non-U.S. Holder is a beneficial owner of our Class A ordinary shares (other than a partnership or a disregarded entity) that is not a U.S. Holder.
If a partnership holds Class A ordinary shares, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our Class A ordinary shares, you should consult your tax advisors. This discussion does not constitute tax advice and is not intended to be a substitute for tax planning.
Prospective shareholders should consult their own tax advisors concerning the U.S. federal, state and local income tax and estate tax consequences in their particular situations of the purchase, ownership and disposition of an ordinary share, as well as any consequences under the laws of any other taxing jurisdiction.
Passive Foreign Investment Companies
Generally. We expect that Royalty Pharma plc will be classified as a passive foreign investment company (PFIC), for U.S. federal income tax purposes. We currently anticipate that Royalty Pharma plc will be the only PFIC in our group, although it is possible that other entities in our group will be treated as PFICs.
A PFIC is any foreign corporation with respect to which either 75% or more of the gross income for a taxable year constitutes passive income for purposes of the PFIC rules or 50% or more of such foreign corporations assets in any taxable year (generally based on the quarterly average of the value of its assets) are held for the production of passive income. We generally expect that our income, which consists primarily of passive royalty revenues and interest income, and our assets, which consists primarily of assets that produce passive royalty revenues and interest income, will satisfy these tests and result in our treatment as a PFIC. There are no minimum stock ownership requirements for PFICs. Once a corporation qualifies as a PFIC it is, subject to certain exceptions, always treated as a PFIC, regardless of whether it satisfies either of the qualification tests in subsequent years.
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There are three separate taxation regimes under the PFIC rules, which are the (i) excess distribution regime (which is the default regime), (ii) qualified electing fund (QEF), regime, and (iii) mark-to-market regime. A U.S. Holder who holds (actually or constructively) stock in a foreign corporation during any year in which such corporation qualifies as a PFIC is subject to U.S. federal income taxation under one of these three regimes. The effect of the PFIC rules on a U.S. Holder will depend upon which of these regimes applies to such U.S. Holder. However, dividends paid by a PFIC are generally not eligible for the lower rates of taxation applicable to qualified dividend income (QDI) under any of the foregoing regimes.
Excess Distribution Regime. If you do not make a QEF election or a mark-to-market election, as described below, you will be subject to the default excess distribution regime under the PFIC rules with respect to (i) any gain realized on a sale or other disposition (including a pledge) of your Class A ordinary shares, and (ii) any excess distribution you receive on your Class A ordinary shares (generally, any distributions in excess of 125% of the average of the annual distributions on our Class A ordinary shares during the preceding three years or your holding period, whichever is shorter). Generally, under this excess distribution regime:
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the gain or excess distribution will be allocated ratably over the period during which you held your Class A ordinary shares; |
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the amount allocated to the current taxable year, will be treated as ordinary income; and |
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the amount allocated to prior taxable years will be subject to the highest tax rate in effect for that taxable year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. |
The tax liability for amounts allocated to years prior to the year of disposition or excess distribution will be payable generally without regard to offsets from deductions, losses and expenses. In addition, gains (but not losses) realized on the sale of your Class A ordinary shares cannot be treated as capital gains, even if you hold the shares as capital assets. Further, no portion of any distribution will be treated as QDI.
QEF Regime. A QEF election is effective for the taxable year for which the election is made and all subsequent taxable years and may not be revoked without the consent of the IRS. If a U.S. Holder makes a timely QEF election with respect to its direct or indirect interest in a PFIC, the U.S. Holder will be required to include in income each year a portion of the ordinary earnings and net capital gains of the PFIC as QEF income inclusions, even if amount is not distributed to the U.S. Holder. Thus, the U.S. Holder may be required to report taxable income as a result of QEF income inclusions without corresponding receipts of cash. We intend to distribute a significant portion of our Adjusted Cash Flow to our shareholders, and our shareholders that are U.S. Holders subject to U.S. federal income tax generally are expected to receive cash distributions from us sufficient to cover their respective U.S. tax liability with respect to such QEF income inclusions, but there can be no assurance in this regard.
The timely QEF election also allows the electing U.S. Holder to: (i) generally treat any gain recognized on the disposition of its shares of the PFIC as capital gain; (ii) treat its share of the PFICs net capital gain, if any, as long-term capital gain instead of ordinary income; and (iii) either avoid interest charges resulting from PFIC status altogether, or make an annual election, subject to certain limitations, to defer payment of current taxes on its share of PFICs annual realized net capital gain and ordinary earnings subject, however, to an interest charge on the deferred tax computed by using the statutory rate of interest applicable to an extension of time for payment of tax. In addition, net losses (if any) of a PFIC will not pass through to our shareholders and may not be carried back or forward in computing such PFICs ordinary earnings and net capital gain in other taxable years. Consequently, a U.S. Holder may over time be taxed on amounts that as an economic matter exceed our net profits.
A U.S. Holders tax basis in our Class A ordinary shares will be increased to reflect QEF income inclusions and will be decreased to reflect distributions of amounts previously included in income as QEF income
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inclusions. No portion of the QEF income inclusions attributable to ordinary income will be treated as QDI. Amounts included as QEF income inclusions with respect to direct and indirect investments generally will not be taxed again when distributed. You should consult your tax advisors as to the manner in which QEF income inclusions affect your allocable share of our income and your basis in your Class A ordinary shares.
We intend to provide all of the information that a U.S. Holder making a QEF election is required to obtain for U.S. federal income tax purposes (e.g., the U.S. Holders pro rata share of our ordinary income and net capital gain), including a PFIC Annual Information Statement containing all the information required to be provided under the applicable Treasury regulations. In addition, if we invest in a PFIC (including, without limitation, in any PFIC subsidiaries), U.S. Holders will generally be subject to the PFIC rules described above with respect to such foreign corporations. There can be no assurance that a portfolio company or subsidiary in which we invest will not qualify as a PFIC, or that a PFIC in which we invest will provide the information necessary for a QEF election to be made by a U.S. Holder (in particular if we do not control that PFIC). However, to the extent any such portfolio company or subsidiary is under our control, we will endeavor to cause such portfolio company or subsidiary to provide all such information necessary for a QEF election to be made by a U.S. Holder with respect to such entity.
Mark-to-Market Regime. Alternatively, a U.S. Holder may make an election to mark marketable shares in a PFIC to market on an annual basis. PFIC shares generally are marketable if: (i) they are regularly traded on a national securities exchange that is registered with the Securities Exchange Commission or on the national market system established under Section 11A of the Securities and Exchange Act of 1934; or (ii) they are regularly traded on any exchange or market that the Treasury Department determines to have rules sufficient to ensure that the market price accurately represents the fair market value of the stock. We expect that our Class A ordinary shares, which are expected to be listed on Nasdaq, will qualify as marketable shares for the PFIC rules purposes, but there can be no assurance that the Class A ordinary shares will be regularly traded for purposes of these rules. Pursuant to such an election, you would include in each year as ordinary income the excess, if any, of the fair market value of such stock over its adjusted basis at the end of the taxable year. You may treat as ordinary loss any excess of the adjusted basis of the stock over its fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the election in prior years. A U.S. Holders adjusted tax basis in the PFIC shares will be increased to reflect any amounts included in income, and decreased to reflect any amounts deducted, as a result of a mark-to-market election. Any gain recognized on a disposition of our Class A ordinary shares will be treated as ordinary income and any loss will be treated as ordinary loss (but only to the extent of the net amount of income previously included as a result of a mark-to-market election). A mark-to-market election only applies for the taxable year in which the election was made, and for each subsequent taxable year, unless the PFIC shares ceased to be marketable or the IRS consents to the revocation of the election. Although we currently anticipate that Royalty Pharma plc will be the only PFIC in our group, U.S. Holders should also be aware that the Code and the Treasury regulations do not allow a mark-to-market election with respect to stock of lower-tier PFICs that are non-marketable. There is also no provision in the Code, Treasury regulations or other published authority that specifically provides that a mark-to-market election with respect to the stock of a publicly-traded holding company (which Royalty Pharma plc will be when this offering is consummated) effectively exempts stock of any lower-tier PFICs from the negative tax consequences arising from the general PFIC rules. Because the fair market value of the stock of a holding company generally includes the fair market value of the stock of its subsidiaries, it is possible that the mark-to-market rules were not intended to subject a U.S. investor to the general PFIC rules with respect to a non-publicly traded PFIC subsidiary if the investor made a valid mark-to-market election with respect to the stock of the public holding company of that subsidiary. However, because authority on the issue is lacking, we cannot assure you that the IRS will agree with any such position. We advise you to consult your own tax advisor to determine whether the mark-to-market tax election is available to you and the consequences resulting from such election.
PFIC Reporting Requirements. 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
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require. Failure to file IRS Form 8621 for each applicable taxable year may result in substantial penalties and result in the U.S. Holders taxable years being open to audit by the IRS until such Forms are properly filed.
Distributions
Subject to the PFIC rules discussed above (including the special rules applicable to U.S. Holders that have made a QEF election), for U.S. federal income tax purposes, the gross amount of a distribution made to a U.S. Holder in respect of our Class A ordinary shares will be treated as dividend income to such U.S. Holder to the extent paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. That dividend income will not be eligible for the dividends received deduction generally allowed to corporations. Further, because we expect to be a PFIC, the dividend income received by an individual is not expected to be eligible for the preferential tax rates that are generally applicable to certain dividend income. To the extent a distribution made to a U.S. Holder in respect of our Class A ordinary shares exceeds the U.S. Holders allocable share of our current and accumulated earnings and profits, the excess will be applied first to reduce the U.S. Holders adjusted tax basis in its Class A ordinary shares, and any remaining excess will constitute gain from the deemed sale or exchange of such shares. This treatment of distributions from a PFIC may not apply to a U.S. Holder that has made a QEF election with respect to a PFIC.
If the U.S. Holder establishes that an amount actually distributed by a PFIC with respect to which a QEF election is in effect is paid out of earnings and profits of the PFIC that were previously included in the U.S. Holders income under the QEF rules, such amount is treated as a distribution that is not a dividend. Accordingly, such amounts are not included in the gross income of the U.S. Holder. Because U.S. Holders that have made a QEF election with respect to a PFIC would be expected to include in income their share of the PFICs annual earnings and profits, such holders generally would not have to also include in gross income distributions from the PFIC of such earnings and profits.
Under Section 904(h) of the Code, dividends paid by a non-U.S. corporation that is at least 50% owned by U.S. Holders may be treated as income derived from sources within the United States rather than from sources without the United States for foreign tax credit purposes to the extent the non-U.S. corporation has more than an insignificant amount of income from sources within the United States. The effect of this rule, for the current year and any applicable future year, may be to treat a portion of the dividends paid by us as income derived from sources within the United States for foreign tax credit purposes. Such treatment may adversely affect a U.S. Holders foreign tax credit limitation. You should consult your own tax advisors regarding the possible impact of Section 904(h) on any dividends that we pay with respect to Class A ordinary shares and on any other income derived from sourced without the United States.
Sale or Exchange of Class A Ordinary Shares
You will recognize gain or loss on a sale of Class A ordinary shares in an amount equal to the difference, if any, between the amount realized on the sale or exchange and your adjusted tax basis in the Class A ordinary shares sold. Your amount realized will be measured by the sum of the cash or the fair market value of other property you receive. Subject to the PFIC rules discussed above, gain or loss recognized by you on the sale or exchange of our Class A ordinary shares generally will be taxable as capital gain or loss and will be long-term capital gain or loss if you have held the Class A ordinary shares you sell or exchange for more than one year on the date of such sale or exchange. Capital gains of a non-corporate U.S. Holder, including an individual, that has held the ordinary shares for more than one year, are eligible for reduced tax rates. Because we expect to be a PFIC, gains from disposition of our Class A ordinary shares will be treated as capital gains only if a QEF election has been timely made. The deductibility of capital losses is subject to limitations. Any gain or loss that you recognize on a disposition of Class A ordinary shares generally will be treated as U.S.-source income or loss for foreign tax credit limitation purposes.
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Medicare Taxes
Certain U.S. Holders that are individuals, estates or trusts are required to pay an additional 3.8% tax on, among other things, interest, dividends and gains from the sale or other disposition of capital assets. Each U.S. Holder that is an individual, estate or trust should consult its own tax advisors regarding the effect, if any, of this tax provision on their ownership and disposition of Class A ordinary shares.
Non-U.S. Holders
Subject to the U.S. backup withholding rules described below, non-U.S. Holders of Class A ordinary shares generally will not be subject to U.S. withholding tax on distributions with respect to or gain on sale or disposition of Class A ordinary shares.
Withholding and Backup Withholding
Under the backup withholding rules, you may be subject to backup withholding tax (at the applicable rate, currently 24%) with respect to distributions paid unless: you are a corporation or come within another exempt category and demonstrate this fact when required, or you provide (generally on an IRS Form W-9) a taxpayer identification number, certify as to no loss of exemption from backup withholding tax and otherwise comply with the applicable requirements of the backup withholding tax rules. If you are an exempt holder, you should indicate your exempt status on a properly completed IRS Form W-9. A non-U.S. Holder holding our Class A ordinary shares through a U.S. or U.S.-related broker may qualify as an exempt recipient by submitting a properly completed IRS Form W-8. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund.
THE FOREGOING DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING. THE TAX MATTERS RELATING TO US AND OUR SHAREHOLDERS ARE COMPLEX AND ARE SUBJECT TO VARYING INTERPRETATIONS. MOREOVER, THE MEANING AND EFFECT OF TAX LAWS AND OF PROPOSED CHANGES WILL VARY WITH THE PARTICULAR CIRCUMSTANCES OF EACH PROSPECTIVE SHAREHOLDER. PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL AND OTHER TAX CONSEQUENCES OF ANY INVESTMENT IN OUR CLASS A ORDINARY SHARES.
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The following is a summary of certain considerations associated with the purchase of our Class A ordinary shares by (i) employee benefit plans that are subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA), (ii) plans, individual retirement accounts and other arrangements that are subject to Section 4975 of the U.S. Tax Code and (iii) entities whose underlying assets are considered to include plan assets of any such employee benefit plans, plans accounts or arrangements (each of the foregoing described in clauses (i), (ii) and (iii) being referred to as an ERISA Plan).
In considering whether to invest the assets of any ERISA Plan in the Class A ordinary shares, a fiduciary of an ERISA Plan should determine, among other things, whether the investment is in accordance with the documents and instruments governing such plan and the applicable provisions of ERISA, the U.S. Tax Code or Similar Law (as defined below) relating to a fiduciarys duties to such ERISA Plan, including, without limitation, the prudence, diversification, delegation of control and prohibited transaction provisions of ERISA, the U.S. Tax Code and any applicable Similar Law.
Prohibited Transaction Issues
ERISA and Section 4975 of the U.S. Tax Code prohibit ERISA Plans from engaging in specified transactions involving plan assets with persons or entities that are parties in interest, within the meaning of ERISA, or disqualified persons, within the meaning of Section 4975 of the U.S. Tax Code, unless an exemption is available. A party in interest or disqualified person who engages in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and/or the U.S. Tax Code. In addition, the fiduciary of the ERISA Plan that engages in such a non-exempt prohibited transaction may be subject to penalties and liabilities under ERISA and the U.S. Tax Code.
Whether or not our underlying assets were deemed to include plan assets, as described below, the acquisition of our Class A ordinary shares by an ERISA Plan with respect to which we are considered a party in interest or a disqualified person may constitute or result in a direct or indirect prohibited transaction under Section 406 of ERISA and/or Section 4975 of the U.S. Tax Code, unless the investment is acquired and is held in accordance with an applicable statutory, class or individual prohibited transaction exemption. In this regard, the U.S. Department of Labor (the DOL) has issued prohibited transaction class exemptions (PTCE), that may provide exemptive relief for direct or indirect prohibited transactions arising from the acquisition and holding of the Class A ordinary shares or any interest therein. These class exemptions include, without limitation, PTCE 84-14 respecting transactions determined by independent qualified professional asset managers, PTCE 90-1 respecting insurance company pooled separate accounts, PTCE 91-38 respecting bank collective investment funds, PTCE 95-60 respecting life insurance company general accounts and PTCE 96-23 respecting transactions determined by in-house asset managers. Each of the aforementioned exemptions contains conditions and limitations on its application, Fiduciaries of ERISA Plans considering acquiring and/or holding our Class A ordinary shares in reliance on any of these or any other exemption should carefully review the exemption to assure that it is applicable. There can be no assurance that all of the conditions of any such exemption will be satisfied.
Plan Asset Issues
ERISA and the regulations, which we refer to as the plan asset regulations, promulgated under ERISA by the DOL generally provide that when an ERISA Plan acquires an equity interest in an entity that is neither a publicly offered security nor a security issued by an investment company registered under the U.S. Investment Company Act, the ERISA Plans assets include both the equity interests and an undivided interest in each of the underlying assets of the entity unless it is established either that less than 25% of the total value of each class of equity interests in the entity is held by benefit plan investors as defined in Section 3(42) of ERISA, which we refer to as the 25% test, or that the entity is an operating company, as defined in the plan asset regulations. There
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can be no assurance that we will satisfy the 25% test and it is not anticipated that we will qualify as an operating company or register as an investment company under the U.S. Investment Company Act. It is anticipated that the Class A ordinary shares offered hereunder will qualify for the exemption for a publicly offered security, although no assurances can be given in this regard.
For purposes of the plan asset regulations, a publicly offered security is a security that is (i) freely transferable, (ii) part of a class of securities that is widely held, and (iii)(a) sold to the ERISA Plan as part of an offering of securities to the public pursuant to an effective registration statement under the U.S. Securities Act and the class of securities to which such security is a part is registered under the U.S. Exchange Act within 120 days after the end of the fiscal year of the Company during which the offering of such securities to the public has occurred, or (b) is part of a class of securities that is registered under Section 12 of the U.S. Exchange Act. We intend to effect such a registration under the U.S. Securities Act and the U.S. Exchange Act. The plan asset regulations provide that a security is widely held only if it is part of a class of securities that is owned by 100 or more investors independent of the Company and one another.
A security will not fail to be widely held because the number of independent investors falls below 100 subsequent to the initial offering thereof as a result of events beyond the control of the Company. The plan asset regulations provide that whether a security is freely transferable is a factual question to be determined on the basis of all the relevant facts and circumstances. It is anticipated that the Class A ordinary shares to be sold in this offering will be widely held and freely transferable, although no assurances can be given in this regard.
If our assets were deemed to be plan assets under ERISA, this would result, among other things, in (i) the application of the prudence and other fiduciary responsibility standards of ERISA to asset acquisitions made by us, and (ii) the possibility that certain transactions in which we might seek to engage could constitute prohibited transactions under ERISA.
Governmental plans, certain church plans and non-U.S. plans, which we refer to collectively with ERISA Plans as Plans, while not subject to the fiduciary responsibility or prohibited transaction provisions of Title I of ERISA or Section 4975 of the U.S. Tax Code, may nevertheless be subject to other U.S. federal, state or local or non-U.S. or other laws or regulations that are substantially similar to the foregoing provisions of ERISA or the U.S. Tax Code, which we collectively refer to as Similar Laws.
Representation
Because of the foregoing, the Class A ordinary shares should not be purchased or held by any person investing plan assets of any Plan unless the purchase and holding will not constitute a non-exempt prohibited transaction under Title I of ERISA or Section 4975 of the U.S. Tax Code or a similar violation of any applicable Similar Laws. Accordingly, by its acquisition of Class A ordinary shares or any interest therein each purchaser will be deemed to have represented and warranted that either (i) no portion of the assets used to purchase or hold the Class A ordinary shares or any interest therein constitutes the assets of any Plan, or (ii) the purchase and holding of the Class A ordinary shares and any interest therein will not result in a non-exempt prohibited transaction under Title I of ERISA or Section 4975 of the U.S. Tax Code or a similar violation of any applicable Similar Laws.
Each Plan fiduciary or other persons considering purchasing our Class A ordinary shares on behalf of, or with the assets of, any Plan should consult with its legal advisor concerning the matters described herein.
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We are offering the Class A ordinary shares described in this prospectus through a number of underwriters. J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, BofA Securities, Inc., Goldman Sachs & Co. LLC, Citigroup Global Markets Inc. and UBS Securities LLC are acting as representatives of the underwriters.
We and the selling shareholders have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we and the selling shareholders have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of Class A ordinary shares listed next to its name in the following table:
Name |
Number of
Class A Ordinary Shares |
|||
J.P. Morgan Securities LLC |
||||
Morgan Stanley & Co. LLC |
||||
BofA Securities, Inc. |
||||
Goldman Sachs & Co. LLC |
||||
Citigroup Global Markets Inc. |
||||
UBS Securities LLC |
||||
Evercore Group L.L.C. |
||||
Cowen and Company, LLC |
||||
SunTrust Robinson Humphrey, Inc. |
||||
BBVA Securities Inc. |
||||
DNB Markets, Inc. |
||||
Scotia Capital (USA) Inc. |
||||
TD Securities (USA) LLC |
||||
|
|
|||
Total |
70,000,000 | |||
|
|
The offering of the Class A ordinary shares by the underwriters is subject to receipt and acceptance and subject to the underwriters right to reject any order in whole or in part. The underwriters are committed to purchase all the Class A ordinary shares offered by us and the selling shareholders if they purchase any Class A ordinary shares. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.
The underwriters propose to offer the Class A ordinary shares directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. After the initial offering of the Class A ordinary shares to the public, if all of the Class A ordinary shares are not sold at the initial public offering price, the underwriters may change the offering price and the other selling terms. Sales of any Class A ordinary shares made outside the United States may be made by affiliates of the underwriters.
The underwriters have an option to buy up to 4,288,710 additional Class A ordinary shares from us and 6,211,290 additional Class A ordinary shares from the selling shareholders. The underwriters have 30 days from the date of this prospectus to exercise this option to purchase additional Class A ordinary shares. If any Class A ordinary shares are purchased with this option to purchase additional shares, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional Class A ordinary shares are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.
The underwriting fee is equal to the public offering price per Class A ordinary share less the amount paid by the underwriters to us per Class A ordinary share. The underwriting fee is $ per share. The following
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table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by us and the selling shareholders assuming both no exercise and full exercise of the underwriters option to purchase additional shares.
Without
option to purchase additional shares exercise |
With full
option to purchase additional shares exercise |
|||||||
Per Share |
$ | $ | ||||||
Total |
$ | $ |
We estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be approximately $10.4 million. We have also agreed to reimburse the underwriters for reasonable fees and expenses of counsel related to the review by FINRA of the terms of sale of the Class A ordinary shares offered hereby in an amount not to exceed $50,000.
A prospectus in electronic format may be made available on the websites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.
We, all of our directors, our executive officers, the selling shareholders, the Manager, certain employees of the Manager and the Continuing Investors Partnerships (which hold all of our Class B shares and all RP Holdings Class B Interests exchangeable for Class A ordinary shares) have agreed not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Class A ordinary shares or any securities convertible into or exercisable or exchangeable for Class A ordinary shares for a period of 180 days after the date of this prospectus, without the prior written consent of J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC.
The restrictions described in the immediately preceding paragraph do not apply to certain transfers, dispositions or transactions, including transfers of Class A ordinary shares or RP Holdings Class B Interests: (i) as a bona fide gift or gifts, or for bona fide estate planning purposes, provided that no filing by the holder or any party under the Exchange Act or other public announcement shall be required or made voluntarily in connection therewith; (ii) by will or intestacy, provided that no filing by the holder or any party under the Exchange Act, or other public announcement shall be required or made voluntarily in connection therewith; (iii) to any trust for the direct or indirect benefit of the holder or the immediate family of the holder, or if the holder is a trust, to a trustor or beneficiary of the trust or to the estate of a beneficiary of such trust, provided that no filing by the holder or any party under the Exchange Act, or other public announcement shall be required or made voluntarily in connection therewith; (iv) to a partnership, limited liability company or other entity of which the holder and the immediate family of the holder are the legal and beneficial owner of all of the outstanding equity securities or similar interests; (v) to a nominee or custodian of a person or entity to whom a disposition or transfer would be permissible under clauses (i) through (iv) above; (vi) if the holder is a corporation, partnership, limited liability company, trust or other business entity, (A) to another corporation, partnership, limited liability company, trust or other business entity that is an affiliate (as defined in Rule 405 promulgated under the Securities Act of 1933) of the holder, or to any investment fund or other entity controlling, controlled by, managing or managed by or under common control with the holder or affiliates of the holder (including, for the avoidance of doubt, where the holder is a partnership, to its general partner or a successor partnership or fund, or any other funds managed by such partnership), or (B) as part of a distribution to members or shareholders of the
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holder, provided that no filing by the holder or any party under the Exchange Act or other public announcement shall be required or made voluntarily in connection therewith; (vii) by operation of law, such as pursuant to a qualified domestic order, divorce settlement, divorce decree or separation agreement, provided that no public announcement shall be made voluntarily in connection therewith; (viii) as part of a sale of the holders Class A ordinary shares acquired in open market transactions after the completion of this offering, provided that no filing by the holder or any party under the Exchange Act or other public announcement shall be required or made voluntarily in connection therewith; (ix) pursuant to a bona fide third-party tender offer, merger, consolidation or other similar transaction that is approved by our board of directors involving a change of control of Royalty Pharma, provided that in the event that such tender offer, merger, consolidation or other similar transaction is not completed, the holders Class A ordinary shares and RP Holdings Class B Interests shall remain subject to the lock-up agreement; (x) to the holders affiliates or to any investment fund or other entity controlled or managed by the holder or its affiliates; (xi) by means of a pledge of and the enforcement of any pledge of Class A ordinary shares and RP Holdings Class B Interests, or any securities convertible into or exercisable or exchangeable for Class A ordinary shares and RP Holdings Class B Interests, provided that (1) no filing by the holder or any party (pledgor or pledgee) under the Exchange Act or other public announcement shall be made voluntarily in connection therewith, and, if any report is required to be filed under the Exchange Act related thereto during the 180 day lock-up period, the holder shall provide the representatives of the underwriters prior written notice informing them of such report, and (2) in the event of the enforcement of any such pledge, the pledgee shall not resell the Class A ordinary shares or RP Holdings Class B Interests during the 180 day lock-up period; (xii) in connection with any exchanges pursuant to the Exchange Agreement (for the avoidance of doubt, the Class A ordinary shares issued upon an exchange made pursuant to the Exchange Agreement shall be subject to the lock-up restrictions); and (xiii) pursuant to the underwriting agreement. Subject to certain exceptions, in the case of any transfer or distribution pursuant to clause (i), (iii), (iv), (v), (vi), (vii), (x), (xi) and (xii) above, each donee, devisee, transferee or distributee shall execute and deliver to the representatives of the underwriters a lock-up agreement; in the case of any transfer or distribution pursuant to clause (i), (iii), (iv), (v), (vi), (viii) and (x) above, no public announcement shall be made voluntarily in connection with such transfer or distribution (other than a filing on Form 5 made after the expiration of the lock-up period); and in the case of any transfer or distribution pursuant to clause (ii), (iv), (vii), (x), (xi) and (xii) above, it shall be a condition to such transfer that any filing under Section 16(a) of the Exchange Act, or other public filing, report or announcement reporting a reduction in beneficial ownership of shares of Class A ordinary shares in connection with such transfer or distribution shall clearly indicate in the footnotes thereto the nature and conditions of such transfer. In addition to the foregoing, the restrictions described in the immediately preceding paragraph do not apply to establishment of one or more trading plans pursuant to Rule 10b5-1 under the Exchange Act for the transfer of Class A ordinary shares, provided that (1) such plans do not provide for the transfer of Class A ordinary shares during the lock-up period and (2) any public announcement or filing under the Exchange Act made by any person regarding the establishment of such plan during the lock-up period shall include a statement that the holder is not permitted to transfer, sell or otherwise dispose of securities under such plan during the lock-up period in contravention of lock-up agreement.
During the 180 days after the date of this prospectus, holders of limited partnership interests in the Continuing Investors Partnerships will be restricted from transferring Class A ordinary shares as a result of the foregoing lock-up arrangements and the terms of the Exchange Agreement. In addition, during the lockup-period such holders are prohibited by the terms of the Continuing Investors Partnerships limited partnership agreements from offering, pledging, selling, contracting to sell, selling any option or contract to purchase, purchasing any option or contract to sell, granting any option, right or warrant to purchase, or otherwise transferring or disposing of, directly or indirectly, or entering into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Class A ordinary shares or any securities convertible into or exercisable or exchangeable for Class A ordinary shares.
At our request, an affiliate of BofA Securities, Inc. have reserved up to 5% of the shares offered by this prospectus for sale at the initial public offering price to certain individuals associated with us through a reserved share program. The number of shares available for sale to the general public will be reduced by the number of
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reserved shares purchased by participants in the program. Except for our officers and directors at the time of consummation of the offering who have entered into lock-up agreements as contemplated in the immediately preceding paragraph, each person buying shares through the reserved share program has agreed that, for a period of 180 days from the date of this prospectus, he or she will not, without the prior written consent of J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock. For certain officers and directors purchasing shares through the reserved share program, the lock-up agreements contemplated in the immediately preceding paragraph shall govern with respect to their purchases. Any reserved shares not purchased will be offered by the underwriters to the general public on the same basis as all other shares offered. We and the selling shareholders have agreed to indemnify the underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the reserved shares.
We and the selling shareholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933.
We have applied to have our Class A ordinary shares approved for listing/quotation Nasdaq under the symbol RPRX.
In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling Class A ordinary shares in the open market for the purpose of preventing or retarding a decline in the market price of the Class A ordinary shares while this offering is in progress. These stabilizing transactions may include making short sales of Class A ordinary shares, which involves the sale by the underwriters of a greater number of Class A ordinary shares than they are required to purchase in this offering, and purchasing Class A ordinary shares on the open market to cover positions created by short sales. Short sales may be covered shorts, which are short positions in an amount not greater than the underwriters option to purchase additional shares referred to above, or may be naked shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their option to purchase additional shares, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the Class A ordinary shares in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.
The underwriters have advised us that, pursuant to Regulation M of the Securities Act of 1933, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the Class A ordinary shares, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase Class A ordinary shares in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.
These activities may have the effect of raising or maintaining the market price of the Class A ordinary shares or preventing or retarding a decline in the market price of the Class A ordinary shares, and, as a result, the price of the Class A ordinary shares may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on Nasdaq, in the over-the-counter market or otherwise.
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Prior to this offering, there has been no public market for our Class A ordinary shares. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. In determining the initial public offering price, we and the representatives of the underwriters expect to consider a number of factors including:
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the information set forth in this prospectus and otherwise available to the representatives; |
|
our prospects and the history and prospects for the industry in which we compete; |
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an assessment of our management; |
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our prospects for future earnings; |
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the general condition of the securities markets at the time of this offering; |
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the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and |
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other factors deemed relevant by the underwriters and us. |
Neither we nor the underwriters can assure investors that an active trading market will develop for our Class A ordinary shares, or that the shares will trade in the public market at or above the initial public offering price.
Reserved Share Program
At our request, an affiliate of BofA Securities, Inc., a participating Underwriter, has reserved for sale, at the initial public offering price, up to 5% of the shares offered by this prospectus for sale to certain individuals associated with us. If these persons purchase reserved shares it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.
Other Relationships
Certain of the underwriters and their affiliates have provided in the past to us and our affiliates and may provide from time to time in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they have received and may continue to receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.
In addition, certain Continuing Investors, including members of our management team, have pledged certain of their interests in the Continuing Investors Partnerships to lenders affiliated with certain of the underwriters of this offering, pursuant to loan and security agreements. We are not a party to these agreements. The pledged interests subject to these agreements represent a total of 95,203,990 Class A ordinary shares issuable pursuant to the Exchange Agreement (of which interests representing the right to receive 26,673,850 Class A ordinary shares have been pledged to an affiliate of Morgan Stanley & Co. LLC, and interests representing the right to receive 68,530,140 Class A ordinary shares have been pledged to an affiliate of BofA Securities, Inc.). In the case of nonpayment at maturity or another event of default under certain of these loan and security agreements (including but not limited to the borrowers inability to satisfy certain payments required under such loan and security agreements), the lender may exercise its right under the loan agreement to foreclose on the pledged interests. In such case, the applicable lender may, in some cases, sell such interests through privately negotiated transactions at any time and may, upon expiration of the underwriters lock-up agreements, sell the amount of our Class A ordinary shares issuable upon the exchange of such interests pursuant to the terms of the Exchange Agreement.
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In addition, affiliates of J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, BofA Securities, Inc., Goldman Sachs & Co. LLC, Citigroup Global Markets Inc., UBS Securities LLC, SunTrust Robinson Humphrey, Inc., BBVA Securities Inc., DNB Markets, Inc., Scotia Capital (USA) Inc. and TD Securities (USA) LLC are lenders under RPI Intermediate FTs credit agreement, dated as of February 11, 2020, for which such affiliates of such underwriters, in each case, have received customary fees.
As of April 22, 2020, employees of Evercore Group L.L.C. and their affiliates beneficially own limited partnership interests in the Continuing Investors Partnerships which, if exchanged in full for our Class A ordinary shares pursuant to the Exchange Agreement, represent 6,286,650 Class A ordinary shares in the aggregate. All of the interests in our Continuing Investors Partnerships owned by Evercore Group L.L.C.s employees and their affiliates were acquired in arms length transactions.
Selling Restrictions
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Canada
The shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchasers province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchasers province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
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European Economic Area and United Kingdom
In relation to each Member State of the European Economic Area and the United Kingdom (each a Relevant State), no shares have been offered or will be offered pursuant to the offering to the public in that Relevant State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant State or, where appropriate, approved in another Relevant State and notified to the competent authority in that Relevant State, all in accordance with the Prospectus Regulation, except that offers of shares may be made to the public in that Relevant State at any time under the following exemptions under the Prospectus Regulation:
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to any legal entity which is a qualified investor as defined under the Prospectus Regulation; |
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to fewer than 150 natural or legal persons (other than qualified investors as defined under the Prospectus Regulation), subject to obtaining the prior consent of the representatives for any such offer; or |
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in any other circumstances falling within Article 1(4) of the Prospectus Regulation, |
provided that no such offer of shares shall require us, the selling shareholders or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation and each person who initially acquires any shares or to whom any offer is made will be deemed to have represented, acknowledged and agreed to and with each of the representatives and us that it is a qualified investor within the meaning of Article 2(e) of the Prospectus Regulation. In the case of any shares being offered to a financial intermediary as that term is used in the Prospectus Regulation, each such financial intermediary will be deemed to have represented, acknowledged and agreed that the shares acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any shares to the public other than their offer or resale in a Relevant State to qualified investors as so defined or in circumstances in which the prior consent of the representatives been obtained to each such proposed offer or resale.
For the purposes of this provision, the expression an offer to the public in relation to shares in any Relevant State means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide to purchase or subscribe for any shares, and the expression Prospectus Regulation means Regulation (EU) 2017/1129.
In each member state of the European Economic Area that has implemented the EU Directive 2011/61/EU on Alternative Investment Fund Managers (the AIFM Directive) and in the United Kingdom (each a Relevant State), the shares may only be offered in accordance with the local measures implementing the AIFM Directive, or in any other circumstances permitted by local law, including at the own initiative of the investor. The communication of this prospectus to any recipient in a Relevant State other than in those countries where the shares are being marketed in accordance with local measures implementing the AIFM Directive is not intended to be nor shall it be deemed to constitute marketing of the shares for the purposes of any legislation implementing the AIFM Directive. In addition to issuing the shares to investors in those countries where the shares are being marketed in accordance with local measures implementing the AIFM Directive, the shares may from time to time be issued to professional investors established in a Relevant State other than in those countries where the shares are being marketed in accordance with local measures implementing the AIFM Directive, provided that such investors subscribe for such shares at their own initiative and provide relevant representations to that effect. This prospectus may therefore only be issues to such a person in a Relevant State where that person is a professional client within the meaning of EU Directive 2014/65/EC on Markets in Financial Instruments who has requested to receive this prospectus at their own initiative.
United Kingdom
In the United Kingdom, this document is being communicated only to, and is directed only at, and any offer subsequently made may only be made to or directed at persons who are qualified investors (as defined in the
217
Prospectus Regulation) (i) who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the Order) and/or (ii) who are high net worth entities falling within Article 49(2)(a) to (d) of the Order and/or (iii) persons to whom it may otherwise be lawfully communicated (all such persons together being referred to as relevant persons) or otherwise in circumstances which have not resulted and will not result in an offer to the public of the shares in the United Kingdom.
Any person in the United Kingdom that is not a relevant person should not act or rely on the information included in this document or use it as basis for taking any action. In the United Kingdom, any investment or investment activity that this document relates to is available only to and will be engaged only with relevant persons.
Switzerland
The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (SIX) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering or marketing material relating to the offering, the Company, the selling shareholders or the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (FINMA), and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (CISA). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.
Dubai International Financial Centre
This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority (DFSA). This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.
Australia
No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission (ASIC), in relation to the offering. This prospectus does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the Corporations Act), and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.
Any offer in Australia of the shares may only be made to persons (the Exempt Investors) who are sophisticated investors (within the meaning of section 708(8) of the Corporations Act), professional
218
investors (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the shares without disclosure to investors under Chapter 6D of the Corporations Act.
The shares applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring shares must observe such Australian on-sale restrictions.
This prospectus contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.
Hong Kong
The shares have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to professional investors as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a prospectus as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document relating to the shares has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.
Japan
The shares have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended) and, accordingly, will not be offered or sold, directly or indirectly, in Japan, or for the benefit of any Japanese Person or to others for re-offering or resale, directly or indirectly, in Japan or to any Japanese Person, except in compliance with all applicable laws, regulations and ministerial guidelines promulgated by relevant Japanese governmental or regulatory authorities in effect at the relevant time. For the purposes of this paragraph, Japanese Person shall mean any person resident in Japan, including any corporation or other entity organized under the laws of Japan.
Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, the shares were not offered or sold or caused to be made the subject of an invitation for subscription or purchase and will not be offered or sold or caused to be made the subject of an invitation for subscription or purchase, and this prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares, has not been circulated or distributed, nor will it be circulated or distributed, whether directly or indirectly, to any person in Singapore other than (i) to an institutional investor (as defined in Section 4A of the Securities and Futures Act (Chapter 289) of Singapore, as modified or amended from time to time (the SFA)) pursuant to Section 274 of the SFA, (ii) to a relevant person (as defined in Section 275(2) of the SFA) pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A) of
219
the SFA, and in accordance with the conditions specified in Section 275 of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
(a) |
a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or |
(b) |
a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, |
securities or securities-based derivatives contracts (each term as defined in Section 2(1) of the SFA) of that corporation or the beneficiaries rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the shares pursuant to an offer made under Section 275 of the SFA except:
(a) |
to an institutional investor or to a relevant person, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA; |
(b) |
where no consideration is or will be given for the transfer; |
(c) |
where the transfer is by operation of law; or |
(d) |
as specified in Section 276(7) of the SFA. |
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ENFORCEABILITY OF CIVIL LIABILITIES
UNDER U.S. FEDERAL SECURITIES LAWS AND OTHER MATTERS
We are incorporated under the laws of England and Wales. In addition, certain of our directors and officers reside outside the United States, and all or a substantial portion of their assets and our assets are or may be located in jurisdictions outside the United States. Therefore, it may be difficult or impossible for investors to effect service of process within the United States on us or upon our non-U.S. directors or officers or to recover against us or our non-U.S. directors or our officers on judgments of U.S. courts, including judgments based on the civil liability provisions of U.S. federal securities laws. However, we may be served with process in the United States with respect to actions against us arising out of or in connection with violations of U.S. federal securities laws relating to offers and sales of Class A ordinary shares made hereby by serving CSC North America, our agent, duly appointed for that purpose.
A final judgment for the payment of money rendered by any U.S. federal or state court based on civil liability, whether or not based solely on U.S. federal or state securities laws, would not automatically be enforceable in England or in countries other than the United States where we have assets.
There is currently no treaty to which the United States and England are parties that provides for the reciprocal recognition and enforcement of judgments in civil and commercial matters (although the United States and the United Kingdom are both parties to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards). Consequently, a final judgment for payment rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon U.S. federal securities laws, would not automatically be enforceable in England. In order to enforce any U.S. judgment in England, fresh proceedings must be initiated by way of common law action on the judgment debt before a court of competent jurisdiction in England. In a common law action, an English court generally will not reinvestigate the merits of the original matter decided by a U.S. court and may order summary judgment on the basis that there is no arguable defense to the claim for payment. The entry of an enforcement order by an English court is conditional, among other things, upon the following:
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the U.S. court having had jurisdiction over the original proceeding according to English conflict of laws principals, regardless of jurisdiction according to U.S. conflict of laws principles; |
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the judgment being final and conclusive on the merits (in the sense of being final and unalterable in the court which pronounced it) and being for a debt or a definite sum of money; |
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the judgment not contravening English public policy or statute in England (including, for example, the U.K. Human Rights Act 1998); |
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the judgment being not for a sum payable in respect of taxes or other charges of a like nature, or in respect of a fine or penalty; |
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the judgment not being arrived at by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damage sustained; and |
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the judgment having not been obtained by fraud or in breach of the principles of natural justice. |
Enforcement proceedings would normally be required to be commenced within six years of the date of the judgment. In addition, it is questionable whether an English court would accept jurisdiction and impose civil liability if proceedings were commenced in England predicated solely upon U.S. federal securities law.
If an English court gives judgment for the sum payable under a U.S. judgment, the English judgment will be enforceable by methods generally available under English law for this purpose. These methods generally permit the court discretion to prescribe the manner of enforcement. It may not be possible to obtain an English judgment or to enforce that judgment if the judgment debtor is subject to any insolvency or similar proceedings, or if the judgment debtor has any set-off or counterclaim against the judgment creditor. Also note that, in any
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enforcement proceedings, the judgment debtor may raise any counterclaim that could have been brought if the action had been originally brought in England unless the subject of the counterclaim was in issue and denied in the U.S. proceedings.
We may comply with a U.S. judgment voluntarily, but, if it were not to do so, you would have to apply to an English court for an original judgment. Consequently, it could prove difficult to enforce civil liabilities solely based on U.S. securities law in England. In addition, awards of punitive damages in actions brought in the United States or elsewhere may not be enforceable in England and English courts are unlikely to enforce any U.S. judgments for specific performance.
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The validity of the Class A ordinary shares and certain legal matters under U.S. and English law will be passed upon for us, and for the selling shareholders, by Davis Polk & Wardwell LLP and Davis Polk & Wardwell London LLP. Certain legal and tax matters under U.S. and English law will be passed upon for us by Akin Gump Strauss Hauer & Feld LLP, New York, New York and Akin Gump LLP, London. Akin Gump Strauss Hauer & Feld LLP also represents RP Management. Certain legal matters in connection with this offering will be passed upon for the underwriters by Goodwin Procter LLP, New York, New York and Goodwin Procter (UK) LLP, London.
The consolidated financial statements of Royalty Pharma Investments and Subsidiaries as of December 31, 2019 and 2018 and for each of the three years in the period ended December 31, 2019 appearing in this prospectus and Registration Statement have been audited by Ernst & Young, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the Class A ordinary shares offered by this prospectus. This prospectus, filed as part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other document filed as an exhibit to the registration statement, each statement being qualified in all respects by such reference. For further information about us and our Class A ordinary shares, we refer you to the registration statement and to its exhibits and schedules.
Upon completion of this offering, we will become subject to the informational requirements of the Exchange Act and will be required to file reports and other information with the SEC.
You can review this registration statement, as well as our future SEC filings, by accessing the SECs website at www.sec.gov.
We intend to make available to our shareholders annual reports containing consolidated financial statements audited by an independent registered public accounting firm.
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ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2020 and December 31, 2019, and
for the Three Months Ended March 31, 2020 and 2019
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019 and 2018, and
For the Years Ended December 31, 2019, 2018 and 2017
Page | ||||
F-29 | ||||
F-30 | ||||
F-31 | ||||
F-32 | ||||
F-33 | ||||
F-34 |
F-1
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands) |
As of
March 31, |
As of
December 31, |
||||||
2020 | 2019 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 624,367 | $ | 283,682 | ||||
Marketable securities |
567,980 | 56,972 | ||||||
Financial royalty assets, net |
489,850 | 452,560 | ||||||
Accrued royalty receivable |
33,721 | 33,525 | ||||||
Available for sale debt securities |
14,007 | | ||||||
Other royalty income receivable |
7,860 | 5,241 | ||||||
Other current assets |
52 | 92 | ||||||
|
|
|
|
|||||
Total current assets |
1,737,837 | 832,072 | ||||||
|
|
|
|
|||||
Financial royalty assets, net |
10,708,272 | 10,842,052 | ||||||
Intangible royalty assets, net |
45,991 | 51,724 | ||||||
Equity securities |
283,291 | 380,756 | ||||||
Available for sale debt securities |
169,998 | 131,280 | ||||||
Derivative financial instruments |
14,071 | 42,315 | ||||||
Investments in non-consolidated affiliates |
411,516 | 124,061 | ||||||
Other assets |
636 | 45,635 | ||||||
|
|
|
|
|||||
Total assets |
$ | 13,371,612 | $ | 12,449,895 | ||||
|
|
|
|
|||||
Liabilities and equity |
||||||||
Current liabilities |
||||||||
Royalty distribution payable to affiliates |
$ | 121,080 | $ | 31,041 | ||||
Accounts payable and accrued expenses |
20,753 | 11,177 | ||||||
Accrued purchase obligation |
110,000 | | ||||||
Current portion of long-term debt |
182,128 | 281,984 | ||||||
Derivative financial instruments |
| 9,215 | ||||||
|
|
|
|
|||||
Total current liabilities |
433,961 | 333,417 | ||||||
|
|
|
|
|||||
Long-term debt |
5,774,958 | 5,956,138 | ||||||
Derivative financial instruments |
| 18,902 | ||||||
|
|
|
|
|||||
Total liabilities |
6,208,919 | 6,308,457 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Shareholders/Unitholders equity |
||||||||
Shareholders/Unitholders contributions |
2,553,001 | 3,282,516 | ||||||
Retained earnings |
2,561,971 | 2,825,212 | ||||||
Non-controlling interest |
2,002,775 | 35,883 | ||||||
Accumulated other comprehensive income/(loss) |
49,212 | 2,093 | ||||||
Treasury interests |
(4,266 | ) | (4,266 | ) | ||||
|
|
|
|
|||||
Total shareholders/unitholders equity |
7,162,693 | 6,141,438 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders/unitholders equity |
$ | 13,371,612 | $ | 12,449,895 | ||||
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
F-2
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands) |
For the three months ended
March 31, |
|||||||
2020 | 2019 | |||||||
Total income and revenues |
||||||||
Income from financial royalty assets |
$ | 462,844 | $ | 382,216 | ||||
Revenue from intangible royalty assets |
34,983 | 43,246 | ||||||
Other royalty income |
3,052 | 9,421 | ||||||
|
|
|
|
|||||
Total income and other revenues |
500,879 | 434,883 | ||||||
|
|
|
|
|||||
Operating expenses |
||||||||
Research and development funding expense |
7,639 | 22,991 | ||||||
Provision for changes in expected cash flows from financial royalty assets |
88,012 | (50,033 | ) | |||||
Amortization of intangible assets |
5,733 | 6,599 | ||||||
General and administrative expenses |
38,065 | 24,426 | ||||||
|
|
|
|
|||||
Total operating expenses, net |
139,449 | 3,983 | ||||||
|
|
|
|
|||||
Operating income |
361,430 | 430,900 | ||||||
Other expense/(income) |
||||||||
Equity in loss of non-consolidated affiliates |
9,074 | 5,529 | ||||||
Interest expense |
53,584 | 67,266 | ||||||
Unrealized loss on derivative contracts |
33,445 | 25,840 | ||||||
Unrealized loss/(gain) on equity securities |
153,166 | (53,744 | ) | |||||
Interest income |
(2,858 | ) | (10,027 | ) | ||||
Other non-operating expense/(income) |
5,923 | (58 | ) | |||||
|
|
|
|
|||||
Total other expense, net |
252,334 | 34,806 | ||||||
|
|
|
|
|||||
Consolidated net income before tax |
109,096 | 396,094 | ||||||
Income tax expense |
| | ||||||
|
|
|
|
|||||
Consolidated net income |
109,096 | 396,094 | ||||||
|
|
|
|
|||||
Less: Net income attributable to non-controlling interest |
(37,856 | ) | (28,650 | ) | ||||
|
|
|
|
|||||
Net income attributable to controlling interest |
71,240 | 367,444 | ||||||
|
|
|
|
|||||
Other comprehensive income/(loss) |
||||||||
Reclassification of loss on interest rate swaps included in net income |
4,066 | 1,587 | ||||||
Change in unrealized movement on available for sale debt securities |
52,725 | | ||||||
|
|
|
|
|||||
Other comprehensive income |
56,791 | 1,587 | ||||||
|
|
|
|
|||||
Comprehensive income |
128,031 | 369,031 | ||||||
|
|
|
|
|||||
Less: Other comprehensive income attributable to non-controlling interest |
(9,672 | ) | | |||||
|
|
|
|
|||||
Comprehensive income attributable to controlling interest |
$ | 118,359 | $ | 369,031 | ||||
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
F-3
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Unaudited)
(in thousands) |
Shareholders
Contributions |
Retained
Earnings |
Accumulated
Other Comprehensive Income/(Loss) |
Non-Controlling
Interest |
Treasury
Interests |
Total
Consolidated Shareholders Equity |
||||||||||||||||||
Balance at December 31, 2019 |
$ | 3,282,516 | $ | 2,825,212 | $ | 2,093 | $ | 35,883 | $ | (4,266 | ) | $ | 6,141,438 | |||||||||||
Contributions |
307,646 | | | 1,133,629 | | 1,441,275 | ||||||||||||||||||
Transfer of interests |
(1,037,161 | ) | | | 1,037,161 | | | |||||||||||||||||
Cumulative adjustment for adoption of ASU 2016-13 |
| (192,705 | ) | | | | (192,705 | ) | ||||||||||||||||
Distributions |
| (141,776 | ) | | (251,426 | ) | | (393,202 | ) | |||||||||||||||
Net income |
| 71,240 | | 37,856 | | 109,096 | ||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Change in unrealized movement on available for sale debt securities |
| | 43,053 | 9,672 | | 52,725 | ||||||||||||||||||
Reclassification of loss on interest rate swaps |
| | 4,066 | | | 4,066 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at March 31, 2020 |
$ | 2,553,001 | $ | 2,561,971 | $ | 49,212 | $ | 2,002,775 | $ | (4,266 | ) | $ | 7,162,693 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Unitholders
Contributions |
Retained
Earnings |
Accumulated
Other Comprehensive Income/(Loss) |
Non-Controlling
Interest |
Treasury
Interests |
Total
Consolidated Unitholders Equity |
|||||||||||||||||||
Balance at December 31, 2018 |
$ | 3,282,516 | $ | 1,215,953 | $ | (10,255 | ) | $ | 63,865 | $ | | $ | 4,552,079 | |||||||||||
Distributions |
| (197,669 | ) | | (44,427 | ) | | (242,096 | ) | |||||||||||||||
Net income |
| 367,444 | | 28,650 | | 396,094 | ||||||||||||||||||
Other comprehensive income/(loss): |
||||||||||||||||||||||||
Reclassification of loss on interest rate swaps |
| | 1,587 | | | 1,587 | ||||||||||||||||||
Purchase of treasury interests |
| | | | (2,327 | ) | (2,327 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at March 31, 2019 |
$ | 3,282,516 | $ | 1,385,728 | $ | (8,668 | ) | $ | 48,088 | $ | (2,327 | ) | $ | 4,705,337 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
F-4
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands) |
For the three months ended
March 31, |
|||||||
2020 | 2019 | |||||||
Cash flows from operating activities: |
||||||||
Cash collections from financial royalty assets |
$ | 488,028 | $ | 467,842 | ||||
Cash collections from intangible royalty assets |
34,788 | 32,738 | ||||||
Other royalty cash collections |
535 | 13,661 | ||||||
Interest received |
2,236 | 10,027 | ||||||
Swap collateral received |
45,252 | | ||||||
Swap collateral posted |
| (360 | ) | |||||
Swap termination payments |
(35,448 | ) | | |||||
Distributions from non-consolidated affiliates |
20,293 | 14,059 | ||||||
Development-stage funding paymentsongoing |
(7,639 | ) | (22,991 | ) | ||||
Payments for operating costs and professional services |
(25,838 | ) | (17,705 | ) | ||||
Interest paid |
(51,103 | ) | (64,376 | ) | ||||
|
|
|
|
|||||
Net cash provided by operating activities |
471,104 | 432,895 | ||||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Purchase of equity securities |
(50,000 | ) | (56 | ) | ||||
Proceeds from available for sale debt securities |
| 150,000 | ||||||
Purchase of marketable securities |
(637,236 | ) | | |||||
Proceeds from sales and maturities of marketable securities |
126,725 | | ||||||
Investments in non-consolidated affiliates |
(13,142 | ) | (8,842 | ) | ||||
Acquisitions of financial royalty assets |
(99,290 | ) | (1,208,274 | ) | ||||
Milestone payments |
| (250,000 | ) | |||||
|
|
|
|
|||||
Net cash used in investing activities |
(672,943 | ) | (1,317,172 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Distributions to shareholders/unitholders |
(141,776 | ) | (197,669 | ) | ||||
Distributions to non-controlling interest |
(161,387 | ) | (41,460 | ) | ||||
Contributions from non-controlling interest- acquisitions |
17,359 | | ||||||
Contributions from non-controlling interest- R&D |
1,260 | | ||||||
Contributions from non-controlling interest- other |
12,405 | | ||||||
Scheduled repayments of long-term debt |
(47,100 | ) | (73,500 | ) | ||||
Repayments of long-term debt |
(5,170,396 | ) | | |||||
Proceeds from issuance of long-term debt |
6,040,000 | | ||||||
Debt issuance costs and other |
(7,841 | ) | | |||||
Purchase of treasury interests |
| (2,327 | ) | |||||
|
|
|
|
|||||
Net cash provided by/(used in) financing activities |
542,524 | (314,956 | ) | |||||
|
|
|
|
|||||
Net change in cash and cash equivalents |
340,685 | (1,199,233 | ) | |||||
Cash and cash equivalents, beginning of period |
283,682 | 1,924,211 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of period |
$ | 624,367 | $ | 724,978 | ||||
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
F-5
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Purpose
Royalty Pharma Investments 2019 ICAV and subsidiaries (the Company, Royalty Pharma Investments, RPI or we) is an Irish collective asset management entity formed to facilitate our Exchange Offer Transactions (defined below) and is the successor to Royalty Pharma Investments, an Irish Unit Trust (Old RPI) for accounting and financial reporting purposes. RPI is owned, directly or indirectly, by RPI US Partners 2019, LP, a Delaware limited partnership (the Continuing US Investors Partnership) and RPI International Holdings 2019, LP, a Cayman Islands exempted limited partnership (the Continuing International Investors Partnership and together with the Continuing US Investors Partnership, the Continuing Investors Partnerships). Old RPI is a unit trust established in August 2011 under the laws of Ireland and authorized by the Central Bank of Ireland pursuant to the Unit Trusts Act, 1990. The owners of Old RPI were RPI US Partners, LP; RPI US Partners II, LP; RPI International Partners, LP; and RPI International Partners II, LP (the Legacy Investors Partnerships).
We are the largest buyer of biopharmaceutical royalties and a leading funder of innovation across the biopharmaceutical industry. We fund innovation in the biopharmaceutical industry both directly and indirectly-directly when we partner with companies to co-fund late-stage clinical trials and new product launches in exchange for future royalties, and indirectly when we acquire existing royalties from the original innovators. We acquire royalties in a variety of ways that can be tailored to the needs of our partners. We classify our acquisitions according to the following structures:
Third-party RoyaltiesA royalty is the contractual right to a percentage of top-line sales from a licensees use of a product, technology or intellectual property. The majority of our current portfolio consists of royalties that had been previously created by other parties prior to our acquisition.
Synthetic / Hybrid RoyaltiesA synthetic royalty is the contractual right to a percentage of top-line sales created by the developer and/or marketer of a therapy in exchange for funding. In many of our synthetic royalty acquisitions, we also make investments in the public equity of the company, where the main value driver of the company is the product on which we concurrently acquired a royalty.
R&D FundingWe fund R&D, typically for large biopharmaceutical companies, in exchange for future royalties and/or milestones if the product or indication we are funding is approved.
Acquisitions of CompaniesWe acquire royalties in connection with M&A transactions, often from the buyers of biopharmaceutical companies when they dispose of the non-strategic assets of the target company following the closing of the acquisition. We also seek to partner with companies to acquire other biopharmaceutical companies that own significant royalties. We may also seek to acquire biopharmaceutical companies that have significant royalties or where we can create royalties in subsequent transactions.
RP Management, LLC (the Manager), a Delaware limited liability company, is an external adviser who is responsible for the management of RPI. RP Management (Ireland) Ltd. (RP Ireland), is the manager of Old RPI and equivalent to the board of directors of a company or general partner of a partnership and is responsible for the day to day operations of Old RPI. Its functions can be delegated to third parties. RP Ireland delegated responsibility for investment management of Old RPI to its parent company, the Manager, in accordance with the investment objectives and policies of Old RPI.
Reorganization Transactions and the U.S. Listing
In connection with an anticipated U.S. listing of Class A ordinary shares of Royalty Pharma plc, we consummated an exchange offer on February 11, 2020 (the Exchange Date). Through the exchange offer, investors representing 82% of the aggregate limited partnership interests in the Legacy Investors Partnerships,
F-6
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
exchanged their limited partnership interests in the Legacy Investors Partnerships for limited partnership interests in the Continuing Investors Partnerships. The exchange offer transaction together with (i) the concurrent incurrence of indebtedness under 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 the U.S. listing are referred to as the Exchange Offer Transactions.
As a result of the Exchange Offer Transactions, 82% of the portfolio of Old RPI was effectively transferred to RPI on the Exchange Date. We own, through our wholly-owned subsidiary RPI 2019 Intermediate Finance Trust, a Delaware statutory trust (RPI Intermediate FT), an 82% economic interest in Old RPI. Through our 82% indirect ownership of Old RPI, we are legally entitled to 82% of the economics of Old RPIs wholly-owned subsidiaries, RPI Finance Trust, a Delaware statutory trust (RPIFT) and RPI Acquisitions (Ireland), Limited (RPI Acquisitions), an Irish private limited company, and 66% of Royalty Pharma Collection Trust, a Delaware statutory trust (RPCT). The remaining 34% of RPCT is owned by the Legacy Investors Partnerships and Royalty Pharma Select Finance Trust, a Delaware statutory trust (RPSFT), which is wholly owned by Royalty Pharma Select, an Irish Unit trust (RPS). From the Exchange Date until the expiration of the Legacy Investors Partnerships investment period on June 30, 2020 (the Legacy Date), we 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 investments and each of Old RPI and the Legacy Investors Partnerships will become legacy entities. Following the Legacy Date, we will make new investments through our wholly-owned subsidiaries (together with RPI, the RPI Group), including RPI Intermediate FT.
As part of the Exchange Offer Transactions, the Legacy Investors Partnerships and RPI Intermediate FT have entered into new credit facilities in the amount of $1,260,000,000 and $6,040,000,000, respectively, the proceeds of which were used to repay the $6,273,000,000 outstanding debt of RPIFT and, in the case of RPI Intermediate FT, will also be used to fund future investments. As part of the new credit facilities, RPI Intermediate FT repaid $5,175,884,653, its pro rata portion of RPIFTs outstanding debt and accrued interest. RPIFT terminated all outstanding interest rate swaps in connection with the debt refinancing.
Prior to, and as a condition precedent to the closing of the U.S. listing, various reorganization transactions will be effected, including the following:
|
the Exchange Offer Transactions (as described above); and |
|
the execution of a new management agreement with the Manager. |
We refer to these transactions collectively as the Reorganization Transactions.
After the consummation of the offering, Royalty Pharma plc, 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 would exist upon the closing of the U.S. listing. Immediately following this offering, Royalty Pharma plc will be a holding company whose principal asset will be a controlling equity interest in Royalty Pharma Holdings Ltd., (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.
Old RPI is the predecessor of RPI and Royalty Pharma plc for financial reporting purposes. The references in the following notes for the periods prior to the Exchange Date refer to the financial results of Old RPI for the same periods.
F-7
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Summary of Significant Accounting Policies
Basis of preparation and use of estimates
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, all adjustments considered necessary to present fairly the results of the interim periods have been included and consist only of normal and recurring adjustments. Certain information and footnote disclosures have been condensed or omitted as permitted under U.S. GAAP. The results for the interim periods are not necessarily indicative of results for the full year.
The unaudited condensed consolidated financial statements contained herein should be read in conjunction with our 2019 audited consolidated financial statements and notes thereto.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates.
Basis of consolidation
The condensed consolidated financial statements include the accounts of RPI as well as its majority-owned and controlled subsidiaries. We hold interests in variable interest entities where we have assessed that we are not the primary beneficiary and therefore do not consolidate these entities. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net (income)/loss attributable to non-controlling interests in our condensed consolidated statements of comprehensive income equal to the percentage of the economic or ownership interest retained in such entities by the respective non-controlling parties.
Following managements determination that a high degree of common ownership existed in RPI both before and after the Exchange Date, RPI recognized Old RPIs assets and liabilities at the carrying value reflected on Old RPIs balance sheet as of the Exchange Date.
As a result of the Exchange Offer Transactions in February 2020, a new non-controlling interest was created related to the Legacy Investors Partnerships ownership of approximately 18% in Old RPI. As the result of a reorganization transaction that took place in 2011, a non-controlling interest was created related to certain legacy investors 20% interest in RPCT held through RPSFT. As noted above, RPIFT, our wholly owned subsidiary, owns the remaining 80% of RPCT, which is fully consolidated.
All intercompany transactions and balances have been eliminated in consolidation.
Concentrations of credit risk
Financial instruments that subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, royalty assets, receivables, and derivatives. Our cash management and investment policy limits investment instruments to investment-grade securities with the objective to preserve capital and to maintain liquidity until the funds are needed for operations. Our cash and cash equivalents, and marketable securities balances at March 31, 2020 and December 31, 2019 were held with State Street Bank and Trust, Deutsche Bank, Merrill Lynch, Pierce, Fenner & Smith, and Bank of America, N.A. Our primary operating accounts significantly exceed the FDIC limits.
F-8
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The majority of our royalty assets and receivables arise from contractual royalty agreements that entitle the Company to royalties on the sales of underlying biopharmaceutical products in the United States, Europe and the rest of the world, with concentrations of credit risk limited due to the broad range of marketers responsible for paying royalties to us and the variety of geographies from which our royalties on product sales are derived. The marketers paying us royalties on these products do not always provide, and are not necessarily required to provide, the breakdown of product sales by geography. The products in which we hold royalties are marketed by leading industry participants, including, among others, Abbott, AbbVie, Amgen, Bristol-Myers Squibb, Celgene, Gilead Sciences, Johnson & Johnson, Lilly, Merck & Co., Pfizer, Novartis, Biogen-Idec, Roche/ Genentech, and Vertex. Vertex, as the marketer and payor of our royalties on the cystic fibrosis franchise products, accounted for 24% and 17% of our current portion of financial royalty assets as of March 31, 2020 and December 31, 2019, respectively.
Recently adopted and issued accounting standards
Upon the January 1, 2020 adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), we recorded a cumulative adjustment to Retained earnings of $192.7 million to recognize an allowance for current expected credit losses on the portion of our portfolio of financial royalty assets that is subject to credit risk.
The Companys significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to our 2019 audited consolidated financial statements. There have been no material changes to our significant accounting policies as of and for the three months ended March 31, 2020, except for our new accounting policy for estimating an allowance for current expected credit losses upon the adoption of ASU 2016-13 (Topic 326).
As a result of adopting ASU2016-13, the Company recognizes an allowance for current expected credit losses on the portion of our portfolio of financial royalty assets that is subject to credit risk. The credit loss allowance is estimated using the probability of default and loss given default methods. The credit rating, which is primarily based on publicly available data and updated on a quarterly basis, is the primary credit quality indicator used to determine the probability of default of the marketers responsible for paying our royalties and resulted loss given default. Current expected credit loss allowance is presented net within the non-current portion of Financial royalty assets, net on the consolidated balance sheets. Any subsequent movement in the allowance for credit losses is recorded as part of the Provision for changes in expected future cash flows from financial royalty assets on the consolidated statements of comprehensive income.
Refer to Note 7 for further information.
3. Fair Value Measurements and Financial Instruments
Fair value measurements
The summary below presents information about assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019, and the valuation techniques we utilized to determine such fair value.
|
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Our level 1 assets consist of equity securities with readily determinable fair values and money market funds. |
F-9
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly. Our level 2 assets generally include marketable securities, warrants, derivatives, available for sale debt securities, and our interest rate swap contracts, which may be in an asset or liability position. |
|
Level 3: Prices or valuation that requires inputs that are both significant to the fair value measurement and unobservable. Our level 3 assets historically consisted of our investment in the Biohaven Preferred Shares. See Note 5 for a description of our investment in the Biohaven Preferred Shares. |
For financial instruments which are carried at fair value, the level in the fair value hierarchy is based on the lowest level of inputs that is significant to the fair value measurement in its entirety.
Fair value hierarchy
The following is a summary of the inputs used to value our financial assets and liabilities measured at fair value as of March 31, 2020 and December 31, 2019:
As of March 31, 2020 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
||||||||||||||||
Money market funds |
$ | 34,688 | $ | | $ | | $ | 34,688 | ||||||||
Commercial paper |
| 290,672 | | 290,672 | ||||||||||||
Certificates of deposit |
| 41,928 | | 41,928 | ||||||||||||
Marketable securities |
||||||||||||||||
U.S. government securities |
| 113,983 | | 113,983 | ||||||||||||
Corporate debt securities |
| 46,982 | | 46,982 | ||||||||||||
Certificates of deposit |
| 407,015 | | 407,015 | ||||||||||||
Available for sale debt securities |
| 14,007 | | 14,007 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current assets |
$ | 34,688 | $ | 914,587 | $ | | $ | 949,275 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity securities |
283,291 | | | 283,291 | ||||||||||||
Available for sale debt securities |
| 169,998 | | 169,998 | ||||||||||||
Warrants (1) |
| 14,071 | | 14,071 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-current assets |
$ | 283,291 | $ | 184,069 | $ | | $ | 467,360 | ||||||||
|
|
|
|
|
|
|
|
F-10
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) |
Related to Epizyme transaction as described in Note 4 and recorded in the non-current asset portion of Derivative financial instruments in the consolidated balance sheet as of March 31, 2020. |
As of December 31, 2019 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
||||||||||||||||
Money market funds |
$ | 222,296 | $ | | $ | | $ | 222,296 | ||||||||
Commercial paper |
| 21,502 | | 21,502 | ||||||||||||
Certificates of deposit |
| 20,011 | | 20,011 | ||||||||||||
Marketable securities |
||||||||||||||||
U.S. government securities |
| 12,877 | | 12,877 | ||||||||||||
Certificates of deposit |
| 44,095 | | 44,095 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current assets |
$ | 222,296 | $ | 98,485 | $ | | $ | 320,781 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity securities |
380,756 | | | 380,756 | ||||||||||||
Available for sale debt securities |
| | 131,280 | 131,280 | ||||||||||||
Warrants (1) |
| 30,815 | | 30,815 | ||||||||||||
Forward purchase contract (1) |
| 11,500 | | 11,500 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-current assets |
$ | 380,756 | $ | 42,315 | $ | 131,280 | $ | 554,351 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Interest rate swaps |
| (9,215 | ) | | (9,215 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current liabilities |
$ | | $ | (9,215 | ) | $ | | $ | (9,215 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Interest rate swaps |
| (18,902 | ) | | (18,902 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-current liabilities |
$ | | $ | (18,902 | ) | $ | | $ | (18,902 | ) | ||||||
|
|
|
|
|
|
|
|
(1) |
Related to Epizyme warrants and put option as described in Note 4 and recorded in the non-current asset portion of Derivative financial instruments in the consolidated balance sheet as of December 31, 2019. |
The table presented below summarizes the change in the carrying value of level 3 financial instruments for the three months ended March 31, 2020 and 2019.
For the three months ended | ||||||||
March 31, 2020 | March 31, 2019 | |||||||
(in thousands) | ||||||||
Available for sale debt securities |
||||||||
Balance at the beginning of the period |
$ | 131,280 | $ | | ||||
Change in unrealized movement |
52,725 | | ||||||
Transfers out |
(184,005 | ) | | |||||
|
|
|
|
|||||
Balance at the end of the period |
$ | | $ | | ||||
|
|
|
|
Valuation inputs
Below is a discussion of the valuation inputs used for financial instruments classified as level 2 and level 3 measurements in the fair value hierarchy.
F-11
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Investment in Biohaven Preferred Shares
The fair value of the Biohaven Preferred Shares at March 31, 2020 was based on the achievement of certain contractual terms, namely the February 2020 approval by the United States Food and Drug Administration (FDA) of Nurtec ODT (rimegepant), which resulted in a payment to Royalty Pharma of two times (2x) the original purchase price of the Series A Preferred Shares payable in equal quarterly installments following approval and starting one-year after approval, through December 31, 2024. The fixed payment amount of $250.0 million results in nominal quarterly payments of $15.6 million. Using Biohavens weighted average cost of capital of 11.6% obtained from a publicly available third party source, management arrived at a fair value of $184.0 million at March 31, 2020 for the Biohaven Preferred Shares, which are classified as a Level 2 measurement at this date for the reasons noted above.
The fair value of the Biohaven Preferred Shares at December 31, 2019 was determined based on significant inputs that were not observable in the market, referred to as Level 3 inputs. The valuation was performed using a Black-Derman-Troy (BDT) lattice model, which takes into account the purchase terms and various probability-weighted redemption and payback scenarios that impact the return on investment. Key inputs to the BDT model included, most notably, the probability (1) of Biohavens pipeline product, rimegepant, being approved by the FDA by specific dates, (2) of a Change of Control event by specific dates, and (3) that Biohaven will elect to redeem the Preferred Shares for a lump sum payment as opposed to payback over time. Probabilities for the above considerations were developed by our Research team, who have significant healthcare and finance expertise to make such assessments. The most critical assumption that impacted the valuation of our Biohaven Preferred Shares at December 31, 2019 was the probability that rimegepant would be approved by the FDA. If the probability that such FDA approval occurs were reduced by 20%, the value of our Biohaven Preferred Shares would not change materially at December 31, 2019.
Assumptions used in the valuation model as of December 31, 2019 included the following significant unobservable inputs:
|
Change of Control probability on a quarterly basis (0%) |
|
Likelihood of FDA approval (0%-86%) |
|
Likelihood of FDA approval at the end of any given quarter by December 31, 2024 (Range: 0%-59%). |
Other financial instruments
We use a third party pricing service for level 2 inputs used to value cash equivalents and short term investments, which provides documentation on an ongoing basis that includes, among other things, pricing information with respect to reference data, methodology, inputs summarized by asset class, pricing application and corroborative information. Level 2 derivative instruments are valued using counterparty confirmations, LIBOR yield curves and credit valuation adjustments. Warrants are valued using a Black-Scholes option pricing model which considers observable and unobservable inputs.
F-12
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial assets not measured at fair value
Financial royalty assets are measured and carried on the consolidated balance sheets at amortized cost using the effective interest method. The current portion of financial royalty assets approximates fair value. Estimated fair values based on Level 3 inputs and related carrying values for the non-current portion of our financial royalty assets classified as of March 31, 2020 and December 31, 2019 are presented below.
(in thousands) | March 31, 2020 | December 31, 2019 | ||||||||||||||
Fair value | Carrying value, net | Fair value | Carrying value, net | |||||||||||||
Financial royalty assets, net |
$ | 16,876,366 | $ | 10,708,272 | $ | 16,501,819 | $ | 10,842,052 |
4. Derivative Instruments
We have historically managed the impact of foreign currency exchange rate and interest rate risk through various financial instruments, including derivative instruments such as interest rate swap contracts and foreign currency forward contracts. Our policy is to use derivatives strategically to hedge existing interest rate exposure and to minimize volatility in cash flow arising from our exposure to interest rate risk and foreign currency risk. We may also acquire other financial instruments that are classified as derivatives. We do not enter into derivative instruments for trading or speculative purposes.
Interest rate swaps
As of March 31, 2020, we do not hold any interest rate swap contracts. In connection with the Exchange Offer Transactions described in Note 1, RPIFT terminated all outstanding interest rate swaps in February 2020. We paid $35.4 million to terminate our swaps and reclaimed $45.3 million of collateral that was held by the respective counterparties.
As of December 31, 2019, RPIFT held interest rate swap contracts to effectively convert a portion of its floating-rate debt to a fixed basis. The notional values and fixed rates payable on the swap contracts are shown in the table below.
Notional Value (in millions) |
Fixed Rate | Maturity Date | ||||||
$600 |
2.019 | % | November 9, 2020 | |||||
$250 |
2.094 | % | March 27, 2023 | |||||
$500 |
2.029 | % | March 27, 2023 | |||||
$250 |
2.113 | % | March 27, 2023 | |||||
$500 |
2.129 | % | March 27, 2023 |
We do not apply hedge accounting and recognize all movement in fair value through earnings. During the three months ended March 31, 2020 and 2019 we recorded in earnings unrealized losses of $10.9 million and $25.8 million, respectively, on interest rate swaps in the condensed consolidated statements of comprehensive income.
The fair value of the swaps at December 31, 2019 was a net liability of $28.1 million (a current liability of $9.2 million and a non-current liability of $18.9 million) and included within derivative financial instruments on the consolidated balance sheets
RPIFT had master International Swaps and Derivatives Association (ISDA) agreements in place with its derivative instrument counterparties which provide for final close out netting with counterparties for all positions
F-13
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
in the case of default or termination of the ISDA agreement. Under these agreements, RPIFT has set-off rights with the same counterparty but elected not to offset such derivative instrument fair values in the condensed consolidated balance sheets.
RPIFT generally had executed a Credit Support Annex (CSA) under the ISDA it maintains with each of its over-the-counter (OTC) derivative counterparties that requires both posting and accepting collateral either in the form of cash or high-quality securities. These CSAs are bilateral agreements that require collateral postings by the party out-of-the-money or in a net derivative liability position. Various thresholds for the amount and timing of collateralization of net liability positions are applicable. RPIFT elected not to offset fair value amounts of any outstanding derivatives against the fair value amounts recognized for the related cash collateral receivable or payable that arise from those derivative instruments on the condensed consolidated balance sheets.
Only the swaps maturing in 2023 had collateral requirements. At December 31, 2019, RPIFT had a receivable of $45.6 million in cash collateral previously posted to trade counterparties, which was recorded in Other assets on the consolidated balance sheets. At December 31, 2019, RPIFT did not have the obligation to return any cash collateral to counterparties, as it did not hold any cash collateral at that date.
Epizyme put option and warrant
In November 2019, RPIFT made an equity investment in Epizyme Inc. (Epizyme) of $100.0 million. Under the terms of its agreement with Epizyme, RPIFT made an upfront payment of $100.0 million for (1) shares of Epizyme common stock, (2) a warrant to purchase an additional 2.5 million shares of Epizyme common stock at $20 per share over a three-year term, and (3) Epizymes royalty on sales of Tazemetostat in Japan payable by Eisai Co., Ltd (Eisai). In addition, Epizyme has an 18 month put option to sell an additional $50.0 million of its common stock to RPIFT at then prevailing prices, not to exceed $20 per share. Epizyme notified the Company its intention to exercise the put option on December 31, 2019. As a result, we recorded a forward purchase contract equal to the difference in market value and exercise share price of $11.5 million in the non-current asset portion of Derivative financial instruments on the consolidated balance sheet at December 31, 2019. The exercise of put option was settled in February 2020.
The warrant was recognized at fair value of $14.1 million and $30.8 million within the non-current asset portion of Derivative financial instruments on the consolidated balance sheet at March 31, 2020 and December 31, 2019, respectively. We recorded an unrealized loss on derivative contracts of $16.7 million related to the change in fair value on the consolidated statements of comprehensive income for the quarter ended March 31, 2020.
Biohaven written put option
The Company determined there was a derivative associated with the Second Tranche of the Biohaven Preferred Share Agreement that was entered into in April 2019. The derivative relates to Biohavens option, exercisable within 12 months from when the NDA for Nurtec ODT was accepted by the FDA for Priority Review, to require the Company to purchase up to an additional $75.0 million of Preferred Shares (the Second Tranche) at the same price and on the same terms as the First Tranche, in one or more transactions of no less than $25.0 million. As of March 31, 2020 and December 31, 2019, management determined that the value of the Second Tranche written put option was immaterial, and therefore no liability has been recognized on the consolidated balance sheets at this time. See Note 5 for a description of our investment in the Biohaven Preferred Shares.
F-14
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Summary of derivatives and reclassifications
The tables below summarize the change in fair value of the derivatives for the three months ended March 31, 2020 and 2019, and the line items within the condensed consolidated statements of comprehensive income where the gains/(losses) on these derivatives are recorded.
For the three months ended | ||||||||||
March 31, 2020 | March 31, 2019 |
Consolidated Statement of Comprehensive
|
||||||||
(in thousands) | ||||||||||
Derivatives in hedging relationships (1) |
||||||||||
Interest Rate Swaps: |
||||||||||
Amount of loss reclassified from AOCI into income |
$ | (4,066 | ) | $ | (1,587 | ) | Unrealized gain/loss on derivative contracts | |||
Change in fair value of interest rate swaps |
73 | (6,296 | ) | Unrealized gain/loss on derivative contracts | ||||||
Interest income |
(114 | ) | 3,773 | Interest expense | ||||||
Derivatives not designated as hedging instruments |
||||||||||
Interest Rate Swaps: |
||||||||||
Change in fair value of interest rate swaps |
(6,908 | ) | (17,957 | ) | Unrealized gain/loss on derivative contracts | |||||
Interest income |
(408 | ) | 1,553 | Interest expense | ||||||
Warrant: |
||||||||||
Change in fair value of warrant |
(16,744 | ) | | Unrealized gain/loss on derivative contracts | ||||||
Forward purchase contract: |
||||||||||
Change in fair value of forward purchase contract |
(5,800 | ) | | Unrealized gain/loss on derivative contracts |
(1) |
Certain older interest rate swaps were previously designated as cash flow hedges. These swaps became ineffective as debt refinancings occurred between 2013-2016. As a result of the termination of interest rate swaps in February 2020, all amounts associated with interest rate swaps previously designated as cash flow hedges and recorded in AOCI have been released into earnings. |
5. Available for Sale Debt Securities
A summary of our available for sale debt securities recorded at fair value is shown below as of March 31, 2020 and December 31, 2019:
Cost | Unrealized gains | Fair Value (1) | ||||||||||
As of March 31, 2020 | (in thousands) | |||||||||||
Biohaven preferred shares |
$ | 125,121 | $ | 58,884 | $ | 184,005 | ||||||
|
|
|
|
|
|
|||||||
Total available for sale debt securities |
$ | 125,121 | $ | 58,884 | $ | 184,005 | ||||||
|
|
|
|
|
|
|||||||
As of December 31, 2019 |
||||||||||||
Biohaven preferred shares |
$ | 125,121 | $ | 6,159 | $ | 131,280 | ||||||
|
|
|
|
|
|
|||||||
Total available for sale debt securities |
$ | 125,121 | $ | 6,159 | $ | 131,280 | ||||||
|
|
|
|
|
|
(1) |
As of March 31, 2020, $14.0 million and $170.0 million are recorded as the current and non-current asset portion of Available for sale debt securities, respectively, in the consolidated balance sheet. The entire balance of the Biohaven Preferred Shares was recorded as a non-current asset as of December 31, 2019. |
F-15
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Biohaven available for sale debt securities
On April 5, 2019, RPIFT funded the purchase of 2,495 Series A Preferred Shares from Biohaven Pharmaceutical Holding Company Ltd (Biohaven) at a price of $50,100.00 per preferred share, for a total of $125.0 million, pursuant to the Preferred Share Agreement. Pursuant to the Preferred Share Agreement, Biohaven may issue and sell to RPIFT, and RPIFT will purchase from Biohaven, the Second Tranche of up to $75.0 million in the aggregate (and no less than $25.0 million at each additional closing) of additional Series A Preferred Shares subject to the acceptance by the FDA of both New Drug Applications (NDAs) with respect to the tablet formulation of rimegepant and the orally disintegrating tablet formulation of rimegepant. As a condition for the issuance of the Second Tranche, one NDA must be accepted under the priority review designation pathway. The issuance of the Second Tranche is subject to customary closing conditions and is entirely at Biohavens option.
The Series A Preferred Shares provided RPIFT with the right to require Biohaven to redeem its shares under the following circumstances:
|
If a Change of Control is announced on or before October 5, 2019, Biohaven has the option to redeem the Series A Preferred Shares for one point five times (1.5x) the original purchase price of the Series A Preferred Shares upon the closing of the Change of Control. If Biohaven does not elect to redeem the Series A Preferred Shares for 1.5x the original purchase price at the closing of Change of Control, then Biohaven is required to redeem the Series A Preferred Shares for two times (2x) the original purchase price, payable in equal quarterly installments following closing of the Change of Control through December 31, 2024. |
|
If a Change of Control is announced after October 5, 2019 and the Series A Preferred Shares have not previously been redeemed, Biohaven must redeem the Series A Preferred Shares for two times (2x) the original purchase price of the Series A Preferred Shares payable in a lump sum at the closing of the Change of Control or in equal quarterly installments following the closing of the Change of Control through December 31, 2024. |
|
If an NDA for rimegepant is not approved by December 31, 2021, RPIFT has the option at any time thereafter to require Biohaven to redeem the Series A Preferred Shares for one point two times (1.2x) the original purchase price of the Series A Preferred Shares. |
|
If no Change of Control has been announced, the Series A Preferred Shares have not previously been redeemed and (i) rimegepant is approved on or before December 31, 2024, following approval and starting one-year after approval, Biohaven must redeem the Series A Preferred Shares for two times (2x) the original purchase price, payable in a lump sum or in equal quarterly installments through December 31, 2024 (provided that if rimegepant is approved in 2024, the entire redemption amount must be paid by December 31, 2024) or (ii) rimegepant is not approved by December 31, 2024, Biohaven must redeem the Series A Preferred Shares for two times (2x) the original purchase price on December 31, 2024. |
|
Biohaven may redeem the Series A Preferred Shares at its option at any time for two times (2x) the original purchase price, which redemption price may be paid in a lump sum or in equal quarterly installments through December 31, 2024. In the event that Biohaven defaults on any obligation to redeem Series A Preferred Shares when required, the redemption amount shall accrue interest at the rate of eighteen percent (18%) per annum. If any such default continues for at least one year, RPIFT will be entitled to convert, subject to certain limitations, such Series A Preferred Shares into common shares, with no waiver of its redemption rights. |
|
Under all circumstances, the Series A Preferred Shares are required to be redeemed by Biohaven by December 31, 2024. |
F-16
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nurtec ODT (rimegepant) was approved by the FDA in February 2020, which results in a payment due to Royalty Pharma of two times (2x) the original purchase price of the Series A Preferred Shares payable in equal quarterly installments following approval and starting one-year after approval, through December 31, 2024.
6. Financial Royalty Assets, Net
Financial royalty assets, net consist of contractual rights to cash flows relating to royalty payments derived from the sales of patent-protected biopharmaceutical products that entitle the Company and its subsidiaries to receive a portion of income from the sale of those products by unrelated companies.
The gross carrying value, cumulative allowance for changes in expected cash flows, exclusive of the allowance for credit losses, and net carrying value for the current and non-current portion of royalty assets classified as financial assets at March 31, 2020 and December 31, 2019 are as follows.
a) |
Dates shown are based on the patent expiry date or managements best estimate of the date through which the Company will be entitled to royalties. Royalty expiration dates can change due to the grant of additional patents, the invalidation of patents, and other reasons. |
b) |
The expiration date for the Cystic fibrosis franchise is based on the patent expiration date for Trikafta, a franchise product which was approved in the US in October 2019. Management estimates that the most material patents provide protection through 2037. |
c) |
Under terms of the agreement, RPIFT acquired a perpetual royalty on net sales of Tysabri. Management has applied an end date of 2031 for purposes of accreting income over the royalty term. |
F-17
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
d) |
The net carrying value by asset is presented before the allowance for credit losses. Refer to Note 7 for additional information. |
December 31, 2019 |
Estimated royalty
expiration (a) |
Gross carrying
value |
Cumulative allowance
for changes in expected cash flows (Note 7) |
Net carrying value | ||||||||||||
(in thousands) | ||||||||||||||||
Cystic fibrosis franchise (d) |
(b) | $ | 4,639,045 | $ | | $ | 4,639,045 | |||||||||
Tysabri |
(c) | 2,131,272 | (71,789 | ) | 2,059,483 | |||||||||||
Imbruvica |
2029 | 1,332,077 | | 1,332,077 | ||||||||||||
Xtandi |
2028 | 1,193,918 | (332,624 | ) | 861,294 | |||||||||||
Promacta |
2026 | 776,555 | | 776,555 | ||||||||||||
Crysvita |
2032 | 321,234 | | 321,234 | ||||||||||||
Other |
2019-2036 | 1,768,929 | (464,005 | ) | 1,304,924 | |||||||||||
|
|
|
|
|
|
|||||||||||
Total |
12,163,030 | (868,418 | ) | 11,294,612 | ||||||||||||
|
|
|
|
|
|
a) |
Dates shown are based on the patent expiry date or managements best estimate of the date through which the Company will be entitled to royalties. Royalty expiration dates can change due to the grant of additional patents, the invalidation of patents, and other reasons. |
b) |
The expiration date for the Cystic fibrosis franchise is based on the patent expiration date for Trikafta, a franchise product which was approved in the US in October 2019. Management estimates that the most material patents provide protection through 2037. |
c) |
Under terms of the agreement, RPIFT acquired a perpetual royalty on net sales of Tysabri. Management has applied an end date of 2031 for purposes of accreting income over the royalty term. |
d) |
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. |
Cystic fibrosis franchise clawback
In November 2019, Vertex announced that it reached an agreement with the French Authorities for a national reimbursement deal for Orkambi. As a result, management expected a reduction to royalty receipts in 2020 of approximately $35.0 million to $45.0 million, to reflect a true up related to prior periods where we collected royalties on French sales of Orkambi at a higher selling price. We recognized a reduction to the current portion of Royalty assets, netfinancial asset of $41.0 million as of December 31, 2019. Upon receipt of the royalty payment in the first quarter of 2020, we did not recognize any material adjustments related to our clawback estimate.
7. Cumulative Allowance for Changes in Expected Cash Flows from Financial Royalty Assets
The Cumulative allowance and the Provision for changes in expected future cash flows from financial royalty assets includes the following activity:
|
the movement in the Cumulative allowance for changes in expected future cash flows, and |
|
the movement in the allowance for credit losses, which is presented net within the non-current portion of Financial royalty assets, net on the consolidated balance sheets. |
F-18
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Upon the January 1, 2020 adoption of ASU 2016-13, we recorded a cumulative adjustment to Retained earnings of $192.7 million to recognize an allowance for credit losses on the portion of our portfolio of financial royalty assets that is subject to credit risk. The provision for changes in expected cash flows from financial royalty assets reflects the activity for the period that relates to the change in estimates applied to calculate the allowance for credit losses, namely any changes in the credit ratings of the marketers responsible for paying our royalties and changes in the underlying cash flow forecasts used in the effective interest model to measure income from our financial royalty assets. Refer to Note 2 for further information.
The following table sets forth the activity in the cumulative allowance for changes in expected cash flows from financial royalty assets, inclusive of the allowance for credit losses, as of the dates indicated:
(in thousands) | Activity for the period | |||
Balance at December 31, 2018 |
$ | (1,982,897 | ) | |
Increases to the cumulative allowance for changes in expected cash flows from financial royalty assets |
(13,706 | ) | ||
Decreases to the cumulative allowance for changes in expected cash flows from financial royalty assets |
63,739 | |||
|
|
|||
Balance at March 31, 2019 |
$ | (1,932,864 | ) | |
|
|
|||
Balance at December 31, 2019 |
(868,418 | ) | ||
Cumulative adjustment for adoption of ASU 2016-13 |
(192,705 | ) | ||
Increases to the cumulative allowance for changes in expected cash flows from financial royalty assets |
(143,268 | ) | ||
Decreases to the cumulative allowance for changes in expected cash flows from financial royalty assets |
137,214 | |||
Reversal of cumulative allowance (a) |
2,964 | |||
Current period provision for credit losses |
(81,958 | ) | ||
|
|
|||
Balance at March 31, 2020 |
$ | (1,146,171 | ) | |
|
|
(a) |
Relates to amounts reversed out of the allowance at the end of a royalty assets life to bring the account balance to zero. Reversals solely impact the asset account and allowance account, there is no impact on the condensed consolidated statements of comprehensive income. |
8. Intangible Royalty Assets, Net
The following schedules of the intangible royalty interests present the cost, accumulated amortization and net carrying value as of March 31, 2020 and December 31, 2019.
As of March 31, 2020 | Cost |
Accumulated
amortization |
Net carrying
value |
|||||||||
(in thousands) | ||||||||||||
DPP-IV Inhibitors |
$ | 606,216 | $ | 560,225 | $ | 45,991 | ||||||
|
|
|
|
|
|
|||||||
Total intangible royalty assets |
$ | 606,216 | $ | 560,225 | $ | 45,991 | ||||||
|
|
|
|
|
|
F-19
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of December 31, 2019 | Cost |
Accumulated
amortization |
Net carrying
value |
|||||||||
(in thousands) | ||||||||||||
DPP-IV Inhibitors |
$ | 606,216 | $ | 554,492 | $ | 51,724 | ||||||
|
|
|
|
|
|
|||||||
Total intangible royalty assets |
$ | 606,216 | $ | 554,492 | $ | 51,724 | ||||||
|
|
|
|
|
|
The patents associated with the royalty interests classified as intangible assets terminate at various dates up to 2022. The weighted average remaining life of the royalty interests classified as intangible assets is 2.0 years. The projected amortization expense is $17.3 million, $23.0 million, and $5.7 million in the remainder of 2020, 2021 and 2022, respectively.
The companys revenue is tied to underlying patent protected sales of other DPP-IV products of various licensees. Such revenue from royalty assets is earned from sales occurring primarily in the US and Europe; however, we do not have the ability to disaggregate our royalty revenue from licensees based on the geography of the underlying sales, as this level of information is not always included in royalty reports provided to the Company. Individual licensees exceeding 10% or more of revenue from royalty assets accounted for 94% and 91% of our revenues from intangible royalty assets in the first three months of 2020 and 2019, respectively. Refer to our Concentration of credit risk policy in Note 2 for additional information.
9. Non-Consolidated Affiliates
The Legacy SLP Interest
In connection with the Exchange Offer, we acquired a special limited partnership interest in the Legacy Investors Partnerships (the Legacy SLP Interest) valued at $303.7 million in exchange for issuing shares in the Company. As a result, RPI became a special limited partner in the Legacy Investors Partnerships. 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 the Company is equal to the general partners former contractual rights to the income of the Legacy Investors Partnerships. The Legacy SLP Interest is treated as an equity method investment as the Manager has the ability to exercise significant influence over the Legacy Investors Partnerships. As the Legacy Investors Partnerships are no longer participating in investment opportunities after June 30, 2020, the value of the Legacy SLP Interest is expected to decline over time. The Legacy Investors Partnerships own a non-controlling interest in Old RPI.
The income allocation from the Legacy SLP Interest is based on an estimate as the Legacy Investors Partnerships are private partnerships that report on a lag. Managements estimate of equity in earnings from the Legacy SLP Interest for the current period will be updated for actuals in the subsequent period. During the first three months of 2020, we received cash distributions of $6.9 million from the Legacy Investors Partnerships and recorded an income allocation of $3.2 million within Equity in loss of non-consolidated affiliates.
The Avillion Entities
We account for our partnership interests in Avillion Financing I, LP (Avillion I) and BAv Financing II, LP (Avillion II, or, together, the Avillion Entities) as equity method investments because RPIFT has the ability to exercise significant influence over the entity.
On December 19, 2017, the Avillion Entities announced that the FDA approved a supplemental New Drug Application for Pfizers BOSULIF® (bosutinib). Avillion I is eligible to receive fixed payments from Pfizer
F-20
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
based on this approval. Subsequent to the asset sale, the only operations of Avillion I are the collection of cash and unwinding of discount on the series of fixed annual payments due from Pfizer. We received distributions of $13.4 million and $14.1 million from Avillion I during the first three months of 2020 and 2019, respectively, in connection with Avillion Is receipt of the fixed annual payments due under its co-development agreement with Pfizer.
In March 2017 RPIFT entered into an agreement to invest approximately $15.0 million to fund approximately 50% of the costs of a phase II clinical trial for the use of Merck KGaAs anti-IL 17 nanobody M1095 (the Merck Asset) for the treatment of psoriasis in exchange for certain milestone and royalty payments. In May 2018 RPIFT entered into an additional agreement to invest up to $105.0 million in Avillion II over multiple years to fund approximately 44% of the costs of Phase II and III clinical trials to advance Pearl Therapeutics, Inc.s product PT-027 (the AZ Asset) through a global clinical development program for the treatment of asthma in exchange for a series of deferred payments and success-based milestones.
In December 2019, the Avillion II agreement was amended to increase RPIFTs funding commitment by an additional $4.0 million in respect of the Merck Asset, for a total funding cap of $19.0 million.
RPIFT had $57.7 million and $70.8 million of unfunded commitments related to the Avillion Entities as of March 31, 2020 and December 31, 2019, respectively. Our maximum exposure to loss at any particular reporting date is limited to the current carrying value of the investment plus the unfunded commitments.
10. Research and Development Funding Expense
During the first three months of 2020 and 2019, we did not enter into any new R&D funding arrangements. The only R&D funding expense incurred related to ongoing development stage funding payments. We recognized $7.6 million of R&D funding expense during the first three months of 2020 primarily related to our R&D funding agreements with Sanofi. We recognized $23.0 million of R&D funding expense during the first three months of 2019, of which $4.0 million and $18.5 million related to our funding agreements with Sanofi and Pfizer, respectively.
As of March 31, 2020 we have a remaining commitment of $25.7 million related to an R&D funding agreement with Sanofi.
11. Borrowings
New Senior Secured Credit Facilities
On February 11, 2020, in connection with the Exchange Offer Transactions (as discussed in Note 1) and using funds contributed by RPI Intermediate FT and the Legacy Investors Partnerships, RPIFT repaid its outstanding debt and accrued interest, and terminated all outstanding interest rate swaps. RPI Intermediate FT, as borrower, entered into a term loan credit agreement (the Credit Agreement) with Bank of America, N.A., as administrative agent, the lenders party thereto from time to time and the other parties thereto. The new senior secured credit facilities contained in the Credit Agreement consist of a term loan A (Tranche A-1) and term loan B (Tranche B-1) in the amounts of $3.20 billion and $2.84 billion, respectively. Tranche A-1 has an interest rate of 1.50% above LIBOR and matures in February 2025. Tranche B-1 has an interest rate of 1.75% above LIBOR matures in February 2027.
The Credit Agreement contains covenants that, among other things, restrict our ability to make certain distributions, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions,
F-21
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
create liens on assets, engage in certain transactions with affiliates or make investments. The Credit Agreement also contains customary events of default. We may voluntarily prepay in whole or in part the outstanding principal amounts of term loans under our Credit Agreement at any time prior to the maturity dates, with certain voluntary prepayments that may be subject to a customary prepayment premium governed by the Credit Agreement.
Financial Covenants
The Credit Agreement contains financial covenants requiring us to maintain (i) a Consolidated Leverage Ratio at or below 4.00 to 1.00 (or at or below 4.50 to 1:00 following a Qualifying Material Acquisition) of Consolidated Funded Debt to Consolidated EBITDA (each as defined and calculated with the ratio level calculated with further adjustments as set forth in the Credit Agreement) and (ii) a Consolidated Coverage Ratio at or above 2.50 to 1.00 of Consolidated EBITDA minus Consolidated Capital Expenditures to Consolidated Charges (each as defined and calculated with further adjustments as set forth in the Credit Agreement).
Our borrowings at March 31, 2020 and December 31, 2019 consisted of the following:
(in thousands) | Maturity |
Spread over
LIBOR (1) |
March 31,
2020 |
December 31,
2019 |
||||||||||||
New RPI Intermediate FT Senior Secured Credit Facilities: |
||||||||||||||||
Term Loan A Facility |
||||||||||||||||
Tranche A-1 |
2/2025 | 150 bps | $ | 3,160,000 | $ | | ||||||||||
Term Loan B Facility |
||||||||||||||||
Tranche B-1 |
2/2027 | 175 bps | 2,832,900 | | ||||||||||||
RPIFT Senior Secured Credit Facilities: |
||||||||||||||||
Term Loan B Facility |
||||||||||||||||
Tranche B-6 |
3/2023 | 200 bps | | 4,123,000 | ||||||||||||
Term Loan A Facility |
||||||||||||||||
Tranche A-4 |
5/2022 | 150 bps | | 2,150,000 | ||||||||||||
Loan issuance costs |
(4,148 | ) | (1,691 | ) | ||||||||||||
Original issue discount |
(31,666 | ) | (33,187 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Total value of senior secured debt (2) |
5,957,086 | 6,238,122 | ||||||||||||||
|
|
|
|
|||||||||||||
Less: Current portion of long-term debt |
(182,128 | ) | (281,984 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Total long-term debt |
$ | 5,774,958 | $ | 5,956,138 | ||||||||||||
|
|
|
|
(1) |
Borrowings under our senior secured credit facilities bear interest at a rate equal to LIBOR plus an applicable margin. |
(2) |
The carrying value of our long term debt, including the current portion, approximates its fair value. |
F-22
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amortization of Term Loans
As of March 31, 2020, we are required to repay the term loans under RPI Intermediate FTs new senior secured credit facilities over the next five years and thereafter as follows:
(in thousands) | Term loan amortization | |||||||||||
Year | Tranche A-1 | Tranche B-1 | Total | |||||||||
Remainder of 2020 |
$ | 120,000 | $ | 21,300 | $ | 141,300 | ||||||
2021 |
160,000 | 28,400 | 188,400 | |||||||||
2022 |
160,000 | 28,400 | 188,400 | |||||||||
2023 |
160,000 | 28,400 | 188,400 | |||||||||
2024 |
160,000 | 28,400 | 188,400 | |||||||||
Thereafter |
2,400,000 | 2,698,000 | 5,098,000 | |||||||||
|
|
|
|
|
|
|||||||
Total (1) |
3,160,000 | 2,832,900 | 5,992,900 | |||||||||
|
|
|
|
|
|
(1) |
Excludes discount on long-term debt of $31.7 million and loan issuance costs of $4.1 million, which are amortized through interest expense over the life of the underlying debt obligations. |
RPIFT Senior Secured Credit Facilities (the Old Credit Facility)
The Old Credit Facility was repaid in full in February 2020 in connection with the Exchange Offer. As of December 31, 2019, RPIFTs Loan Facility included two term loans, Term Loan A and Term Loan B. Tranche A-4 required annual amortization of 5.9% per year and tranche B-6 required annual amortization of 3.2% per year. The Old Credit Facility was secured by a grant by RPIFT of a security interest in substantially all of its personal property and a grant by RPCT of a security interest in RPIFTs share (80%) of all amounts on deposit in the Collection Trust Account.
The Old Credit Facility contained the following covenants measured quarterly: (i) maximum total leverage ratio of 4:00 to 1:00; (ii) debt coverage ratio of greater than 3.50 to 1.00. RPIFT was in compliance with these covenants at December 31, 2019.
F-23
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. Indirect Cash Flow
Adjustments to reconcile consolidated net income to net cash provided by operating activities are summarized below.
(in thousands) |
For the three months ended
March 31, |
|||||||
2020 | 2019 | |||||||
Cash flow from operating activities: |
||||||||
Consolidated net income |
$ | 109,096 | $ | 396,094 | ||||
Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
||||||||
Provision for changes in expected cash flows from financial royalty assets |
88,012 | (50,033 | ) | |||||
Amortization of intangible assets |
5,733 | 6,599 | ||||||
Amortization of loan issuance and discount on long-term debt |
2,478 | 3,082 | ||||||
Unrealized loss on derivate contracts |
33,445 | 25,840 | ||||||
Unrealized loss/(gain) on equity securities |
153,166 | (53,744 | ) | |||||
Equity in loss of non-consolidated affiliates |
9,074 | 5,529 | ||||||
Distributions from non-consolidated affiliates |
20,293 | 14,059 | ||||||
Loss on extinguishment of debt |
5,406 | | ||||||
Other |
3,469 | | ||||||
(Increase)/decrease in operating assets: |
||||||||
Financial royalty assets |
(462,844 | ) | (382,216 | ) | ||||
Cash collected on financial royalty assets |
488,028 | 467,842 | ||||||
Available for sale debt securities |
| (150,000 | ) | |||||
Accrued royalty receivable |
(196 | ) | (7,571 | ) | ||||
Other receivables |
| 150,000 | ||||||
Other royalty income receivable |
(2,619 | ) | 4,140 | |||||
Other current assets |
40 | 4,060 | ||||||
Other assets |
45,007 | (360 | ) | |||||
(Decrease)/increase in operating liabilities: |
||||||||
Accounts payable and accrued expenses |
8,468 | (426 | ) | |||||
Derivative financial instruments |
(34,952 | ) | | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
$ | 471,104 | $ | 432,985 | ||||
|
|
|
|
Supplemental information relating to non-cash investing and financing activities is summarized below.
(in thousands) |
For the three months ended
March 31, |
|||||||
2020 | 2019 | |||||||
Supplemental schedule of non-cash investing / financing activities: |
||||||||
Contribution of investment in Legacy Investors Partnerships(1) |
$ | 303,679 | $ | | ||||
Settlement of Epizyme forward purchase contract(2) |
5,700 | | ||||||
Accrued purchase obligationTazverik(3) |
110,000 | | ||||||
Repayments of long-term debt by contributions from non-controlling interest(4) |
1,103,774 | |
(1) |
See Note 9. |
(2) |
See Note 4. |
F-24
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) |
See Note 15. |
(4) |
Related to the pro rata portion of RPIFTs outstanding debt repaid by the Legacy Investors Partnerships. |
13. Other Comprehensive Income (Loss)
Comprehensive income is comprised of net income and other comprehensive income/(loss). We include unrealized gains and losses on available for sale securities and unrealized gains/(losses) on the interest rate swaps that were designated as cash flow hedges in other comprehensive income/(loss). Prior to January 1, 2018, unrealized gains and losses on available for sale equity securities were included in accumulated other comprehensive income/(loss). Beginning on January 1, 2018, unrealized gains and losses on equity securities are recognized through earnings.
Changes in accumulated other comprehensive income/(loss) by component are as follows:
Unrealized gain/(loss)
on available for sale debt securities |
Unrealized gain/(loss)
on interest rate swaps |
Total Accumulated
Other Comprehensive Income/(Loss) |
||||||||||
(in thousands) | ||||||||||||
Balance at December 31, 2019 |
$ | 6,159 | $ | (4,066 | ) | $ | 2,093 | |||||
Activity for the year |
43,053 | | 43,053 | |||||||||
Reclassifications |
| 4,066 | 4,066 | |||||||||
|
|
|
|
|
|
|||||||
Balance at March 31, 2020 |
$ | 49,212 | $ | | $ | 49,212 | ||||||
|
|
|
|
|
|
Unrealized gain/(loss)
on available for sale debt securities |
Unrealized gain/(loss)
on interest rate swaps |
Total Accumulated
Other Comprehensive Income/(Loss) |
||||||||||
(in thousands) | ||||||||||||
Balance at December 31, 2018 |
$ | | $ | (10,255 | ) | $ | (10,255 | ) | ||||
Reclassifications |
| 1,587 | 1,587 | |||||||||
|
|
|
|
|
|
|||||||
Balance at March 31, 2019 |
$ | | $ | (8,668 | ) | $ | (8,668 | ) | ||||
|
|
|
|
|
|
14. Related Party Transactions
The Manager
The Manager is an affiliate of RP Ireland, the Administrator of RPIFT and RPI 2019 Intermediate Finance Trust (RPI Intermediate FT) and the investment manager for RPI. The sole member of the Manager holds an indirect interest in RPI and serves on the investment committee of the Manager.
Historically, the Manager received Operating and Personnel Payments payable in equal quarterly installments and increasing by 5% annually on a compounded basis under the terms of its Management Agreement with Old RPI and the Legacy Investors Partnerships. RP Ireland receives an annual management fee payable in advance by Old RPI in equal quarterly installments under terms of the Limited Partnership Agreements of the Legacy Investors Partnerships. Operating and Personnel Payments incurred during the three months ended March 31, 2019 were $15.0 million and were recognized within General and administrative expenses on the consolidated statements of comprehensive income.
In connection with the Exchange Offer Transactions (discussed in Note 1), the Manager has entered into new management agreements with RPI and the Continuing Investors Partnerships, and with the Legacy Investors
F-25
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Partnerships. Pursuant to the new management agreements, RPI pays quarterly Operating and Personnel Payments in respect of operating and personnel expenses to the Manager or its affiliates equal to 6.5% of the Adjusted Cash Receipts (as defined therein) for such quarter and 0.25% of the GAAP value of our security investments, including equity securities and derivative financial instruments, as of the end of such quarter. The Operating and Personnel Payment for Old RPI, an obligation of the Legacy Investors Partnerships as a non-controlling interest in Old RPI and for which the expense is reflected in our income statement, is payable in equal quarterly installments and increasing by 5% annually on a compounded basis. Operating and Personnel Payments incurred during the three months ended March 31, 2020 were $19.7 million.
Royalty Distribution Payable
The Royalty distribution payable to affiliates of $121.1 million at March 31, 2020 includes the following: (1) $92.6 million of royalty receipts due from Old RPI to RPI Intermediate FT in connection with the Legacy Investors Partnerships non-controlling interest in Old RPI that arose in the Reorganization Transactions, and (2) $28.5 million of royalty receipts due from RPCT to RP Select Finance Trust in connection with its non-controlling interest in RPCT. The Royalty distribution payable to affiliates of $31.0 million at December 31, 2019 represents royalty receipts due from RPCT to RP Select Finance Trust. The accrual is recorded based on estimated royalty receipts for the period, which are derived from estimates generated from analyst consensus forecasts for each product, and will be collected one quarter in arrears, and is payable to the non-controlling interest owners under the terms of collection account control agreements whereby RPCT and Old RPI are required to disperse royalty receipts collected to the minority owners in proportion to their ownership interests.
Acquisition from Epizyme Inc.
In November 2019, in connection with an equity investment in Epizyme Inc. of $100.0 million made by RPIFT, Pablo Legorreta, Royalty Pharmas CEO, was appointed as a director of Epizyme, for which he will receive compensation in cash and shares, all of which will be contributed to the Manager and used to reduce costs and expenses which would otherwise be billed to the Company or its affiliates.
Acquisition from Bristol-Myers Squibb
In November 2017, our wholly owned subsidiary, RPI Acquisitions (Ireland) Limited (RPI Acquisitions), entered into a Purchase Agreement with Bristol-Myers Squibb (BMS) to acquire from BMS a percentage of its future royalties on worldwide sales of Onglyza, Farxiga, and related diabetes products marketed by AstraZeneca. We agreed to make payments to BMS based on sales of the products over the eight quarters beginning with the first quarter of 2018 in exchange for a high single-digit royalty on worldwide sales of the products from 2020 through 2025.
On December 8, 2017, RPI Acquisitions entered into a purchase, sale and assignment agreement with a wholly owned subsidiary of BioPharma Credit PLC (LSE: BPCR, BPCR), an affiliate of RPI. BPCR is a related entity due to the sole member of the investment manager having significant influence over both entities. Under the terms of the Assignment Agreement, RPI Acquisitions assigned the benefit of 50% of the payment stream acquired from BMS to BPCR in consideration for BPCR meeting 50% of the funding obligations owed to BMS under the Purchase Agreement.
We began making installment payments to BMS during the second quarter of 2018. Upon transfer of funds from BPCR to RPI Acquisitions to meet the quarterly funding obligation to BMS, RPI Acquisitions derecognizes 50% of the financial royalty asset. Cash received from BPCR in respect of each funding obligation equals the carrying
F-26
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
amount of the assigned transfer of interest, therefore no gain or loss is recognized upon the transfer. The financial royalty asset of $163.7 million and $150.3 million included in financial royalty assets, net on the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively, represents only the Companys right to the future payment streams acquired from BMS.
Our funding was completed in the first quarter of 2020. We have funded a cumulative amount of $162.4 million, net of the assignment. We began to recognize income from the BMS asset when our installment funding obligation was completed and we expect to receive our first royalty payment on the BMS asset in the second quarter of 2020.
Other transactions
During the year ended December 31, 2019, RPIFT acquired 27,210 limited partnership interests in an affiliate of, and an equity method investor in, Old RPI and RPIFT, whose only substantive operations are its investment in Old RPI. The total investment of $4.3 million is recorded as treasury interests in the consolidated balance sheet as of December 31, 2019.
15. Commitments and Contingencies
In the ordinary course of its business, we may enter into contracts or agreements that contain customary indemnifications relating to such things as confidentiality agreements and representations as to corporate existence and authority to enter into contracts. The maximum exposure under such agreements is indeterminable until a claim, if any, is made. However, no such claims have been made against Royalty Pharma to date and we believe that the likelihood of such proceedings taking place in the future is remote.
In November 2019, RPIFT agreed to pay $330.0 million to purchase Eisais royalties on future worldwide sales of Tazverik (tazemetostat), a novel targeted therapy in late-stage clinical development that was approved by the FDA in January 2020 for epithelioid sarcoma, and with the potential to be approved in several cancer indications. Under the terms of its agreement with Eisai, RPIFT acquired Eisais future worldwide royalties on net sales by Epizyme of Tazverik outside of Japan, for an upfront payment of $110.0 million plus up to an additional $220.0 million for the remainder of the royalty upon FDA approval of Tazverik for certain indications. The FDA approval of Tazverik in January 2020 triggered our obligation to fund the next $110.0 million tranche in November 2020, which is recognized as an accrued liability on the consolidated balance sheet at March 31, 2020. The remaining funding commitment of up to $110.0 million will be recognized upon resolution of the remaining associated contingency.
We have commitments to advance funds to counterparties through our contingent funding of the Second Tranche of Biohaven Preferred Shares, investments in non-consolidated affiliates, and research and development arrangements. Please refer to Notes 4, 9, and 10, respectively, for details of these arrangements. We also have requirements to make Operating and Personnel Payments over the life of the Management Agreement as described in Note 14, which are variable and based on projected cash receipts.
Outstanding litigation
In December 2015, Boehringer Ingelheim International GmBH (BI) notified Royalty Pharma that (a) BI had revised its interpretation of the license agreement between BI and Royalty Pharma, (b) as a result BI believed that it had overpaid royalties on sales of Tradjenta, Jentadueto and Glyxambi, the DPP-IVs, for periods prior to 2015 by 7.7 million, and (c) BI was seeking a refund in that amount. Management does not agree with BIs
F-27
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
interpretation of the license agreement and has had extensive discussions with BI in an effort to reach an amicable settlement of this dispute. On January 21, 2019, RPCT filed a lawsuit in England against BI seeking recovery of 23.1 million in underpaid royalties. We intend to pursue this claim vigorously, but there can be no assurance that we will prevail in this dispute. Due to the uncertainty at this time, we have not accrued any amounts related to this matter and any legal costs will be expensed as incurred.
16. Subsequent Events
In April 2020, we acquired a royalty on Prevymis, an approved product used to prevent cytomegalovirus infection in stem cell transplants, from AiCuris Anti-infective Cures GmbH in exchange for an upfront payment of $220.0 million.
Coronavirus Outbreak
The current outbreak of the novel coronavirus, or COVID-19, 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. Given the uncertainty around the extent and timing of the potential future spread or mitigation efforts related to the current outbreak of COVID-19, the financial impact cannot be reasonably estimated at this time.
Pfizer Funding Agreement
On May 29, 2020, Pfizer provided an update on the Phase III PALLAS trial for which we provided joint R&D funding in historical periods, noting that the independent data monitoring committee concluded after the recent interim analysis that the PALLAS trial is unlikely to show a statistically significant improvement in the primary endpoint of invasive disease-free survival. As a result, we do not expect any future royalty income associated with this trial.
F-28
Report of Independent Registered Public Accounting Firm
To the Board of Directors of RP Management (Ireland) Limited
as manager of Royalty Pharma Investments
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Royalty Pharma Investments and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of comprehensive income, unitholders equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young
We have served as the Companys auditor since 2003.
Dublin, Ireland
March 26, 2020
F-29
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
As of December 31, | As of December 31, | |||||||
2019 | 2018 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 283,682 | $ | 1,924,211 | ||||
Marketable securities |
56,972 | | ||||||
Financial royalty assets, net |
452,560 | 461,821 | ||||||
Accrued royalty receivable |
33,525 | 35,996 | ||||||
Other receivables |
| 150,000 | ||||||
Derivative financial instruments |
| 19,196 | ||||||
Other royalty income receivable |
5,241 | 12,631 | ||||||
Other current assets |
92 | 4,699 | ||||||
|
|
|
|
|||||
Total current assets |
832,072 | 2,608,554 | ||||||
|
|
|
|
|||||
Financial royalty assets, net |
10,842,052 | 8,377,231 | ||||||
Intangible royalty assets, net |
51,724 | 75,648 | ||||||
Equity securities |
380,756 | 146,008 | ||||||
Available for sale debt securities |
131,280 | | ||||||
Derivative financial instruments |
42,315 | 19,111 | ||||||
Investment in non-consolidated affiliates |
124,061 | 143,595 | ||||||
Other long-term assets |
45,635 | | ||||||
|
|
|
|
|||||
Total assets |
$ | 12,449,895 | $ | 11,370,147 | ||||
|
|
|
|
|||||
Liabilities and equity |
||||||||
Current liabilities |
||||||||
Royalty distribution payable to affiliates |
$ | 31,041 | $ | 44,259 | ||||
Accounts payable and accrued expenses |
11,177 | 4,477 | ||||||
Milestone payable |
| 250,000 | ||||||
Current portion of long-term debt |
281,984 | 281,436 | ||||||
Derivative financial instruments |
9,215 | | ||||||
|
|
|
|
|||||
Total current liabilities |
333,417 | 580,172 | ||||||
|
|
|
|
|||||
Long-term debt |
5,956,138 | 6,237,896 | ||||||
Derivative financial instruments |
18,902 | | ||||||
|
|
|
|
|||||
Total liabilities |
6,308,457 | 6,818,068 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Unitholders equity |
||||||||
Unitholders contributions |
3,282,516 | 3,282,516 | ||||||
Retained earnings |
2,825,212 | 1,215,953 | ||||||
Non-controlling interest |
35,883 | 63,865 | ||||||
Accumulated other comprehensive income/(loss) |
2,093 | (10,255 | ) | |||||
Treasury interests |
(4,266 | ) | | |||||
|
|
|
|
|||||
Total unitholders equity |
6,141,438 | 4,552,079 | ||||||
|
|
|
|
|||||
Total liabilities and unitholders equity |
$ | 12,449,895 | $ | 11,370,147 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
F-30
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the years ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Total income and revenues |
||||||||||||
Income from financial royalty assets |
$ | 1,648,837 | $ | 1,524,816 | $ | 1,539,417 | ||||||
Revenue from intangible royalty assets |
145,775 | 134,118 | 38,090 | |||||||||
Other royalty income |
19,642 | 135,960 | 20,423 | |||||||||
|
|
|
|
|
|
|||||||
Total income and other revenues |
1,814,254 | 1,794,894 | 1,597,930 | |||||||||
|
|
|
|
|
|
|||||||
Operating expenses |
||||||||||||
Research and development funding expense |
83,036 | 392,609 | 117,866 | |||||||||
Provision for changes in expected cash flows from financial royalty assets |
(1,019,321 | ) | (57,334 | ) | 400,665 | |||||||
Amortization of intangible assets |
23,924 | 33,267 | 33,267 | |||||||||
General and administrative expenses |
103,439 | 61,906 | 106,440 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
(808,922 | ) | 430,448 | 658,238 | ||||||||
|
|
|
|
|
|
|||||||
Operating income |
2,623,176 | 1,364,446 | 939,692 | |||||||||
Other expense/(income) |
||||||||||||
Equity in loss/(earnings) of non-consolidated affiliates |
32,517 | 7,023 | (163,779 | ) | ||||||||
Interest expense |
268,573 | 279,956 | 247,339 | |||||||||
Realized gain on available for sale debt securities |
| (419,481 | ) | (412,152 | ) | |||||||
Gain on sale of royalty asset |
| | (52,753 | ) | ||||||||
Unrealized loss/(gain) on derivative contracts |
39,138 | (11,923 | ) | (16,999 | ) | |||||||
Unrealized (gain)/loss on equity securities |
(155,749 | ) | 13,939 | | ||||||||
Interest income |
(22,329 | ) | (24,441 | ) | (6,762 | ) | ||||||
Other non-operating (income)/expense, net |
(393 | ) | 1,518 | 1,618 | ||||||||
|
|
|
|
|
|
|||||||
Total other expense/(income), net |
161,757 | (153,409 | ) | (403,488 | ) | |||||||
|
|
|
|
|
|
|||||||
Consolidated net income before tax |
2,461,419 | 1,517,855 | 1,343,180 | |||||||||
Income tax expense |
| | | |||||||||
|
|
|
|
|
|
|||||||
Consolidated net income |
2,461,419 | 1,517,855 | 1,343,180 | |||||||||
|
|
|
|
|
|
|||||||
Less: Net income attributable to non-controlling interest |
(112,884 | ) | (140,126 | ) | (133,155 | ) | ||||||
|
|
|
|
|
|
|||||||
Net income attributable to controlling interest |
2,348,535 | 1,377,729 | 1,210,025 | |||||||||
|
|
|
|
|
|
|||||||
Other comprehensive income/(loss) |
||||||||||||
Reclassification of loss on interest rate swaps included in net income |
6,189 | 8,003 | 8,931 | |||||||||
Change in unrealized movement on available for sale debt securities |
6,159 | (402,502 | ) | (341,099 | ) | |||||||
|
|
|
|
|
|
|||||||
Other comprehensive income/(loss) |
12,348 | (394,499 | ) | (332,168 | ) | |||||||
|
|
|
|
|
|
|||||||
Comprehensive income |
2,360,883 | 983,230 | 877,857 | |||||||||
|
|
|
|
|
|
|||||||
Less: Other comprehensive income/(loss) attributable to non-controlling interest |
| | | |||||||||
|
|
|
|
|
|
|||||||
Comprehensive income attributable to controlling interest |
$ | 2,360,883 | $ | 983,230 | $ | 877,857 | ||||||
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-31
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS EQUITY
(in thousands)
Unitholders
Contributions |
Retained
Earnings |
Accumulated
Other Comprehensive Income/(Loss) |
Non-Controlling
Interest |
Treasury
Interests |
Total
Consolidated Unitholders Equity |
|||||||||||||||||||
Balance at December 31, 2016 |
$ | 3,282,516 | $ | 180,595 | $ | 713,549 | $ | 268,960 | $ | | $ | 4,445,620 | ||||||||||||
Distributions |
| (735,174 | ) | | (260,912 | ) | | (996,086 | ) | |||||||||||||||
Net income |
| 1,210,025 | | 133,155 | | 1,343,180 | ||||||||||||||||||
Other comprehensive income/(loss): |
||||||||||||||||||||||||
Unrealized loss on available for sale debt securities |
| | (341,099 | ) | | | (341,099 | ) | ||||||||||||||||
Reclassification of loss on interest rate swaps |
| | 8,931 | | | 8,931 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at December 31, 2017 |
$ | 3,282,516 | $ | 655,446 | $ | 381,381 | $ | 141,203 | $ | | $ | 4,460,546 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Distributions |
| (814,359 | ) | | (217,464 | ) | | (1,031,823 | ) | |||||||||||||||
Cumulative adjustment for adoption of ASU 2016-01 |
(2,863 | ) | 2,863 | | | |||||||||||||||||||
Net income |
| 1,377,729 | | 140,126 | | 1,517,855 | ||||||||||||||||||
Other comprehensive income/(loss): |
||||||||||||||||||||||||
Unrealized loss on available for sale debt securities |
| | (402,502 | ) | | | (402,502 | ) | ||||||||||||||||
Reclassification of loss on interest rate swaps |
| | 8,003 | | | 8,003 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at December 31, 2018 |
$ | 3,282,516 | $ | 1,215,953 | $ | (10,255 | ) | $ | 63,865 | $ | | $ | 4,552,079 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Distributions |
| (739,276 | ) | | (140,866 | ) | | (880,142 | ) | |||||||||||||||
Net income |
| 2,348,535 | | 112,884 | | 2,461,419 | ||||||||||||||||||
Other comprehensive income/(loss): |
||||||||||||||||||||||||
Unrealized loss on available for sale debt securities |
| | 6,159 | | | 6,159 | ||||||||||||||||||
Reclassification of loss on interest rate swaps |
| | 6,189 | | | 6,189 | ||||||||||||||||||
Purchase of treasury interests |
| | | | (4,266 | ) | (4,266 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at December 31, 2019 |
$ | 3,282,516 | $ | 2,825,212 | $ | 2,093 | $ | 35,883 | $ | (4,266 | ) | $ | 6,141,438 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-32
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Cash collections from financial royalty assets |
$ | 1,934,092 | $ | 2,052,592 | $ | 1,752,996 | ||||||
Cash collections from intangible royalty assets |
143,298 | 106,689 | 103,250 | |||||||||
Other royalty cash collections |
27,448 | 125,162 | 13,014 | |||||||||
Interest received |
20,136 | 24,441 | 6,754 | |||||||||
Distributions from non-consolidated affiliates |
14,059 | 39,402 | | |||||||||
Swap collateral received |
360 | 3,467 | 900 | |||||||||
Swap collateral posted |
(45,630 | ) | (510 | ) | (3,850 | ) | ||||||
Development stage funding payments - ongoing |
(83,036 | ) | (108,163 | ) | (118,366 | ) | ||||||
Development stage funding payments - upfront |
| (284,446 | ) | | ||||||||
Payments for operating costs and professional services |
(88,524 | ) | (72,535 | ) | (74,681 | ) | ||||||
Payments for rebates |
| (125 | ) | (26,499 | ) | |||||||
Interest paid |
(254,964 | ) | (267,657 | ) | (235,205 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
1,667,239 | 1,618,317 | 1,418,313 | |||||||||
|
|
|
|
|
|
|||||||
Cash flows from investing activities: |
||||||||||||
Proceeds from available for sale debt securities |
150,000 | 750,000 | 600,000 | |||||||||
Purchases of available for sale debt securities |
(125,121 | ) | | | ||||||||
Purchase of warrants |
(8,840 | ) | | | ||||||||
Purchase of marketable securities |
(429,400 | ) | | | ||||||||
Proceeds from sales and maturities of marketable securities |
374,551 | | | |||||||||
Acquisitions of financial royalty assets |
(1,721,291 | ) | (269,593 | ) | (2,290,707 | ) | ||||||
Purchases of equity securities |
(78,999 | ) | (152,810 | ) | (10,000 | ) | ||||||
Investments in non-consolidated affiliates |
(27,042 | ) | (24,173 | ) | (2,000 | ) | ||||||
Proceeds from sale of royalty asset |
| | 115,000 | |||||||||
Milestone payments |
(250,000 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Net cash (used in)/provided by investing activities |
(2,116,142 | ) | 303,424 | (1,587,707 | ) | |||||||
|
|
|
|
|
|
|||||||
Cash flows from financing activities: |
||||||||||||
Distributions to unitholders |
(739,276 | ) | (814,359 | ) | (735,174 | ) | ||||||
Distributions to non-controlling interest |
(154,084 | ) | (268,693 | ) | (278,727 | ) | ||||||
Repayments of long-term debt |
(294,000 | ) | (294,000 | ) | (193,000 | ) | ||||||
Proceeds from issuance of long-term debt |
| | 1,100,000 | |||||||||
Other |
(4,266 | ) | (2,049 | ) | (16,353 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in financing activities |
(1,191,626 | ) | (1,379,101 | ) | (123,254 | ) | ||||||
|
|
|
|
|
|
|||||||
Net change in cash and cash equivalents |
(1,640,529 | ) | 542,640 | (292,648 | ) | |||||||
Cash and cash equivalents, beginning of year |
1,924,211 | 1,381,571 | 1,674,219 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents, end of year |
$ | 283,682 | $ | 1,924,211 | $ | 1,381,571 | ||||||
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-33
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Purpose
Royalty Pharma Investments and subsidiaries (the Trust, Company, Old RPI or we) is a unit trust established in August 2011 under the laws of Ireland and authorized by the Central Bank of Ireland pursuant to the Unit Trusts Act, 1990. Our goal is to participate in royalties generated from the sale of pharmaceutical products through the acquisition of the contractual royalty streams associated with these products and, in some cases, the underlying intellectual property. We do this through directly acquiring royalties held by inventors, universities, research hospitals, foundations or companies; co-funding the development of pharmaceutical products with strategic operating partners; and indirectly acquiring royalty-rich companies for the purpose of obtaining the royalties, either alone or with partners who are interested in the acquisition of the operating assets.
RP Management (Ireland) Ltd. (RP Ireland), is the manager of the Trust and equivalent to the board of directors of a company or general partner of a partnership and is responsible for the day to day operations of the Trust. Its functions can be delegated to third parties. RP Ireland has delegated responsibility for investment management of the Trust to its parent company RP Management, LLC (the Manager), in accordance with the investment objectives and policies of the Trust. RP Ireland has delegated responsibility for the administrative functions of the Trust to State Street (Ireland) Limited (the Administrator), an unrelated party.
The units of the Trust are held exclusively by RPI US Partners, LP; RPI US Partners II, LP; RPI International Partners, LP; and RPI International Partners II, LP (the Legacy Investors Partnerships). The RPI Legacy Holders are also managed by the Manager. At the discretion of RP Ireland, the Trust can distribute to its unitholders free cash flow after debt service and covenant requirements.
Reorganization Transactions and the U.S. Listing
In connection with an anticipated U.S. listing of Class A ordinary shares of Royalty Pharma plc, we consummated an exchange offer on February 11, 2020 (the Exchange Date). Through the exchange offer, 82% of 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 RPI US Partners 2019, LP, a Delaware limited partnership (the Continuing US Investors Partnership) or RPI International Holdings 2019, LP, a Cayman Islands exempted limited partnership (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 the U.S. listing are referred to as the Exchange Offer Transactions.
As a result of the Exchange Offer Transactions, 82% of the portfolio of Old RPI was effectively transferred to our successor, Royalty Pharma Investments 2019 ICAV, an Irish collective asset management entity (RPI) on the Exchange Date. RPI, through its wholly-owned subsidiary RPI 2019 Intermediate Finance Trust, a Delaware statutory trust (RPI Intermediate FT), owns an 82% economic interest in Old RPI. Through its 82% indirect ownership of Old RPI, RPI is legally entitled to 82% of the economics of Old RPIs wholly-owned subsidiaries, RPI Finance Trust, a Delaware statutory trust (RPIFT) and RPI Acquisitions (Ireland), Limited (RPI Acquisitions), an Irish private limited company, and 66% of Royalty Pharma Collection Trust, a Delaware statutory trust (RPCT). The remaining 34% of RPCT is owned by the Legacy Investors Partnerships and Royalty Pharma Select Finance Trust, a Delaware statutory trust (RPSFT), which is wholly owned by Royalty Pharma Select, an Irish Unit trust (RPS). 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
F-34
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Legacy Date, Old RPI will cease making new investments and each of Old RPI and the Legacy Investors Partnerships will become legacy entities. Following the Legacy Date, we will make new investments through RPI and its wholly-owned subsidiaries (together with RPI, the RPI Group), including RPI Intermediate FT.
As part of the Exchange Offer Transactions, the Legacy Investors Partnerships and RPI Intermediate FT have entered into new credit facilities in the amount of $1,260,000,000 and $6,040,000,000, respectively, the proceeds of which were used to repay the $6,273,000,000 outstanding debt of RPIFT and, in the case of RPI Intermediate FT, will also be used to fund future investments. As part of the new credit facilities, RPI Intermediate FT repaid $5,175,884,653, its pro rata portion of RPIFTs outstanding debt and accrued interest. RPIFT terminated all outstanding interest rate swaps in connection with the debt refinancing.
Prior to, and as a condition precedent to the closing of the U.S. listing, various reorganization transactions will be effected, including the following:
|
the Exchange Offer Transactions (as described above); and |
|
the execution of a new management agreement with the Manager. |
We refer to these transactions collectively as the Reorganization Transactions.
After the consummation of the Reorganization Transactions and before the consummation of the offering, Royalty Pharma plc, Royalty Pharma, the Company, we, us and our refer to Royalty Pharma Investments 2019 ICAV. After the consummation of this offering, Royalty Pharma plc, 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 would exist upon the closing of the U.S. listing. Immediately following this offering, we will be a holding company and our principal asset will be a controlling equity interest in Royalty Pharma Holdings Ltd., (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. The RP Holdings Class B shares will be initially held through a depositary. We refer to the RP Holdings Class B shares or the depositary receipts that represent them as the RP Holdings Class B Interests.
2. Summary of Significant Accounting Policies
Basis of preparation and use of estimates
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various market specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources.
Basis of consolidation
The consolidated financial statements include the accounts of Royalty Pharma Investments and its wholly owned subsidiaries RPIFT and RPI Acquisitions, and RPCT. For consolidated entities where we own or are exposed to less than 100% of the economics, such as RPCT, we record net (income)/loss attributable to non-controlling interests in our consolidated statements of comprehensive income equal to the percentage of the economic or ownership interest retained in such entities by the respective non-controlling parties.
F-35
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As the result of a reorganization transaction that took place in 2011, a non-controlling interest was created related to certain legacy investors 20% interest in RPCT held through RPSFT. As noted above, RPIFT, our wholly owned subsidiary, owns the remaining 80% of RPCT, which is fully consolidated.
All intercompany transactions and balances have been eliminated in consolidation.
Segment Information
We determined that our chief executive officer is the chief operating decision maker (CODM). The CODM reviews financial information presented on a consolidated basis to allocate resources, evaluate financial performance, and make overall operating decisions. As such, we concluded that we operate as one segment primarily focused on acquiring royalty-generating products.
Royalty assets
An acquisition of a royalty asset provides the buyer with contractual rights to cash flows relating to royalties from the sales of patent-protected biopharmaceutical products. These acquisitions entitle us to receive a portion of income from the sale of patent-protected biopharmaceutical products by unrelated biopharmaceutical companies. For the majority of our royalties , our rights are protective in nature. In other words, we do not own the intellectual property, and we do not have the right to commercialize the underlying products. Acquisitions of contractual cash flow streams with yield components that most closely resemble loans are classified as financial assets.
In the limited instances where we possess the rights to exploit the underlying patents, rights to the intellectual property related to the biopharmaceutical products, or the ability to influence the amount or duration of future royalty payments, these royalties are classified as intangible assets.
Financial royalty assets, net
Although a royalty asset does not have the contractual terms typical of a loan (such as contractual principal and interest), we analogize to the accounting guidance within Accounting Standards Codification 310 (ASC), Receivables, as it most closely aligns with the underlying economics of our royalties that are classified as financial assets. Therefore, such royalties are classified similar to loans receivable and are measured at amortized cost using the prospective effective interest method described in ASC 835-30 Imputation of Interest.
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. The effective interest rate is reviewed and adjusted each reporting period as differences between expected cash flows and actual cash flows are realized and as there are changes to expected future cash flows. Income is calculated by multiplying the carrying value of the royalty asset by the effective interest rate. The carrying value of Financial royalty assets, net is made up of the opening balance, or net purchase price for a new royalty asset, increased by the interest income accrual and decreased by cash receipts in the period to arrive at the ending balance. If the ending balance is greater than the net present value of the expected future cash flows, a provision is recorded to reduce the asset balance to the net present value. The provision is recorded through the income statement as Provision for changes in expected future cash flows and the carrying value of Financial royalty assets, net is net of the cumulative allowance for changes in expected future cash flows.
The application of the prospective approach to measure royalty assets requires managements judgment in forecasting the expected future cash flows of the underlying royalties. In addition, income recognition from
F-36
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
royalty assets can be impacted by managements assumptions around (1) product growth rates and sales trends in outer years, (2) the geographical allocation of annual sales data from sell-side equity research analysts models, (3) product and pricing mix for franchised products, (4) the strength of patent protection, including anticipated entry of generics, and (5) estimates of the duration of the royalty. The amounts and duration of forecasted expected future cash flows are largely impacted by sell-side equity research analyst coverage, commercial performance of the product, and the royalty duration, each discussed in further detail below.
|
Analyst coverage. Forecasts of expected future cash flows are developed from sales projections of the underlying biopharmaceutical products as published in sell-side equity research analyst reports. In projecting future cash flows, our policy is to derive annual sales projections for each royalty asset by applying the median growth rates calculated from consensus forecasts among sell-side equity research analysts currently reporting on a product to the corresponding periods for which we are entitled to royalties. Growth rates inherent in these forecasts are based on input from internal and external market research that analyzes factors such as growth in global economies, industry trends and product life cycles. When royalty-bearing biopharmaceutical products have no coverage, limited sell-side equity research analyst coverage or where sell-side equity research analyst estimates are not available for the full term of the royalty, particularly for the later years in a products life, management uses reasonable judgment to make assumptions about the growth or decline in the sales of these products based on historical data, market trends and managements own expertise. Further, based on the level of detail in sell-side equity research analyst models, management can also be required to apply assumptions to the sales forecasts to estimate the quarterly and geographical allocation from annual sales projections and, for franchised products, to estimate the product mix and pricing mix, or to exclude from projections sales forecasts for unapproved products or indications. Royalty Pharmas contractual royalty terms and rates are then applied to the adjusted sales projections to calculate the expected royalty payments over the term of the royalty assets life, forming the basis for our forecast of expected future cash flows used to calculate and measure interest income. |
|
Commercial performance. The approval of a product for use in new indications can extend the date through which we are entitled to royalties on that product. Likewise, for certain royalties, such as the cystic fibrosis franchise, we are entitled to royalties on approved combination products and may be entitled to royalties on future combination products, which, once approved, create new cash flow streams which were not initially contemplated and whose sales were previously not reflected in sales projections. We do not recognize income from, or forecast sales for, unapproved products or indications. If a product is removed from all or a portion of a market, subsequent sell-side equity research analysts forecasts will reflect the expected drop in sales. Both the new cash flow streams and the cessation of cash flow streams related to a products performance in the market can materially affect our forecast of expected future cash flows over the royalty term. |
|
Royalty duration. The duration of a royalty can be based on a number of factors, such as patent expiration dates, the number of years from first commercial sale, or the first date of manufacture of the patent-protected product, the entry of generics, or a contractual date arising from litigation, which are all impacted by the timing in the products life cycle at which we acquire the royalty assets. The royalty duration varies by geography as the United States, European Union, and other jurisdictions may be subject to different country-specific patent protection terms or exclusivity based on contractual terms. Products may be covered by a number of patents and, for products whose royalty term is linked to the existence of valid patents, management is required to make judgments about the patent providing the strongest patent protection to align the period over which management forecasts expected future cash flows to the royalty term. It is common for the latest expiring patent in effect at the date we acquire a royalty asset to be extended, adjusted, or replaced with newer dated patents subsequent to our acquisition date due to new information, resulting in changes to the royalty term in later periods. Patents may expire earlier than expected at the time of the acquisition due to the loss of patent protection, loss of data exclusivity on intellectual property, |
F-37
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
contractual licensing terms limiting royalty payments based on time from product launch, or due to recent legal developments and/or litigation outcomes. Macroeconomic factors, such as changes in economies or the competitive landscape, including the unexpected loss of exclusivity to the products underlying our portfolio of royalties , changes in government legislation, product life cycles, industry consolidations and other changes beyond our control could result in a positive or negative impact on projections. |
Management is required to make assumptions around the royalty duration for the recognition of interest income on royalty assets classified as financial assets. In some cases, patent protection may extend to a later period than the expiration date management has estimated. Management may apply a shorter royalty term in this situation if, based on the experience and expertise of the research team, management believes that it is more likely that the associated patents are subject to opposition or infringement, that the market for a particular product may shift based on pipeline approvals and products, or that product sales may be harmed by competition from generics. For products providing perpetual royalties, management applies judgment in establishing the duration over which it forecasts expected future cash flows. Management may assign a 10 year royalty term initially to correspond to the average remaining patent life of a product after approval, which is reviewed and revised as necessary at each reporting period.
A shortened royalty term can result in a reduction in the effective interest rate, a decline the carrying value of the royalty asset, a decline in income from royalty assets, significant reductions in royalty payments compared to expectations, or a permanent impairment. Additionally, royalty payments may occasionally continue beyond the royalty term for such reasons we cannot foresee such as excess inventory in the channel or additional scope of patent protection identified after expiry, including royalties we may become entitled to from new indications, new compounds, or for new regulatory jurisdictional approvals.
The current portion of Financial royalty assets, net represents an estimation for current quarter royalty receipts which are collected during the subsequent quarter and for which the estimates are derived from the latest external publicly available sell-side equity research analyst reports, reported in arrears.
Cumulative allowance and Provision for changes in expected cash flows from financial royalty assets
We evaluate royalty assets for impairment on an individual basis at the end of each reporting period by comparing the effective interest rate to that of the prior period. If the current period effective interest rate is lower than the prior period, and the gross cash flows have declined (expected and collected), management records a provision for the change in expected cash flows. The provision is measured as the difference between the royalty assets amortized cost basis and the net present value of the expected future cash flows, calculated based on the prior periods effective interest rate. The amount recognized as provision expense increases the royalty assets cumulative allowance, which reduces the net carrying value of the royalty asset.
In a subsequent period, if there is an increase in expected future cash flows, or if actual cash flows are greater than cash flows previously expected, we reduce the previously established cumulative allowance for the increase in the present value of cash flows expected to be collected, resulting in a non-cash credit to the provision line on the income statement. Management also recalculates the amount of accretable yield to be received based on the revised remaining cash flows. The adjustment to the accretable yield is treated as a change in estimate and is recognized prospectively over the remaining life of the royalty asset by adjusting the effective interest rate used to calculate income.
Movements in the cumulative allowance for changes in expected cash flows, which forms part of the Financial royalty assets, net line item on the balance sheet, are accompanied by corresponding changes to the provision. Amounts not expected to be collected are written off against the allowance at the time that such a determination is made. Recoveries of previously written-off amounts are credited to the allowance. In some
F-38
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
cases, when a royalty assets contractual cash flows expire, the final royalty payment may differ from the remaining net carrying value. We account for this non-cash true-up at the end of the royalty term as either Provision for changes in expected cash flows from financial royalty assets or as Income from financial royalty assets on the consolidated statements of comprehensive income.
Income from financial royalty assets
We recognize income from financial royalty assets when there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The accretable yield is recognized as income at the effective rate of return over the expected life of royalty assets classified as financial assets. After acquisition, if reasonable timing of expected cash flows is not available for a product or if we have not completed the required funding obligations payable over time for an approved product, a royalty asset is placed in non-accrual status (e.g., for royalties from products that have not yet received FDA approval or for accelerated royalties). Such royalty assets are held at cost and no income is recognized until the reasonable expectation of the timing of the future cash flows to be collected is available or until funding obligations payable over time for an approved product are complete.
When royalties continue to be collected for financial assets that have been fully depleted, such income is recognized as Other royalty income.
Intangible royalty assets, net
Currently, the Januvia, Janumet, and Other DPP-IV (DPP-IV) patents are the Companys only intangible assets. The DPP-IV patents are finite-life intangible assets whose cost is amortized using the straight-line method over the expected lives of the patents, which terminate at various dates up to 2022. The amortization period commences concurrent with the sale of the product underlying the royalty asset.
Management reviews the performance of royalties classified as intangible assets periodically for impairment as required by ASC 360-10 Property, Plant, and Equipment - Overall. The test for recoverability is performed by comparing the carrying value of the royalty asset with the estimated future undiscounted cash flows generated through royalty payments from sales of the underlying DPP-IV products. When evaluating indicators of impairment, we consider factors such as competitive environment and the products life cycle stage, recent and prospective sales trends, collectibility concerns, and any potential rebate chargebacks that may occur at the end of a royaltys term. An impairment loss is recognized if the carrying value of the royalty asset is not recoverable and its carrying amount exceeds its fair value.
Revenue from intangible royalty assets and Accrued royalty receivable
We earn royalties on sales by our licensees of DPP-IV products covered under company-owned patents. We do not have future performance obligations under these license arrangements. Royalty revenue on DPP-IV products is recognized in the period the product is sold. However, under the license agreements, licensees generally provide royalty reports and payments on a one quarter lag. Thus, the accrued royalty receivable is based on an analysis of historical royalties received and sell-side equity research analysts projected sales, adjusted for any changes in estimates. Royalty-bearing sales are net of certain rebates and other discounts, as permitted under the terms of the license agreements. Because rebates are generally invoiced and paid in arrears by the marketer, royalty reports often reflect deductions in current periods for rebates related to prior periods which we do not have the ability to estimate.
Critical estimates that could cause a change in estimated future cash flows include changes in product demand and market growth assumptions, a change in the pricing strategy of the marketer or reimbursement
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ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
coverage, and changes in country-specific contractual or patent expiry dates. Actual royalty receipts may differ from estimates and any differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically on the basis of royalty receipts.
Milestone payments
Certain acquisition agreements provide for future contingent payments based on the financial performance of the related biopharmaceutical product generally over a multi-year period. For purposes of measuring income from royalty assets classified as financial assets, milestones payable to the royalty seller are typically netted from the cash inflows used to forecast expected future cash flows in the period the milestone trigger is projected to be satisfied.
Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful completion of the defined milestones. Payments under these agreements generally become due and payable upon achievement of certain commercial milestones, and when the contingency is resolved.
Financial Instruments
Certain financial instruments reflected in the consolidated balance sheets, (e.g., cash, cash equivalents, certain other assets, accounts payable, and certain other liabilities) are recorded at cost, which approximates fair value due to their short-term nature. The fair values of financial instruments other than Financial royalty assets, net are determined through a combination of management estimates and information obtained from third parties using the latest market data. The fair value of financial instruments is determined utilizing the valuation techniques appropriate to the type of instrument as discussed in Note 3.
Cash and cash equivalents and Marketable securities
Cash and cash equivalents include cash held at banks and all highly liquid financial instruments with original maturities of 90 days or less. The Company invests in marketable debt securities that are classified as trading securities and reported at fair value. In 2019, we invested our excess cash in marketable securities and money market funds that were held with Deutsche Bank, and Bank of America, N.A. as custodian. Beginning in 2019, we used BlackRock, Inc. to manage and invest our excess cash held with Bank of America, N.A. In 2018, we invested our excess cash primarily in money market funds held with Deutsche Bank.
At December 31, 2019, $41.5 million of the total cash and cash equivalents balance was invested in commercial paper and certificates of deposit with maturities of 90 days or less, and $222.3 million was invested in money market funds. At December 31, 2019, our marketable securities total $57.0 million, of which $44.1 million and $12.9 million was invested in certificates of deposit and U.S. government securities with maturities of 12 months or less, respectively. At December 31, 2018, the Company had $1.8 billion of the total cash and cash equivalents balance invested in money market funds and did not hold any marketable securities.
Equity securities and Available for sale debt securities
Our equity securities are measured and recorded at fair value with unrealized gains and losses recorded in earnings. Prior to January 1, 2018, unrealized gains and losses were included in accumulated other comprehensive income/(loss) (AOCI) within equity. Our equity securities represent investments in publicly traded equity securities. Financial assets that can contractually be prepaid or otherwise settled in such a way that the holder would not recover substantially all of its recorded investment are measured like investments in debt
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ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
securities in accordance with ASC 860, Transfers and Servicing. Available for sale debt securities, including the Companys investment in the Biohaven Preferred Shares, are measured at fair value and unrealized gains and losses are included in accumulated other comprehensive income. Realized gains and losses are recorded in earnings.
A decline in the market value of any available for sale debt security below its cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value and is recognized in earnings. The determination of whether an available for sale debt security is other-than-temporarily impaired requires significant judgment and requires consolidation of available quantitative and qualitative evidence in evaluating the potential impairment. Factors evaluated to determine whether the investment is other-than-temporarily impaired include: significant deterioration in the Companys earnings performance, credit rating, asset quality, business prospects of the Company, adverse changes in the general market conditions in which the Company operates, length of time that the fair value has been below cost, our expected future cash flows from the security, our intent not to sell, an evaluation as to whether it is more likely than not that we will have to sell before recovery of the cost basis, and issues that raise concerns about the Companys ability to continue as a going concern. Assumptions associated with these factors are subject to future market and economic conditions, which could differ from managements assessment.
Derivatives
All derivatives are measured at fair value on the consolidated balance sheets. Prior to 2017, RPIFT applied hedge accounting to its interest rate swap agreements and foreign currency contracts. Following various refinancings of our senior secured credit facilities in November 2013, May 2015 and October 2016, certain swap contracts no longer qualified for hedge accounting treatment. As a result, all cash flow hedges became ineffective and unrealized gains and losses on interest rate swaps arising since October 2016 are recorded in earnings.
Upon the discontinuation of hedge accounting, the accumulated other comprehensive income previously recorded on the cash flow hedges has continued and will continue to be reversed out of other comprehensive income in line with terms of the associated swap contract. This reclassification adjustment is shown on the consolidated statements of comprehensive income as part of unrealized gain/(loss) on interest rate swaps. Realized gains or losses associated with the execution of the respective hedged transactions are included in other expenses.
We continually monitor our positions with, and credit quality of, the financial institutions which are counterparties to our derivative contracts. We may be exposed to credit loss in the event of non-performance by our counterparty to the derivative contracts. However, management considers this risk to be low.
Investment in non-consolidated affiliates
We have variable interests in entities formed for the purposes of entering into co-development arrangements for potential biopharmaceutical products (the Avillion entities). The Avillion entities are variable interest entities for which Royalty Pharma is not the primary beneficiary as we do not have the power to direct the activities that most significantly influence the economic performance of the entity. In determining whether we are the primary beneficiary of an entity, management applies a qualitative approach that determines whether it has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant. Management continuously assesses whether Royalty Pharma is the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of one or more of its investees.
F-41
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In circumstances where we are not the primary beneficiary, but where we have the ability to exercise significant influence over the operating and financial policies of an investee, we utilize the equity method of accounting for recording investment activity. In the case of the Avillion entities, we maintain significant influence through our partnership interests. We record our share of any loss or income generated by the Avillion entities, which is recorded on a three-month lag, within the consolidated statement of comprehensive income as a component of Equity in (earnings)/loss of non-consolidated affiliates. The investment is reflected as an investment in non-consolidated entities on the consolidated balance sheet.
When we have committed to provide further support to the investee through capital call commitments and the investment has been reduced to zero, we provide for additional losses, resulting in a negative equity method investment, which is presented as a liability on the consolidated balance sheets.
Research and development funding expense
We enter into transactions where we agree to jointly fund the research and development for products undergoing late stage clinical trials in exchange for future royalties if the products are successfully developed and commercialized. In accordance with ASC 730 Research and Development, we account for the funded amounts as research and development expense when we have the ability to obtain the results of the research and development, the transfer of financial risk is genuine and substantive and, at the time of entering into the transaction, it is not yet probable that the product will receive regulatory approval.
Royalty payments owed to the Company on successfully commercialized products generated from research and development agreements are recognized as Other royalty income in the same period in which the sale of the product occurs. Fixed or milestone payments receivable based on the achievement of contractual criteria (i.e., typically the achievement of agreed upon sales thresholds) for products arising out of our research and development arrangements are also recognized as Other royalty income in the period that the commercial sales threshold is met. Milestone thresholds are typically not triggered until after all funding obligations have been completed and we have no further performance obligations.
Income taxes
Under current law and practice, the Trust qualifies as an investment undertaking as defined in Section 739B of the Taxes Consolidation Act, 1997, as amended. On this basis, it is not subject to Irish tax on its income or gains. Certain distributions to Irish residents are subject to an exit tax. Consequently, Royalty Pharma does not record a provision for income taxes. Unitholders are required to report their share of the Trusts income or loss on their tax returns.
Concentrations of credit risk
Financial instruments that subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, royalty assets, receivables, and derivatives. Our cash management and investment policy limits investment instruments to investment-grade securities with the objective to preserve capital and to maintain liquidity until the funds are needed for operations. Our cash and cash equivalents, and marketable securities balances at December 31, 2019 were held with State Street Bank and Trust, Deutsche Bank, Merrill Lynch, Pierce, Fenner & Smith, and Bank of America, N.A. . Our primary operating accounts significantly exceed the FDIC limits.
The majority of the our royalty assets and receivables arise from contractual royalty agreements that entitle the Company to royalties on the sales of underlying biopharmaceutical products in the United States, Europe and
F-42
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
the rest of the world, with concentrations of credit risk limited due to the broad range of marketers responsible for paying royalties to us and the variety of geographies from which our royalties on product sales are derived. The marketers paying us royalties on these products do not always provide, and are not necessarily required to provide, the breakdown of sales occurring by geography. The products in which we hold royalties are marketed by leading industry participants, including, among others, Abbott, AbbVie, Amgen, Bristol-Myers Squibb, Celgene, Gilead Sciences, Johnson & Johnson, Lilly, Merck & Co., Pfizer, Novartis, Biogen-Idec, Roche/Genentech, and Vertex. For the years ended December 31, 2019, 2018 and 2017, Vertex, as the marketer and payor of Royalty Pharmas royalties on the cystic fibrosis franchise products, accounted for 23%, 22% and 22% of our total income and other revenues for each respective year.
We monitor the financial performance and creditworthiness of the counterparties to our royalty agreements and to our derivative contracts so that we can properly assess and respond to changes in their credit profile. To date, we have not experienced any significant losses with respect to the collection of income or revenue on our royalty assets or on the settlement of our derivative contracts.
Recently adopted and issued accounting standards
In May 2014, the Financial Accounting Standard Board (FASB) issued a new revenue standard under ASC Topic 606 (ASU 2014-09). ASU 2014-09 applies to all contracts with customers. The objective of the new guidance is to improve comparability of revenue recognition practices across entities and to provide more useful information to users of financial statements through improved disclosure requirements. Based on managements assessment, income from financial royalty assets which are accounted for in accordance with ASC 310, Receivables, is not subject to the application of ASU 2014-09. As a result, management believes that financial royalty assets represent contractual rights and obligations that continue to be within the scope of Topic 310 and therefore specifically exempted from the new revenue standard. The provisions of ASU 2014-09 became effective for the Company on January 1, 2018, including interim reporting periods. Our revenues are primarily derived from royalties associated with its intangible assets, which fall under the sales-based royalties exception in the new standard. Therefore, we did not recognize any adjustment upon adoption of the new revenue standard.
In January 2016, the FASB issued revised guidance for the accounting and reporting of financial instruments (ASU 2016-01) and in 2018 issued related technical corrections (ASU 2018-03). The new guidance requires that equity investments with readily determinable fair values currently classified as available for sale be measured at fair value with changes in fair value recognized in net income. The new guidance also changed certain disclosure requirements. We adopted ASU 2016-01 as of January 1, 2018 using a modified retrospective approach. 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 its available for sale equity securities. ASU 2018-03 was also adopted as of January 1, 2018 on a prospective basis and did not result in any additional impact upon adoption.
In August 2016, the FASB issued revised guidance which makes eight targeted changes to how royalty receipts and cash payments are presented and classified in the Statement of Cash Flows (ASU 2016-15). Among the updates, the standard allows companies to elect the cumulative earnings approach or the nature-of-the-distribution approach in distinguishing whether distributions received from equity method investees are returns of investment, which should be classified as cash flows from investing activities, and returns on investment, which should be classified as cash flows from operating activities. We made a policy election to use the cumulative earnings approach and adopted ASU 2016-15 for the year ended December 31, 2018.
In June 2016, the FASB issued a new accounting standard that amends the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the incurred-loss model with
F-43
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
an expected-loss model (ASU 2016-13). Accordingly, these financial assets will be presented at the net amount expected to be collected. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The new standard is effective for interim and annual periods beginning on January 1, 2020. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact on retained earnings as of the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements and disclosures.
In January 2017, the FASB issued a new accounting standard that changes the definition of a business to assist entities with the evaluation of when a set of assets acquired or disposed of should be considered a business (ASU 2017-01). The new standard requires that an entity evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets; if so, the set of assets would not be considered a business. The new standard also requires that a business include at least one substantive process, and it narrows the definition of outputs. We adopted this standard as of January 1, 2018 with no impact on our consolidated financial statements.
In August 2018, the FASB issued a new accounting standard that eliminates, adds, and modified certain disclosures requirements for fair value measurements under Topic 820 (ASU 2018-13). The ASU modifies the disclosures by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income/(loss). The new standard is effective for interim and annual periods beginning on January 1, 2020. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements and disclosures.
3. Fair Value Measurements and Financial Instruments
Fair value measurements
The summary below presents information about assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2019 and 2018, and the valuation techniques we utilized to determine such fair value.
|
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Our level 1 assets consist of equity securities with readily determinable fair values and money market funds. |
|
Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly. Our level 2 assets generally include warrants, derivatives, and our interest rate swap contracts, which may be in an asset or liability position. |
|
Level 3: Prices or valuation that requires inputs that are both significant to the fair value measurement and unobservable. Our level 3 assets consisted of our investment in Tecfidera and Biohaven Preferred Shares, which were recorded as available for sale debt securities. See Note 5 for a description of our investment in Tecfidera and Biohaven Preferred Shares. |
For financial instruments which are carried at fair value, the level in the fair value hierarchy is based on the lowest level of inputs that is significant to the fair value measurements in its entirety.
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ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fair value hierarchy
The following is a summary of the inputs used to value our financial assets and liabilities measured at fair value as of December 31, 2019 and 2018:
(in thousands) | As of December 31, 2019 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
||||||||||||||||
Money market funds |
$ | 222,296 | $ | | $ | | $ | 222,296 | ||||||||
Commercial paper |
| 21,502 | | 21,502 | ||||||||||||
Certificates of deposit |
| 20,011 | | 20,011 | ||||||||||||
Marketable securities |
||||||||||||||||
U.S. government securities |
| 12,877 | | 12,877 | ||||||||||||
Certificates of deposit |
| 44,095 | | 44,095 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current assets |
$ | 222,296 | $ | 98,485 | $ | | $ | 320,781 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Available for sale debt securities |
| | 131,280 | 131,280 | ||||||||||||
Equity securities |
380,756 | | | 380,756 | ||||||||||||
Warrants (1) |
| 30,815 | | 30,815 | ||||||||||||
Forward purchase contract (1) |
| 11,500 | | 11,500 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-current assets |
$ | 380,756 | $ | 42,315 | $ | 131,280 | $ | 554,351 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Interest rate swaps |
| (9,215 | ) | | (9,215 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current liabilities |
$ | | $ | (9,215 | ) | $ | | $ | (9,215 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Interest rate swaps |
| (18,902 | ) | | (18,902 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-current liabilities |
$ | | $ | (18,902 | ) | $ | | $ | (18,902 | ) | ||||||
|
|
|
|
|
|
|
|
(1) |
Related to Epizyme warrants and put option as described in Note 4 and recorded in the non-current asset portion of Derivative financial instruments in the consolidated balance sheet as of December 31, 2019. |
(in thousands) | As of December 31, 2018 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Cash equivalents |
||||||||||||||||
Money market funds |
$ | 1,815,717 | $ | | $ | | $ | 1,815,717 | ||||||||
Interest rate swaps |
| 19,196 | | 19,196 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total current assets |
$ | 1,815,717 | $ | 19,196 | $ | | $ | 1,834,913 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest rate swaps |
| 19,111 | | 19,111 | ||||||||||||
Equity securities |
146,008 | | | 146,008 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-current assets |
$ | 146,008 | $ | 19,111 | $ | | $ | 165,119 | ||||||||
|
|
|
|
|
|
|
|
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ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The table presented below summarizes the change in the carrying value of level 3 financial instruments for the years ended December 31, 2019 and December 31, 2018.
(in thousands) | For the years ended December 31, | |||||||
2019 | 2018 | |||||||
Balance at beginning of the year |
$ | | $ | 583,021 | ||||
Purchases |
125,121 | | ||||||
Change in unrealized movement |
6,159 | (402,502 | ) | |||||
Realized gains |
| 419,481 | ||||||
Proceeds earned |
| (600,000 | ) | |||||
|
|
|
|
|||||
Balance at end of the year |
$ | 131,280 | $ | | ||||
|
|
|
|
There were no transfers between levels during the years ended December 31, 2019 and December 31, 2018.
Valuation inputs
Below is a discussion of the valuation inputs used for financial instruments classified as level 2 and level 3 measurements in the fair value hierarchy.
Investment in Biohaven
The fair value of the Biohaven Preferred Shares of $131.3 million at December 31, 2019 was determined based on significant inputs that are not observable in the market, referred to as Level 3 inputs. The valuation was performed using a Black-Derman-Troy (BDT) lattice model, which takes into account the purchase terms and various probability-weighted redemption and payback scenarios that impact the return on investment. Key inputs to the BDT model include, most notably, the probability (1) that Biohavens pipeline product, Nurtec ODT (rimegepant), will be approved by the FDA by specific dates, (2) of a Change of Control event by specific dates, and (3) that Biohaven will elect to redeem the Preferred Shares for a lump sum payment as opposed to payback over time. Probabilities for the above considerations were developed by the Companys Research team, who have significant healthcare and finance expertise to make such assessments. The most critical assumption that impacts the valuation of the Biohaven Preferred Shares is the probability that Nurtec ODT (rimegepant) will be approved by the FDA. If the probability that such FDA approval occurs is reduced by 20%, the value of the Biohaven Preferred Shares would not change materially. See Note 5 for a description of our investment in Biohaven.
Assumptions used in the valuation model as of December 31, 2019 include the following significant unobservable inputs:
|
Change of Control probability on a quarterly basis (0%) |
|
Likelihood of FDA approval (0%-86%) |
|
Likelihood of FDA approval at the end of any given quarter by December 31, 2024 (Range: 0%-59%). |
Investment in Tecfidera
Our investment in Tecfidera was valued using the discounted cash flow method, with a discount rate of 8% used for valuation at Decemebr 31, 2018. The unobservable inputs used to assess the fair value of Tecfidera primarily included the discount rate and cash flow projections derived from sell-side equity research analysts forecasts. See Note 5 for a description of our investment in Tecfidera.
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ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Other financial instruments
We use a third party pricing service for level 2 inputs used to value cash equivalents and short term investments, which provides documentation on an ongoing basis that includes, among other things, pricing information with respect to reference data, methodology, inputs summarized by asset class, pricing application and corroborative information. Level 2 derivative instruments are valued using counterparty confirmations, LIBOR yield curves and credit valuation adjustments. Warrants are valued using a Black-Scholes option pricing model which considers observable and unobservable inputs.
Financial assets not measured at fair value
Royalty assets classified as financial assets are measured and carried on the consolidated balance sheets at amortized cost using the effective interest method (see Note 2). The current portion of royalty assets classified as financial assets approximates its fair value. Estimated fair values based on Level 3 inputs and related carrying values for the non-current portion of our royalty assets classified as financial assets as of December 31, 2019 and 2018 are presented below.
(in thousands) | December 31, 2019 | December 31, 2018 | ||||||||||||||
Fair value | Carrying value, net | Fair value | Carrying value, net | |||||||||||||
Financial royalty assets, net |
$ | 16,501,819 | $ | 10,842,052 | $ | 12,021,288 | $ | 8,377,231 |
4. Derivative Instruments
We have historically managed the impact of foreign currency exchange rate and interest rate risk through various financial instruments, including derivative instruments such as interest rate swap contracts and foreign currency forward contracts. Our policy is to use derivatives strategically to hedge existing interest rate exposure and to minimize volatility in cash flow arising from our exposure to interest rate risk and foreign currency risk. We may also acquire other financial instruments that are classified as derivatives. We do not enter into derivative instruments for trading or speculative purposes.
Interest rate swaps
As of December 31, 2019 and 2018, RPIFT held interest rate swap contracts to effectively convert a portion of its floating-rate debt to a fixed basis. The notional values and fixed rates paid on the swap contracts are shown in the table below.
Notional Value
|
Fixed Rate |
Maturity Date |
||||||
$ | 450 | 1.310 | % | May 9, 2018 | ||||
$ | 325 | 1.795 | % | May 9, 2018 | ||||
$ | 325 | 1.787 | % | May 9, 2018 | ||||
$ | 300 | 1.775 | % | November 9, 2018 | ||||
$ | 200 | 1.585 | % | November 9, 2018 | ||||
$ | 385 | 1.250 | % | November 9, 2019 | ||||
$ | 385 | 1.358 | % | November 9, 2019 | ||||
$ | 600 | 2.019 | % | November 9, 2020 | ||||
$ | 250 | 2.094 | % | March 27, 2023 | ||||
$ | 500 | 2.029 | % | March 27, 2023 | ||||
$ | 250 | 2.113 | % | March 27, 2023 | ||||
$ | 500 | 2.129 | % | March 27, 2023 |
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ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Prior to 2017, management had designated the swap contracts with maturity dates through 2020 as cash flow hedges at inception, with the effective portion of the gain or loss on the swap reported as a component of other comprehensive income/(loss). Following various refinancings of RPIFTs senior secured credit facilities in November 2013, May 2015 and October 2016, certain swap contracts no longer qualified for hedge accounting treatment. With each refinancing, the highly effective criterion was no longer met in respect of the individual swaps and, as a result, after October 2016, all changes in fair value related to these swaps have subsequently been recorded in earnings as part of unrealized gain/(loss) on interest rate swaps.
For the years ended December 31, 2019, 2018 and 2017, we did not have any swaps that were treated as effective cash flow hedges for accounting purposes. In the fourth quarter of 2017, RPIFT entered into four new swaps maturing in 2023, which were not designated as cash flow hedges, and are recorded at fair value through earnings.
During the years ended December 31, 2019, 2018 and 2017, we recorded in earnings unrealized losses of $72.6 million, unrealized gains of $11.9 million and unrealized gains of $17.0 million, respectively, on interest rate swaps in the consolidated statements of comprehensive income.
The fair value of the swaps at December 31, 2019 and December 31, 2018 was a net liability of $28.1 million (a current liability of $9.2 million and a non-current liability of $18.9 million) and a net asset of $38.3 million (a current asset of $19.2 million and a non-current asset of $19.1 million), respectively, and is included in derivative financial instruments on the consolidated balance sheets.
RPIFT has master International Swaps and Derivatives Association (ISDA) agreements in place with its derivative instrument counterparties which provide for final close out netting with counterparties for all positions in the case of default or termination of the ISDA agreement. Under these agreements, we have set-off rights with the same counterparty. Management has elected not to offset such derivative instrument fair values in the consolidated balance sheets.
RPIFT generally has executed a Credit Support Annex (CSA) under the ISDA it maintains with each of its over-the-counter derivative counterparties of these swap contracts maturing in 2023 that requires both posting and accepting collateral either in the form of cash or high-quality securities. These CSAs are bilateral agreements that require collateral postings by the party out-of-the-money or in a net derivative liability position. Various thresholds for the amount and timing of collateralization of net liability positions are applicable. RPIFT has elected not to offset fair value amounts of any outstanding derivatives against the fair value amounts recognized for the related cash collateral receivable or payable that arise from those derivative instruments on the consolidated balance sheets. We have established a policy whereby we will only call collateral if our derivatives are in an asset position and management believes there is significant uncertainty around market risk or the credit risk of our counterparties.
Only the swaps maturing in 2023 have collateral requirements. At December 31, 2019, RPIFT had a receivable of $45.6 million in cash collateral previously posted to trade counterparties, which was recorded in Other long-term assets on the consolidated balance sheets. At December 31, 2019, RPIFT did not have the obligation to return any cash collateral to counterparties, as it did not hold any cash collateral at that date. At December 31, 2018, RPIFT did not have a receivable or payable related to cash collateral.
In connection with the Exchange Offer Transactions described in Note 1, RPIFT terminated all outstanding swaps in February 2020.
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ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Epizyme put option and warrant
In November 2019, RPIFT made an equity investment in Epizyme Inc. (Epizyme) of $100.0 million. Under the terms of its agreement with Epizyme, RPIFT made an upfront payment of $100.0 million for (1) shares of Epizyme common stock, (2) a warrant to purchase an additional 2.5 million shares of Epizyme common stock at $20 per share over a three-year term, and (3) Epizymes royalty on sales of Tazemetostat in Japan payable by Eisai Co., Ltd (Eisai). In connection with this transaction, Pablo Legorreta, Royalty Pharmas CEO, was appointed as a director of Epizyme, for which he will receive compensation in cash and shares, all of which will be contributed to RPM and used to reduce costs and expenses which would otherwise be billed to the Company or its affiliates. In addition, Epizyme has an 18 month put option to sell an additional $50.0 million of its common stock to RPIFT at then prevailing prices, not to exceed $20 per share.
The warrant was recognized at fair value of $30.8 million within the non-current asset portion of Derivative financial instruments on the consolidated balance sheet at December 31, 2019. The Company received notice from Epizyme on December 30, 2019, that it intended to exercise its put option at the contractually determined $20 per share price, resulting in 2.5 million shares on settlement in February 2020. As a result, the Company recorded a forward purchase contract equal to the difference in market value and exercise share price of $11.5 million in the non-current asset portion of Derivative financial instruments on the consolidated balance sheet at December 31, 2019. The Company also recorded an unrealized gain on derivative contracts of $11.5 million related to the forward purchase contract on the consolidated statements of comprehensive income for the year ended December 31, 2019.
Biohaven written put option
The Company determined there was a derivative associated with the Second Tranche of the Biohaven Preferred Share Agreement. The derivative relates to Biohavens option, exercisable within 12 months after the NDA for Nurtec ODT (rimegepant) is accepted by the FDA for Priority Review, to require the Company to purchase up to an additional $75.0 million of Preferred Shares (the Second Tranche) at the same price and on the same terms as the First Tranche, in one or more transactions of no less than $25.0 million. As of December 31, 2019, management determined that the value of the Second Tranche written put option was immaterial, and therefore no liability has been recognized on the consolidated balance sheets at this time. See Note 5 for a description of our investment in Biohaven.
F-49
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Summary of derivatives and reclassifications
All interest rate swaps were ineffective during the years ended December 31, 2019, 2018, and 2017. The table below summarizes the change in fair value of the recognized derivatives held by RPIFT for the years ended December 31, 2019, 2018, and 2017 and the line item within the consolidated statements of comprehensive income where the gains/(losses) on these derivatives are recorded.
(in thousands) | For the years ended December 31, | |||||||||||||
2019 | 2018 | 2017 |
Consolidated Statement of Income location |
|||||||||||
Derivatives in hedging relationships (1) |
||||||||||||||
Interest Rate Swaps: |
||||||||||||||
Amount of loss reclassified from AOCI into income |
$ | (6,189 | ) | $ | (8,003 | ) | $ | (8,931 | ) | Unrealized gain/loss on interest rate swaps (1) | ||||
Change in fair value of interest rate swaps |
(16,954 | ) | 3,357 | 18,948 | Unrealized gain/loss on interest rate swaps (1) | |||||||||
Interest income/(expense), net |
9,565 | 9,758 | (13,734 | ) | Interest expense | |||||||||
Derivatives not designated as hedging instruments |
||||||||||||||
Interest Rate Swaps: |
||||||||||||||
Change in fair value of interest rate swaps |
(49,472 | ) | 16,569 | 6,982 | Unrealized gain/loss on derivatives | |||||||||
Interest income/(expense), net |
(2,681 | ) | 440 | | Interest expense | |||||||||
Warrant: |
||||||||||||||
Change in fair value of warrant |
21,977 | | | Unrealized gain/loss on derivatives | ||||||||||
Forward purchase contract: |
||||||||||||||
Change in fair value of forward purchase contract |
11,500 | | | Unrealized gain/loss on derivatives |
(1) |
Certain older interest rate swaps were previously designated as cash flow hedges. These swaps became ineffective as debt refinancings occurred between 2013-2015. Interest rate swaps to be reclassified from AOCI into income expire at various dates up until 2020, at which point all associated amounts initially recorded in AOCI will have been released. The portion of loss to be reclassified from AOCI into income within the next twelve months is $4.1 million. |
5. Available for Sale Debt Securities and Equity Securities
A summary of our available for sale debt securities recorded at fair value is shown below as of December 31, 2019:
Cost | Unrealized gains | Fair Value | ||||||||||
(in thousands) | ||||||||||||
Biohaven preferred shares |
$ | 125,121 | $ | 6,159 | $ | 131,280 | ||||||
|
|
|
|
|
|
|||||||
Total available for sale debt securities |
$ | 125,121 | $ | 6,159 | $ | 131,280 |
Biohaven available for sale debt securities
In April 2019, RPIFT funded the purchase of 2,495 Series A Preferred Shares from Biohaven Pharmaceutical Holding Company Ltd (Biohaven) at a price of $50,100.00 per preferred share, for a total of $125.0 million, pursuant to the Preferred Share Agreement. Pursuant to the Preferred Share Agreement, Biohaven may issue and sell to RPIFT, and RPIFT will purchase from Biohaven, the Second Tranche of up to $75.0 million in the aggregate (and no less than $25.0 million at each additional closing) of additional Series A
F-50
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Preferred Shares at the same price and on the same terms as the First Tranche subject to the acceptance by the United States Food and Drug Administration (FDA) of both New Drug Applications (NDAs) with respect to the tablet formulation of Nurtec ODT (rimegepant) and the orally disintegrating tablet formulation of Nurtec ODT (rimegepant). As a condition for the issuance of the Second Tranche, one NDA must be accepted under the priority review designation pathway. The issuance of the Second Tranche is subject to customary closing conditions and is entirely at Biohavens option.
The Series A Preferred Shares provide RPIFT with the right to require Biohaven to redeem its shares under the following circumstances:
|
If a Change of Control is announced after October 5, 2019 and the Series A Preferred Shares have not previously been redeemed, Biohaven must redeem the Series A Preferred Shares for two times (2x) the original purchase price of the Series A Preferred Shares payable in a lump sum at the closing of the Change of Control or in equal quarterly installments following the closing of the Change of Control through December 31, 2024. |
|
If an NDA for Nurtec ODT (rimegepant) is not approved by December 31, 2021, RPIFT has the option at any time thereafter to require Biohaven to redeem the Series A Preferred Shares for one point two times (1.2x) the original purchase price of the Series A Preferred Shares. If no Change of Control has been announced, the Series A Preferred Shares have not previously been redeemed and (i) Nurtec ODT (rimegepant) is approved on or before December 31, 2024, following approval and starting one-year after approval, Biohaven must redeem the Series A Preferred Shares for two times (2x) the original purchase price, payable in a lump sum or in equal quarterly installments through December 31, 2024 (provided that if Nurtec ODT (rimegepant) is approved in 2024, the entire redemption amount must be paid by December 31, 2024) or (ii) Nurtec ODT (rimegepant) is not approved by December 31, 2024, Biohaven must redeem the Series A Preferred Shares for two times (2x) the original purchase price on December 31, 2024. |
|
Biohaven may redeem the Series A Preferred Shares at its option at any time for two times (2x) the original purchase price, which redemption price may be paid in a lump sum or in equal quarterly installments through December 31, 2024. In the event that Biohaven defaults on any obligation to redeem Series A Preferred Shares when required, the redemption amount shall accrue interest at the rate of eighteen percent (18%) per annum. If any such default continues for at least one year, RPIFT will be entitled to convert, subject to certain limitations, such Series A Preferred Shares into common shares, with no waiver of its redemption rights. |
|
Under all circumstances, the Series A Preferred Shares are required to be redeemed by Biohaven by December 31, 2024. |
|
In February 2020, Biohaven announced that the FDA approved Nurtec ODT (rimegepant) for the acute treatment of migraine in adults. |
Tecfidera available for sale debt securities
In May 2012 and December 2013, RPIFT acquired interests in the earn-out payable to the former shareholders of Fumapharm AG. The Fumapharm earn-out primarily represents an indirect interest in Biogen Idecs sales of Tecfidera, an oral therapeutic for the treatment of relapsing-remitting multiple sclerosis. Under the terms of our investment in Tecfidera, we were entitled to receive milestone payments based on cumulative sales of Tecfidera until cumulative sales exceed $20 billion, which occurred by the end of 2018. Our investment in the Tecfidera earn-out is fair valued and classified as available for sale, as under the terms of the contracts the full investment would not have been recovered if sales of Tecfidera did not reach certain prescribed thresholds.
F-51
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unrealized gains and losses on our investment in Tecfidera were included in accumulated other comprehensive income.
This investment was structured in the form of 22 potential milestone payments, of which all were earned as of December 31, 2018. The allocated cost of each milestone was derived using a third party analysis based on projected sales over time, the future competitive landscape, the strength of the patents underlying the product, and the prevailing interest rate environment. Once cumulative sales of Tecfidera reached certain agreed upon levels, an estimated accrual was recorded for the milestone payment to be received based on the sales of Fumaderm products as reported by Biogen Idec. The allocated cost of that particular milestone reduced the available for sale security recorded on the consolidated balance sheets. The excess of the payments received over the allocated cost was recognized as a realized gain on available for sale securities in the consolidated statements of comprehensive income. The accumulated other comprehensive income balance was unwound in line with the natural decline in the fair value of the asset, as the individual milestones were met.
The $600.0 million milestone payments that RPIFT was entitled to receive based on sales during the year ended December 31, 2018 were recorded as a $419.5 million realized gain in the consolidated statements of comprehensive income and a $180.5 million reduction of the investment in Tecfidera recorded as available for sale securities in the consolidated balance sheets. At December 31, 2018, milestone payments receivable of $150.0 million were recorded as other receivables on the consolidated balance sheets and was collected during the first quarter of 2019.
We did not have an available for sale debt securities balance recorded for Tecfidera as of December 31, 2018.
Equity securities
We own equity securities in publicly traded companies, which were recorded at fair value through accumulated other comprehensive income prior to January 1, 2018. Beginning on January 1, 2018, unrealized gains and losses on equity securities are recognized through earnings.
6. Financial Royalty Assets, Net
Financial royalty assets, net consist of contractual rights to cash flows relating to royalty payments derived from the sales of patent-protected biopharmaceutical products that entitle the Company and its subsidiaries to receive a portion of income from the sale of those products by unrelated companies.
F-52
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The gross carrying value, cumulative allowance for changes in expected cash flows, and net carrying value for the current and non-current portion of royalty assets classified as financial assets at December 31, 2019 are as follows.
(in thousands) |
Estimated
royalty expiration (a) |
Gross carrying value |
Cumulative
allowance for changes in expected cash flows (Note 7) |
Net carrying value | ||||||||||||
Cystic fibrosis franchise (d) |
(b) | $ | 4,639,045 | $ | | $ | 4,639,045 | |||||||||
Tysabri |
(c) | 2,131,272 | (71,789 | ) | 2,059,483 | |||||||||||
Imbruvica |
2029 | 1,332,077 | | 1,332,077 | ||||||||||||
Xtandi |
2028 | 1,193,918 | (332,624 | ) | 861,294 | |||||||||||
Promacta |
2026 | 776,555 | | 776,555 | ||||||||||||
Crysvita |
2032 | 321,234 | | 321,234 | ||||||||||||
Other |
2019-2036 | 1,768,929 | (464,005 | ) | 1,304,924 | |||||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 12,163,030 | $ | (868,418 | ) | $ | 11,294,612 | |||||||||
|
|
|
|
|
|
a) |
Dates shown are based on the patent expiry date or managements estimate of the date through which the Company will be entitled to royalties. Royalty expiration dates can change due to the grant of additional patents, the invalidation of patents, and other reasons. |
b) |
The expiration date for the Cystic fibrosis franchise is based on the patent expiration date for Trikafta, a franchise product which was approved in the US in October 2019. Management estimates that the most material patents provide protection through 2037. |
c) |
Under terms of the agreement, RPIFT acquired a perpetual royalty on net sales of Tysabri. Management has applied an end date of 2031 for purposes of accreting income over the royalty term. |
d) |
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. |
The gross carrying value, cumulative allowance for changes in expected cash flows, and net carrying value for the current and non-current portion of royalty assets classified as financial assets at December 31, 2018 are as follows.
(in thousands) |
Estimated
royalty expiration (a) |
Gross
carrying value |
Cumulative
allowance for changes in expected cash flows (Note 7) |
Net
carrying value |
||||||||||||
Cystic fibrosis franchise |
(b) | $ | 4,641,167 | $ | (1,101,675 | ) | $ | 3,539,492 | ||||||||
Tysabri |
(c) | 2,237,534 | (138,240 | ) | 2,099,294 | |||||||||||
Imbruvica |
2029 | 1,253,425 | | 1,253,425 | ||||||||||||
Xtandi |
2028 | 1,214,081 | (256,056 | ) | 958,025 | |||||||||||
Soliqua |
2025 | 210,413 | | 210,413 | ||||||||||||
Lexiscan |
2022 | 214,572 | (46,890 | ) | 167,682 | |||||||||||
Other |
2019-2028 | 1,050,757 | (440,036 | ) | 610,721 | |||||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 10,821,949 | $ | (1,982,897 | ) | $ | 8,839,052 | |||||||||
|
|
|
|
|
|
a) |
Dates shown are based on the patent expiry date or managements best estimate of the date through which we will be entitled to royalties. Royalty expiration dates can change due to the grant of additional patents, the invalidation of patents, and other reasons. |
F-53
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
b) |
Kalydeco monotherapy patents begin expiring in 2027, while other patents in the franchise are expected to provide protection for combination use of Kalydeco through 2029 to 2031. Management estimates that the most material patents provide protection through 2030. |
c) |
Under terms of the agreement, RPIFT acquired a perpetual royalty on net sales of Tysabri. Management has applied an end date of 2031 for purposes of accreting income over the royalty term. The one-year extension of the royalty term from the prior year was based in part on the absence of sales projections declines by sell-side equity research analysts in later periods and no immediate expected launch of biosimilars. |
Gain on sale of royalty asset
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 as shown on the consolidated statements of comprehensive income for the year ended December 31, 2017.
Tysabri milestone
Tysabri royalty payments due to the Company exceeded $333.0 million for the year ended December 2018, as evidenced by marketer provided sales reports, and triggered a milestone payment of $250.0 million payable to the royalty seller Perrigo Company PLC (Perrigo). Under the terms of the Purchase and Sale Agreement for Tysabri, this milestone payment was treated as additional purchase price. We recognized a $250.0 million increase to the gross carrying value of our Tysabri royalty asset and a corresponding milestone payable on the consolidated balance sheets as of December 31, 2018, which was subsequently paid in the first quarter of 2019.
Cystic fibrosis franchise clawback
In November 2019, Vertex announced that it reached an agreement with the French Authorities for a national reimbursement deal for Orkambi. As a result, management expects a reduction to royalty receipts in 2020 by approximately $35.0 million to $45.0 million, to reflect a true up related to prior periods where we collected royalties on French sales of Orkambi at a higher selling price. We recognized a reduction to the current portion of Royalty assets, net - financial asset of $41.0 million as of December 31, 2019.
F-54
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. Cumulative Allowance for Changes in Expected Cash Flows from Financial Royalty Assets
The following table sets forth the activity in the cumulative allowance for changes in expected cash flows from financial royalty assets classified as financial assets during 2019, 2018, and 2017:
Activity for the year | ||||
(in thousands) | ||||
Balance at December 31, 2016 |
$ | (1,838,766 | ) | |
Increases to the Cumulative allowance for changes in expected cash flows from financial royalty assets |
(641,956 | ) | ||
Decreases to the Cumulative allowance for changes in expected cash flows from financial royalty assets |
241,291 | |||
Sale of royalty asset |
85,550 | |||
Reversal of cumulative allowance (a) |
108,013 | |||
|
|
|||
Balance at December 31, 2017 |
$ | (2,045,868 | ) | |
|
|
|||
Increases to the Cumulative allowance for changes in expected cash flows from financial royalty assets |
(284,214 | ) | ||
Decreases to the Cumulative allowance for changes in expected cash flows from financial royalty assets |
341,548 | |||
Reversal of cumulative allowance (a) |
5,637 | |||
|
|
|||
Balance at December 31, 2018 |
$ | (1,982,897 | ) | |
|
|
|||
Increases to the Cumulative allowance for changes in expected cash flows from financial royalty assets |
(322,717 | ) | ||
Decreases to the Cumulative allowance for changes in expected cash flows from financial royalty assets |
1,342,038 | |||
Reversal of cumulative allowance (a) |
95,158 | |||
|
|
|||
Balance at December 31, 2019 |
$ | (868,418 | ) | |
|
|
(a) |
Relates to amounts reversed out of the cumulative allowance at the end of a royalty assets life to bring the account balance to zero. Reversals solely impact the gross asset and cumulative allowance balances; there is no impact to the consolidated statements of comprehensive income. |
8. Intangible Royalty Assets, Net
The following are schedules of the royalty assets classified as intangible assets showing cost, accumulated amortization and net carrying value at December 31, 2019 and 2018.
(in thousands) | As of December 31, 2019 | |||||||||||
Cost |
Accumulated
amortization |
Net carrying
value |
||||||||||
DPP-IV license agreements |
$ | 606,216 | $ | 554,492 | $ | 51,724 |
(in thousands) | As of December 31, 2018 | |||||||||||
Cost |
Accumulated
amortization |
Net carrying
value |
||||||||||
DPP-IV license agreements |
$ | 606,216 | $ | 530,568 | $ | 75,648 |
The patents associated with our royalty assets classified as intangible assets terminate at various dates up to 2022. The weighted average remaining royalty duration of the royalty assets classified as intangible assets is
F-55
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2.2 years. The projected amortization charge for each of the next three years is $23.0 million in 2020, $23.0 million in 2021, and $5.7 million in 2022.
The companys revenue is tied to underlying patent protected sales of other DPP-IV products of various licensees. Such revenue from royalty assets is earned from sales occurring primarily in the US and Europe; however, we do not have the ability to disaggregate our royalty revenue from licensees based on the geography of the underlying sales, as this level of information is not always included in royalty reports provided to the Company. Individual licensees exceeding 10% or more of revenue from royalty assets accounted for 91% of our revenues from royalty assets in 2019, 73% and 14% of our revenues from royalty assets in 2018, and 49% of our revenues from royalty assets in 2017. Refer to our Concentration of credit risk policy in Note 2 for additional information.
In August 2015, Merck & Co., Inc. (Merck) sued to invalidate all of our patents covering the DPP-IV products in the United States, the United Kingdom and the Netherlands. Beginning with the third quarter of 2015, Merck withheld payment of royalties on sales of DPP-IV products sold by Merck in all countries other than Germany. In September 2016, Merck also brought suit in Germany. In December 2016, we settled the dispute with Merck and agreed that (1) Merck will pay all past due royalties, (2) Merck will be entitled to pay zero royalties for a five-quarter period ending March 2018, and (3) Merck will not challenge any of our patents or license agreements again.
During the years ended December 31, 2018 and 2017, we made payments to Merck in connection with charge-backs for over-payments of royalties received for DPP-IV product sales in prior periods. The chargebacks arose from rebates on Januvia and Janumet collected by Merck during its royalty payment holiday period that Merck subsequently deducted from our royalty-eligible net sales, which were zero during the holiday period. These rebate chargebacks invoiced throughout the holiday period were treated as bad debt expense and recorded within general and administrative expenses on the consolidated statements of comprehensive income as management had no visibility into the timing of rebate receipts or Mercks historical rebate recognition by quarter. We recorded bad debt expense for the years ended December 31, 2018 and 2017 of $1.0 million and $34.7 million, respectively.
9. Non-Consolidated Affiliates
In 2014, RPIFT entered into an agreement to invest up to $46.0 million to fund approximately 40% of the costs of a clinical trial for the use of Bosulif in first line treatment of chronic myeloids leukemia. RPIFTs investment in the entity that is funding the clinical trials, Avillion Financing I, LP (Avillion or Avillion I) was made through multiple capital calls. RPIFT met its total funding commitment of $46.0 million in December of 2016. We account for our partnership interests in the Avillion entities as equity method investments because RPIFT has the ability to exercise significant influence over the entity.
On December 19, 2017, Avillion announced that the FDA approved a supplemental New Drug Application for Pfizers BOSULIF® (bosutinib). Avillion is eligible to receive fixed payments from Pfizer based on this approval. As a result, Avillion recognized a gain on the sale of its in-process R&D intangible asset equal to the present value of a series of guaranteed fixed annual payments due from Pfizer over a 10 year period. Our portion of this non-recurring gain amounted to approximately $165.0 million in 2017. Subsequent to the asset sale, the only operations of Avillion I are the collection of cash and unwinding of discount on the series of fixed annual payments due from Pfizer. We received distributions of $14.1 million and $39.4 million from Avillion I during the year ended December 31, 2019 and 2018, respectively, in connection with Avillions receipt of the fixed annual payments due under its co-development agreement with Pfizer.
F-56
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In March 2017 RPIFT entered into an agreement to invest approximately $15.0 million to fund approximately 50% of the costs of a phase II clinical trial for the use of Merck KGaAs anti-IL 17 nanobody M1095 (the Merck asset) for the treatment of psoriasis. Similar to Avillion I, RPIFTs investment in the development of Merck KGaAs M1095 is held through its restructured A Limited Partner interests (discussed below) and 50% economic ownership in Class A ordinary shares in the entity that is funding the clinical trials, BAv Financing II, LP (Avillion II), and will be funded through multiple capital calls. In December 2019, the agreement was amended to increase RPIFTs funding commitment by an additional $4.0 million, for a total funding cap of $19.0 million.
In May 2018 RPIFT entered into an additional agreement to invest up to $105.0 million over multiple years to fund approximately 44% of the costs of Phase II and III clinical trials of Avillion II. Avillion II simultaneously entered into a co-development agreement with AstraZeneca, to advance PT-027 (the AZ asset) through a global clinical development program for the treatment of asthma in exchange for a series of deferred payments and success-based milestones. Upon entering into this agreement, Avillion II was restructured to designate existing shareholders, those who have rights associated with the Merck asset, as A Limited Partners, and the creation of B Limited Partners, with rights related to the AZ asset. RPIFT continues to hold an investment in the Merck asset, and now also owns B Limited Partner interests and 44% of the economics through the B ordinary shares related to the AZ asset.
RPIFT had $70.8 million and $93.8 million of unfunded commitments related to the Avillion entities as of December 31, 2019 and 2018, respectively. Our maximum exposure to loss at any particular reporting date is limited to the current carrying value of the investment plus the unfunded commitments.
10. Research and Development Funding Expense
Biohaven
In June 2018, RPIFT entered into a funding agreement with Biohaven Pharmaceutical Holding Company Ltd. (Biohaven), in which we agreed to provide funding of $100.0 million and to acquire $50.0 million in common stock of Biohaven at a premium in exchange for a revenue participation right in relation to the development and commercialization of Nurtec ODT (rimegepant) and vazegepant for the treatment of migraines. The $100.0 million upfront payment and the premium paid over market value in connection with the $50.0 million stock purchase were recorded as research and development funding expense on the consolidated statements of comprehensive income for the year ended December 31, 2018. In February 2020, Biohaven announced that the FDA approved Nurtec ODT (rimegepant) for the acute treatment of migraine in adults.
See Note 5 for a description of a separate investment in Biohaven that is unrelated to our R&D funding arrangement.
Immunomedics
In January 2018, RPIFT entered into a funding agreement with Immunomedics, Inc. (Immunomedics), in which RPIFT agreed to provide funding of $175.0 million and to acquire $75.0 million in common stock of Immunomedics at a premium in exchange for a revenue participation right in relation to the development and commercialization of Trodelvy (sacituzumab govitecan-hziy), an antibody drug conjugate for multiple cancer types. The $175.0 million upfront payment and the premium paid over market value in connection with the $75.0 million stock purchase were recorded as research and development funding expense on the consolidated statements of comprehensive income for the year ended December 31, 2018.
Pfizer
In January 2016, RPIFT entered into an agreement with Pfizer, under which RPIFT will fund up to $300.0 million in development costs related to certain Phase III clinical trials of Pfizers Ibrance product primarily for adjuvant
F-57
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
treatment of hormone receptor positive early breast cancer, all of which has been funded through December 31, 2019. If successful, and upon approval of Ibrance in certain geographies, RPIFT will be eligible to receive royalties on certain sales over approximately seven years, as well as a combination of fixed milestone payments of up to $250.0 million dependent upon results of the clinical trials. During the years ended December 31, 2019, 2018 and 2017, we recorded $62.8 million, $99.3 million, and $80.1 million, respectively, as research and development funding expense on the consolidated statements of comprehensive income in connection with this agreement.
As of December 31, 2018, we had a remaining commitment of $62.8 million related to the research and development funding agreement with Pfizer. We completed our funding commitments during 2019.
Sanofi
In December 2014, RPIFT entered into an agreement with Sanofi in which RPIFT agreed to fund up to 294.0 million of the total development costs incurred by Sanofi for the development of three Phase III studies, of which 264.0 million has been funded through December 31, 2019. In exchange for this funding, RPIFT obtained the right to receive royalty payments on future sales of the specified products when approved for sale in certain geographies in the future.
RPIFT records funding made to Sanofi as research and development funding expense on the consolidated statements of comprehensive income. During the years ended December 31, 2019, 2018, and 2017, we recorded $18.2 million, $6.9 million and $35.8 million, respectively, as research and development funding expense on the consolidated statements of comprehensive income in relation to this agreement.
In November 2016, Sanofis product received FDA approval. Commercial sales began in the United States in January 2017. During the years ended December 31, 2019, 2018 and 2017, we recognized royalty income of $8.7 million, $5.5 million and $3.5 million, respectively, related to this product, which is recorded in Other royalty income on the consolidated statements of comprehensive income.
As of December 31, 2019 and 2018, we had a remaining commitment of $32.5 million and $50.7 million, respectively, related to the research and development funding agreement with Sanofi.
11. Borrowings
RPIFTs borrowings at December 31, 2019 and 2018 consisted of the following:
(In thousands) | Maturity |
Spread over
LIBOR (1) |
As of December 31, | |||||||||||||
2019 | 2018 | |||||||||||||||
RPIFT Senior Secured Credit Facilities: |
||||||||||||||||
Term Loan B Facility |
||||||||||||||||
Tranche B-6 |
3/2023 | 200 bps | $ | 4,123,000 | $ | 4,267,000 | ||||||||||
Term Loan A Facility |
||||||||||||||||
Tranche A-4 |
5/2022 | 150 bps | 2,150,000 | 2,300,000 | ||||||||||||
Loan issuance costs |
(1,691 | ) | (2,284 | ) | ||||||||||||
Original issue discount |
(33,187 | ) | (45,384 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Total carrying value of senior secured debt(2) |
6,238,122 | 6,519,332 | ||||||||||||||
|
|
|
|
|||||||||||||
Less: Current portion of long-term debt |
(281,984 | ) | (281,436 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Total long-term debt |
$ | 5,956,138 | $ | 6,237,896 | ||||||||||||
|
|
|
|
F-58
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(1) |
Borrowings under RPIFTs senior secured credit facilities bear interest at a rate equal to LIBOR plus an applicable margin. |
(2) |
The carrying value of our long term debt, including the current portion, approximates its fair value. |
RPIFT Senior Secured Credit Facilities (the Credit Facility)
As of December 31, 2019 and 2018, RPIFTs Credit Facility consisted of two term loans, Term Loan A and Term Loan B. Tranche A-4 requires annual amortization of 5.9% per year and tranche B-6 requires annual amortization of 3.2% per year. Principal and interest payments are made quarterly. The Credit Facility is secured by a grant of a security interest in substantially all of RPIFTs personal property and a grant by RPCT of a security interest in RPIFTs share (80%) of all amounts on deposit in the Collection Trust Account.
In connection with our acquisition of the Tysabri royalty asset in March 2017, RPIFT issued an incremental $1.1 billion of debt under tranche B-6 of its Senior Secured Term Loan B. RPIFT also agreed to refinance $3.4 billion of its outstanding tranche B-5 to reduce its cost and extend its duration, which funded in April 2017.
In May 2017, RPIFT repaid the outstanding balance of tranche A-2 of $2.5 billion through the issuance of $2.5 billion in new senior secured debt consisting of a new term loan tranche, A-3. The May 2017 refinancing of tranche A-2 reduced the spread from 225 basis points to 175 basis points and extended the maturity by one year.
In May of 2018, RPIFT repaid the $2.4 billion outstanding balance of term loan tranche A-3 through the issuance of $2.4 billion in senior secured debt consisting of a new tranche, A-4 (the 2018 Refinancing). The 2018 Refinancing of tranche A-3 reduced the spread from 175 basis points to 150 basis points and extended the maturity by six months.
The covenants contained in the Credit Facility and measured quarterly included the following: (i) maximum total leverage ratio of 4:00 to 1:00; (ii) debt coverage ratio of greater than 3.50 to 1.00. RPIFT was in compliance with these covenants at December 31, 2019 and 2018.
New Senior Secured Credit Facilities
On February 11, 2020, in connection with the Exchange Offer Transactions (as discussed in Note 1) and using funds contributed RPI Intermediate FT and the Legacy Investors Partnerships, RPIFT repaid its outstanding debt and accrued interest, and terminated all outstanding interest rate swaps. RPI Intermediate FT, as borrower, entered into a term loan credit agreement (the Credit Agreement) with Bank of America, N.A., as administrative agent, the lenders party thereto from time to time and the other parties thereto. The new senior secured credit facilities contained in the Credit Agreement consist of a term loan A (Tranche A-1) and term loan B (Tranche B-1) in the amounts of $3.20 billion and $2.84 billion, respectively. Tranche A-1 has an interest rate of 1.50% above LIBOR and matures in February 2025. Tranche B-1 has an interest rate of 1.75% above LIBOR matures in February 2027.
The Credit Agreement contains covenants that, among other things, restrict our ability to make certain distributions, incur additional debt, engage in certain asset sales, mergers, acquisitions or similar transactions, create liens on assets, engage in certain transactions with affiliates or make investments. The Credit Agreement also contains customary events of default. We may voluntarily prepay in whole or in part the outstanding principal amounts of term loans under our Credit Agreement at any time prior to the maturity dates, with certain voluntary prepayments that may be subject to a customary prepayment premium governed by the Credit Agreement.
F-59
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Financial Covenants
The Credit Agreement contains financial covenants requiring us to maintain (i) a Consolidated Leverage Ratio at or below 4.00 to 1.00 (or at or below 4.50 to 1:00 following a Qualifying Material Acquisition) of Consolidated Funded Debt to Consolidated EBITDA (each as defined and calculated with the ratio level calculated with further adjustments as set forth in the Credit Agreement) and (ii) a Consolidated Coverage Ratio at or above 2.50 to 1.00 of Consolidated EBITDA minus Consolidated Capital Expenditures to Consolidated Charges (each as defined and calculated with further adjustments as set forth in the Credit Agreement).
Amortization of Term Loans
As of February 2020, we are required to repay the term loans under RPI Intermediate FTs new senior secured credit facilities over the next five years and thereafter as follows:
(in thousands) | Term loan amortization | |||||||||||
Year | Tranche A-1 | Tranche B-1 | Total | |||||||||
2020 |
$ | 160,000 | $ | 28,400 | $ | 188,400 | ||||||
2021 |
160,000 | 28,400 | 188,400 | |||||||||
2022 |
160,000 | 28,400 | 188,400 | |||||||||
2023 |
160,000 | 28,400 | 188,400 | |||||||||
2024 |
160,000 | 28,400 | 188,400 | |||||||||
Thereafter |
2,400,000 | 2,698,000 | 5,098,000 | |||||||||
|
|
|
|
|
|
|||||||
Total (1) |
$ | 3,200,000 | $ | 2,840,000 | $ | 6,040,000 |
(1) |
Excludes discount on long-term debt of $32.6 million and loan issuance costs of $4.1 million, which are amortized through interest expense over the life of the underlying debt obligations. |
F-60
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. Indirect Cash Flow
Adjustments to reconcile consolidated net income to net cash provided by operating activities are summarized below.
For the years ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Consolidated net income |
$ | 2,461,419 | $ | 1,517,855 | $ | 1,343,180 | ||||||
Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
||||||||||||
Provision for changes in expected cash flows from financial royalty assets |
(1,019,321 | ) | (57,334 | ) | 400,665 | |||||||
Amortization of intangible assets |
23,924 | 33,267 | 33,267 | |||||||||
Amortization of loan issuance and discount on long-term debt |
12,790 | 13,127 | 12,910 | |||||||||
Realized gain on available for sale debt securities |
| (419,481 | ) | (412,152 | ) | |||||||
Unrealized loss/(gain) on derivative contracts |
39,138 | (11,923 | ) | (16,999 | ) | |||||||
Distributions from non-consolidated affiliates |
14,059 | 39,402 | | |||||||||
Equity in loss/(earnings) of non-consolidated affiliates |
32,517 | 7,023 | (163,779 | ) | ||||||||
Unrealized (gain)/loss on equity securities |
(155,749 | ) | 13,939 | | ||||||||
Gain on sale of royalty asset |
| | (52,753 | ) | ||||||||
Other |
(2,122 | ) | (7,771 | ) | 583 | |||||||
(Increase)/decrease in operating assets: |
||||||||||||
Financial royalty assets |
(1,648,837 | ) | (1,524,816 | ) | (1,539,417 | ) | ||||||
Cash collected on financial royalty assets |
1,934,092 | 2,052,592 | 1,749,010 | |||||||||
Available for sale debt securities |
(150,000 | ) | (150,000 | ) | 150,000 | |||||||
Accrued royalty receivable |
2,471 | (27,372 | ) | 66,739 | ||||||||
Other receivables |
150,000 | 150,000 | (150,000 | ) | ||||||||
Other royalty income receivable |
7,390 | (11,099 | ) | (1,219 | ) | |||||||
Other current assets |
4,607 | (442 | ) | (2,239 | ) | |||||||
Other assets |
(45,635 | ) | | | ||||||||
Increase in operating liabilities: |
||||||||||||
Accounts payable and accrued expenses |
6,496 | 1,350 | 517 | |||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
$ | 1,667,239 | $ | 1,618,317 | $ | 1,418,313 | ||||||
|
|
|
|
|
|
13. Other Comprehensive Income / (Loss)
Comprehensive income is comprised of net income and other comprehensive income/(loss). We include unrealized gains and losses on available for sale securities and unrealized gains/(losses) on the interest rate swaps that were designated as cash flow hedges in other comprehensive income/(loss). Prior to January 1, 2018, unrealized gains and losses on available for sale equity securities were included in accumulated other comprehensive income/(loss). Beginning on January 1, 2018, unrealized gains and losses on equity securities are recognized through earnings.
F-61
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Change in accumulated other comprehensive income/(loss) by component are as follows:
(In thousands) |
Unrealized gain/(loss)
on equity securities |
Unrealized gain/(loss)
on available for sale debt securities |
Unrealized
gain/(loss) on interest rate swaps |
Total Accumulated
Other Comprehensive Income/(Loss) |
||||||||||||
Balance at December 31, 2017 |
$ | (2,863 | ) | $ | 402,502 | $ | (18,258 | ) | $ | 381,381 | ||||||
Activity for the year |
| (402,502 | ) | | (402,502 | ) | ||||||||||
Cumulative adjustment for adoption of ASU 2016-01 |
2,863 | | | 2,863 | ||||||||||||
Reclassifications |
| | 8,003 | 8,003 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at December 31, 2018 |
$ | | $ | | $ | (10,255 | ) | $ | (10,255 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Activity for the year |
| 6,159 | | 6,159 | ||||||||||||
Reclassifications |
| | 6,189 | 6,189 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at December 31, 2019 |
$ | | $ | 6,159 | $ | (4,066 | ) | $ | 2,093 | |||||||
|
|
|
|
|
|
|
|
14. Equity
As of December 31, 2019 and 2018, the Trust had 36,705,936 units outstanding.
(a) Subscriptions
The first issue of units took place on August 10, 2011. At the absolute discretion of RP Ireland, additional units may be issued at the net asset value per unit, as defined in the trust deed and in accordance with the provisions of the trust deed of the Trust.
(b) Redemptions
To the extent that there is surplus cash available, RP Ireland may, in its sole discretion, permit redemptions of units to be effected on a valuation day, as defined in the trust deed. Unitholders will be given at least ten business days notice of any valuation day upon which redemptions of units will be offered. The offer will be made to all unitholders on a pro rata basis based on the number of units held by such unitholders. Units will be redeemed at the net asset value per unit on the relevant valuation day. Subject to the foregoing, RP Ireland may refuse to accept any request for redemption of units.
(c) Distribution policy
Distributions may be made by the Trust at the sole discretion of RP Ireland. The nature of the assets acquired by Royalty Pharma is such that they provide cash flow on a quarterly, semi-annual or annual basis.
Distributions to unitholders for the years ended December 31, 2019, 2018, and 2017 totaled $739.3 million, $814.4 million, and $735.2 million, respectively.
15. Related Party Transactions
The Manager
An affiliate of RP Ireland, the Manager, is the administrator of RPIFT, and also the investment manager for Royalty Pharma Investments. The sole member of the Manager holds an indirect interest in Royalty Pharma and serves on the investment committee of the Manager.
F-62
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Historically, the Manager received Operating and Personnel Payments payable in equal quarterly installments and increasing by 5% annually on a compounded basis under the terms of its Management Agreement with Royalty Pharma and the Legacy Investors Partnerships. RP Ireland receives an annual management fee payable in advance by Royalty Pharma in equal quarterly installments under terms of the Limited Partnership Agreements of the Legacy Investors Partnerships. Operating and Personnel Payments incurred during the years ended December 31, 2019, 2018 and 2017 were $60.0 million, $57.2 million and $54.4 million, respectively, and were recognized within General and administrative expenses on the consolidated statements of comprehensive income.
In connection with the Exchange Offer Transactions (discussed in Note 1), the Manager has entered into new management agreements with RPI and the Continuing Investors Partnerships. Pursuant to the new management agreements, RPI will pay quarterly Operating and Personnel Payments in respect of operating and personnel expenses to the Manager or its affiliates equal to 6.5% of the Adjusted Cash Receipts (as defined therein) for such quarter and 0.25% of the GAAP value of our security investments, including equity securities and derivative financial instruments, as of the end of such quarter.
Royalty Distribution Payable
The Royalty distribution payable to affiliates of $31.0 million and $44.3 million recorded on the consolidated balance sheets at December 31, 2019 and 2018, respectively, represents royalty receipts due from RPCT to RPSFT in connection with its non-controlling interest. The accrual is recorded based on estimated fourth quarter royalty receipts, which are derived from estimates generated from sell-side equityresearch analyst consensus forecasts for each product, and will be collected one quarter in arrears, and is payable to RPSFT under the terms of the Collection Account Control Agreement, whereby RPCT is required to disperse royalty receipts collected to RPSFT and RPIFT in proportion to their ownership interests.
Acquisition from Epizyme Inc.
In November 2019, RPIFT made an equity investment in Epizyme Inc. of $100.0 million, with options to invest up to an additional $100.0 million in Epizyme common stock. Refer to Note 4 for additional discussion of this transaction. In connection with this transaction, Pablo Legorreta, Royalty Pharmas CEO, was appointed as a director of Epizyme, for which he will receive compensation in cash and shares, all of which will be contributed to the Manager and used to reduce costs and expenses which would otherwise be billed to the Company or its affiliates.
Acquisition from Bristol-Myers Squibb
In November 2017, a wholly owned subsidiary of the Company, RPI Acquisitions, entered into a purchase agreement with Bristol-Myers Squibb (BMS) to acquire from BMS a percentage of its future royalties on worldwide sales of Onglyza, Farxiga, and related diabetes products marketed by AstraZeneca. We agreed to make payments to BMS based on sales of the products over the eight quarters beginning with the first quarter of 2018 in exchange for a high single-digit royalty on worldwide sales of the products from 2020 through 2025. Management estimated that the total payments to BMS will be in the range of $280 million to $320 million.
On December 8, 2017, RPI Acquisitions entered into a purchase, sale and assignment agreement with a wholly owned subsidiary of BioPharma Credit PLC (LSE: BPCR, BPCR), an affiliate of the Company. BPCR is a related entity of the Company due to the sole member of the investment manager having significant influence over both entities. Under the terms of the Assignment Agreement, RPI Acquisitions assigned the benefit of 50% of the payment stream acquired from BMS to BPCR in consideration for BPCR meeting 50% of the funding obligations owed to BMS under the Purchase Agreement. Our estimated funding commitment after this
F-63
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
assignment is between $140 million to $160 million. RPI Acquisitions only retains servicing responsibilities under the Assignment Agreement. To determine whether this transfer of financial assets should be accounted for as a sale or a secured borrowing under ASC 860-10, management evaluated whether: (i) the transferred assets are legally isolated, (ii) the transferee has the right to pledge or exchange the transferred assets, and (iii) the Company has relinquished effective control of the transferred assets. As all three conditions are met, the transfer is accounted for as a sale. BPCRs assigned portion of each funding obligation and royalty payment stream will be derecognized as each contractual payment is made to or received from BMS.
Installment payments made to BMS during the year ended December 31, 2019 and 2018 totaled $171.0 million and $128.8 million, respectively, of which RPI Acquisitions funded $85.5 million and $64.4 million, respectively. Upon transfer of funds from BPCR to RPI Acquisitions to meet the quarterly funding obligation to BMS, RPI Acquisitions derecognizes 50% of the financial asset. Cash received from BPCR in respect of each funding obligation equals the carrying amount of the assigned transfer of interest. Therefore no gain or loss is recognized upon the transfer. The financial asset of $150.3 million and $64.8 million included in Financial royalty assets, net on the consolidated balance sheets as of December 31, 2019 and 2018, respectively, only represents our right to the future payment streams acquired from BMS. We will not recognize any income from the BMS royalty asset until we have completed our installment funding obligation in the first quarter of 2020.
Other transactions
During the year ended December 31, 2019, RPIFT acquired 27,210 limited partnership interests in an affiliate of, and an equity method investor in, Royalty Pharma Investments and RPIFT, whose only substantive operations are its investment in Royalty Pharma Investments. The total investment of $4.3 million is recorded as Treasury interests in the consolidated balance sheet as of December 31, 2019.
16. Commitments and Contingencies
In the ordinary course of business, we may enter into contracts or agreements that contain customary indemnifications relating to such things as confidentiality agreements and representations as to corporate existence and authority to enter into contracts. The maximum exposure under such agreements is indeterminable until a claim, if any, is made. However, no such claims have been made against Royalty Pharma to date and management believes that the likelihood of such proceedings taking place in the future is remote.
In November 2019, RPIFT agreed to pay $330.0 million to purchase Eisais royalties on future worldwide sales of Tazverik (tazemetostat), a novel targeted therapy in late-stage clinical development that was approved by the FDA in January 2020 epithelioid sarcoma and with the potential to be approved in several cancer indications. Under the terms of its agreement with Eisai, RPIFT acquired Eisais future worldwide royalties on net sales by Epizyme of Tazverik outside of Japan, for an upfront payment of $110.0 million plus up to an additional $220.0 million for the remainder of the royalty upon FDA approval of Tazverik for certain indications. The FDA approved Tazverik in January 2020 for epithelioid sarcoma, triggering our obligation to fund the next $110.0 million tranche in November 2020 and our right to the increased royalty. The remaining funding commitment of up to $110.0 million will be recognized upon resolution of the remaining associated contingency.
We have commitments to advance funds to counterparties through our contingent funding of the Second Tranche of Biohaven Preferred Shares, investments in non-consolidated affiliates, research and development arrangements, and the acquisition of an accelerated royalty from BMS. Please refer to Notes 5, 9, 10 and 15, respectively, for details of these arrangements. We also have requirements to make Operating and Personnel Payments over the life of the Management Agreement as described in Note 15, which are variable and based on projected cash receipts.
F-64
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On April 15, 2016, AbbVie Inc. and AbbVie Biotechnology Ltd. filed a complaint against MedImmune LLC seeking to invalidate U.S. Patent No. 6,248,516 (the 516 Patent). The license agreement relating to the Humira royalty asset provides that the royalty is payable until the expiration of the last to expire patent listed in the license agreement. The last to expire patent on this list was the 516 Patent, which expired in June 2018. MedImmune LLC is the owner of the 516 Patent and the successor to the party that sold the Humira royalty to Royalty Pharma. As such, MedImmune LLC had agreed to defend the 516 patent against AbbVies challenge. If AbbVie was successful in invalidating the 516 Patent, Abbvie contended that its obligation to pay royalties would end in January 2018 rather than in June 2018. In January 2017, a federal district court dismissed AbbVies claims and in February 2018 the Court of Appeals for the Federal Circuit affirmed that dismissal without prejudice. As such, AbbVie had the right to file a new action alleging new grounds for avoiding its obligation to pay royalties for the first six months of 2018. No such action was filed, and we received a royalty payment from AbbVie for the final royalty term covering January 2018 to June 2018 in the amount of $243.5 million.
We are entitled to royalties on Remicade from Janssen Biotech (Janssen) on U.S. sales of Remicade based on a U.S. Patent No. 6,284,471 (the 471 Patent), which is co-owned by Janssen and NYU Medical Center. The 471 Patent expired in September 2018. In September 2013, the United States Patent and Trademark Office (USPTO) initiated an office action to reexamine the 471 Patent and ultimately invalidated the 471 Patent for obviousness-type double patenting. In November 2016, the Patent Trial and Appeal Board affirmed the USPTOs invalidation of the 471 Patent. In August 2016, as a result of a lawsuit filed by Celltrion, a federal district court also ruled that the 471 Patent was invalid for obviousness-type double patenting. In January 2018, Janssens appeals of both of these decisions to the CAFC were denied. Janssen filed a petition for certiorari with the US Supreme Court. While the decisions in these two separate proceedings were being appealed, the 471 Patent was valid and enforceable. Management adjusted the carrying value of the Remicade royalty asset in 2015 in light of the uncertainty around the outcome of litigation and, specifically, the expectation that cash flows from this royalty would not continue after 2017. As Janssen continued to pay royalties for sales through 2018, we recorded Other royalty income as the payments were received. We received $93.7 million during the year ended December 31, 2018 related to royalties for sales in the first, second and third quarters of 2018, through the end of the royalty term.
In December 2015, Boehringer Ingelheim International GmBH (BI) notified Royalty Pharma that (a) BI had revised its interpretation of the license agreement between BI and Royalty Pharma, (b) as a result BI believed that it had overpaid royalties on sales of Tradjenta, Jentadueto and Glyxambi, the DPP-IVs, for periods prior to 2015 by 7.7 million, and (c) BI was seeking a refund in that amount. Management does not agree with BIs interpretation of the license agreement and has had extensive discussions with BI in an effort to reach an amicable settlement of this dispute. On January 21, 2019, Royalty Pharma Collection Trust filed a lawsuit in England against BI seeking recovery of 23.1 million in underpaid royalties. We intend to pursue this claim vigorously, but there can be no assurance that we will prevail in this dispute. Due to the uncertainty at this time, we have not accrued any costs related to this matter and any legal costs have been expensed as incurred.
17. Subsequent Events
Exchange Offer Transactions
Refer to additional discussion in Note 1 for details of the Exchange Offer Transactions that closed on February 11, 2020 and the anticipated U.S. Listing.
During the first quarter of 2020, we acquired a royalty on Entyvio, an approved product for the treatment of ulcerative colitis and Crohns disease, from The General Hospital Corporation in exchange for an upfront payment of $86.6 million.
F-65
ROYALTY PHARMA INVESTMENTS AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Coronavirus Outbreak
The current outbreak of the novel coronavirus, or COVID-19, 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. Given the uncertainty around the extent and timing of the potential future spread or mitigation efforts related to the current outbreak of COVID-19, the financial impact cannot be reasonably estimated at this time.
F-66
Through and including , 2020 (the 25th day after the date of this prospectus), all dealers effecting transactions in the Class A ordinary shares, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealers obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
Class A Ordinary Shares
PRELIMINARY PROSPECTUS
J.P. Morgan
Morgan Stanley
BofA Securities
Goldman Sachs & Co. LLC
Citigroup
UBS Investment Bank
Evercore ISI
Cowen
SunTrust Robinson Humphrey
BBVA
DNB Markets
Scotiabank
TD Securities
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. |
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. |
The following table sets forth the expenses payable by the registrant in connection with the issuance and distribution of the Class A ordinary shares being registered hereby. All of such expenses are estimates, other than the filing and listing fees payable to the Securities and Exchange Commission, the Financial Industry Regulatory Authority and Nasdaq.
Amount to
Be Paid |
||||
Filing FeeSecurities and Exchange Commission |
$ | 292,569 | ||
FeeFinancial Industry Regulatory Authority |
225,500 | |||
Nasdaq Listing Fee |
295,000 | |||
Fees and Expenses of Counsel |
7,000,000 | |||
Printing Expenses |
900,000 | |||
Fees and Expenses of Accountants |
1,075,000 | |||
Transfer Agent and Registrars Fees |
540,000 | |||
Miscellaneous Expenses |
33,469 | |||
|
|
|||
Total |
$ | 10,361,538 | ||
|
|
ITEM 14. |
INDEMNIFICATION OF DIRECTORS AND OFFICERS. |
We plan to enter into indemnification agreements with our directors and executive officers to indemnify them to the maximum extent allowed under applicable law. These agreements indemnify these individuals against certain costs, charges, losses, liabilities, damages and expenses incurred by such director or officer in the execution or discharge of his or her duties or the exercise of his or her powers or otherwise in relation to or in connection with his or her duties, powers or office. These agreements do not indemnify our directors against any liability attaching to such individuals in connection with any negligence, default, breach of duty or breach of trust in relation to the company of which he or she is a director, which would be rendered void under the U.K. Companies Act.
The Company also maintains directors and officers insurance to insure such persons against certain liabilities.
In the underwriting agreement, the underwriters will agree to indemnify, under certain conditions, the Company, members of the Companys board of directors, and persons who control the Company within the meaning of the Securities Act against certain liabilities.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
The indemnification rights set forth above shall not be exclusive of any other right which an indemnified person may have or hereafter acquire under any statute, provision of our Articles, agreement, vote of shareholders or disinterested directors or otherwise.
II-1
ITEM 15. |
RECENT SALES OF UNREGISTERED SECURITIES. |
The following is a description of all securities sold or issued by the predecessors to the registrant in the three years preceding the date of this registration statement. No underwriters were involved in these sales. There was no general solicitation of investors or advertising, and we did not pay or give, directly or indirectly, any commission or other remuneration, in connection with the offering of these shares.
On February 6, 2020, RPI US Partners 2019, LP and RPI International Partners 2019, LP formed Royalty Pharma Ltd., a private limited company organized under the laws of England and Wales (RP Ltd.), which issued one Class B ordinary share and one Class R redeemable share to each of RPI US Partners 2019, LP and RPI International Partners 2019, LP in exchange for a nominal capital contribution. On February 10, 2020, RP Ltd. formed Royalty Pharma Holdings Ltd. (RP Holdings), which issued one Class A ordinary share to RP Ltd. in exchange for a nominal capital contribution. In connection with consummation of the closing, each of RPI US Partners 2019, LP and RPI International Partners 2019, LP will transfer their shares of Royalty Pharma Investments 2019 ICAV to RP Holdings in exchange for the issuance by RP Holdings of 226,704,600 and 308,678,380 Class B shares (or depository receipts representing such shares), respectively, to each of RPI US Partners 2019, LP and RPI International Partners 2019, LP and one Class C ordinary share to EPA Holdings.
On March 25, 2020 RPI US Partners 2019, LP and RPI International Partners 2019, LP each subscribed for an aggregate of 24,999 Class R redeemable shares of RP Ltd. for an aggregate purchase price of £24,999. On April 22, 2020, RP Ltd. was re-registered as Royalty Pharma plc.
The offers, sales and issuances of the securities described above were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act as transactions by an issuer not involving any public offering. The recipients in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof.
ITEM 16. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
1.1** | Form of Underwriting Agreement | |
3.1 | Form of Articles of Association of Royalty Pharma plc | |
3.2 | Form of Articles of Association of Royalty Pharma Holdings Ltd. | |
4.1 | Form of Class A Ordinary Share Certificate | |
5.1 | Opinion of Davis Polk & Wardwell London LLP as to the validity of the Class A ordinary shares | |
8.1 | Opinion of Akin Gump Strauss Hauer & Feld LLP relating to tax matters | |
10.1** | Form of Management and Services Agreement, dated , 2020, among Royalty Pharma plc and RP Management, LLC | |
10.2** | Credit Agreement dated February 11, 2020 between RPI 2019 Intermediate Finance Trust, as borrower, Bank of America, N.A., as administrative agent, and certain lender parties thereto | |
10.3** | Form of Exchange Agreement | |
10.4** | Form of Registration Rights Agreement | |
10.5** | Form of Deed of Indemnity | |
10.6 | Director Appointment Agreement, dated June 9, 2020, between the Company and Mr. Germano Giuliani | |
10.7**# | Amended and Restated Purchase and Sale Agreement with the Cystic Fibrosis Foundation Therapeutics Incorporated, dated November 14, 2014 | |
10.8**# | Amendment No. 1 to the Amended and Restated Purchase and Sale Agreement, dated October 13, 2016 with the Cystic Fibrosis Foundation | |
10.9**# | Research, Development and Commercialization Agreement between the Cystic Fibrosis Foundation Therapeutics Incorporated and Vertex Pharmaceuticals Inc., dated as of May 24, 2004, as amended | |
10.10**# | Amendment No. 1 to Research, Development and Commercialization Agreement, dated January 6, 2006 by and between Vertex Pharmaceuticals Incorporated and Cystic Fibrosis Foundation Therapeutics Incorporated |
II-2
10.11** | Amendment No. 2 to Research, Development and Commercialization Agreement, dated January 1, 2006 by and between Vertex Pharmaceuticals Incorporated and Cystic Fibrosis Foundation Therapeutics Incorporated | |
10.12**# | Amendment No. 5 to Research, Development and Commercialization Agreement, dated April 1, 2011 by and between Vertex Pharmaceuticals Incorporated and Cystic Fibrosis Foundation Therapeutics Incorporated | |
10.13**# | Amendment No. 7 to Research, Development and Commercialization Agreement, dated September 1, 2016 by and between Vertex Pharmaceuticals Incorporated and Cystic Fibrosis Foundation Therapeutics Incorporated | |
10.14** | Form of Amended and Restated Management and Services Agreement, dated 2020, among Royalty Pharma Investments 2019 ICAV and RP Management, LLC | |
10.15 | Form of Independent Director Equity Incentive Plan | |
21.1** | List of subsidiaries | |
23.1 | Consent of Ernst & Young | |
23.2 | Consent of Davis Polk & Wardwell London LLP (included as part of Exhibit 5.1) | |
23.3 | Consent of Akin Gump Strauss Hauer & Feld LLP (included as part of Exhibit 8.1) | |
24.1 | Power of Attorney (included on the signature page to this registration statement) |
* |
To be filed by amendment. |
** |
Previously filed. |
|
Management contract or compensatory plan or arrangement. |
# |
Certain information has been excluded from the exhibit because it both (i) is not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed. |
ITEM 17. |
UNDERTAKINGS |
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the U.S. Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the U.S. Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the U.S. Securities Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the U.S. Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the U.S. Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the U.S. Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3
EXHIBIT INDEX
II-4
* |
To be filed by amendment. |
** |
Previously filed. |
|
Management contract or compensatory plan or arrangement. |
# |
Certain information has been excluded from the exhibit because it both (i) is not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed. |
II-5
SIGNATURES
Pursuant to the requirements of the U.S. Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York, on the day of 11th day of June 2020.
ROYALTY PHARMA PLC | ||
By: |
/s/ Pablo Legorreta |
|
Name: Pablo Legorreta | ||
Title: Chief Executive Officer |
II-6
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints George Lloyd as the other the individuals true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for the person and in his or her name, place and stead, in any and all capacities, to sign this registration statement and any or all amendments, including post-effective amendments to the registration statement, including a prospectus or an amended prospectus therein and any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the U.S. Securities Act of 1933, as amended, and all other documents in connection therewith to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact as agent or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the U.S. Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities indicated on the 11th day of June, 2020.
Signature |
Title |
|
/s/ Pablo Legorreta Pablo Legorreta |
Chairman of the Board, Director & Chief Executive Officer (Principal Executive Officer and Royalty Pharma plcs authorized representative in the United States) |
|
/s/ Terrance Coyne Terrance Coyne |
Executive Vice President & Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |
/s/ Errol De Souza Errol De Souza |
Director | |
/s/ William Ford William Ford |
Director | |
/s/ Greg Norden Greg Norden |
Director | |
/s/ M. Germano Giuliani M. Germano Giuliani |
Director | |
/s/ Rory Riggs Rory Riggs |
Director | |
/s/ Bonnie Bassler Bonnie Bassler |
Director |
II-7
Exhibit 3.1
COMPANY NUMBER: 12446913
COMPANIES ACT 2006
A PUBLIC COMPANY LIMITED BY SHARES
ARTICLES OF ASSOCIATION
of
ROYALTY PHARMA PLC
(adopted by a special resolution passed on [●] 2020)
CONTENTS
Clause | Page | |||
PRELIMINARY |
1 | |||
SHARE CAPITAL AND LIMITED LIABILITY |
6 | |||
AUTHORITY TO ALLOT SHARES AND DISAPPLICATION OF PRE-EMPTION RIGHTS |
12 | |||
VARIATION OF RIGHTS |
14 | |||
SHARES IN UNCERTIFICATED FORM |
15 | |||
SHARE CERTIFICATES |
17 | |||
LIEN |
18 | |||
CALLS ON SHARES |
19 | |||
FORFEITURE AND SURRENDER |
20 | |||
TRANSFER OF SHARES |
21 | |||
TRANSMISSION OF SHARES |
23 | |||
ALTERATION OF SHARE CAPITAL |
24 | |||
PURCHASE OF OWN SHARES |
25 | |||
GENERAL MEETINGS |
25 | |||
NOTICE OF GENERAL MEETINGS |
26 | |||
PROCEEDINGS AT GENERAL MEETINGS |
30 | |||
PROPOSED SHAREHOLDER RESOLUTIONS |
34 | |||
VOTES OF MEMBERS |
40 | |||
NOTIFICATION OF INTERESTS IN SHARES |
43 | |||
PROXIES AND CORPORATE REPRESENTATIVES |
47 | |||
NUMBER OF DIRECTORS |
51 | |||
APPOINTMENT OF DIRECTORS |
52 | |||
POWERS OF THE BOARD |
53 | |||
BORROWING POWERS |
54 | |||
CHANGE OF THE COMPANYS NAME |
54 | |||
DELEGATION OF POWERS OF THE BOARD |
54 | |||
RESIGNATION, DISQUALIFICATION AND REMOVAL OF DIRECTORS |
55 | |||
REMUNERATION AND EXPENSES OF DIRECTORS |
56 | |||
EXECUTIVE OFFICERS |
57 | |||
ALTERNATE DIRECTORS |
57 |
-i-
CONTENTS
(continued)
Clause | Page | |||
DIRECTORS INTERESTS |
59 | |||
GRATUITIES, PENSIONS AND INSURANCE |
64 | |||
PROCEEDINGS OF THE BOARD |
65 | |||
SECRETARY |
68 | |||
MINUTES |
68 | |||
THE SEAL |
68 | |||
REGISTERS |
69 | |||
DIVIDENDS |
69 | |||
CAPITALISATION OF PROFITS AND RESERVES |
74 | |||
RECORD DATES |
76 | |||
ACCOUNTS |
76 | |||
COMMUNICATIONS |
77 | |||
DESTRUCTION OF DOCUMENTS |
82 | |||
UNTRACED MEMBERS |
84 | |||
WINDING UP |
85 | |||
INDEMNITY |
86 | |||
DISPUTE RESOLUTION |
87 |
-ii-
COMPANY NUMBER: 12446913
COMPANIES ACT 2006
A PUBLIC COMPANY LIMITED BY SHARES
ARTICLES OF ASSOCIATION
of
Royalty Pharma plc
(adopted by special resolution passed on [●] 2020)
Model Articles
1 This document comprises the Articles of Association of Royalty Pharma plc (the Company) and no regulations set out in any statute or statutory instrument concerning companies (including the Companies (Model Articles) Regulation 2008 (SI 2008/3229)) shall apply as Articles of Association of the Company.
Definitions
2 In these Articles, except where the subject or context otherwise requires:
A Shares means the voting class A ordinary shares of US$[] each in the capital of the Company, identified in Article 6 and with the rights set out therein and in these Articles generally;
Act means the Companies Act 2006, including any modification or re-enactment of it for the time being in force;
address means in relation to electronic communications, any number or address (including, in the case of any Uncertificated Proxy Instruction permitted in accordance with these Articles, an identification number of a participant in the Relevant System concerned) used for the purposes of such communications;
Articles means these articles of association, as amended from time to time and Article shall be construed accordingly;
1
auditors means the auditors for the time being of the Company;
B Shares means the voting class B ordinary shares of US$[] each in the capital of the Company, identified in Article 7 and with the rights set out therein and in these Articles generally;
Board means the board of directors of the Company, as constituted from time to time;
Business Day means any day except (i) a Saturday, (ii) a Sunday, (iii) any day on which the principal office of the Company is not open for business, and (iv) any other day on which commercial banks in New York, New York or in the United Kingdom are authorised or obligated by law or executive order to close;
Certificated Share means a Share which is held in physical certificated form and references in these Articles to a Share being held in certificated form shall be construed accordingly;
clear days means, in relation to the sending of a notice, the period excluding the day on which a notice is given or deemed to be given and the day for which it is given or on which it is to take effect;
Companys website means the website, operated or controlled by the Company, which contains information about the Company in accordance with the Statutes;
default shares has the meaning given in Article 125(a);
Deferred Shares means the deferred shares in the capital of the Company identified in Article 10 and with the rights set out therein and in these Articles generally;
Depositary means any depositary, custodian or nominee approved by the Board that holds legal title to Shares for the purposes of facilitating beneficial ownership of such Shares by another individual or individuals;
Derivative Instrument has the meaning given in Article 117(a)(ii)(B);
direction notice has the meaning given in Article 125;
director means a director of the Company for the time being, and includes any person occupying the position of director, by whatever name called;
dividend means dividend or bonus;
EEA State means a state within the European Economic Area;
electronic communication has the same meaning as provided in section 15 of the Electronic Communications Act;
Electronic Communications Act means the Electronic Communications Act 2000 (as amended from time to time);
electronic form means in a form specified by section 1168(3) of the Act and otherwise complying with the provisions of that section;
2
electronic general meeting has the meaning given in Article 90;
entitled by transmission means, in relation to a Share, entitled as a consequence of the death or bankruptcy of the holder or otherwise by operation of law;
Exchange has the meaning give in Article 19;
Exchange Act means the United States Securities Exchange Act of 1934, as amended from time to time and the rules and regulations of the SEC promulgated thereunder;
Group Company has the meaning given in Article 208;
Group Company Interest has the meaning given in Article 208;
holder means, in relation to a Share, the member whose name is entered in the Register as the holder of that Share;
Interested Director has the meaning given in Article 207;
member means a member of the Company;
member default shares shall have the meaning given in Article 118;
Nasdaq means Nasdaq Global Select Market (or other similar national quotation system of the Nasdaq Stock Market);
Office means the registered office for the time being of the Company;
Operator means a person approved under the Regulations as operator of a Relevant System;
ordinary resolution has the meaning given in section 282 of the Act;
Other Interests has the meaning given in Article 117(a)(ii)(D);
paid means paid or credited as paid;
Preference Shares has the meaning given in Article 9;
public announcement means disclosure in a press release reported by Reuters, the Dow Jones News Service, Associated Press or a comparable news service of other method of public announcement as the Board may deem appropriate in the circumstances or, where applicable, in a document publicly filed by the Company with the SEC pursuant to Section 13, 14 or 15(d) of the Exchange Act;
R Shares means the redeemable ordinary shares of £1.00 each in the capital of the Company;
Register means the register of members of the Company;
Regulations means the Uncertificated Securities Regulations 2001 (SI 2001/3755) (as amended and replaced from time to time and any subordinate legislation and rules made under them for the time being in force);
Relevant Class has the meaning given in Article 35;
3
Relevant Share Capital has the meaning given in Article 136(a);
Relevant System means any computer based system, and procedures, permitted by the Regulations, which enables title in units of a security to be evidenced and transferred without a written instrument and which facilitate supplementary and incidental matters;
Retiring Directors has the meaning given in Article 169;
Rights has the meaning given in Article 17;
Rights Plan has the meaning given in Article 16;
seal means the common seal (if any) of the Company and includes any official seal (if any) kept by the Company by virtue of section 49 or 50 of the Act;
SEC means the United States Securities and Exchange Commission;
secretary means the secretary of the Company and includes a joint, assistant, deputy or temporary secretary and any other person appointed to perform the duties of the secretary of the Company;
section 793 notice has the meaning given in Article 125;
Securities Act means the United States Securities Act of 1933, as amended from time to time and the rules and regulations of the SEC promulgated thereunder;
Shareholder Associated Person has the meaning given in Article 117;
Shareholder Information means notices, documentation or information which the Company wishes or is required to communicate to members including, without limitation, annual reports and accounts, interim financial statements, summary financial statements, notices of meeting and proxy forms;
Shares means shares of any class in the capital of the Company and Share shall be construed accordingly;
Situational Conflict has the meaning given in Article 207;
special resolution has the meaning given to it in section 283 of the Act;
Statutes means the Act and every other statute (including any orders, regulations or other subordinate legislation made under them) for the time being in force concerning companies and affecting the Company (including, without limitation, the Regulations and the Electronic Communications Act);
Sterling or £ means the lawful currency of the United Kingdom;
Uncertificated Proxy Instruction means a properly authenticated dematerialised instruction, and/or other instruction or notification, which is sent by means of the Relevant System concerned and received by such participant in that system acting on behalf of the Company as the directors may prescribe, in such form and subject to such terms and conditions as may from
4
time to time be prescribed by the directors (subject always to the facilities and requirements of the Relevant System concerned);
Uncertificated Share means in relation to any Share or other security of the Company, that title to it is evidenced and may be transferred by means of a Relevant System;
United Kingdom means Great Britain and Northern Ireland;
US Dollars or $ means the lawful currency of the United States of America;
Voting Agreement has the meaning given in Article 117(a)(ii)(C);
Voting Commitment has the meaning given in Article 117(A)(i);
Voting Shares means the A Shares and B Shares; and
website communication means the publication of a notice or other Shareholder Information on the Companys website in accordance with Part 4 of Schedule 5 to the Act.
Construction
3 References to a document or information being sent, supplied or given to or by a person mean such document or information, or a copy of such document or information, being sent, supplied, given, delivered, issued or made available to or by, or served on or by, or deposited with or by that person by any method authorised by these Articles, and sending, supplying and giving shall be construed accordingly.
References to outstanding Shares in the Company shall not include Shares held by the Company in treasury.
References to electronic platforms include, without limitation, website addresses and conference call systems, and references to persons attending meetings by electronic means means attendance at electronic general meetings via the electronic platform(s) stated in the notice of such meeting.
References to writing mean the representation or reproduction of words, symbols or other information in a visible form by any method or combination of methods, whether in electronic form or otherwise, and written shall be construed accordingly.
Words denoting the singular number include the plural number and vice versa, words denoting the masculine gender include the feminine gender and vice versa, and words denoting persons include bodies corporate (wherever resident or domiciled) and unincorporated bodies of persons.
Words or expressions contained in these Articles which are not defined in Article 2 but are defined in the Statutes have the same meaning as in the Statutes (but excluding any modification of the Statutes not in force at the date these Articles took effect) unless inconsistent with the subject or context.
Subject to the preceding two paragraphs, references to any provision of any enactment or of any subordinate legislation (as defined by section 21(1) of the Interpretation Act 1978) include any modification or re-enactment of that provision for the time being in force.
5
Any words following the terms including, include, in particular or any similar expression shall be construed as illustrative and shall not limit the sense of the words, description, definition , phrase or term preceding those terms.
References to other and otherwise shall not be construed ejusdem generis where a wider construction is possible.
A reference in these Articles to a holder or holder(s) of any class of Shares, as the case may be, shall in each case, be deemed to exclude the Company in relation to any Shares in treasury.
Headings are inserted for convenience only and do not affect the construction of these Articles.
In these Articles, (a) powers of delegation shall not be restrictively construed but the widest interpretation shall be given to them; (b) the word Board in the context of the exercise of any power contained in these Articles includes any committee consisting of one or more directors, any director, any other officer of the Company and any local or divisional board, manager or agent of the Company to which or, as the case may be, to whom the power in question has been delegated; and (c) except where expressly provided by the terms of delegation, the delegation of a power shall not exclude the concurrent exercise of that power by any other body or person who is for the time being authorised to exercise it under these Articles or under another delegation of the power.
SHARE CAPITAL AND LIMITED LIABILITY
Limited Liability
4 The liability of the members is limited to the amount, if any, unpaid on the Shares held by them.
Share Capital
5 |
Except as otherwise provided in these Articles, the A Shares, the B Shares, the R Shares, the Deferred Shares and any class of Preferred Shares issued by the Company shall each constitute a separate class of Shares. |
6 The A Shares shall carry the following rights:
(a) |
The A Shares are voting Shares and shall be issued with one (1) vote attached to each A Share for voting purposes in respect of all matters on which Voting Shares in the capital of the Company have voting rights and shall form a single class with the other Voting Shares in the capital of the Company for such purposes. |
(b) |
The A Shares shall have the right to receive pro rata (on a per share basis) and on a pari passu basis any dividends approved from time to time by the Board. |
(c) |
On a return of capital on a winding-up (excluding any reorganisation of the Companys assets and liabilities on an intra-group and solvent basis) each A Share shall be paid an amount equal to a proportionate share of their respective interests in the assets of the Company remaining for distribution to the holders of the A Shares, subject to the provisions of Articles 7(c) and 10(c) below. |
7 The B Shares shall carry the following rights:
6
(a) |
The B Shares are voting Shares and shall be issued with one (1) vote attached to each B Share for voting purposes in respect of all matters on which Voting Shares in the capital of the Company have voting rights and shall form a single class with the other Voting Shares in the capital of the Company for such purposes. |
(b) |
The B Shares shall confer no rights to participate in the profits of the Company and shall have no right to receive any dividends approved from time to time by the Board. |
(c) |
On a return of capital on a winding-up (excluding any reorganisation of the Companys assets and liabilities on an intra-group and solvent basis), there shall be paid to the holders of B Shares, the nominal capital paid up or credited as paid up on such B Shares after first paying to the holders of the A Shares (i) the nominal capital paid up or credited as paid up on all A Shares held by them, together with (ii) the sum of US$10,000,000 on each A Share. |
(d) |
Each B Share will be re-designated as a Deferred Share by the Company in accordance with the provisions of Article 12 below. |
8 The R Shares shall carry the following rights:
(a) |
The R Shares are non-voting Shares. The holders of R Shares shall not be entitled in their capacity as holders of R Shares to receive notice of any general meeting of the Company or to attend, speak or vote at any such meeting. |
(b) |
The R Shares shall confer no rights to participate in the profits of the Company and shall have no right to receive any dividends approved from time to time by the Board. |
(c) |
The R Shares shall confer no right to participate in any return of capital on a winding-up (excluding any reorganisation of the Companys assets and liabilities on an intra-group and solvent basis). |
(d) |
The R Shares may be immediately redeemed in cash by the Company at any time and from time to time on prior written notice from the Board to the holder of the R Shares. |
9 The Company may issue preference shares (Preference Shares), which Preference Shares shall be denominated in US Dollars with a nominal value to be determined by the Board. Preference Shares may be issued in one or more classes or series with or without voting rights attached to them, with the Board to determine the existence of such voting rights and, if any, the ranking of such voting rights in relation to the other Shares in the capital of the Company. The Board may determine any other terms and conditions of any class of Preference Shares, including with regards to their rights (i) to receive dividends (which may include, without limitation, the right to receive preferential or cumulative dividends), (ii) to distributions made by the Company on a winding up; and (iii) to be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of shares, at such prices or prices or at such rates of exchange and with such adjustments as may be determined by the Board. Preference Shares may be issued as redeemable shares, at the option of the Board.
10 The Deferred Shares shall carry the following rights:
(a) |
The Deferred Shares are non-voting Shares. The holders of Deferred Shares shall not |
7
be entitled in their capacity as holders of Deferred Shares to receive notice of any general meeting of the Company or to attend, speak or vote at any such meeting. |
(b) |
The Deferred Shares shall confer no rights to participate in the profits of the Company and shall have no right to receive any dividends approved from time to time by the Board. |
(c) |
On a return of capital on a winding-up (excluding any reorganisation of the Companys assets and liabilities on an intra-group and solvent basis), but not otherwise, there shall be paid to the holders of Deferred Shares, the nominal capital paid up or credited as paid up on such Deferred Shares after first paying (A) to the holders of the A Shares (i) the nominal capital paid up or credited as paid up on all A Shares held by them, together with (ii) the sum of US$10,000,000 on each A Share, and (B) to the holders of the B Shares the nominal capital paid up or credited as paid up on all B Shares held by them. |
(d) |
No share certificates shall be issued in respect of the Deferred Shares. |
(e) |
The Deferred Shares shall not be transferable except with the written consent of the Board except that the Company may at any time (and from time to time), subject to the provisions of the Act, without obtaining the sanction of the holder or holders of the Deferred Shares: |
(i) |
appoint any person to execute on behalf of any holder of Deferred Shares a transfer of all of the Deferred Shares or any part thereof (and/or an agreement to transfer the same) to the Company or to such person as the Board may determine (whether or not an officer of the Company) and/or purchase the same in accordance with the provisions of the Act, in any case for not more than the aggregate amount of one (1) U.S. Dollar cent for all the Deferred Shares then being transferred; and |
(ii) |
cancel all or any of the Deferred Shares so acquired by the Company in accordance with the Act. |
(f) |
The Company may from time to time create, allot and issue further shares, with or without voting rights, whether ranking pari passu with or in priority to the Deferred Shares and any creation, allotment or issue of such further shares (whether or not ranking in any respect in priority to the Deferred Shares) shall be treated as being in accordance with the rights attaching to the Deferred Shares and shall not involve a variation of such rights for any purpose or require the consent of the holders of the Deferred Shares. No reduction in capital by the Company of the capital paid up on the Deferred Shares shall constitute a variation of such rights for any purpose and the Company shall be authorised at any time to reduce its capital (in accordance with the Act) without obtaining the consent of the holders of Deferred Shares. Without prejudice to the foregoing, the Company is authorised to reduce (or purchase shares in) its capital of any class or classes and such reduction (or purchase) shall not involve a variation of rights attaching to the Deferred Shares for any purpose or require the consent of the holders of the Deferred Shares. No amendment to, or replacement of, the articles of association of the Company shall constitute a variation of rights attaching to the Deferred Shares for any purposes. To the extent that there is any conflict between the |
8
provisions of this Article 10(f) and any other provision of these Articles, the provisions of this Article 10(f) shall prevail. |
Shares with special rights
11 Subject to the provisions of the Statutes, and without prejudice to any rights attached to any existing Shares or class of Shares, any Share may be issued with such preferred, deferred or other special rights or subject to such restrictions (whether in regard to dividends, return of capital, voting or otherwise) as the Company may by ordinary resolution determine or, subject to and in the absence of such determination, as the Board shall determine.
Redesignation of Class B Shares
12 Conditional upon (a) receipt of a written notice from a holder of B Shares, received and completed in accordance with an agreement entered into between, amongst others, the holder of the relevant B Shares and the Company; and (b) transfer to the Company of class B ordinary shares, or depositary receipts representing such shares, in the capital of Royalty Pharma Holdings Ltd. in consideration for the issuance of A Shares, the number of B Shares specified in such notification shall be redesignated as Deferred Shares upon issuance of such A Shares.
Uncertificated Shares
13 Subject to the provisions of the Regulations, and without prejudice to any powers which the Company or the Board may have to issue, allot, dispose of, convert or otherwise deal with or make arrangements in relation to Shares and other securities in any form:
(a) |
the Board may permit the holding of Shares in any class in uncertificated form; |
(b) |
the Company may issue Shares in uncertificated form; |
(c) |
Shares may be converted from certificated form to uncertificated form and vice versa; and |
(d) |
title to Shares in any class may be transferred by means of a Relevant System. |
No separate class of Shares
14 Shares that fall within a certain class shall not form a separate class of Shares from other Shares in that class because any Share in that class is held in uncertificated form.
Exercise of Companys entitlements in respect of Uncertificated Shares
15 Where the Company is entitled under any provision of the Statutes or these Articles to sell, transfer or otherwise dispose of, forfeit, re-allot, accept the surrender of, or otherwise enforce a lien over, a Share held in uncertificated form, the Company shall be entitled, subject to the provisions of the Statutes and these Articles and the facilities and requirements of the Relevant System:
(a) |
to require the holder of that Uncertificated Share by notice to change that Share into certificated form within the period specified in the notice and to hold that Share in certificated form so long as required by the Company; |
9
(b) |
to require the holder of that Uncertificated Share by notice to give any instructions necessary to transfer title to that Share by means of the Relevant System within the period specified in the notice; |
(c) |
to require the holder of that Uncertificated Share by notice to appoint any person to take any step, including without limitation the giving of any instructions by means of the Relevant System, necessary to transfer that Share within the period specified in the notice and such steps shall be as effective as if they had been taken by the registered holder of that Share; and |
(d) |
to take any action that the Board considers appropriate to achieve the sale, transfer, disposal, forfeiture, re-allotment or surrender of that Share, or otherwise to enforce a lien in respect of that Share. |
Rights Plan
16 Subject to the provisions of the Statutes, the Board may exercise any power of the Company to establish a shareholder rights plan (a Rights Plan), including the execution of any document relating to the adoption and/or implementation (or both) of the Rights Plan. The Rights Plan may be in such form as the Board shall in its absolute discretion decide and may in particular (but without restriction or limitation) include such terms as are described in the Summary of Example Terms in the form appearing in the Appendix to these Articles.
17 Subject to the provisions of the Statutes, the Board may exercise any power of the Company to grant rights to subscribe for Shares of the Company and/or to acquire Shares of the Company, in accordance with the Rights Plan (the Rights).
18 The purposes for which the Board shall be entitled to establish the Rights Plan and to grant Rights in accordance therewith, as provided in Articles 16 and 17, shall include (without limitation) the following where, in the opinion of the majority of the Board present at a duly convened meeting, acting in good faith and on such grounds as the Board shall consider reasonable, irrespective of whether such grounds would be considered reasonable by any other party with or without the benefit of hindsight, to do so would improve the likelihood that:
(a) |
any process which may result in an acquisition or change of Control of the Company is conducted in an orderly manner; |
(b) |
all members of the Company will be treated equally and fairly and in a similar manner; |
(c) |
an optimum price for A Shares would be received by or on behalf of all holders thereof; |
(d) |
the success of the Company would be promoted for the benefit of its members as a whole, having regard to the matters in section 172 of the Act; |
(e) |
the long term interests of the Company, its employees, its members and its business would be safeguarded; |
(f) |
the Company would not suffer serious economic harm; or |
(g) |
the Board would have additional time to gather relevant information or pursue appropriate strategies, |
10
or all or any of the above.
19 Subject to the provisions of the Statutes, the Board may determine not to redeem the Rights and accordingly exercise any power of the Company to:
(a) |
allot Shares of the Company pursuant to the exercise of the Rights; or |
(b) |
exchange or cause to be exchanged all or part of the Rights, |
in each case other than the Rights of an Acquiring Person, for Shares (an Exchange) in each case in accordance with the Rights Plan. The purposes for which the Board shall be entitled not to redeem the Rights, and accordingly to exercise any power of the Company to allot Shares or effect an Exchange, shall include (without limitation) the following where, in the opinion of the majority of the Board members present at a duly convened meeting, acting in good faith and on such grounds as the Board shall consider reasonable, irrespective of whether such grounds would be considered reasonable by any other party with or without the benefit of hindsight, not to redeem the Rights and accordingly to exercise any power of the Company to effect an Exchange or to allot Shares, would improve the likelihood that:
(i) |
the use of abusive tactics by any person in connection with any potential acquisition or change of Control of the Company would be prevented; |
(ii) |
any potential acquisition or change of Control of the Company which would be unlikely to treat all members of the Company equally and fairly and in a similar manner would be prevented; |
(iii) |
any potential acquisition or change of Control of the Company at a price which would undervalue the Company or its Shares would be prevented; |
(iv) |
any potential acquisition or change of Control of the Company which would not be likely to promote the success of the Company for the benefit of its members as a whole, having regard to the matters in section 172 of the Act, would be prevented; |
(v) |
the long term interests of the Company and/or its members, its employees and its business would be safeguarded; or |
(vi) |
the Company would not suffer serious economic harm, |
or all or any of the above.
20 For the purposes of Articles 16 to 19:
(a) |
a person shall be treated as entitled to acquire anything which he is entitled to acquire at a future date, or will at a future date be entitled to acquire, irrespective of whether such future acquisition is contingent upon satisfaction of any conditions precedent; |
(b) |
there shall be attributed to any person (other than a Depositary) any rights or powers of a nominee of him, that is to say, any rights or powers which another person possesses on his behalf or may be required to exercise on his direction or behalf (including rights or powers of a nominee possessed or exercisable by the nominee on behalf of such person); |
11
(c) |
Acquiring Person means a person having Control of the Company; |
(d) |
beneficial ownership of any person or group of affiliated or associated persons shall have the meaning given to such term under the US federal securities laws, including the Exchange Act, and shall mean the notional securities underlying any derivatives contract held by the person or group in question (whether to be settled in cash, Shares or others); |
(e) |
Control means that a person, alone or with (I) a group of affiliated or associated persons, (II) anyone with whom he is acting in concert, or (III) both, exercises, or is able to exercise or is entitled to acquire, the direct or indirect power to direct or cause the direction of the management and policies of the Company, whether through the ownership of voting securities, by contract or otherwise, and in particular, but without prejudice to the generality of the preceding words, if he, alone or with (x) a group of affiliated or associated persons, (y) anyone with whom he is acting in concert, or (z) both, possesses or is entitled to acquire: |
(i) |
beneficial ownership of fifteen (15) per cent. or more of the voting rights attributable to the capital of the Company which are exercisable at a general meeting of the Company; |
(ii) |
such percentage of the issued share capital of the Company as would, if the whole of the income or assets of the Company were in fact distributed among the members (without regard to any rights which he or any other person has as a loan creditor), entitle him to receive fifteen (15) per cent. or more of the income or assets so distributed; or |
(iii) |
such rights as would, in the event of the winding-up of the Company or in any other circumstances, entitle him to receive fifteen (15) per cent. or more of the assets of the Company which would then be available for distribution among the members; |
(f) |
group of affiliated or associated persons shall have the meaning given to such terms under the Exchange Act; and |
(g) |
person means, without limitation, any individual, firm, body corporate, unincorporated association, government, state or agency of state, association, joint venture or partnership, in each case whether or not having a separate legal personality provided that any reference to a person shall not include a person providing depositary or clearance services or a nominee of such person. |
AUTHORITY TO ALLOT SHARES AND DISAPPLICATION OF PRE-EMPTION RIGHTS
Power to allot Shares
21 The Board has general and unconditional authority to exercise all the powers of the Company to allot Shares in the Company or to grant rights to subscribe for or to convert any security into Shares in the Company up to an aggregate nominal amount equal to the section 551 amount, for each prescribed 551 period.
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Disapplication of pre-emption rights
22 The Board is empowered for each prescribed 561 period to allot equity securities for cash pursuant to the authority conferred by Article 21 as if section 561 of the Act did not apply to any such allotment, provided that its power shall be limited to the allotment of equity securities up to an aggregate nominal amount equal to the section 561 amount.
This Article 22 applies in relation to a sale of Shares which is an allotment of equity securities by virtue of section 560(3) of the Act as if in this Article 22 the words pursuant to the authority conferred by Article 21 were omitted.
Offer or agreement to allot
23 The Company may make an offer or agreement which would or might require Shares to be allotted, or rights to subscribe for or convert any security into Shares to be granted, after an authority given pursuant to Article 21 or a power given pursuant to Article 22 has expired. The Board may allot Shares, or grant rights to subscribe for or convert any security into Shares, in pursuance of that offer or agreement as if the authority or power pursuant to which that offer or agreement was made had not expired.
Interpretation
24 In this Article 24 and Articles 21, 22 and 23:
prescribed 551 period means any period for which the authority conferred by Article 21 is given by ordinary or special resolution stating the section 551 amount (which may be the same as the prescribed 561 period);
prescribed 561 period means any period for which the power conferred by Article 22 is given by special resolution stating the section 561 amount (which may be the same as the prescribed 551 period);
section 551 amount means, for any prescribed 551 period, the amount stated as such in the relevant resolution; and
section 561 amount means, for any prescribed 561 period, the amount stated as such in the relevant special resolution.
25 Subject to the provisions of the Statutes relating to authority, pre-emption rights or otherwise and of any resolution of the Company in general meeting passed pursuant to those provisions, and, in the case of redeemable Shares, the provisions of Article 26, all Shares for the time being in the share capital of the Company (whether forming part of the original or any increased capital) and all (if any) Shares in the Company lawfully held by or on behalf of it shall be at the disposal of the Board which may reclassify, allot (with or without conferring a right of renunciation), grant options over, or otherwise dispose of them to such persons, on such terms and conditions and at such times as it thinks fit.
26 Subject to the provisions of the Statutes, and without prejudice to any rights attached to any existing Shares or class of Shares, Shares may be issued which are to be redeemed or are to be liable to be redeemed at the option of the Company or the holder. The Board may
13
determine the terms, conditions and manner of redemption of Shares, provided that it does so before the Shares are allotted.
Commissions
27 The Company may exercise all powers of paying commissions or brokerage conferred or permitted by the Statutes. Subject to the provisions of the Statutes, any such commission or brokerage may be satisfied by the payment of cash or by the allotment of fully or partly paid Shares or partly in one way and partly in the other and may be in respect of a conditional or an absolute subscription.
Trusts not recognised
28 Except as required by law, the Company shall recognise no person as holding any Share on any trust and (except as otherwise provided by these Articles or by law) the Company shall not be bound by or required in any way to recognise any interest in any Share (or in any fractional part of a Share) except the holders absolute right to the entirety of the Share (or fractional part of the Share).
Method of varying rights
29 Subject to the provisions of the Statutes, if at any time the share capital of the Company is divided into different classes of Shares, all or any of the rights attached to any existing class may (unless otherwise provided by the terms of allotment of the Shares of that class) be varied or abrogated, whether or not the Company is being wound up:
(a) |
in such manner (if any) as may be provided by those rights; |
(b) |
with the written consent of the holders of three-quarters in nominal value of the issued Shares of the class (excluding any Shares of that class held as treasury shares), which consent shall be in hard copy form or in electronic form sent to such address (if any) for the time being specified by or on behalf of the Company for that purpose, or in the absence of such specification to the Office, and may consist of several documents, each executed or authenticated in such manner as the Board may approve by or on behalf of one or more holders, or a combination of both; or |
(c) |
with the sanction of a special resolution passed at a separate general meeting of the holders of the Shares of the class, |
but not otherwise.
30 Where there are two (2) or more classes of Shares, every decision by general meeting shall be subject to a separate vote by each class of shareholders whose class rights are affected thereby.
When rights are deemed to be varied
31 For the purposes of Article 29, if at any time the share capital of the Company is divided into different classes of Shares, unless otherwise expressly provided by the rights attached to
14
any Share or class of Shares, those rights shall be deemed to be varied, save in respect of the Deferred Shares, by:
(a) |
the reduction of the capital paid up on that Share or class of Shares otherwise than by a purchase or redemption by the Company of its own Shares; and |
(b) |
except as a result of the exercise by the Board of any power permitting the allotment of Class A Shares or Class B Shares, the allotment of another Share ranking in priority for payment of a dividend or in respect of capital or which confers on its holder voting rights more favourable than those conferred by that Share or class of Shares, |
but shall not be deemed to be varied by:
(a) |
the creation or issue of another Share ranking equally with, or subsequent to, that Share or class of Shares; |
(b) |
the purchase or redemption by the Company of its own Shares or the holding of such Shares as treasury shares in accordance with the provisions of the Statutes; |
(c) |
the sale of any Shares held as treasury shares in accordance with the provisions of the Statutes; or |
(d) |
the Company permitting, in accordance with the Regulations, the holding of and transfer of title to Shares of that or any other class in uncertificated form by means of a Relevant System; and |
(e) |
the capitalisation of any sum standing to the credit of any reserve or fund of the Company to allot and issue Deferred Shares pursuant to any authority granted to the Board prior to the adoption of these Articles. |
32 Subject to the terms on which any Shares may be issued, the rights or privileges attached to any class of Shares shall be deemed not to be varied or abrogated by the creation or issue of any new Shares ranking pari passu in substantially all respects (save as to the date from which such new Shares shall rank for dividend) with or subsequent to any Shares already issued or by any purchase by the Company of its own Shares.
Power to use a Relevant System
33 The directors shall have power to implement such arrangements as they may, in their absolute discretion, deem fit in order for any class of Shares to be a participating security (subject always to the Regulations and the facilities and requirements of the Relevant System concerned). Where they do so, Articles 34 and 35 shall come into effect immediately prior to the time at which the Operator of the Relevant System concerned permits the class of Shares concerned to be a participating security.
Effect of the Regulations
34 In relation to any class of Shares which is, for the time being, a participating security, and for so long as such class remains a participating security, no provision of these Articles shall apply or have effect to the extent that it is in any respect inconsistent with:
(a) |
the holding of Shares of that class in uncertificated form; |
(b) |
the transfer of title to Shares of the class by means of a Relevant System; or |
15
(c) |
the Regulations, |
and, without prejudice to the generality of this Article 34, no provision of these Articles shall apply or have effect to the extent that it is in any respect inconsistent with the maintenance, keeping or entering by the Operator, so long as that is permitted or required by the Regulations, of an Operator register of securities in respect of Shares of that class in uncertificated form.
35 Without prejudice to the generality of Article 34 and notwithstanding anything contained in these Articles where any class of Shares is, for the time being, a participating security (such class being referred to in these Articles as the Relevant Class):
(a) |
Shares of the Relevant Class may be issued in uncertificated form in accordance with and subject as provided in the Regulations; |
(b) |
unless the Board otherwise determines, Shares of the Relevant Class held by the same holder or joint holder in certificated form and uncertificated form shall be treated as separate holdings; |
(c) |
Shares of the Relevant Class may be changed from uncertificated to certificated form, and from certificated to uncertificated form, in accordance with and subject as provided in the Regulations; |
(d) |
title to Shares of the Relevant Class which are recorded on the Register as being held in uncertificated form may be transferred by means of the Relevant System concerned and accordingly (and in particular) Article 61 shall not apply in respect of such Shares to the extent that those Articles require or contemplate the effecting of a transfer by an instrument in writing and the production of a certificate for the Share to be transferred; |
(e) |
the Company shall comply with the provisions of Regulations 25 and 26 in relation to the Relevant Class; |
(f) |
the provisions of these Articles with respect to meetings of or including holders of the Relevant Class, including notices of such meetings, shall have effect subject to the provisions of Regulation 41; and |
(g) |
Articles 38 to 42 shall not apply so as to require the Company to issue a certificate to any person holding Shares of the Relevant Class in uncertificated form. |
Disposal, forfeiture and surrender of Uncertificated Shares
36 If, under these Articles or the Statutes, the Company is entitled to sell, transfer or otherwise dispose of, forfeit, re-allot, accept the surrender of or otherwise enforce a lien over an Uncertificated Share then, subject to these Articles and the Statutes, such entitlement shall include the right of the Board to:
(a) |
require the holder of the Uncertificated Share by notice in writing to change that Share from uncertificated to certificated form within such period as may be specified in the notice and keep it as a Certificated Share for so long as the Board requires; |
(b) |
appoint any person to take such other steps, by instruction given by means of a Relevant System or otherwise, in the name of the holder of such Share as may be required to |
16
effect the transfer of such Share and such steps shall be effective as if they had been taken by the registered holder of that Share; and |
(c) |
take such other action that the Board considers appropriate to achieve the sale, transfer, disposal, forfeiture, re-allotment or surrender of that Share or otherwise enforce a lien in respect of that Share. |
Register of Uncertificated Securities
37 The Company shall be entitled to assume that the entries of any record of securities maintained by it in accordance with the Regulations and regularly reconciled with the relevant register of securities held by the Operator are a complete and accurate reproduction of the particulars entered into the register of securities held by the Operator and shall accordingly not be liable in respect of any act or thing done or omitted to be done by or on behalf of the Company in reliance upon such assumption, and, in particular, any provision of these Articles which requires or envisages that action will be taken in reliance on information contained in the Register shall be construed to permit that action to be taken in reliance on information contained in any relevant register of securities (as so maintained and reconciled).
Members right to certificates
38 Subject to these Articles and the provisions of the Regulations, every member (except a person in respect of whom the Company is not by law required to complete and have ready for delivery a certificate), on becoming the holder of a Share shall be entitled, except as provided by the Statutes, without payment, to have issued to him within two months after allotment or lodgement of a transfer (unless the terms of the issue of Shares provide otherwise) to one certificate for all the Certificated Shares of each class held by him (and, on transferring a part of his holding of Certificated Shares of any class, to a certificate for the balance of his holding of Certificated Shares). Each member may elect to receive one or more additional certificates for any of his Certificated Shares if he pays a reasonable sum determined from time to time by the Board for every certificate after the first.
39 Every certificate shall:
(a) |
be executed by the Company in such manner as the Board, having regard to the Statutes, may approve; and |
(b) |
specify the number, class and distinguishing numbers (if any) of the Shares to which it relates and the nominal value of and the amount or respective amounts paid up on the Shares. |
40 The Board may by resolution decide, either generally or in particular case or cases, that any signatures on any certificates for Shares or any other form of security issued at any time by the Company need not be autographic but may be applied to the certificates by some mechanical means or may be printed on them or that the certificates need not be signed by any person.
41 The Company shall not be bound to issue more than one certificate for Certificated Shares held jointly by more than one person and delivery of a certificate to one joint holder
17
shall be a sufficient delivery to all of them and seniority shall be determined in accordance with Article 122. Shares of different classes may not be included in the same certificate.
Replacement Certificates
42 If a share certificate is defaced, worn out, lost or destroyed, it may be renewed on such terms (if any) as to evidence and indemnity and payment of any exceptional out-of-pocket expenses reasonably incurred by the Company in investigating evidence and preparing the requisite form of indemnity as the Board may determine but otherwise free of charge, and (in the case of defacement or wearing out) on delivery up of the old certificate to the Company.
Company to have a lien on Shares
43 The Company shall have a first and paramount lien on every Share (not being a fully paid Share) for all monies payable to the Company (whether presently or not) in respect of that Share. The Board may at any time (generally or in a particular case) waive any lien or declare any Share to be wholly or in part exempt from the provisions of this Article 43. The Companys lien on a Share shall extend to any amount (including, without limitation, dividends) payable in respect of it.
Enforcement by sale
44 The Company may sell, in such manner as the Board determines, any Share on which the Company has a lien if a sum in respect of which the lien exists is presently payable and is not paid within fourteen (14) clear days after notice in writing has been sent to the holder of the Share in question, or to the person entitled to it by transmission, demanding payment of the sum presently payable and stating that if the notice is not complied with the Share may be sold.
Giving effect to sale
45 To give effect to any such sale, the Board may, if the Share is a Certificated Share, authorise such person as it directs to execute an instrument of transfer in respect of the Share sold to, or in accordance with the directions of, the buyer. If the Share is an Uncertificated Share, the Board may, to enable the Company to deal with the Share in accordance with the provisions of this Article 45, exercise any of the powers of the Company under Article 15 to effect the sale of the Share to, or in accordance with the directions of, the buyer. The buyer shall not be bound to see to the application of the purchase money and his title to the Share shall not be affected by any irregularity in or invalidity of the proceedings in relation to the sale.
Application of proceeds
46 The net proceeds of the sale, after payment of the costs, shall be applied in or towards payment or satisfaction of so much of the sum in respect of which the lien exists as is presently payable. Any residue shall (if the Share sold is a Certificated Share, on surrender to the Company for cancellation of the certificate in respect of the Share sold and, whether the Share sold is a Certificated Share or an Uncertificated Share, subject to a like lien for any monies not presently payable as existed on the Share before the sale) be paid to the person entitled to the Share at the date of the sale.
18
Power to make calls
47 Subject to the terms of allotment of any Shares, the Board may from time to time make calls on the members in respect of any monies unpaid on their Shares (whether in respect of nominal value or premium). Each member shall (subject to receiving at least fourteen (14) clear days notice specifying when and where payment is to be made) pay to the Company the amount called on his Shares as required by the notice. A call may be required to be paid by instalments. A call may, before receipt by the Company of an amount due under it, be revoked in whole or part and the time fixed for payment of a call may be postponed in whole or part as the Board may determine. A person on whom a call is made shall remain liable for calls made on him even if the Shares in respect of which the call was made are subsequently transferred.
Time when call made
48 A call shall be deemed to have been made at the time when the resolution of the Board authorising the call was passed.
Liability of joint holders
49 The joint holders of a Share shall be jointly and severally liable to pay all calls in respect of it.
Interest payable
50 If a call or any instalment of a call remains unpaid in whole or in part after it has become due and payable the person from whom it is due and payable shall pay interest on the amount unpaid from the day it became due and payable until it is actually paid. Interest shall be paid at the rate fixed by the terms of allotment of the Share or in the notice of the call or, if no rate is fixed, the rate determined by the Board, not exceeding fifteen (15) per cent per annum, or, if higher, the appropriate rate (as defined in the Act), but the Board may in respect of any individual member waive payment of such interest wholly or in part. No dividend or other payment or distribution in respect of any such Share shall be paid or distributed and no other rights which would otherwise normally be exercisable in accordance with these Articles may be exercised by a holder of any such Share so long as any such sum or any interest or expenses payable in accordance with this Article 50 in relation thereto remains due.
Deemed calls
51 An amount payable in respect of a Share on allotment or at any fixed date, whether in respect of nominal value or premium or as an instalment of a call, shall be deemed to be a call duly made and notified and payable on the date so fixed or in accordance with the terms of the allotment. If it is not paid, the provisions of these Articles shall apply as if that amount had become due and payable by virtue of a call duly made and notified.
Differentiation on calls
52 Subject to the terms of allotment, the Board may make arrangements on the issue of Shares for a difference between the allottees or holders in the amounts and times of payment of calls on their Shares.
19
Payment of calls in advance
53 The Board may, if it thinks fit, receive from any member all or any part of the monies uncalled and unpaid on any Share held by him. Such payment in advance of calls shall extinguish the liability on the Share in respect of which it is made to the extent of the payment. The Company may pay on all or any of the monies so advanced (until they would but for such advance become presently payable) interest at such rate agreed between the Board and the member not exceeding (unless the Company by ordinary resolution otherwise directs) fifteen (15) per cent per annum or, if higher, the appropriate rate (as defined in the Act).
Notice requiring payment of call
54 If a call or any instalment of a call remains unpaid in whole or in part after it has become due and payable, the Board may, at any time thereafter during such time as any part of such call or instalment remains unpaid, give the person from whom it is due not less than fourteen (14) clear days notice requiring payment of the amount unpaid together with any interest which may have accrued and any costs, charges and expenses incurred by the Company by reason of such non-payment. The notice shall name the place where payment is to be made and shall state that if the notice is not complied with the Shares in respect of which the call was made will be liable to be forfeited.
Forfeiture for non-compliance
55 If that notice is not complied with, any Share in respect of which it was sent may, at any time before the payment required by the notice has been made, be forfeited by a resolution of the Board to that effect. The forfeiture shall include all dividends or other monies payable in respect of the forfeited Share which have not been paid before the forfeiture. When a Share has been forfeited, notice of the forfeiture shall be sent to the person who was the holder of the Share before the forfeiture. An entry shall be made promptly in the Register opposite the entry of the Share showing that notice has been sent, that the Share has been forfeited and the date of forfeiture, which shall be deemed to occur at the time of the passing of the relevant Board resolution. No forfeiture shall be invalidated by the omission or neglect to send that notice or to make those entries.
Sale of forfeited Shares
56 Subject to the provisions of the Statutes, a forfeited Share shall be deemed to be the property of the Company and may be sold, re-allotted or otherwise disposed of on such terms and in such manner as the Board determines, either to the person who was the holder before the forfeiture or to any other person. At any time before sale, re-allotment or other disposal, the forfeiture may be cancelled on such terms as the Board thinks fit. Where for the purposes of its disposal a forfeited Certificated Share is to be transferred to any person, the Board may authorise any person to execute an instrument of transfer of the Share to that person. Where for the purposes of its disposal a forfeited Share held in uncertificated form is to be transferred to any person, the Board may exercise any of the powers of the Company under Article 15. The Company may receive the consideration given for the Share on its disposal and may register the transferee as holder of the Share.
Liability following forfeiture
20
57 A person, any of whose Shares have been forfeited or surrendered, shall cease to be a member in respect of any Share which has been forfeited and shall, if the Share is held in certificated form, surrender the certificate for any forfeited Share to the Company for cancellation. The person shall remain liable to the Company for all monies which at the date of forfeiture were presently payable by him to the Company in respect of that Share with interest on that amount at the rate at which interest was payable on those monies before the forfeiture or, if no interest was so payable, at the rate determined by the Board, not exceeding fifteen (15) per cent per annum or, if higher, the appropriate rate (as defined in the Act), from the date of forfeiture until payment. The Board may waive payment wholly or in part or enforce payment without any allowance for the value of the Share at the time of forfeiture or for any consideration received on its disposal.
Surrender
58 The Board may accept the surrender of any Share which it is in a position to forfeit on such terms and conditions as may be agreed. Subject to those terms and conditions, a surrendered Share shall be treated as if it had been forfeited.
Extinction of rights
59 The forfeiture or surrender of a Share shall involve the extinction at the time of forfeiture or surrender of all interest in and all claims and demands against the Company in respect of the Share and all other rights and liabilities incidental to the Share as between the person whose Share is forfeited or surrendered and the Company, except only those rights and liabilities expressly saved by these Articles, or as are given or imposed in the case of past members by the Statutes.
Evidence of forfeiture or surrender
60 A statutory declaration by a director or the secretary that a Share has been duly forfeited or surrendered on a specified date shall be conclusive evidence of the facts stated in it as against all persons claiming to be entitled to the Share. The declaration shall (subject if necessary to the execution of an instrument of transfer, if necessary) constitute a good title to the Share. The person to whom the Share is disposed of shall not be bound to see to the application of the purchase money, if any, and his title to the Share shall not be affected by any irregularity in, or invalidity of, the proceedings in reference to the forfeiture, surrender, sale, re-allotment or disposal of the Share.
Method of transfer
61 Subject to these Articles:
(a) |
without prejudice to any power of the Company to register as a shareholder a person to whom the right to any Share has been transmitted by operation of law, each member may transfer all or any of its Shares which are in certificated form by instrument of transfer in writing in any usual form or in any form approved by the Board. Such instrument shall be executed by or on behalf of the transferor and (in the case of a Share which is not fully paid up) by or on behalf of the transferee. An instrument of transfer need not be under seal. |
21
(b) |
each member may transfer all or any of its Shares which are in uncertificated form by means of the Relevant System in such manner as is provided for in the Regulations. No provision of these Articles shall apply in respect of an Uncertificated Share to the extent that it requires or contemplates the effecting of a transfer by an instrument in writing or the production of a certificate for the Share to be transferred. |
Transfers of partly paid Certificated Shares
62 The Board may, in its absolute discretion, refuse to register the transfer of a Certificated Share which is not fully paid, provided that the refusal does not prevent dealings in Shares in the Company from taking place on an open and proper basis.
Invalid transfers of Certificated Shares
63 The Board may in its absolute discretion also refuse to register the transfer of a Certificated Share:
(a) |
unless the instrument of transfer: |
(i) |
is lodged, duly stamped (if stampable), at the Office or at another place appointed by the Board, accompanied by the certificate for the Shares to which it relates and such other evidence (if any) as the Board may reasonably require to show the right of the transferor to make the transfer, or evidence of someone other than the transferor to make the transfer on the transferors behalf; |
(ii) |
is in respect of only one class of Shares; |
(iii) |
is in favour of not more than four (4) transferees; and |
(iv) |
where it is in favour of a person providing depositary or clearance services or a nominee of such person, is in a form reasonably satisfactory to the Board; or |
(b) |
if the transfer is with respect to a Share on which the Company has a lien and a sum in respect of which the lien exists is presently payable and is not paid within fourteen (14) clear days after notice has been sent to the holder of the Share in accordance with Article 44; or |
(c) |
if it is a Certificated Share and is not presented for registration together with the share certificate and such evidence of title as the Company reasonably requires. |
Invalid transfers of Uncertificated Shares
64 The Board may also refuse to register a transfer of Uncertificated Shares in any circumstances that are allowed or required by the Regulations or the Relevant System.
Notice of refusal to register
65 If the Board refuses to register a transfer of a Certificated Share, it shall send the transferee notice of its refusal as soon as reasonably practicable and, in any event, within two (2) months after the date on which the instrument of transfer was lodged with the Company (in the case of a transfer of a Share in certificated form), or the instructions to the Relevant System were received, together with reasons for the refusal.
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No fee payable on registration
66 No fee shall be charged for the registration of any instrument of transfer or other document relating to or affecting the title to a Share.
Retention of transfers
67 The Company shall be entitled to retain an instrument of transfer which is registered, but an instrument of transfer which the Board refuses to register (except in the case of fraud) shall be returned to the person lodging it when notice of the refusal is sent.
Written instrument of transfer
68 For the avoidance of doubt, nothing in these Articles shall require Shares to be transferred by a written instrument if the Statutes and the rules of Nasdaq provide otherwise and the directors shall be empowered to implement such arrangements as they consider fit in accordance with and subject to the Statutes and the rules of Nasdaq to regulate the transfer of title to Shares in the Company and for the approval or disapproval, as the case may be, by the Board or the Operator of any Relevant System of the registration of those transfers.
Renunciation of allotment
69 Nothing in these Articles shall preclude the Board from recognising a renunciation of the allotment of any Shares by the allottee in favour of some other person.
Transmission
70 If a member dies, the survivor or survivors where he was a joint holder, and his personal representatives where he was a sole holder or the only survivor of joint holders, shall be the only persons recognised by the Company as having any title to his interest. Nothing in these Articles shall release the estate of a deceased member (whether a sole or joint holder) from any liability in respect of any Share held by him solely or jointly with other persons.
Elections permitted
71 A person becoming entitled by transmission to a Share may, on production of any evidence as to his entitlement reasonably required by the Board and subject to these Articles, elect either to be registered as the holder of the Share or to have another person nominated by him registered as the transferee. If he elects to become the holder, he shall send notice to the Company to that effect. If he elects to have another person registered and the Share is a Certificated Share, he shall execute an instrument of transfer of the Share to that person. If he elects to have himself or another person registered and the Share is an Uncertificated Share, he shall take any action the Board may require (including without limitation the execution of any document) to enable himself or that person to be registered as the holder of the Share. All the provisions of these Articles relating to the transfer of Shares apply to that notice or instrument of transfer as if it were an instrument of transfer executed by the member and the death or bankruptcy of the member or other event giving rise to the transmission had not occurred.
Elections required
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72 The Board may at any time send a notice requiring any such person to elect either to be registered himself or to transfer the Share. If the notice is not complied with within sixty (60) days, the Board may after the expiry of that period withhold payment of all dividends or other monies payable in respect of the Share until the requirements of the notice have been complied with.
Right of persons entitled by transmission
73 A person becoming entitled by transmission to a Share shall, on production of any evidence as to his entitlement properly required by the Board and subject to the requirements of Article 71, have the same rights in relation to the Share as he would have had if he were the holder of the Share, subject to Article 269. That person may give a discharge for all dividends and other monies payable in respect of the Share, but he shall not, (except with the authority of the Board), before being registered as the holder of the Share, be entitled in respect of it to receive notice of, or to attend or vote at, any meeting of the Company or to receive notice of, or to attend or vote at, any separate meeting of the holders of any class of Shares.
New Shares, consolidation and sub-division
74 Subject to the Statutes and the provisions of these Articles, and without prejudice to any special rights attached to any class of Shares, the Company may from time to time:
(a) |
increase its share capital by allotting new Shares; |
(b) |
consolidate and divide all or any of its share capital into Shares of larger nominal amount than its existing Shares; |
(c) |
sub-divide its Shares, or any of them, into Shares of smaller nominal amount than its existing Shares; |
(d) |
redeem and/or cancel any of its Shares; |
(e) |
redenominate its share capital or any class of share capital; and |
(f) |
determine that, as between the Shares resulting from such a sub-division, any of them may have any preference or advantage as compared with the others, |
and where any difficulty arises in regard to any consolidation, division or subdivision, the Board may settle such difficulty as they see fit and provided that all classes of Voting Shares must be redenominated, consolidated and divided and/or sub-divided on an equal per share basis as though a single class and, save as expressly contemplated by the rights of the A Shares and B Shares set out in these Articles, A Shares and B Shares must be redesignated on an equal per share basis.
75 All Shares created by increase of the Companys share capital (unless otherwise provided by the terms of allotment of the Shares of that class), by consolidation, division or sub-division of its share capital or the conversion of stock into paid-up Shares shall be subject to all the provisions of these Articles, including without limitation provisions relating to payment of calls, lien, forfeiture, transfer and transmission.
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Fractions
76 Whenever any fractions arise as a result of a consolidation, division or sub-division of Shares, a redesignation of Shares, a reduction of capital of the Companys reserves or a distribution of shares in another company, pursuant to which any members would become entitled to fractions of a Share, the Board may on behalf of the members deal with the fractions as it thinks fit, and, in particular, without limitation, the Board may (on behalf of those members) sell Shares representing fractions to which any members would otherwise become entitled to any person (including, subject to the provisions of the Statutes, the Company) and distribute the net proceeds of sale in due proportion among those members (except that any proceeds in respect of any holding less than a sum fixed by the Board may be retained for the benefit of the Company). Where the Shares to be sold are held in certificated form, the Board may, to enable the Company to deal with the Shares in accordance with the provisions of this Article 76, authorise a person to execute an instrument of transfer of the Shares to, or in accordance with the directions of, the buyer. Where the Shares to be sold are held in uncertificated form, the Board may do all acts and things it considers necessary or expedient to effect the transfer of the Shares to, or in accordance with the directions of, the buyer. The buyer shall not be bound to see to the application of the purchase monies and his title to the Shares shall not be affected by any irregularity in, or invalidity of, the proceedings in relation to the sale.
77 On any purchase by the Company of its own Shares, neither the Company nor the Board shall be required to select the Shares to be purchased rateably or in any manner as between the holders of Shares of the same class or as between them and the holders of Shares of any other class or in accordance with the rights as to dividends or capital conferred by any class of Shares.
Annual general meetings
78 The Board shall convene and the Company shall hold general meetings and annual general meetings in accordance with the requirements of the Statutes. The annual general meeting shall be held at such time and place as the Board may appoint.
79 A general meeting (other than an annual general meeting) may be called by shorter notice if it is so agreed by a majority in number of the members having a right to attend and vote at the meeting, being a majority who together hold not less than ninety-five (95) per cent. in nominal value of the Shares giving that right (excluding any Shares held as treasury shares).
Class meetings
80 Subject to these Articles and to any rights for the time being attached to any classes of Shares in the Company, all provisions of these Articles relating to general meetings of the Company shall, mutatis mutandis, apply to every separate general meeting of the holders of any class of Shares, except that:
(a) |
the necessary quorum at any such meeting shall be two (2) holders of the relevant class of shares present personally or by proxy, holding at least one-third in nominal value of the issued shares of the class, who shall be deemed to constitute a meeting; and |
25
(b) |
each holder of shares of the class shall have one (1) vote in respect of every share of the class held by him. |
For the purposes of this Article 80, where a person is present by proxy or proxies, he is treated only as holding the shares in respect of which those proxies are authorised to exercise voting rights.
Time and place of meetings
81 The Board shall determine whether a general meeting is to be held as a physical general meeting or an electronic general meeting. The Board may call general meetings whenever and at such times and places (including electronic platforms) as it shall determine. On the requisition of members pursuant to the provisions of the Statutes, the Board shall promptly convene a general meeting in accordance with the requirements of the Statutes.
Period of notice
82 An annual general meeting shall be called by not less than twenty-one (21) clear days notice in writing and no more than sixty (60) days notice in writing. Subject to the provisions of the Statutes, all other general meetings may be called by not less than fourteen (14) clear days notice in writing and no more than sixty (60) days notice in writing.
Recipients of notice
83 Subject to the provisions of the Statutes, to the provisions of these Articles and to any special rights or restrictions imposed on any Shares, the notice shall be sent to every member as of the record date of such meeting and every director. The auditors are entitled to receive all notices of, and other communications relating to, any general meeting which any member is entitled to receive.
Contents of notice: general
84 Subject to the provisions of the Statutes, the notice shall specify:
(a) |
whether the meeting shall be a physical and/or electronic general meeting; |
(b) |
for physical meetings, the time, date and place of the meeting (including without limitation any satellite meeting place arranged for the purposes of Article 89, which shall be identified as such in the notice); and |
(c) |
for electronic general meetings, the time, date and electronic platform for the meeting, which electronic platform may vary from time to time and from meeting to meeting as the Board, in its sole discretion, sees fit, |
and the general nature of the business to be dealt with and shall state, with reasonable prominence, that a member entitled to attend and vote is entitled to appoint one or more proxies, to attend, to speak and to vote instead of him and that a proxy need not be a member.
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85 Where the Company has given an electronic address in any notice of meeting, any document or information relating to proceedings at the meeting may be sent by electronic means to that address, subject to any conditions or limitations specified in the relevant notice.
Contents of notice: additional requirements
86 In the case of an annual general meeting, the notice shall specify the meeting as such. In the case of a meeting to pass a special resolution, the notice shall include the text of the resolution and shall specify the intention to propose the resolution as a special resolution.
Record date
87 The notice of a general meeting must specify a time (which must not be more than 48 hours, excluding any part of a day which is not a working day, before the time fixed for the meeting) by which a person must be entered on the Register in order to have the right to attend or vote at the meeting. Changes to entries on the Register after the time specified in the notice will be disregarded in deciding the rights of any person to attend or vote.
Notifying other arrangements for viewing and hearing proceedings
88 The notice shall include details of any arrangements made for the purpose of Article 92 (making clear that participation in those arrangements will not amount to attendance at the meeting to which the notice relates).
General meetings at more than one place
89 Without prejudice to Article 84, the Board may resolve to enable persons entitled to attend a general meeting or an adjourned general meeting to do so by simultaneous attendance and participation at a satellite meeting place anywhere in the world. The members present in person or by proxy at satellite meeting places shall be counted in the quorum for, and entitled to vote at, the general meeting in question, and that meeting shall be duly constituted and its proceedings valid if the chairman of the general meeting is satisfied that adequate facilities are available throughout the general meeting to ensure that members attending at all the meeting places are able to:
(a) |
participate in the business for which the meeting has been convened; |
(b) |
hear and see all persons who speak (whether by the use of microphones, loudspeakers, audio-visual communications equipment or otherwise) in the principal meeting place and any satellite meeting place; and |
(c) |
be heard and seen by all other persons so present in the same way. |
The chairman of the general meeting shall be present at, and the meeting shall be deemed to take place at, the principal meeting place.
Electronic general meetings
90 Without prejudice to Article 84, the Board may resolve to enable persons entitled to attend a general meeting or an adjourned general meeting hosted on an electronic platform (such meeting being an electronic general meeting) to do so by simultaneous attendance by electronic means with no member necessarily in physical attendance at the electronic general
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meeting. The members or their proxies present shall be counted in the quorum for, and entitled to vote at, the electronic general meeting in question, and that meeting shall be duly constituted and its proceedings valid if the chairman of the electronic general meeting is satisfied that adequate facilities are available throughout the electronic general meeting to ensure that members attending the electronic general meeting who are not present together at the same place may, by electronic means, attend and speak and vote at it.
Nothing in these Articles prevents a general meeting being held both physically and electronically.
Interruption or adjournment where facilities inadequate
91 If it appears to the chairman of the general meeting that:
(a) |
the facilities at the principal meeting place or any satellite meeting place; or |
(b) |
the electronic platform, facilities or security at the electronic general meeting, |
have become inadequate for the purposes referred to in Articles 89 or 90, then the chairman may, without the consent of the meeting, interrupt or adjourn the general meeting. All business conducted at that general meeting up to the time of that adjournment shall be valid. The provisions of Article 110 shall apply to that adjournment.
Other arrangements for viewing and hearing proceedings at physical general meetings
92 The Board may make arrangements for persons entitled to attend a general meeting or an adjourned general meeting to be able to view and hear the proceedings of the general meeting or adjourned general meeting and to speak at the meeting (whether by the use of microphones, loudspeakers, audio-visual communications equipment or otherwise) by attending at a venue anywhere in the world not being a satellite meeting place. If the general meeting is only held as a physical meeting and not also as an electronic meeting, those attending at any such venue shall not be regarded as present at the general meeting or adjourned general meeting and shall not be entitled to vote at the meeting at or from that venue. The inability for any reason of any member present in person or by proxy at such a venue to view or hear all or any of the proceedings of the physical general meeting or to speak at the meeting shall not in any way affect the validity of the proceedings of the meeting.
Controlling level of attendance at physical general meetings
93 For meetings held in accordance with Article 89, the Board may from time to time make any arrangements for controlling the level of attendance at any venue for which arrangements have been made pursuant to Article 89 or Article 91 (including without limitation the issue of tickets or the imposition of some other means of selection) which it, in its absolute discretion, considers appropriate, and may from time to time change those arrangements. If a member, pursuant to those arrangements, is not entitled to attend in person or by proxy at a particular venue, he shall be entitled to attend in person or by proxy at any other venue for which arrangements have been made pursuant to Article 89 or Article 91. The entitlement of any member to be present at such venue in person or by proxy shall be subject to any such arrangement then in force and stated by the notice of meeting or adjourned meeting to apply to the meeting.
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Change in place/electronic platform and/or time of meeting
94 If, after the sending of notice of a general meeting but before the meeting is held, or after the adjournment of a general meeting but before the adjourned meeting is held, the Board decides that it is impracticable or unreasonable, for a reason beyond its control, to hold:
(a) |
the physical general meeting at the declared place (or any of the declared places, in the case of a meeting to which Article 89 or Article 91 applies); or |
(b) |
the electronic general meeting on the electronic platform specified in the notice, |
and/or, in either case, at the specified time, it may change the place (or any of the places, in the case of a meeting to which Article 89 or Article 91 applies) or electronic platform and/or postpone the time at which the meeting is to be held. If such a decision is made, the Board may then change the place (or any of the places, in the case of a meeting to which Article 89 or Article 91 applies) or electronic platform and/or postpone the time again if it decides that it is reasonable to do so. In either case:
(i) |
no new notice of the meeting need be sent, but the Board shall, if practicable, advertise the date, time and place of, or electronic platform for, the meeting by public announcement and in at least two newspapers with national circulation in the United Kingdom and shall make arrangements for notices of the change of place or electronic platform and/or postponement to appear at the original place or electronic platform and/or at the original time; and |
(ii) |
a proxy appointment in relation to the meeting may, if by means of a document in hard copy form, be delivered to the Office or to such other place within the United Kingdom as may be specified by or on behalf of the Company in accordance with Article 152(a)(i) or Article 152(b)(i)(A) or, if in electronic form, be received at the address (if any) specified by or on behalf of the Company in accordance with Article 152(a)(ii) or Article 152(b)(i)(B), at any time not less than forty-eight (48) hours before the postponed time appointed for holding the meeting, provided that the Board may specify, in any case, that in calculating the period of forty-eight (48) hours, no account shall be taken of any part of that day that is not a working day. |
Meaning of participate
95 For the purposes of Articles 89, 91, 92, 93 and 94, in relation to physical general meetings, the right of a member to participate in the business of any general meeting shall include without limitation the right to speak, vote on a poll, be represented by a proxy and have access to all documents which are required by the Statutes or these Articles to be made available at the meeting.
96 For the purposes of Articles 90, 91, 93 and 94, in relation to electronic general meetings, the right of a member to participate in the business of any general meeting shall include without limitation the right to speak, vote on a poll, be represented by a proxy and have access (including electronic access) to all documents which are required by the Statutes or these Articles to be made available at the meeting.
Accidental omission to send notice
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97 The accidental omission to send a notice of a meeting or resolution, or to send any notification where required by the Statutes or these Articles in relation to the publication of a notice of meeting on a website, or to send a form of proxy where required by the Statutes or these Articles, to any person entitled to receive it, or the non-receipt for any reason of any such notice, resolution or notification or form of proxy by that person, whether or not the Company is aware of such omission or non-receipt, shall not invalidate the proceedings at that meeting.
98 The Board may postpone a general meeting if it deems it necessary to do so. Notice of such postponement shall be given in accordance with these Articles.
PROCEEDINGS AT GENERAL MEETINGS
List of members for voting at general meetings
99 Subject to the requirements under the Act, at least ten (10) days before every general meeting, the secretary shall prepare a complete list of the members entitled to vote at the meeting. Such list shall:
(a) |
be arranged in alphabetical order; |
(b) |
show the address of each member entitled to vote at the meeting; and |
(c) |
show the number of Shares registered in the name of each member. |
100 The list of members prepared in accordance with Article 99 shall be available during ordinary business hours for a period of at least ten (10) days before the general meeting for inspection by any member for any purpose relevant to the meeting. If the notice of the meeting does not specify the place where the members may inspect the list of members, the list of members shall be available for inspection (at the discretion of the Board) at either the Office or on a website. The list of members shall be available for inspection by any member who is present at the meeting, at the place(s) or electronic platform and for the duration, of the meeting.
Quorum
101 No business shall be dealt with at any general meeting unless a quorum is present, but the absence of a quorum shall not preclude the choice or appointment of a chairman in accordance with these Articles, which shall not be treated as part of the business of the meeting. Except as otherwise provided by these Articles, the necessary quorum for a general meeting shall be at least two qualifying persons entitled to vote on the business to be dealt with, present in person or by proxy, who together represent at least one-third of the voting rights attached to the Voting Shares entitled to vote at the relevant meeting for all purposes, unless:
(a) |
each is a qualifying person only because he is authorised under the Statutes to act as a representative of a corporation in relation to the meeting, and they are representatives of the same corporation; or |
(b) |
each is a qualifying person only because he is appointed as proxy of a member in relation to the meeting, and they are proxies of the same member. |
For the purposes of this Article 101 and Article 102 a qualifying person means (i) an individual who is a member of the Company, (ii) a person authorised under the Statutes to act as a representative of the corporation in relation to the meeting, or (iii) a person appointed as
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proxy of a member in relation to the meeting.
102 If the Company has only one (1) member, one qualifying person present at the meeting and entitled to vote on the business to be dealt with shall be a quorum.
If quorum not present
103 If a quorum is not present within fifteen (15) minutes (or such longer time not exceeding thirty (30) minutes as the chairman of the meeting may decide) from the time appointed for the meeting, or if during a meeting such a quorum ceases to be present, the meeting, if convened on the requisition of members, shall be dissolved, and in any other case shall stand adjourned to such time and place or electronic platform (being not less than fourteen (14) days nor more than twenty-eight (28) days thereafter) as the chairman of the meeting may, subject to the provisions of the Statutes, determine. If a meeting is adjourned for lack of quorum, the quorum of the adjourned meeting will be two members present in person or by proxy and entitled to vote. The adjourned meeting shall be dissolved if a quorum is not present within fifteen (15) minutes after the time appointed for holding the meeting, provided that the Company must give at least 7 clear days notice of any adjourned meeting (that is, excluding the day of the adjourned meeting and the day on which notice is given) to the same persons to whom notice of the Companys general meeting is required to be given and containing the same information which such notice is required to contain.
Chairman
104 The chairman, if any, of the Board or, in his absence, any deputy chairman of the Company shall preside as chairman of the meeting. If neither the chairman nor the deputy chairman is present within five (5) minutes after the time appointed for holding the meeting or is not willing to act as chairman, the directors present shall elect one of their number to be chairman. If there is only one director present and willing to act, he shall be chairman. If no director is willing to act as chairman, or if no director is present within five (5) minutes after the time appointed for holding the meeting, the members present in person or by proxy and entitled to vote shall choose a member present in person or a proxy of a member or a person authorised to act as a representative of a corporation in relation to the meeting to be chairman.
Persons entitled to speak
105 A director shall, notwithstanding that he is not a member, be entitled to attend and speak at any general meeting and at any separate meeting of the holders of any class of Shares. Subject to the Statutes, the chairman may invite any person to attend and speak at general meetings of the Company whom the chairman considers to be equipped by knowledge or experience of the Companys business to assist in the deliberations of the meeting. In addition, the chairman may invite any person who has been nominated by a member of the Company (provided that the chairman is satisfied that at such time as the chairman may determine, the member holds any Shares in the Company as such persons nominee) to attend and, if the chairman considers it appropriate, to speak at general meetings.
Security at general meetings
106 The Board or the chairman of the meeting may make any arrangement and impose any requirement or restriction it or he considers appropriate to ensure the security of a general meeting including, without limitation, requirements for evidence of identity to be produced by
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those attending the meeting, the searching of their personal property and the restriction of items that may be taken into the meeting place. The Board or the chairman of the meeting are entitled in its or his absolute discretion to refuse entry to, or eject from any general meeting, a person who refuses to comply with these arrangements, requirements or restrictions.
Security at electronic general meetings
107 The Board or the chairman at any electronic general meeting may make any arrangement and impose any requirement or restriction as is:
(a) |
necessary to ensure the identification of those taking part and the security of the electronic communication; and |
(b) |
proportionate to those objectives. |
In this respect, the Company is able to authorise any voting application, system or facility for electronic general meetings as it sees fit.
Safety at general meetings
108 The Board or the chairman of the meeting may take such action, give such direction or put in place such arrangements as they or he consider appropriate to secure the safety of the people attending the meeting and to promote the orderly conduct of the business of the meeting as set out in the notice of the meeting. The chairmans discretion on matters of procedure or arising incidentally from the business of the meeting shall be final, as shall be his determination as to whether any matter is of such a nature.
Adjournment powers
109 Without prejudice to any other power of adjournment which he may have under these Articles or at common law, the chairman:
(a) |
may adjourn a meeting from time to time and from place to place without giving any reason therefor and without notice other than announcement at the meeting; |
(b) |
shall, if so directed by a meeting at which a quorum is present, adjourn the meeting from time to time and from place to place (which place may include electronic platforms); or |
(c) |
may adjourn the meeting to another time and place or electronic platform without such consent if it appears to him that: |
(i) |
it is likely to be impracticable to hold or continue that meeting because of the number of members wishing to attend who are not present; or |
(ii) |
the behaviour of anyone attending the meeting prevents or is likely to prevent the orderly continuation of the business of the meeting; or |
(iii) |
an adjournment is necessary to protect the safety of any person attending the meeting; or |
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(iv) |
an adjournment is otherwise necessary so that the business of the meeting may be properly conducted, including where the chairman determines that proper conduct requires an adjournment to enable time for consideration of new information, and |
each of paragraphs (a), (b) and (c) above shall constitute a separate power to adjourn and no such paragraph shall limit or restrict the power contained in another such paragraph.
Adjournment procedures
110 No business shall be dealt with at an adjourned meeting other than business which might properly have been dealt with at the meeting had the adjournment not taken place. Any such adjournment may, subject to the provisions of the Statutes, be for such time and to such other place (or, in the case of a meeting held at a principal meeting place and a satellite meeting place, such other places) or electronic platform as the chairman may, in his absolute discretion determine, notwithstanding that by reason of such adjournment some members may be unable to be present at the adjourned meeting. Any such member may nevertheless appoint a proxy for the adjourned meeting either in accordance with Article 152 or by means of a document in hard copy form which, if delivered at the meeting which is adjourned to the chairman or the secretary or any director, shall be valid even though it is given at less notice than would otherwise be required by Article 152(a). Subject to the provisions of the Statutes and the provisions of Article 103, notice shall be sent at least seven (7) clear days before the date of the adjourned meeting specifying the time and place (or places, in the case of a meeting to which Article 89 or Article 91 applies) or electronic platform of the adjourned meeting and the general nature of the business to be transacted.
Amendments to resolutions
111 A resolution duly proposed as a special resolution may be amended by ordinary resolution if:
(a) |
the chairman of the meeting proposes the amendment at the general meeting at which the resolution is proposed; and |
(b) |
the amendment does not go beyond what is necessary to correct a clear error in the resolution). |
112 A resolution duly proposed as an ordinary resolution may be amended by ordinary resolution if:
(a) |
at least forty-eight (48) hours before the time appointed for holding the meeting or adjourned meeting at which the ordinary resolution is to be considered (which, if the Board so specifies, shall be calculated taking no account of any part of a day that is not a working day), notice of the terms of the amendment and the intention to move it has been delivered in hard copy form to the Office or to such other place as may be specified by or on behalf of the Company for that purpose, or received in electronic form at such address (if any) for the time being specified by or on behalf of the Company for that purpose and such notice of amendment shall provide the information required under Article 117 relating to the proposing member or Shareholder Associated Person of such a member as if the notice was of a resolution proposed by such member in accordance with that Article; and |
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(b) |
the proposed amendment does not, in the reasonable opinion of the chairman, materially alter the scope of the resolution, |
unless the chairman in his absolute discretion decides that the amendment may be considered and voted on.
113 If an amendment is proposed to any resolution under consideration but is in good faith ruled out of order by the chairman, the proceedings on the substantive resolution shall not be invalidated by any error in such ruling. With the consent of the chairman, an amendment may be withdrawn by its proposer before it is voted on.
Conduct of a poll
114 Subject to Article 115, a poll shall be taken in such manner as the chairman directs and he may, and shall if required by the meeting, appoint scrutineers (who need not be members) and fix a time and place or electronic platform for declaring the result of the poll. The result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded.
115 A poll on the election of a chairman or on a question of adjournment shall be taken immediately. A poll on any other question shall be taken at either the meeting or at such time and place as the chairman directs not being more than twenty-eight (28) days after the meeting.
Effectiveness of special resolutions
116 Where for any purpose an ordinary resolution of the Company is required, a special resolution shall also be effective.
PROPOSED SHAREHOLDER RESOLUTIONS
Information required in connection with proposed resolutions
117 Where a member or members, in accordance with the provisions of the Act, request the Company to (i) call a general meeting for the purposes of bringing a resolution before the meeting, or (ii) give notice of a resolution to be proposed at a general meeting, such request must, in each case and in addition to the requirements of the Statutes:
(a) |
set forth, as to the member making the request and any Shareholder Associated Person, if any, of such member on whose behalf the nomination or proposal is made: |
(i) |
the name and address of such member, as they appear in the Register, and of such Shareholder Associated Persons, if any, |
(ii) |
|
(A) |
the class or series and number of Shares of the Company which are, directly or indirectly, owned of record or beneficially by such member and by any Shareholder Associated Person, |
(B) |
any option, warrant, convertible security, share appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of Shares of the Company or with a value derived in whole or in part from the |
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value of the Company or any class or series of Shares or other securities of the Company, whether or not such instrument or right shall be subject to settlement in the underlying class or series of Shares of the Company or otherwise directly or indirectly owned beneficially by such member or by any of its Shareholder Associated Persons and any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of any security or instrument of the Company, in each case, regardless of whether (x) such interest conveys any voting rights in such security to such member or Shareholder Associated Person, (y) such interest is required to be, or is capable of being, settled through delivery of such security or instrument or (z) such person may have entered into other transactions to hedge the economic effect of such interest (any such interest in this clause (ii)(B) (a Derivative Instrument), |
(C) |
the name of each person with whom such member or Shareholder Associated Person has any agreement, arrangement or understanding (whether written or oral) (1) for the purposes of acquiring, holding, voting (except pursuant to a revocable proxy given to such person in response to a public proxy or consent solicitation made generally by such person to all holders of Shares of the Company) or disposing of any Shares of the Company, (2) to cooperate in obtaining, changing or influencing the control of the Company (except independent financial, legal and other advisors acting in the ordinary course of their respective businesses), (3) with the effect or intent of increasing or decreasing the voting power of, or that contemplates any person voting together with, any such member or Shareholder Associated Person with respect to any Shares of the Company or any business proposed by the member or (4) otherwise in connection with any business proposed by a member and a description of each such agreement, arrangement or understanding (any agreement, arrangement or understanding described in this clause (C) being a Voting Agreement), |
(D) |
details of all other material interests of each such member or any Shareholder Associated Person of such member in such request or any security of the Company (including, without limitation, any rights to dividends or performance-related fees based on any increase or decrease in the value of such security or Derivative Instruments or if such person directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has the opportunity to profit or share in any profit derived from any decrease in the value of the subject security) (collectively, Other Interests), |
(E) |
a list of all transactions by such member and any Shareholder Associated Person of such member involving any securities of the Company or any Derivative Instruments, Voting Agreements or Other Interests within the six-month period prior to the date of the request, |
(F) |
any proportionate interest in shares of the Company or Derivative Instruments held, directly or indirectly, by a general or limited |
35
partnership in which such member or any Shareholder Associated Person of such member is a general partner or, directly or indirectly, beneficially owns an interest in a general partner, |
(G) |
any performance-related fees (other than an asset-based fee) that such member or any Shareholder Associated Person of such member is entitled to based on any increase or decrease in the value of Shares of the Company or Derivative Instruments, if any, as of the date of such request, including without limitation any such interests held by the immediate family of such member or any Shareholder Associated Person of such member sharing the same household (which information shall be supplemented by such member and any Shareholder Associated Person of such member not later than ten (10) days after the record date for the meeting to disclose such ownership as of the record date), |
(H) |
a description of all economic terms of all of the foregoing items, including all Derivative Instruments, Voting Agreements or Other Interests, and copies of all agreements and other documents (including, without limitation, master agreements, confirmations and all ancillary documents and the names and details of counterparties to, and brokers involved in, all such transactions) relating to each such item, including all Derivative Instruments, Voting Agreements or Other Interests, |
(I) |
a representation that the member is a holder of record of Shares of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business, and |
(J) |
a representation as to whether the member or any Shareholder Associated Person of such member intends, or is part of a group that intends, to (1) deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Companys Shares required to approve or adopt the proposal or (2) otherwise solicit proxies or votes from shareholders in support of such proposal, and |
(iii) |
any other information relating to such member and any Shareholder Associated Person of such member that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or for the election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder, |
(b) |
if the request relates to any business that the member proposes to bring before the meeting, set forth: |
(i) |
a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, the text of the proposal (including the complete text of any resolution(s) proposed for consideration) and, in the event that such business includes a proposal to amend these Articles, the complete text of the proposed amendment and any material interest of such member or any Shareholder Associated Person of such member in such business |
36
(including any anticipated benefit therefrom to the member or Shareholder Associated Person of such member), and |
(ii) |
a description of all agreements, arrangements and understandings (whether written or oral) between such member or any Shareholder Associated Person of such member and any other person or persons (including their names) in connection with the request by such member, |
(c) |
set forth, as to each person, if any, whom the member proposes to nominate for appointment or reappointment to the Board as a result of any such request: |
(i) |
all information relating to such person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in a contested election (even if a contested election is not involved) pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder (including such persons written consent to being named in the proxy statement as a nominee and to serving as a director if elected), and |
(ii) |
a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among such member or any Shareholder Associated Person of such member, and their respective affiliates and associates, on the one hand, and each proposed nominee, and his respective affiliates and associates, on the other hand, including, without limitation, all information that would be required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the U S Securities Exchange Commission under the Exchange Act if the member making the nomination and any Shareholder Associated Person of such member on whose behalf the nomination is made, if any, or any affiliate or associate thereof, were the registrant for purposes of such rule and the nominee were a director or executive officer of such registrant, and |
(d) |
with respect to each nominee for appointment or reappointment to the Board, the Company may require any proposed nominee for appointment to the Board to furnish such other information as may reasonably be required by the Company to determine the eligibility of such proposed nominee to serve as a director of the Company or that could be material to a reasonable members understanding of the independence, or lack thereof, of such nominee, and |
(e) |
set forth, to the extent known by the member(s) giving the notice, the name and address of any other member supporting the nominee for election or re-election as a director or the proposal of other business on the date of such request; and |
such business must otherwise be a proper matter for member action.
For purposes of this Article 117, a Shareholder Associated Person of any member shall mean (i) any person controlling, directly or indirectly, or acting in concert with, such member, (ii) any beneficial owner of Shares owned of record or beneficially by such member, and (iii) any person controlling, controlled by or under common control with such Shareholder Associated Person.
37
Subject to the provisions of these Articles, only such persons who are nominated by or at the direction of the Board or in compliance with the procedures set forth in this Article 117 shall be eligible to serve as directors and only such business shall be conducted at a general meeting as shall have been brought before the meeting by or at the direction of the Board or pursuant to a member request that complies with the procedures set forth in this Article 117.
Except as otherwise provided by law or the Articles, the chairman of the meeting shall have the power and duty to determine whether a member request was made in compliance with the procedures set forth in this Article 117 and, if any request is not in compliance with this Article 117, to declare that such defective request shall be disregarded.
To be eligible to be a nominee for appointment or reappointment as a director of the Company pursuant to a proposal made by a member or members pursuant to this Article 117, a person must deliver (in accordance with the time periods prescribed for delivery of a request set forth in this Article 117) to the secretary at the Office a written questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided by the secretary upon written request) and a written representation and agreement (in the form provided by the secretary upon written request) that such person:
(A) |
is not and will not become a party to: |
(i) |
any agreement, arrangement or understanding (whether written or oral) with, and has not given any commitment or assurance to, any person or entity as to how such person, if appointed as a director of the Company, will act or vote on any issue or question (a Voting Commitment) that has not been disclosed to the Company, or |
(ii) |
any Voting Commitment that could limit or interfere with such persons ability to comply, if appointed as a director of the Company, with such persons fiduciary duties under applicable law; |
(B) |
is not and will not become a party to any agreement, arrangement or understanding (whether written or oral) with any person or entity other than the Company with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein; and |
(C) |
in such persons individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if appointed as a director of the Company, and will comply with all applicable corporate governance, conflict of interest, confidentiality, securities ownership and trading policies and guidelines of the Company and any other policies and guidelines of the Company applicable to directors or adopted by the Board (such policies and guidelines to be made available to such person by the secretary on request). |
For the purpose of this Article 117, where a request(s) in respect of a general meeting are made by more than one member, references to a member in relation to notice and other information requirements shall apply to each member, respectively, as the context requires.
Notwithstanding anything in the foregoing provisions of this Article 117 to the contrary, this Article 117 shall not be applicable to, or in respect of, any member who is a person providing
38
depositary or clearance services or a nominee of any such person, except that any reference to a member in the definition of Shareholder Associated Person shall include a person providing depositary or clearance services or a nominee of such person .
Members in default not entitled to vote
118 If a request made in accordance with Article 117 does not include the information specified in that Article (save with respect to any information required to be provided by a proposed director), or if a request made in accordance with Article 117 is not received in the time and manner indicated in Article 119, in respect of the Shares which the relevant member(s) hold (the member default shares), the relevant member(s) shall not be entitled to vote, either personally or by proxy at a general meeting or at a separate meeting of the holders of that class of Shares (or at an adjournment of any such meeting), the member default shares with respect to the matters detailed in the request made in accordance with Article 117.
Timing and manner of information
119 Without prejudice the rights of any member under the Act, a member who makes a request to which Article 117(a)(ii) relates (and where the general meeting to be convened is an annual general meeting) must deliver any such request in writing to the secretary at the Office not earlier than the close of business on the one hundred and twentieth (120th) calendar day nor later than the close of business on the ninetieth (90th) calendar day prior to the date of the first anniversary of the preceding years annual general meeting, provided, however, that if the date of an annual meeting is more than thirty (30) calendar days before or more than sixty (60) calendar days after the date of the first anniversary of the preceding years annual general meeting, notice by the member must be so delivered in writing not earlier than the close of business on the one hundred and twentieth (120th) calendar day prior to such annual general meeting and not later than the close of business on the later of (i) the ninetieth (90th) calendar day prior to such annual general meeting, and (ii) if the first public announcement of the date of such annual general meeting is less than one hundred (100) days prior to the date of the meeting, the tenth (10th) calendar day after the day on which public announcement of the date of such annual general meeting is first made by the Company. In no event shall any adjournment or postponement of an annual general meeting or the public announcement thereof commence a new time period for the giving of a members notice as described in this Article 119.
Notwithstanding anything in the foregoing provisions of this Article 119 to the contrary, in the event that the number of directors to be elected to the Board is increased and there is no public announcement by the Company naming all of the nominees for director or specifying the size of the increased Board of directors made by the Company at least one hundred (100) calendar days prior to the date of the first anniversary of the preceding years annual general meeting, a members notice required by this Article 119 shall also be considered as validly delivered in accordance with this Article 119, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the Office not later than 5:00 pm, local time, on the tenth (10th) calendar day after the day on which such public announcement is first made by the Company.
Notwithstanding the provisions of Article 117 or Article 118 or the foregoing provisions of this Article 119, a member shall also comply with all applicable requirements of the Statutes and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in Article 117 or Article 118 and this Article 119 provided, however, that any references
39
in the Articles to the Exchange Act or the rules and regulations promulgated thereunder are not intended to and shall not limit the requirements of these Articles applicable to member requests. Nothing in Article 117 or Article 118 or this Article 119 shall be deemed to affect any rights of members to request inclusion of proposals in, nor the right of the Company to omit proposals from, the Companys proxy statement pursuant to Rule 14a-8 (or any successor provision) under the Exchange Act, subject in each case to compliance with the Exchange Act.
Voting by poll
120 Any resolution put to the vote of a general meeting must be decided on a poll. This Article 120 may only be removed, amended or varied by resolution of the members passed unanimously at a general meeting of the Company.
Right to vote on a poll
121 Subject to any rights or restrictions attached to any Shares, on a vote on a resolution on a poll every member present in person or by proxy shall have one (1) vote for every Share of which he is the holder or in respect of which his appointment of a proxy or corporate representative has been made.
Votes of joint holders
122 In the case of joint holders of a Share, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders. For this purpose seniority shall be determined by the order in which the names of the holders stand in the Register in respect of the joint holding.
Member under incapacity
123 A member in respect of whom an order has been made by a court or official having jurisdiction (whether in the United Kingdom or elsewhere) in matters concerning mental disorder may vote by his receiver, curator bonis or other person authorised for that purpose appointed by that court or official. That receiver, curator bonis or other person may vote by proxy. The right to vote shall be exercisable only if evidence satisfactory to the Board of the authority of the person claiming to exercise the right to vote has been delivered to the Office, or another place specified in accordance with these Articles for the delivery of proxy appointments, not less than forty-eight (48) hours before the time appointed for holding the meeting or adjourned meeting at which the right to vote is to be exercised provided that the Company may specify, in any case, that in calculating the period of forty-eight (48) hours, no account shall be taken of any part of a day that is not a working day. Failure to satisfy the requirements of this Article 123 shall cause the right to vote not to be exercisable.
Calls in arrears
124 No member shall, unless the Board otherwise determines, be entitled to vote at a general meeting or at a separate meeting of the holders of any class of Shares, either in person or by proxy, in respect of any Share held by him unless all monies presently payable by him in respect of that Share have been paid.
40
Section 793 of the Companies Act: restrictions if in default
125 If at any time the Board is satisfied that any member, or any other person appearing to be interested in Shares held by such member, has been duly served with a notice under section 793 of the Act (a section 793 notice) and is in default for the prescribed period in supplying to the Company the information thereby required, or, in purported compliance with such a notice, has made a statement or given information which is false or inadequate in a material particular, then the Board may, in its absolute discretion at any time thereafter by notice (a direction notice) to such member direct that:
(a) |
in respect of the Shares in relation to which the default occurred (the default shares, which expression includes any Shares issued after the date of the section 793 notice in respect of those Shares) the member shall not be entitled to attend or vote either personally or by proxy at a general meeting or at a separate meeting of the holders of that class of Shares or on a poll or to exercise any other right conferred by membership in relation to any such meeting or poll; |
(b) |
in respect of the default shares: |
(i) |
no payment shall be made by way of dividend or distribution (or any other amount payable in respect of the default shares) and the Company shall not be required to pay interest in respect of any such amounts not paid; |
(ii) |
no transfer of any default share shall be registered unless: |
(A) |
the member is not himself in default as regards supplying the information requested and the transfer when presented for registration is accompanied by a certificate by the member in such form as the Board may in its absolute discretion require to the effect that after due and careful enquiry the member is satisfied that no person in default as regards supplying such information is interested in any of the Shares the subject of the transfer and that none of the Shares the subject of the transfer are default shares; or |
(B) |
the transfer is an approved transfer; and/or |
(iii) |
in respect of any Shares held in uncertificated form, such Shares be converted into certificated form (and the Board shall be entitled to direct the Operator of any Relevant System applicable to those Shares to effect that conversion immediately) and that member shall not after that be entitled to convert all or any Shares held by him into uncertificated form (except with the authority of the Board), |
(and, for the purposes of ensuring this Article 125(b) can apply to all Shares held by the holder, the Company may, in accordance with the Regulations, issue a written notification to the Operator requiring the conversion into certificated form of any Shares held by the holder in uncertificated form).
Copy of notice to interested persons
41
126 The Company shall send the direction notice to each other person appearing to be interested in the default shares, but the failure or omission by the Company to do so shall not invalidate such notice.
When restrictions cease to have effect
127 Any direction notice shall cease to have effect not more than seven (7) days after the earlier of receipt by the Company of:
(a) |
a notice of an approved transfer, but only in relation to the Shares transferred; or |
(b) |
all the information required by the relevant section 793 notice, in a form satisfactory to the Board and with the Board being reasonably satisfied that such information is complete and accurate. |
Withdrawal notice
128 The Board may at any time withdraw a direction notice, in whole or in part, or suspend in whole or in part, the imposition of any restrictions contained in the direction notice for a given period by serving on the holder of the default shares a notice in writing to that effect (a withdrawal notice).
Cancellation of restrictions
129 Unless and until a withdrawal notice is duly served in relation thereto or a direction notice in relation thereto is deemed to have been withdrawn, suspended or varied or the Shares to which a direction notice relates are transferred by means of an approved transfer, the sanctions referred to in Article 125 shall continue to apply.
130 The Company may exercise any of its powers under Article 15 in respect of any default share that is held in uncertificated form.
Supplementary provisions
131 For the purposes of this Article 131 and Articles 125 to 130:
(a) |
a person shall be treated as interested in any Shares if the member holding such Shares has sent to the Company a notification under section 793 of the Act which names such person as being so interested or if the Company (after taking into account information obtained from the member and from any other relevant section 793 notification) knows or has reasonable cause to believe that the person in question is or may be interested in the Shares; |
(b) |
interested shall be construed as it is for the purposes of section 793 of the Act; |
(c) |
the prescribed period is fourteen (14) days from the date of service of the section 793 notice; and |
(d) |
a transfer of Shares is an approved transfer if: |
(i) |
it is a transfer of Shares pursuant to an acceptance of a takeover offer (within the meaning of section 974 of the Act); or |
42
(ii) |
the Board is satisfied that the transfer is made pursuant to a bona fide sale of the whole of the beneficial ownership of the Shares the subject of the transfer to a party unconnected with the member and with any other person appearing to be interested in the Shares; or |
(iii) |
the transfer results from a sale made through Nasdaq or any other recognised investment exchange (as defined in the Financial Services and Markets Act 2000) or any other stock exchange outside the United Kingdom on which the Companys Shares are normally traded. |
For the purposes of sub-paragraph (ii), any associate (as defined in Section 435 of the Insolvency Act 1986) shall be included amongst the persons who are connected with the member or any person appearing to be interested in such Shares.
Section 794 of the Act
132 Nothing contained in Articles 125 to 131 limits the power of the Company under section 794 of the Act.
Errors in voting
133 If any votes are counted which ought not to have been counted, or might have been rejected, the error shall not vitiate the result of the voting unless it is pointed out at the same meeting, or at any adjournment of the meeting, and, in the opinion of the chairman, it is of sufficient magnitude to vitiate the result of the voting.
Objections to voting
134 No objection shall be raised to the qualification of any voter except at the meeting or adjourned meeting or poll at which the vote objected to is tendered. Every vote not disallowed at such meeting shall be valid and every vote not counted which ought to have been counted shall be disregarded. Any objection made in due time shall be referred to the chairman whose decision shall be final and conclusive.
Multiple votes
135 On a poll, a member, proxy or corporate representative entitled to more than one vote need not, if he votes, use all his votes or cast all the votes he uses in the same way.
NOTIFICATION OF INTERESTS IN SHARES
Interpretation
136 For the purposes of Article 137 through Article 149:
(a) |
Relevant Share Capital means any class of the Companys issued share capital carrying rights to vote in all circumstances at general meetings of the Company; and for the avoidance of doubt (a) where the Companys share capital is divided into different classes of Shares, references to Relevant Share Capital are to each such class taken separately and (b) any adjustment to or restriction on the voting rights attached to Shares shall not affect the application of this Article 136 in relation to interests in those or any other Shares; and |
43
(b) |
interested shall be construed as it is for the purposes of section 793 of the Act. |
Additional obligations
137 The provisions of Article 136 through Article 149 are in addition to and separate from any other rights or obligations arising at law or otherwise.
Notification
138 A member other than a Depositary holding Relevant Share Capital shall notify the Company of his interests (if any) in Relevant Share Capital if:
(a) |
he has a notifiable interest immediately after the relevant time, but did not have such an interest immediately before that time; |
(b) |
he had a notifiable interest immediately before the relevant time, but does not have such an interest immediately after it; or |
(c) |
he had a notifiable interest immediately before the relevant time, and has such an interest immediately after it, but the percentage levels of his interest immediately before and immediately after that time are not the same. |
Timing of notification
139 A member other than a Depositary holding Relevant Share Capital shall, to the extent he is lawfully able to do so, notify the Company of the interests of any other person in the Relevant Share Capital of which he is the registered holder (or, to the extent he is not lawfully able to make such notification, shall use his reasonable endeavours to procure that such person makes notification of his interests to the Company) if:
(a) |
such person has a notifiable interest immediately after the relevant time, but did not have such an interest immediately before that time; |
(b) |
such person had a notifiable interest immediately before the relevant time, but does not have such an interest immediately after it; or |
(c) |
such person had a notifiable interest immediately before the relevant time, and has such an interest immediately after it, but the percentage levels of his interest immediately before and immediately after that time are not the same. |
Percentage level
140 The expression percentage level in Articles 138(c) and 139(c), means the percentage figure found by expressing the aggregate nominal value of all the Shares comprised in the Relevant Share Capital concerned in which the person has interests immediately before or (as the case may be) immediately after the relevant time as a percentage of the aggregate nominal value of that Relevant Share Capital and rounding that figure down, if it is not a whole number, to the next whole number. Where the aggregate nominal value of the Relevant Share Capital is greater immediately after the relevant time than it was immediately before, the percentage level of the persons interest immediately before (as well as immediately after) that time shall be determined by reference to the larger amount.
44
141 For the purposes of Articles 138, 139 and 140:
(a) |
relevant time means: |
(i) |
the time at which: |
(A) |
a person acquires an interest in shares comprised in Relevant Share Capital; or |
(B) |
a person ceases to be interested in Shares comprised in Relevant Share Capital; or |
(C) |
another change of circumstances affecting facts relevant to the application of this Article occurs, |
in each case provided that the person is aware of such acquisition, cessation or change in circumstances at the time it occurs; and
(ii) |
where a person is not so aware, the time at which: |
(A) |
that person becomes aware that he has acquired an interest in shares comprised in Relevant Share Capital; or |
(B) |
that person becomes aware that he has ceased to be interested in shares comprised in Relevant Share Capital; or |
(C) |
that person otherwise becomes aware of any facts relevant to the application of this Article (whether or not arising from a change of circumstances). |
(b) |
a person who is interested in Shares comprised in Relevant Share Capital has a notifiable interest at any time when the aggregate nominal value of the Shares in the Relevant Share Capital in which he has such interests is equal to or more than five (5) per cent of the aggregate nominal value of that Relevant Share Capital. |
Form of notification
142 Any notification required by to be made by a member under Article 138 and Article 139 must be made in writing to the Company within the period of ten (10) days next following the day on which that obligation arises. To the extent a member is not lawfully able to make a notification under Article 139, such member shall use its reasonable endeavours to procure that the relevant person notifies his interests to the Company within such ten (10) day period or within such longer period as the directors may allow.
Content of notification
143 The notification shall specify the share capital of the Company to which it relates, and must also:
(a) |
state the number of Shares comprised in that share capital in which the person making the notification knows he (or any other relevant person) had interests immediately after the time when the obligation arose; or |
45
(b) |
in a case where the person making the notification (or any other relevant person) no longer has a notifiable interest in shares comprised in that share capital, state that he (or that other person) no longer has that interest. |
144 A notification (other than one stating that a person no longer has a notifiable interest) shall include the following particulars, so far as known to the person making the notification at the date when it is made:
(a) |
the identity of each registered holder of Shares to which the notification relates and the number of such Shares held by each of them; and |
(b) |
the nature of the relevant interests in such Shares. |
145 A person other than a Depositary holding Relevant Share Capital who has an interest in shares comprised in Relevant Share Capital or knows or becomes aware that any other person has an interest in shares so comprised of which he is the registered holder, that interest being notifiable, shall notify (or, to the extent he is not lawfully able to make such notification, shall use his reasonable endeavours to procure that such other person shall notify) the Company in writing:
(a) |
of any particulars in relation to those Shares which are specified in Article 144; and |
(b) |
of any change in those particulars |
of which in either case he becomes aware at any time after any interest notification date and before the first occasion following that date on which he comes under any further obligation of disclosure with respect to his interest in shares comprised in that share capital. A notification required under this Article 145 shall be made within the period of ten (10) days next following the day on which it arises. The reference to an interest notification date, in relation to a persons interest in shares comprised in the Companys Relevant Share Capital, is to either (i) the date of any notification made or procured by him with respect to his or any other persons interest under this Article 145 or (ii) where he has failed to make, or procure the making of, a notification, the date on which the period allowed for making it came to an end.
Duration of interest
146 A person who at any time has a notifiable interest in shares is to be regarded under Article 145 as continuing to have a notifiable interest in them unless and until the registered holder of the Shares in question comes under an obligation to make or use his reasonable endeavours to procure a notification stating that he (or any other relevant person) no longer has such an interest in those Shares.
Agency
147 Where a person authorises another (the agent) to acquire or dispose of, on his behalf, interests in Shares comprised in the Relevant Share Capital, he shall secure that the agent notifies him immediately of acquisitions or disposals effected by the agent which will or may give rise to any obligation of disclosure imposed on him by this Article 147 with respect to his interest in that share capital.
Consequences of notifiable interest
46
148 If it shall come to the notice of the Board that any member has not, within the requisite period, made or, as the case may be, procured the making of any notification required by Article 138, Article 139 or Article 145, the Company may (in the absolute discretion of the Board) at any time thereafter give notice to such member and such notice shall have the same contents and effect, and be subject to the same provisions of these Articles as if it were a direction notice given under Article 125, provided that the provisions of Article 125(b)(ii) shall not apply to any Shares subject to such a direction notice.
Deemed interest in Shares
149 For the purposes of this Article 149, Article 138, Article 139 or Article 145, a person shall be treated as appearing to be interested in any Shares if the member holding such shares has given to the Company a notification whether following service of a notice in accordance with the Act or otherwise which either:
(a) |
names such person as being so interested; or |
(b) |
(after taking into account any such notification and any other relevant information in the possession of the Company) the Company knows or has reasonable cause to believe that the person in question is or may be interested in the Shares. |
PROXIES AND CORPORATE REPRESENTATIVES
Appointment of proxy
150 A member is entitled to appoint another person, who need not be a member, as his proxy to exercise all or any of his rights to attend and to speak and vote at a meeting of the Company in respect of the Voting Shares to which the proxy appointment relates. The proxy appointment shall, unless it provides to the contrary, be valid for any adjournment of the meeting as a well as for the meeting to which it relates.
151 The appointment of a proxy (whether made by instrument in writing, in electronic form or by website communication) shall be in any usual form as contemplated by these Articles or as the Board may otherwise approve. Invitations to appoint a proxy shall be sent or made available by the Company to all persons entitled to notice of and to attend and vote at any meeting, and shall provide for voting both for and against all resolutions to be proposed at that meeting other than resolutions relating to the procedure of the meeting. The accidental omission to send or make available an invitation to appoint a proxy or the non-receipt thereof by any member entitled to attend and vote at a meeting shall not invalidate the proceedings at that meeting.
152 The appointment of a proxy shall be:
(a) |
in the case of a proxy relating to Shares held in the name of a Depositary, in a form or manner of communication approved by the Board, which may include, without limitation, a voter instruction form to be provided to the Company by certain third parties on behalf of the Depositary. Subject thereto, the appointment of a proxy may be: |
(i) |
in hard copy form; or |
(ii) |
in electronic form, to the electronic address provided by the Company for this |
47
purpose; or |
(b) |
in the case of a proxy relating to Shares to which Article 152(a) does not apply: |
(i) |
in any usual form or in any other form or manner of communication which the Board may approve. Subject thereto, the appointment of a proxy may be: |
(A) |
in hard copy form; or |
(B) |
in electronic form, to the electronic address provided by the Company for this purpose. |
Execution of proxy
153 The appointment of a proxy, whether made in hard copy form or in electronic form, shall be executed in such manner as may be approved by or on behalf of the Company from time to time. Subject thereto, the appointment of a proxy shall be executed by the appointor or any person duly authorised by the appointor or, if the appointor is a corporation, executed by a duly authorised person or under its common seal or in any other manner authorised by its constitution.
Distribution of proxies
154 The Board may, if it thinks fit, but subject to the provisions of the Statutes, at the Companys expense (with or without provision for their return prepaid) send hard copy forms of proxy for use at the meeting, or at any separate meeting of the holders of any class of Shares, and issue invitations in electronic form to appoint a proxy in relation to the meeting in such form as may be approved by the Board. If, for the purposes of any meeting appointments of proxy or invitations to appoint as proxy a person or one of a number of persons specified in the invitations are issued at the Companys expense, they shall be issued to all (and not some only) of the members entitled to be sent a notice of the meeting and to vote at it. The accidental omission, or the failure due to circumstances beyond the Companys control, to send or make available, such an appointment of proxy or give such an invitation to, or the non-receipt thereof by, any member entitled to attend and vote at a meeting shall not invalidate the proceedings at that meeting. The appointment of a proxy shall not preclude a member from attending and voting in person at the meeting or poll concerned. A member may appoint more than one proxy to attend on the same occasion, provided that each such proxy is appointed to exercise the rights attached to a different Share or Shares held by that member. References in these Articles to an appointment of a proxy include references to an appointment of multiple proxies.
Delivery/receipt of proxy appointment
155 Without prejudice to Article 94(ii) or to the third sentence of Article 110, the appointment of a proxy shall:
(a) |
if in hard copy form, be delivered by hand or by post to the Office or such other place within the United Kingdom as may be specified by or on behalf of the Company for that purpose: |
(i) |
in the notice convening the meeting; or |
48
(ii) |
in any form of proxy sent by or on behalf of the Company in relation to the meeting, by the time specified by the Board (as the Board may determine, in compliance with the provisions of the Act) in any such notice or form of proxy. |
(b) |
if in electronic form, be received at any address to which the appointment of a proxy may be sent by electronic means pursuant to a provision of the Statutes or to any other address specified by or on behalf of the Company for the purpose of receiving the appointment of a proxy in electronic form: |
(i) |
in the notice convening the meeting; or |
(ii) |
in any form of proxy sent by or on behalf of the Company in relation to the meeting; or |
(iii) |
in any invitation to appoint a proxy issued by the Company in relation to the meeting; or |
(iv) |
on a website that is maintained by or on behalf of the Company and identifies the Company, |
by the time specified by the Board (as the Board may determine, in compliance with the provisions of the Statutes) in any such method of notification.
The Board may specify, when determining the dates by which proxies are to be lodged, that no account need be taken of any part of a day that is not a working day.
156 Any means of appointing a proxy which is authorised by or under this Article 156 shall be subject to any terms, limitations, conditions or restrictions that the Board may from time to time prescribe. Without limiting the foregoing, in relation to any Shares which are held in uncertificated form, the Board may from time to time permit appointments of a proxy to be made by means of an electronic communication in the form of an Uncertificated Proxy Instruction, and received by such participant in the Relevant System concerned acting on behalf of the Company as the Board may prescribe, in such form and subject to such terms and conditions as may from time to time be prescribed by the Board (subject always to the facilities and requirements of the Relevant System concerned), and may in a similar manner permit supplements to, or amendments or revocations of, any such Uncertificated Proxy Instruction to be made by like means. The Board may in addition prescribe the method of determining the time at which any such properly authenticated dematerialised instruction (and/or other instruction or notification) is to be treated as received by the Company or such participant. The Board may treat any such Uncertificated Proxy Instruction which purports to be or is expressed to be sent on behalf of a holder of a Share as sufficient evidence of the authority of the person sending that instruction to send it on behalf of that holder.
Authentication of proxy appointment not made by holder
157 Subject to the provisions of the Statutes, where the appointment of a proxy is expressed to have been or purports to have been made, sent or supplied by a person on behalf of the holder of a Share:
(a) |
the Company may treat the appointment as sufficient evidence of the authority of that person to make, send or supply the appointment on behalf of that holder; |
49
(b) |
that holder shall, if requested by or on behalf of the Company at any time, send or procure the sending of reasonable evidence of the authority under which the appointment has been made, sent or supplied (which may include, without limitation, a copy of such authority certified notarially or in some other way approved by the Board), to such address and by such time as may be specified in the request and, if the request is not complied with in any respect, the appointment may be treated as invalid; and |
(c) |
whether or not a request under this Article 157 has been made or complied with, the Board may determine that it has insufficient evidence of an authority of that person to make, send or supply the appointment on behalf of that holder and may treat the appointment as invalid. |
Validity of proxy appointment
158 Subject to Article 156, a proxy appointment which is not delivered or received in accordance with Article 155 shall be invalid. When two (2) or more valid proxy appointments are delivered or received in respect of the same Share for use at the same meeting, the one that was last delivered or received shall be treated as replacing or revoking the others as regards that Share, provided that if the Company determines that it has insufficient evidence to decide whether or not a proxy appointment is in respect of the same Share, it shall be entitled to determine which proxy appointment (if any) is to be treated as valid. Subject to the Statutes, the Company may determine at its discretion when a proxy appointment shall be treated as delivered or received for the purposes of these Articles.
Rights of proxy
159 A proxy appointment shall be deemed to entitle the proxy to exercise all or any of the appointing members rights to attend and to speak and vote at a meeting of the Company in respect of the Shares to which the proxy appointment relates. The proxy appointment shall, unless it provides to the contrary, be valid for any adjournment of the meeting as well as for the meeting to which it relates.
Checking proxy votes
160 The Company shall not be required to check that a proxy or corporate representative votes in accordance with any instructions given by the member by whom he is appointed. Any failure to vote as instructed shall not invalidate the proceedings on the resolution.
Corporate representatives
161 Any corporation which is a member of the Company (in this Article 161 the grantor) may, by resolution of its directors or other governing body, authorise such person or persons as it thinks fit to act as its representative or representatives at any meeting of the Company or at any separate meeting of the holders of any class of Shares. A director, the secretary or other person authorised for the purpose by the secretary may require all or any of such persons to produce a certified copy of the resolution of authorisation before permitting him to exercise his powers. Such person is entitled to exercise (on behalf of the grantor) the same powers as the grantor could exercise if it were an individual member of the Company. Where a grantor authorises more than one (1) person to exercise a power and more than one (1) authorised person purports in respect of the same Shares:
50
(a) |
to exercise the power in the same way as each other, the power is treated as exercised in that way; and |
(b) |
not to exercise the power in the same way as each other, the power is treated as not exercised. |
Revocation of authority
162 The termination of the authority of a person to act as a proxy or duly authorized representative of a corporation does not affect:
(a) |
whether he counts in deciding whether there is a quorum at a meeting; |
(b) |
the validity of anything he does as chairman of a meeting; |
(c) |
the validity of a poll demanded by him at a meeting; or |
(d) |
the validity of a vote given by that person, |
unless notice of the termination was either delivered or received as mentioned in the following sentence at least twenty-four (24) hours before the start of the relevant meeting or adjourned meeting or (in the case of a poll taken otherwise than on the same day as the meeting or adjourned meeting) the time appointed for taking the poll. Such notice of termination shall be either by means of a document in hard copy form delivered to the Office or to such other place within the United Kingdom as may be specified by or on behalf of the Company in accordance with Article 155(a) or in electronic form received at the address specified (if any) by or on behalf of the Company in accordance with Article 155(b), regardless of whether any relevant proxy appointment was effected in hard copy form or in electronic form.
Duration of general authority
163 A proxy given in the form of a power of attorney or similar authorisation granting power to a person to vote on behalf of a member at forthcoming meetings in general shall not be treated as valid for a period of more than twelve months, unless a contrary intention is stated in it.
Minimum number of directors
164 The number of directors (other than any alternate directors) shall be at least two (2) and shall be subject to any maximum number fixed from time to time by a resolution of the majority of the Board.
Fewer than the minimum directors
165 If the number of directors is reduced below the minimum number fixed in accordance with these Articles, the directors for the time being may act for the purpose of filling vacancies in their number or of calling a general meeting of the Company, but for no other purpose. If there are no directors willing to act, then any two members may summon a general meeting (or instruct the secretary to do so) for the purpose of appointing directors.
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Number of directors to retire
166 At each annual general meeting of the Company, every director at the date of the notice convening the meeting shall retire from office. A retiring director may offer himself for re-appointment by the members and a director that is so re-appointed will be treated as continuing in office without a break.
167 A director who retires at an annual general meeting shall (unless he is removed from office or his office is vacated in accordance with these Articles) retain office until the close of the meeting at which he retires or (if earlier) when a resolution is passed at that meeting not to fill the vacancy or to elect another person in his place or the resolution to re-appoint him is put to the meeting and lost.
Eligibility for election
168 No person shall be appointed a director at any general meeting unless:
(a) |
he is a director retiring at the meeting; |
(b) |
he is recommended by the Board; or |
(c) |
notice in respect of that person is given by a member qualified to vote at the meeting has been received by the Company in accordance with Article 117 and Article 119 (and, if applicable, section 338 of the Act) of the intention to propose that person for appointment stating the particulars which would, if he were so appointed, be required to be included in the Companys register of directors, together with notice by that person of his willingness to be appointed. |
Provisions if insufficient directors appointed
169 If:
(a) |
any resolution or resolutions for the appointment or re-appointment of the persons eligible for appointment or re-appointment as directors are put to the annual general meeting and are not approved; and |
(b) |
at the end of that meeting the number of directors is fewer than any minimum number of directors required under Article 164, |
all retiring directors who stood for re-appointment at that meeting (for the purposes of Articles 169 and 170, Retiring Directors) shall be deemed to have been re-appointed as directors and shall remain in office, but the Retiring Directors may only:
(c) |
act for the purpose of filling vacancies and convening general meetings of the Company; and |
(d) |
perform such duties as are appropriate to maintain the Company as a going concern and to comply with the Companys legal and regulatory obligations, |
but not for any other reasons.
52
170 The Retiring Directors shall convene a general meeting as soon as reasonably practicable following the annual general meeting referred to in Article 169, and they shall retire from office at that meeting. If at the end of any meeting convened under this Article 170 the number of directors is fewer than any minimum number of directors required under Article 164, the provisions of Articles 169 and 170 shall also apply to that meeting.
Separate resolutions on appointment
171 Except as otherwise authorised by the Statutes, a motion for the appointment of two or more persons as directors by a single resolution shall not be made unless a resolution that it should be so made has first been agreed to by the meeting without any vote being given against it.
Filling vacancies and additional appointments
172 Subject to the provisions of these Articles, the Company may by ordinary resolution appoint a person who is willing to act to be a director either to fill a vacancy or as an additional director. The appointment of a person to fill a vacancy or as an additional director shall take effect from the end of the relevant meeting.
173 The Board may appoint a person who is willing to act to be a director, either to fill a casual vacancy or as an additional director. Any director so appointed shall hold office only until the next following annual general meeting, and shall then be eligible for election, or until his earlier resignation or removal in accordance with these Articles.
No share qualification
174 A director shall not be required to hold any Shares by way of qualification.
Business to be managed by the Board
175 Subject to the provisions of the Statutes and these Articles and any directions given by special resolution, to take, or refrain from taking, specified action, the business of the Company shall be managed by the Board, which may exercise all the powers of the Company, whether relating to the management of the business or not, including, without limitation, the power to dispose of all or any part of the undertaking of the Company.
176 No alteration of these Articles and no such direction shall invalidate any prior act of the Board which would have been valid if that alteration had not been made or that direction had not been given. The powers given by this Article 176 shall not be limited by any special power given to the Board by these Articles. A meeting of the Board at which a quorum is present may exercise all powers exercisable by the Board.
Exercise by the Company of voting rights
177 The Board may exercise the voting power conferred by the shares in any body corporate held or owned by the Company in such manner in all respects as it thinks fit (including without limitation the exercise of that power in favour of any resolution appointing its members or any of them directors of such body corporate, or voting or providing for the payment of remuneration to the directors of such body corporate).
53
178 Subject as provided in these Articles, the Board may exercise all of the powers of the Company to borrow money, to indemnify and guarantee, to mortgage or charge its undertaking, property and assets (present and future) and uncalled capital or parts thereof, and, subject to the Statutes, to issue debentures and other securities, whether outright or as collateral security, for any debt, liability or obligation of the Company or of any third party.
179 The Companys name may be changed by resolution of the Board.
DELEGATION OF POWERS OF THE BOARD
Committees of the Board
180 The Board may delegate any of its powers:
(a) |
to any committee consisting of one (1) or more directors and (if thought fit) one (1) or more other persons, to such an extent and on such terms and subject to such conditions as the Board thinks fit; and |
(b) |
to such person(s) by such means, to such an extent and on such terms and subject to such conditions as the Board thinks fit, including to any director holding any executive office such of its powers as the Board considers desirable to be exercised by him. |
Any such delegation shall, in the absence of express provision to the contrary in the terms of delegation, be deemed to include authority to sub-delegate to one or more directors (whether or not acting as a committee) or to any other person all or any of the powers delegated and may be made subject to such conditions as the Board may specify, and may be revoked or altered.
Subject to any conditions imposed by the Board, the proceedings of a committee with two (2) or more members shall be governed by these Articles regulating the proceedings of directors so far as they are capable of applying, provided that the quorum at any such meeting shall be a majority of the members of such committee then in office unless the committee shall consist of one or two members, in which case one member shall constitute a quorum.
Local boards
181 The Board may establish local or divisional boards or agencies for managing any of the affairs of the Company, either in the United Kingdom or elsewhere, and may appoint any persons to be members of the local or divisional boards, or any managers or agents, and may fix their remuneration. The Board may delegate to any local or divisional board, manager or agent any of the powers, authorities and discretions vested in or exercisable by the Board, with power to sub-delegate, and may authorise the members of any local or divisional board, or any of them, to fill any vacancies and to act notwithstanding vacancies. Any appointment or delegation made pursuant to this Article 181 may be made on such terms and subject to such conditions as the Board may decide. The Board may remove any person so appointed and may revoke or vary the delegation but no person dealing in good faith and without notice of the revocation or variation shall be affected by it.
Agents
54
182 The Board may, by power of attorney or otherwise, appoint any person to be the agent of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Board) and for such period and on such conditions as the Board determines, including without limitation authority for the agent to delegate all or any of his powers, authorities and discretions, and may revoke or vary such delegation.
Offices including the title director
183 The Board may appoint any person to any office or employment having a designation or title including the word director or attach to any existing office or employment with the Company such a designation or title and may terminate any such appointment or the use of any such designation or title. The inclusion of the word director in the designation or title of any such office or employment shall not imply that the holder is a director of the Company, and the holder shall not thereby be empowered in any respect to act as, or be deemed to be, a director of the Company for any of the purposes of these Articles.
RESIGNATION, DISQUALIFICATION AND REMOVAL OF DIRECTORS
Resignation
184 A director may resign his office either by notice in writing submitted to the Board or, if he shall in writing offer to resign, if the other directors resolve to accept such offer.
185 Without prejudice to the provisions for retirement (by rotation or otherwise) contained in these Articles, a person shall cease to be a director as soon as:
(a) |
that persons period of appointment expires, if he has been appointed for a fixed period; |
(b) |
that person ceases to be a director by virtue of any provision of the Statutes or is prohibited from being a director by law or, if applicable, any provisions of the rules of Nasdaq; |
(c) |
that person is deemed unfit or has otherwise been requested to be removed from office by any regulatory authority in any applicable jurisdiction; |
(d) |
a bankruptcy order is made against that person or an application is made for an interim court order under s.253 of the Insolvency Act 1986 in connection with a voluntary arrangement under that statute or any similar legislation in any applicable jurisdiction; |
(e) |
an arrangement or composition is made with that persons creditors generally in satisfaction of that persons debts; |
(f) |
a registered medical practitioner who is treating that person gives a written opinion to the Company stating that that person has become mentally or physically incapable of acting as a director and may remain so for more than three months; |
(g) |
that person has become a patient for the purposes of any statute relating to mental health or any court claiming jurisdiction on the ground of mental health or disorder (however stated) makes an order for his detention or for the appointment of a guardian, receiver or other person (howsoever designated) to exercise powers with respect to his property or affairs and in any such case the directors resolve that he should cease to be a director; |
55
(h) |
notification is received by the Company from the director that the director is resigning from office, and such resignation has taken effect in accordance with its terms; |
(i) |
in the case of a director who holds any executive office, that persons appointment as such is terminated or expires and the directors resolve that he should cease to be a director; |
(j) |
that person is absent for more than six consecutive months without permission of the directors from meetings of the directors held during that period and the directors resolve that that person should cease to be a director; |
(k) |
that person receives notice approved by not less than two thirds of the other directors stating that that person should cease to be a director. In calculating the number of directors who are required to give such notice to the director, (i) an alternate director appointed by him acting in his capacity as such shall be excluded, and (ii) a director and any alternate director appointed by him and acting in his capacity as such shall constitute a single director for this purpose, so that notice by either shall be sufficient; or |
(l) |
that person dies. |
Power of the Company to remove director
186 The Company may, without prejudice to the provisions of the Statutes, by ordinary resolution remove any director from office (notwithstanding any provision of these Articles or of any agreement between the Company and such director, but without prejudice to any claim he may have for damages for breach of any such agreement). The Company may, by ordinary resolution, appoint another person in place of a director removed from office in accordance with this Article 186.
REMUNERATION AND EXPENSES OF DIRECTORS
Arrangements with executive directors
187 Subject to the provisions of the Statutes and these Articles (as and to the extent applicable), the salary or remuneration of any director appointed to hold any employment or executive office in accordance with these Articles may be either a fixed sum of money, or may altogether or in part be governed by business done or profits made or otherwise determined by the Board, and may be in addition to or instead of any fee payable to him for serving as a director under these Articles.
Arrangements with non-executive directors
188 Subject to the provisions of the Statutes, the Board may enter into, vary and terminate an agreement or arrangement with any director who does not hold executive office for the provision of his services to the Company. Any such agreement or arrangement may be made on such terms as the Board determines, provided that the terms of any such agreement or arrangement would not result in non-compliance with any listing requirements of Nasdaq.
Ordinary remuneration
56
189 Each non-executive director shall be paid a fee for their services (which shall be deemed to accrue from day to day) at such rate as may from time to time be determined by the Board, provided that the agreement or payment of any such fee would not result in non-compliance with any listing requirements of Nasdaq.
Additional remuneration for special services
190 Any director who does not hold executive office with the Company and who performs special services which in the opinion of the Board are outside the scope of the ordinary duties of a director, may be paid such extra remuneration by way of additional fee, salary, commission or otherwise as the Board may determine, provided the payment of any such extra remuneration would not result in non-compliance with any listing requirements of Nasdaq.
Other remuneration
191 Unless the Board decides otherwise, a director is not accountable to the Company for any remuneration which he received as a director or other officer or employee of the Companys subsidiary undertakings or of any other body corporate in which the Company is interested.
Expenses
192 The directors may be paid all reasonable travelling, hotel, and other expenses properly incurred by them in connection with their attendance at meetings of the Board or committees of the Board, general meetings or separate meetings of the holders of any class of Shares or of debentures of the Company or otherwise in connection with the discharge of their duties as a director.
Appointment to executive office
193 Subject to the provisions of the Statutes, the Board may appoint one or more of its body or any other employee of the Company to be the holder of any executive office (including, without limitation, to hold office as president, chief executive officer, vice president, executive vice president, senior vice president and/or treasurer, but excluding that of auditor) in the Company and may enter into an agreement or arrangement with any such director or employee for his employment by the Company or for the provision by him of any services outside the scope of the ordinary duties of a director or employee. Any such appointment, agreement or arrangement may be made on such terms, including without limitation terms as to remuneration, as the Board determines, provided that the terms of any such agreement or arrangement would not result in non-compliance with any listing requirements of Nasdaq. The Board may revoke or vary any such appointment but without prejudice to any rights or claims which the person whose appointment is revoked or varied may have against the Company because of the revocation or variation.
Termination of appointment to executive office
194 Any appointment of a director to an executive office shall terminate if he ceases to be a director but without prejudice to any rights or claims which he may have against the Company by reason of such cessation. A director appointed to an executive office shall not be exempt
57
from retirement by rotation, and if he ceases for any reason to hold the executive office by virtue of which he is termed an executive director, he shall offer to resign as a director in accordance with Article 184 and he shall cease to be a director if the other directors resolve to accept such offer.
Emoluments to be determined by the Board
195 The emoluments of any director or employee holding executive office for his services as such shall be determined by the Board, provided that the terms of any such agreement or arrangement would not result in non-compliance with any listing requirements of Nasdaq and may be of any description, including without limitation admission to, or continuance of, membership of any scheme (including any share acquisition scheme) or fund instituted or established or financed or contributed to by the Company for the provision of pensions, life assurance or other benefits for employees or their dependants, or the payment of a pension or other benefits to him or his dependants on or after retirement or death, apart from membership of any such scheme or fund.
ALTERNATE DIRECTORS
Power to appoint alternates
196 Any director (other than an alternate director) may appoint another director, or any other person approved by the Board and willing to act, and permitted by law to do so, to be an alternate director and may at any time terminate that appointment by notice in writing. Subject to the foregoing, a director may appoint more than one (1) alternate and a person may act as an alternate for more than one (1) director. An alternate director shall not be required to hold any Shares in the Company and shall not be counted in determining any maximum number of directors permitted by these Articles.
Method of appointment or removal
197 Any appointment or removal of an alternate director shall be by notice to the Company signed by the director making or revoking the appointment or in any other manner approved by the Board and shall take effect in accordance with the terms of the notice (subject to any approval required by Article 196) on receipt of such notice by the Company which shall be in hard copy form or in electronic form sent to such address (if any) specified by or on behalf of the Company for that purpose. A notice of appointment must contain a statement signed by the proposed alternate that he is willing to act as the alternate of the director giving the notice.
Alternates entitled to receive notice
198 An alternate director shall (subject to his giving to the Company a postal address and, if applicable, an address in relation to which electronic communications may be received by him) be entitled to receive notice of all meetings of the Board and of all meetings of committees of the Board of which his appointer is a member, to attend and vote at any such meeting at which the director appointing him is not personally present but at which his appointer would be entitled to vote, and generally to perform all the functions of his appointer in his absence (except as regards powers to appoint an alternate) as a director in his absence.
Alternates representing more than one director
58
199 A director or any other person may act as an alternate director to represent more than one director, and an alternate director shall be entitled at meetings of the Board or any committee of the Board to one (1) vote for every director whom he represents (and who is present) in addition to his own vote (if any) as a director, but he shall count as only one (1) director for the purposes of determining whether a quorum is present.
Termination of appointment
200 An alternate director shall automatically cease to be an alternate director:
(a) |
if his appointer ceases to be a director or dies, but if a director retires by rotation or otherwise vacates office and is elected or deemed to have been elected at the meeting at which he retires, any appointment of an alternate director made by him which was in force immediately prior to his retirement shall continue after his election; or |
(b) |
on the happening of any event which, if he were a director, would cause him to vacate office as a director or, if it occurred in relation to his appointer, would result in termination of his appointers appointment as a director; or |
(c) |
if he resigns his office by notice to the Company. |
Alternate not an agent
201 Save as otherwise provided in these Articles, an alternate director:
(a) |
shall be deemed for all purposes to be a director; |
(b) |
shall alone be responsible for his own acts and defaults; |
(c) |
shall, in addition to any restrictions which may apply to him personally, be subject to the same restrictions applicable to his appointer; |
(d) |
shall not be deemed to be the agent of the director appointing him, |
and accordingly, except where the context otherwise requires, a reference to a director shall be deemed to include a reference to an alternate director.
Expenses and remuneration of alternates
202 An alternate director may be repaid by the Company such expenses as might properly have been repaid to him if he had been a director but shall not (unless the Company by ordinary resolution otherwise determines), in respect of his office as alternate director, be entitled to receive any remuneration or fee from the Company in respect of his services as an alternate director except such part (if any) of the remuneration otherwise payable to his appointer as such appointer may by notice to the Company from time to time direct. An alternate director shall be entitled to be indemnified by the Company, and receive the benefits of any insurance or agreement for the Company to incur directly costs in respect of any proceedings or investigation, to the same extent as if he were a director.
Interested director not to be counted for quorum or voting purposes
59
203 Subject to Article 205, if a proposed decision of the directors is concerned with an actual or proposed transaction or arrangement with the Company in which a director is interested, that director is not to be counted as participating in the decision-making process for quorum or voting purposes.
Interpretation
204 For the purposes of these Articles (i) a conflict of interest includes (x) a conflict of interest and duty and (y) a conflict of duties and (ii) interest includes both direct and indirect interests.
When interested director may be counted for quorum or voting purposes
205 If:
(a) |
the Company by ordinary resolution disapplies the provision of these Articles which would otherwise prevent a director from being counted as participating in the decision-making process; |
(b) |
the directors interest cannot reasonably be regarded as likely to give rise to a conflict of interest; |
(c) |
the board of directors authorises the directors conflict of interest; or |
(d) |
the directors conflict of interest arises from a permitted cause, |
a director who is interested in an actual or proposed transaction or arrangement with the Company is to be counted as participating in the decision-making process for quorum and voting purposes.
Permitted causes
206 For the purposes of Article 205, the following are permitted causes:
(a) |
the giving of a guarantee, security or indemnity in respect of money lent to, or an obligation incurred by, a director at the request of, or for the benefit of, the Company or any of its Subsidiaries; |
(b) |
the giving of a guarantee, security or indemnity in respect of a debt or obligation of the Company or any of its Subsidiaries by a director for which he has assumed responsibility (in whole or in part and whether alone or jointly with others) under a guarantee or indemnity or by the giving of security; |
(c) |
the giving to a director of any other indemnity which is on substantially the same terms as indemnities given or to be given to all of the other directors and/or to the funding by the Company of his expenditure on defending proceedings or the doing by the Company of anything to enable him to avoid incurring such expenditure where all other directors have been given or are to be given substantially the same arrangements; |
(d) |
a contract, arrangement, transaction or proposal concerning an offer of shares, debentures or other securities of the Company or any of its Subsidiaries for subscription, purchase or exchange, in which offer the director is or may be entitled to participate as |
60
holder of securities or in the underwriting or sub-underwriting of which he is to participate; |
(e) |
a contract, arrangement, transaction or proposal concerning any other undertaking in which a director or any person connected with him is interested, directly or indirectly, and whether as an officer, shareholder, member, partner, creditor or otherwise if he and any persons connected with him do not to his knowledge hold an interest (as that term is used in sections 820 to 825 of the Act) representing one (1) per cent. or more of either any class of the equity share capital of such undertaking (or any other undertaking through which his interest is derived) or of the voting rights available to shareholders, members, partners or equivalent of the relevant undertaking (or any interest being deemed for the purpose of this Article 206 to be likely to give rise to a conflict with the interests of the Company in all circumstances); |
(f) |
a contract, arrangement, transaction or proposal for the benefit of employees and directors and/or former employees and directors of the Company or any of its Subsidiaries and/or members of their families (including a spouse or civil partner or a former spouse or former civil partner) or any person who is or was dependent on such persons, including but without being limited to a retirement benefits scheme and an employees share scheme, which does not accord to any director any privilege or advantage not generally accorded to the employees and/or former employees to whom such arrangement relates; and |
(g) |
a contract, arrangement, transaction or proposal concerning any insurance against any liability which the Company is empowered to purchase or maintain for, or for the benefit of, any directors or for persons who include directors. |
Situational Conflicts
207 The directors may, in accordance with the requirements set out in these Articles, authorise any matter or situation proposed to them by any director, which would, if not authorised, involve a director (an Interested Director) breaching his duty under section 175 of the Act to avoid conflicts of interest (a Situational Conflict) and the continued performance by the relevant director of his duties as a director, on such terms and subject to such conditions as they think fit from time to time.
208 Subject to compliance by him with his duties as a director under Part 10 of the Act (other than the duty in section 175(1) of the Act which is the subject of this Article 208, a director may be an officer of, employed by, or hold shares or other securities (whether directly or indirectly) in, or otherwise be interested in, directly or indirectly, the Company or a subsidiary of the Company (in each case, a Group Company Interest and references to a Group Company shall be construed accordingly) and notwithstanding his office or the existence of an actual or potential conflict between any Group Company Interest and the interests of the Company which would fall within the ambit of that section 175(1), the relevant director:
(a) |
shall be entitled to attend any meeting or part of a meeting of the directors at which any matter which may be relevant to the Group Company Interest may be discussed, and to vote on any resolution of the directors relating to such matter, and any board papers relating to such matter shall be provided to the relevant director at the same time as the other directors (save that a director may not vote on any resolution in respect of matters |
61
relating to his employment with the Company or other Group Company); |
(b) |
shall not be obliged to account to the Company for any remuneration or other benefits received by him in consequence of any Group Company Interest; and |
(c) |
will not be obliged to disclose to the Company or use for the benefit of the Company any confidential information received by him by virtue of his Group Company Interest and otherwise than by virtue of his position as a director, if to do so would breach any duty of confidentiality to any other Group Company or third party. |
209 No contract entered into shall be liable to be avoided by virtue of:
(a) |
any director having an interest of the type referred to in Article 206 where the relevant situation has been approved as provided by that Article; or |
(b) |
any director having a Group Company Interest which falls within Article 207 or which is authorised pursuant to Article 208. |
210 Any authorisation under Article 207 will be effective only if:
(a) |
the proposal to be authorised is made by a director in writing and delivered to the other directors or made orally at a meeting of the board, in each case setting out particulars of the Situational Conflict; |
(b) |
any requirements as to the quorum for consideration of the relevant matter is met without counting the Interested Director or any other Interested Director; and |
(c) |
the matter was agreed to without the Interested Director voting or would have been agreed to if the Interested Directors vote had not been counted. |
211 Any authorisation of a Situational Conflict under these Articles may (whether at the time of giving the authorisation or subsequently):
(a) |
extend to any actual or potential conflict of interest which may reasonably be expected to arise out of the matter or situation so authorised; |
(b) |
provide that the Interested Director be excluded from the receipt of documents and information and the participation in discussions (whether at meetings of the directors or otherwise) related to the Situational Conflict; |
(c) |
provide that the Interested Director shall or shall not be an eligible director in respect of any future decision of the directors in relation to any resolution related to the Situational Conflict; |
(d) |
impose upon the Interested Director such other terms for the purposes of dealing with the Situational Conflict as the directors think fit; |
(e) |
provide that, where the Interested Director obtains, or has obtained (through his involvement in the Situational Conflict and otherwise than through his position as a director of the Company), information that is confidential to a third party, he will not be obliged to disclose that information to the Company, or to use it in relation to the Companys affairs where to do so would amount to a breach of that confidence; and |
62
(f) |
permit the Interested Director to absent himself from the discussion of matters relating to the Situational Conflict at any meeting of the directors and be excused from reviewing papers prepared by, or for, the directors to the extent to which they relate to such matters. |
212 Where the directors authorise a Situational Conflict, the Interested Director will be obliged to conduct himself in accordance with any terms and conditions imposed by the directors in relation to the Situational Conflict.
213 The directors may revoke or vary such authorisation in respect of any Situational Conflict at any time, but this will not affect anything done by the Interested Director, prior to such revocation or variation, in accordance with the terms of such authorisation.
214 A director is not required, by reason of being a director (or because of the fiduciary relationship established by reason of being a director), to account to the Company for any remuneration, profit or other benefit which he derives from or in connection with a relationship involving a Situational Conflict which has been authorised by the directors or by the Company in general meeting (subject in each case to any terms, limits or conditions attaching to that authorisation) and no contract shall be liable to be avoided on such grounds.
215 The provisions of Articles 207 to 214 shall not apply to a direct or indirect conflict of interest of a director which arises in relation to an existing or proposed transaction or arrangement with the Company to which the provisions of Articles 203 to 206 and 219 to 220 shall apply.
216 For the purposes of these Articles, references to proposed decisions and decision-making processes include any directors meeting or part of a directors meeting.
217 Subject to Article 218, if a question arises at a meeting of directors or of a committee of directors as to the right of a director to participate in the meeting (or part of the meeting) for voting or quorum purposes, the question may, before the conclusion of the meeting, be referred to the Chairman whose ruling in relation to any director other than the Chairman is to be final and conclusive.
218 If any question as to the right to participate in the meeting (or part of the meeting) should arise in respect of the Chairman, the question is to be decided by a decision of the directors at that meeting, for which purpose the Chairman is not to be counted as participating in the meeting (or that part of the meeting) for voting or quorum purposes.
Transactional conflicts
219 Subject to the provisions of the Statutes and provided that he has disclosed to the Board the nature and extent of his interest (unless the circumstances referred to in section 177(5) or section 177(6) of the Act apply, in which case no such disclosure is required) a director notwithstanding his office:
(a) |
may be a party to, or otherwise interested in, any transaction or arrangement with the Company or in which the Company is otherwise (directly or indirectly) interested; |
(b) |
may (or any firm of which he is a member) act in a professional capacity for the Company (otherwise than as auditor) or any other body in which the Company is |
63
interested and the relevant director or his firm shall be entitled to remuneration for professional services as if he were not a director; and |
(c) |
may be a director or other officer of, or employed by, or a party to a transaction or arrangement with, or otherwise interested in, any undertaking: |
(i) |
in which the Company is (directly or indirectly) interested as shareholder or otherwise; or |
(ii) |
with which he has such a relationship at the request or direction of the Company. |
220 For the purposes of Article 219:
(a) |
a general notice given to the directors that a director is to be regarded as having an interest of the nature and extent specified in the notice in any transaction or arrangement in which a specified person or class of persons is interested shall be deemed to be a disclosure that the director has an interest in any such transaction of the nature and extent so specified; |
(b) |
an interest of which a director has no knowledge and of which it is unreasonable to expect such director to have knowledge shall not be treated as an interest of such director; and |
(c) |
a director shall be deemed to have disclosed the nature and extent of an interest which consists of him being a director, officer or employee of any undertaking in which the Company is interested. |
GRATUITIES, PENSIONS AND INSURANCE
Gratuities and pensions
221 The Board may (by establishment of, or maintenance of, schemes or otherwise) provide benefits, whether by the payment of gratuities or pensions or by insurance or otherwise, for any past or present director or employee of the Company or any of its subsidiary undertakings or any body corporate associated with, or any business acquired by, any of them, and for any member of his family (including a spouse, a civil partner, a former spouse and a former civil partner) or any person who is or was dependent on him, and may (as well before as after he ceases to hold such office or employment) contribute to any fund and pay premiums for the purchase or provision of any such benefit.
Insurance
222 Subject to the provisions of the Act, and without prejudice to the provisions of Articles 297 to 300, the Board may exercise all the powers of the Company to purchase and maintain insurance for or for the benefit of any person who is or was:
(a) |
a director, officer or employee of the Company, or any body which is or was the holding company or subsidiary undertaking of the Company, or in which the Company or such holding company or subsidiary undertaking has or had any interest (whether direct or indirect) or with which the Company or such holding company or subsidiary undertaking is or was in any way allied or associated; or |
64
(b) |
a trustee of any pension fund in which employees of the Company or any other body referred to in paragraph (a) of this Article 222 are or have been interested, |
including, without limitation, insurance against any liability incurred by such persons in respect of any act or omission in the actual or purported execution or discharge of their duties or in the exercise or purported exercise of their powers or otherwise in relation to their duties, powers or offices in relation to the relevant body or fund.
Directors not liable to account
223 No director or former director shall be accountable to the Company or the members liable to account for any benefit provided pursuant to these Articles. The receipt of any such benefit shall not disqualify any person from being or becoming a director of the Company.
Section 247 of the Act
224 The Board may make provision for the benefit of any persons employed or formerly employed by the Company or any of its subsidiaries other than a director or former director or shadow director in connection with the cessation or the transfer of the whole or part of the undertaking of the Company or any subsidiary. Any such provision shall be made by a resolution of the Board in accordance with section 247 of the Act.
Regulation of proceedings
225 Subject to the provisions of these Articles, the Board may regulate its proceedings as it thinks fit. A director may, and the secretary at the request of a director shall, call a meeting of the Board by giving at least five (5) days notice of the meeting to each director, which notice may be waived or shortened with the consent of each director. Notice of a Board meeting shall be deemed to be given to a director if it is given to him personally or by word of mouth or sent in hard copy form to him at his last known address or such other address (if any) as may for the time being be specified by him or on his behalf to the Company for that purpose, or sent in electronic form to such address (if any) for the time being specified by him or on his behalf to the Company for that purpose Any director may waive notice of a meeting and any such waiver may be retrospective. Any notice pursuant to this Article 225 need not be in writing if the Board so determines and any such determination may be retrospective.
Decision making
226 Questions arising at any Board meeting shall be determined by a majority of votes of the directors present at such meeting. A director who is an alternate director who is appointed by two (2) or more directors shall be entitled to a separate vote on behalf of each appointer in the appointers absence.
Quorum
227 No business shall be transacted at any meeting of the Board unless a quorum is present. The quorum necessary for the transaction of the business of the Board may be fixed by the Board and unless so fixed at any other number shall be two (2) persons, each being a director. A person who is not himself a director shall, if his appointer is not present but is entitled to be
65
counted in the quorum, be counted in the quorum. A duly convened meeting of the Board at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions for the time being vested in or exercisable by the Board.
228 Any director who ceases to be a director at a Board meeting may continue to be present and to act as a director and be counted in the quorum until the termination of the Board meeting if no director objects.
229 A director shall not be counted in the quorum present in relation to a matter or resolution on which he is not entitled to vote (or when his vote cannot be counted) but shall be counted in the quorum present in relation to all other matters or resolutions considered or voted on at the meeting.
Power of directors if number falls below minimum
230 The continuing directors or a sole continuing director may act notwithstanding any vacancies in their number, but if the number of directors is less than the number fixed as the quorum the continuing directors or director may act only for the purpose of filling vacancies or of calling a general meeting.
Chairman and deputy chairman
231 The Board may appoint one of their number to be the chairman, and one of their number to be the deputy chairman, of the Board and may at any time remove either of them from such office. Unless he is unwilling to do so, the director appointed as chairman, or in his stead the director appointed as deputy chairman, shall preside at every meeting of the Board at which he is present. If there is no director holding either of those offices, or if neither the chairman nor the deputy chairman is willing to preside or neither of them is present within five (5) minutes after the time appointed for the meeting, the directors present may appoint one of their number to be chairman of the meeting.
Validity of acts of the Board
232 All acts done by a meeting of the Board, or of a committee of the Board, or by a person acting as a director or alternate director, shall, as regards all persons dealing in good faith with the Company, notwithstanding that it be afterwards discovered that there was a defect in the appointment of any director or any member of the committee or alternate director or that any of them were disqualified from holding office, or had vacated office, or were not entitled to vote, or that the meeting was not quorate (provided that the directors present at the inquorate meeting believed, in good faith, that the meeting was quorate and made all such enquiries as were reasonable in the circumstances to establish that the meeting was quorate) be as valid as if every such person had been duly appointed and was qualified and had continued to be a director or, as the case may be, an alternate director and had been entitled to vote and that the meeting was quorate.
Resolution in writing
233 A resolution in writing agreed to by all the directors entitled to vote at a meeting of the Board or of a committee of the Board but excluding any director whose vote is not to be counted in respect of the matter in question (not being less than the number of directors required to form a quorum of the Board or committee of the Board) shall be as valid and effectual as if it had
66
been passed at a meeting of the Board or (as the case may be) a committee of the Board duly convened and held. For this purpose:
(a) |
a director signifies his agreement to a proposed written resolution when the Company receives from him a document indicating his agreement to the resolution authenticated in the manner permitted by the Statutes for a document in the relevant form; |
(b) |
the director may send the document in hard copy form or in electronic form to such address (if any) for the time being specified by the Company for that purpose; |
(c) |
if an alternate director signifies his agreement to the proposed written resolution, his appointer need not also signify his agreement; and |
(d) |
if a director signifies his agreement to the proposed written resolution, an alternate director appointed by him need not also signify his agreement in that capacity. |
Meetings by conference communications
234 Without prejudice to the first sentence of Article 225, a person entitled to be present at a meeting of the Board or of a committee of the Board shall be deemed to be present for all purposes if he is able (directly or by electronic communication) to speak to and be heard by all those present or deemed to be present simultaneously. A director so deemed to be present shall be entitled to vote and be counted in a quorum accordingly. Such a meeting shall be deemed to take place where it is convened to be held or (if no director is present in that place) where the largest group of those participating is assembled, or, if there is no such group, where the chairman of the meeting is. The word meeting in these Articles shall be construed accordingly.
Suspending restrictions on voting
235 The Company may by ordinary resolution suspend or relax to any extent, either generally or in respect of any particular matter, any provision of these Articles prohibiting a director from voting at a meeting of the Board or of a committee of the Board or ratify any transaction not duly authorised by reason of contravention of such provision.
Division of proposals
236 Where proposals are under consideration concerning the appointment (including without limitation fixing or varying the terms of appointment) of two or more directors to offices or employments with the Company or any body corporate in which the Company is interested, the proposals may be divided and considered in relation to each director separately. In such cases each of the directors concerned shall be entitled to vote in respect of each resolution except that concerning his own appointment.
Decision of chairman final and conclusive
237 If a question arises at a meeting of the Board or of a committee of the Board as to the entitlement of a director to vote, the question may, before the conclusion of the meeting, be referred to the chairman of the meeting and his ruling in relation to any director other than himself shall be final and conclusive except in a case where the nature or extent of the interests of the director concerned have not been fairly disclosed. If any such question arises in respect of the chairman of the meeting, it shall be decided by resolution of the Board (on which the
67
chairman shall not vote) and such resolution will be final and conclusive except in a case where the nature and extent of the interests of the chairman have not been fairly disclosed.
238 Subject to the provisions of the Statutes, the secretary shall be appointed by the Board for such term, at such remuneration and on such conditions as it may think fit. Any secretary so appointed may be removed by the Board, but without prejudice to any claim for damages for breach of any contract of service between him and the Company.
Minutes required to be kept
239 The Board shall cause minutes to be recorded for the purpose of:
(a) |
all appointments of officers made by the Board; |
(b) |
all proceedings at meetings of the Company, the holders of any class of Shares, the Board and committees of the Board, including the names of the directors present at each such meeting; and |
(c) |
all resolutions of the Company. |
Conclusiveness of minutes
240 Any such minutes, if purporting to be authenticated by the chairman of the meeting to which they relate or of the next meeting at which they are read, shall be sufficient evidence of the proceedings at the meeting without any further proof of the facts stated in them.
Authority for execution of a deed
241 The seal shall only be used by the authority of a resolution of the Board. The Board may determine who shall sign any document executed under the seal. If they do not, it shall be signed by at least one authorised person in the presence of a witness who attests the signature. Any document may be executed under the seal by impressing the seal by mechanical means or by printing the seal or a facsimile of it on the document or by applying the seal or a facsimile of it by any other means to the document. A document executed, with the authority of a resolution of the Board, in any manner permitted by section 44(2) of the Act and expressed (in whatever form of words) to be executed by the Company has the same effect as if executed under the seal.
Certificates for Shares and debentures
242 The Board may by resolution determine either generally or in any particular case that any certificate for Shares or debentures or representing any other form of security may have any signature affixed to it by some mechanical or electronic means, or printed on it or, in the case of a certificate executed under the seal, need not bear any signature.
68
Overseas and local registers
243 Subject to the provisions of the Statutes and the Regulations, the Company may keep an overseas or local or other register in any place, and the Board may make, amend and revoke any regulations it thinks fit about the keeping of that register.
Authentication and certification of copies and extracts
244 Any director or the secretary or any other person appointed by the Board for the purpose shall have power to authenticate and certify as true copies of and extracts from:
(a) |
any document comprising or affecting the constitution of the Company, whether in hard copy form or electronic form; |
(b) |
any resolution passed by the Company, the holders of any class of Shares, the Board or any committee of the Board, whether in hard copy form or electronic form; and |
(c) |
any book, record and document relating to the business of the Company, whether in hard copy form or electronic form (including without limitation the accounts). |
If certified in this way, a document purporting to be a copy of a resolution, or the minutes or an extract from the minutes of a meeting of the Company, the holders of any class of Shares, the Board or a committee of the Board, whether in hard copy form or electronic form, shall be conclusive evidence in favour of all persons dealing with the Company in reliance on it or them that the resolution was duly passed or that the minutes are, or the extract from the minutes is, a true and accurate record of proceedings at a duly constituted meeting.
Declaration of dividends
245 Subject to the provisions of the Statutes, the Company may by ordinary resolution declare that out of the profits available for distribution there be paid dividends to the holders of A Shares in accordance with the provisions of these Articles, but no dividend shall exceed the amount recommended by the Board.
Interim dividends
246 Subject to the provisions of the Statutes, the Board may pay interim dividends if it appears to the Board that they are justified by the profits of the Company available for distribution and the position of the Company. If the share capital is divided into different classes, the Board may:
(a) |
pay interim dividends on Shares which confer deferred or non-preferred rights with regard to dividends as well as on Shares which confer preferential rights with regard to dividends, but no interim dividend shall be paid on Shares carrying deferred or non-preferred rights if, at the time of payment, any preferential dividend is in arrear; and |
(b) |
pay at intervals settled by it any dividend payable at a fixed rate if it appears to the Board that the profits available for distribution justify the payment. |
69
If the Board acts in good faith it shall not incur any liability to the holders of Shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on any Shares having deferred or non-preferred rights. Where any distribution is satisfied wholly or partly by the distribution of assets, where any difficulty arises in regard to such distribution, the directors may settle the same as they think fit and in particular (but without limitation) may issue fractional certificates (or ignore fractions) and fix the value for distribution of any assets and may determine that cash shall be paid to any member on the basis of the value so fixed in order to adjust the rights of members and may vest any assets in trustees.
Declaration and payment in different currencies
247 Dividends may be declared and paid in any currency or currencies that the Board shall determine. The Board may also determine the exchange rate and the relevant date for determining the value of the dividend in any currency.
248 Except as otherwise provided by the rights attached to Shares:
(a) |
all dividends shall be declared and paid according to the amounts paid up on the Shares on which the dividend is paid, but no amount paid on a Share in advance of the date on which a call is payable shall be treated for the purpose of this Article 248 as paid on the Share; and |
(b) |
all dividends shall be apportioned and paid proportionately to the amounts paid up on the Shares during any portion or portions of the period in respect of which the dividend is paid, but, if any Share is allotted or issued on terms providing that it shall rank for dividend as from a particular date, that Share shall rank for dividend accordingly. |
For the purpose of this Article 248, an amount paid up on a Share in advance of a call shall be treated, in relation to any dividend declared after the payment but before the call, as not paid up on the Share.
Dividend in specie
249 A general meeting declaring a dividend may, on the recommendation of the Board, by ordinary resolution direct that it shall be satisfied wholly or partly by the distribution of assets, including without limitation paid up Shares or debentures of another body corporate. If the Shares in respect of which any such proposed non-cash distribution is paid are Uncertificated Shares, any Shares in the Company which are issued as non-cash consideration in respect of them must be uncertificated. The Board may make any arrangements it thinks fit to settle any difficulty arising in connection with the distribution, including without limitation (a) the fixing of the value for distribution of any assets, (b) the payment of cash to any member on the basis of that value in order to adjust the rights of members, and (c) the vesting of any asset in a trustee.
Permitted deductions and retentions
250 The Board may deduct from any dividend or other monies payable to any member in respect of a Share any monies presently payable by him to the Company in respect of that Share. Where a person is entitled by transmission to a Share, the Board may retain any dividend payable in respect of that Share until that person (or that persons transferee) becomes the holder of that Share.
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Methods of payment to holders and others entitled
251 Any dividend or other monies payable in respect of a Share may be paid (whether in Dollars or another currency) by such method or combination of methods as the Board, in its absolute discretion, may decide and subject in the case of joint holders of a Share to the provisions of Article 252. Different methods of payment may apply to different holders or groups of holders. Without limiting any other method of payment that the Board may decide, the Board may decide that payment shall be made wholly or partly:
(a) |
in cash; or |
(b) |
by cheque or warrant made payable to or to the order of the holder or person entitled to payment; or |
(c) |
by any direct debit, bank or other funds transfer system to the holder or person entitled to payment or, if practicable, to a person designated by notice to the Company by the holder or person entitled to payment; |
(d) |
if any Share is in uncertificated form, where the Company is authorised to do so by or on behalf of the holder or joint holders in such manner as the Company shall from time to time consider sufficient, the Company may also pay any such dividend, interest or other monies by means of the Relevant System concerned (subject always to the facilities and requirements of the Relevant System); or |
(e) |
by any other method approved by the Board and agreed (in such form as the Company thinks appropriate) by the holder or person entitled to payment. |
Without prejudice to paragraph (d) of the foregoing, in respect of any Shares in uncertificated form, such payment may include sending by the Company or any person on its behalf of an instruction to the Operator of the Relevant System to credit the cash memorandum account of the holder or joint holders or, if permitted by the Company, of such person as the holder or joint holders may direct in writing.
Joint entitlement
252 If two (2) or more persons are registered as joint holders of any Share, or are entitled by transmission jointly to a Share, the Company may (without prejudice to Article 254):
(a) |
pay any dividend or other monies payable in respect of the Share to any one of them and any one of them may give effectual receipt for that payment; and |
(b) |
for the purpose of Article 251, rely in relation to the Share on the written direction, designation or agreement of, or notice to the Company by, any one of them. |
Payment by post
253 A cheque or warrant or any similar financial instrument may be sent by post:
(a) |
where a Share is held by a sole holder, to the registered address of the holder of the Share; or |
71
(b) |
if two or more persons are the holders, to the registered address of the person who is first named in the Register; or |
(c) |
without prejudice to Article 251, if a person is entitled by transmission to the Share, as if it were a notice to be sent under Article 274; or |
(d) |
in any case, to such person and to such address as the person entitled to payment may direct by notice to the Company. |
Discharge to Company and risk
254 Payment of a cheque or warrant or similar financial instrument by the bank on which it was drawn or the transfer of funds by the bank instructed to make the transfer, or payment by electronic means or by any other means approved by the Board to an account (of a type approved by the Board) or, in respect of an Uncertificated Share, the making of payment in accordance with the facilities and requirements of the Relevant System shall be a good discharge to the Company. Every cheque or warrant or similar financial instrument sent or transfer of funds or payment made by the relevant bank or system in accordance with these Articles shall be at the risk of the holder or person entitled. The Company shall have no responsibility for any sums lost or delayed in the course of payment by any method used by the Company in accordance with Article 251.
Interest not payable
255 No dividend or other monies payable in respect of a Share shall bear interest against the Company unless otherwise provided by the rights attached to the Share.
Treatment of unclaimed dividends
256 Any dividend which has remained unclaimed for twelve (12) years from the date when it became due for payment shall, if the Board so resolves, be forfeited and cease to remain owing by the Company. The payment of any unclaimed dividend or other monies payable in respect of a Share may (but need not) be paid by the Company into an account separate from the Companys own account. Such payment shall not constitute the Company a trustee in respect of it. The Company shall be entitled to cease sending dividend warrants, cheques and similar financial instruments by post or otherwise to a member if those instruments have been returned undelivered, or left uncashed by that member, on at least two (2) consecutive occasions, or, following one (1) such occasion, reasonable enquiries have failed to establish the members new address. The entitlement conferred on the Company by this Article 256 in respect of any member shall cease if the member claims a dividend or cashes a dividend warrant, cheque or similar financial instrument.
Scrip dividends
257 The Board may offer any holder of A Shares the right to elect to receive A Shares, credited as fully paid, instead of cash in respect of the whole (or some part, to be determined by the Board) of all or any dividend subject to the following terms and conditions:
(a) |
each holder of A Shares shall be entitled to that number of new A Shares as are together as nearly as possible equal in value to (but not greater than) the cash amount (disregarding any tax credit) of the dividend that such holder would have received by |
72
way of dividend but elects to forego (each a new A Share). For this purpose, the value of each new A Share shall be: |
(i) |
equal to the average quotation for the A Shares, that is, the average of the closing prices for A Shares on Nasdaq or, if a Nasdaq quote is not available, such other exchange or quotation service on which the Companys A Shares are listed or quoted as derived from such source as the Board may deem appropriate, on the day on which such A Shares are first quoted ex the relevant dividend and the four subsequent Business Days; or |
(ii) |
calculated in any other manner the Board considers fit, |
but shall never be less than the par value of the new A Share. A certificate or report by the auditors as to the value of a new A Share in respect of any dividend shall be conclusive evidence of that value;
(b) |
each holder of A Shares shall only be entitled to new A Shares; |
(c) |
on or as soon as possible after announcing that any divided is to be declared or recommended, the Board, if it intends to offer an election in respect of that dividend, shall also announce that intention. If, after determining the basis of allotment, the Board decides to proceed with the offer, it shall notify the holders of A Shares of the terms and conditions of the right of election offered to them, specifying the procedure to be followed and place at which, and the latest time by which, elections or notices amending or terminating existing elections must be delivered in order to be effective; |
(d) |
the Board shall not proceed with any election unless the Board has sufficient authority to allot new A Shares and sufficient reserves or funds that may be appropriated to give effect to it after the basis of allotment is determined; |
(e) |
the Board may exclude from any offer any holders of Shares where the Board believes the making of the offer to them would or might involve the contravention of the laws of any territory or that for any other reason the offer should not be made to them; |
(f) |
the dividend (or that part of the dividend in respect of which a right of election has been offered) shall not be payable in cash on A Shares in respect of which an election has been made (the elected A Shares) and instead such number of new A Shares shall be allotted to each holder of elected A Shares as is arrived at on the basis stated in paragraph (a) of this Article 257. For that purpose the Board shall appropriate out of any amount for the time being standing to the credit of any reserve or fund (including without limitation the profit and loss account), whether or not it is available for distribution, a sum equal to the aggregate nominal amount of the new A Shares to be allotted and apply it in paying up in full the appropriate number of new A Shares for allotment and distribution to each holder of elected A Shares as is arrived at on the basis stated in paragraph (a) of this Article 257; |
(g) |
the new A Shares when allotted shall rank pari passu in all respects with the fully paid A Shares then in issue except that they shall not be entitled to participate in the relevant dividend in lieu of which they were allotted; |
(h) |
no fraction of an A Share shall be allotted. The Board may make such provisions as it |
73
thinks fit for any fractional entitlements including without limitation payment in cash to holders in respect of their fractional entitlements, provision for the accrual, retention or accumulation of all or part of the benefit of fractional entitlements to or by the Company or to or by or on behalf of any holder or the application of any accrual, retention or accumulation to the allotment of fully paid A Shares to any holder; |
(i) |
the Board may do all acts and things it considers necessary or expedient to give effect to the allotment and issue of any share pursuant to this Article 257 or otherwise in connection with any offer made pursuant to this Article 257 and may authorise any person, acting on behalf of the holders concerned, to enter into an agreement with the Company providing for such allotment or issue and incidental matters. Any agreement made under such authority shall be effective and binding on all concerned; and |
(j) |
the Board may, at its discretion, amend, suspend or terminate any offer pursuant to the above. |
CAPITALISATION OF PROFITS AND RESERVES
Power to capitalise
258 Without prejudice to any authority granted to the Board prior to the adoption of these Articles, the Board may with the authority of an ordinary resolution of the Company:
(a) |
subject to the provisions of this Article 258, resolve to capitalise any undistributed profits of the Company not required for paying any preferential dividend (whether or not they are available for distribution) or any sum standing to the credit of any reserve or other fund of the Company, including without limitation the Companys share premium account and capital redemption reserve, if any; |
(b) |
appropriate the sum resolved to be capitalised to the members or any class of members on the record date specified in the relevant resolution who would have been entitled to it if it were distributed by way of dividend and in the same proportion to the nominal amount of the Shares (whether or not fully paid up) held by them respectively which would entitle them to participate in a distribution of that sum if the Shares were fully paid and the sum was then distributed by way of dividend; |
(c) |
apply that sum on their behalf either in or towards paying up the amounts, if any, for the time being unpaid on any Shares held by them respectively, or in paying up in full unissued Shares, debentures or other obligations of the Company of a nominal amount equal to that sum but the share premium account, the capital redemption reserve, and any profits which are not available for distribution may, for the purposes of this Article 258, only be applied in paying up Shares to be allotted to members credited as fully paid; |
(d) |
allot the Shares, debentures or other obligations credited as fully paid to those members, or as they may direct, in those proportions, or partly in one way and partly in the other; |
(e) |
resolve that any Shares so allotted to any member in respect of any holding by him of any partly paid Shares shall, so long as such Shares remain partly paid, rank for dividend only to the extent that the latter Shares rank for dividend; |
74
(f) |
where Shares or debentures become, or would otherwise become, distributable under this Article 258 in fractions, make such provision as they think fit for any fractional entitlements including without limitation authorising their sale and transfer to any person, resolving that the distribution be made as nearly as practicable in the correct proportion but not exactly so, ignoring fractions altogether or resolving that cash payments be made to any members in order to adjust the rights of all parties; |
(g) |
authorise any person to enter into an agreement with the Company on behalf of all the members concerned providing for either: |
(i) |
the allotment to the members respectively, credited as fully paid, of any Shares, debentures or other obligations to which they are entitled on the capitalisation; or |
(ii) |
the payment up by the Company on behalf of the members of the amounts, or any part of the amounts, remaining unpaid on their existing Shares by the application of their respective proportions of the sum resolved to be capitalised, |
and any agreement made under that authority shall be binding on all such members; and
(h) |
generally do all acts and things required to give effect to the ordinary resolution, |
provided always that any allotment of Shares pursuant to this Article 258 must be made on an equal per share basis so that the same number of A Shares and B Shares are allotted.
Capitalisation of reserves: Rights Plan
259 Notwithstanding Article 258, where:
(a) |
the Board has established a Rights Plan and has granted Rights in accordance therewith as provided in Articles 16 and 17 above, and |
(b) |
the Board has exercised any discretion which may be conferred upon it by any Rights Plan so established to exchange or cause to be exchanged all or part of the Rights (other than Rights held by or on behalf of an Acquiring Person, which would have become void) for Shares, |
for the purposes of giving effect to any such exchange as is referred to in Article 259(b), the Board may (without the authority of an ordinary resolution of the Company):
(c) |
resolve to capitalise any undistributed profits of the Company not required for paying any preferential dividend (whether or not they are available for distribution) or any sum standing to the credit of any reserve or other fund of the Company, including without limitation the Companys share premium account and capital redemption reserve, whether or not available for distribution, being an amount equal to the nominal amount of the Shares which are to be exchanged for the Rights (other than Rights held by or on behalf of or for the benefit of an Acquiring Person); and |
(d) |
apply that sum in paying up in full Shares and allot such Shares, credited as fully paid, to the holders of Rights (other than an Acquiring Person) and/or to a Depositary (including, for the avoidance of doubt, to a nominee of a Depositary) in exchange for |
75
the Rights (other than Rights held by or on behalf of or for the benefit of an Acquiring Person). |
260 The provisions of Articles 258(f), 258(g) and 258(h) shall apply (mutatis mutandis) to any resolution of the Board pursuant to Article 259(b) as they apply to any resolution of the board pursuant to Article 258.
261 For the purposes of Article 259 above Acquiring Person shall have the meaning ascribed to it in Article 20(c).
Reservation of profit
262 The Board may, before recommending any dividend (whether preferential or otherwise), set aside out of the profits of the Company such sum as it deems fit as a reserve or reserves which shall, at the discretion of the Board, be applicable for any purpose to which the profits of the Company may be properly applied, and pending such application may, also at such discretion, either be employed in the business of the Company or be invested in such investments as the Board may deem fit, and so that it shall not be necessary to keep any investments constituting the reserve or reserves separate or distinct from any other investments of the Company. The Board may also, without placing the same to reserve, carry forward any profits which it may deem prudent not to distribute.
263 Notwithstanding any other provision of these Articles, and subject to the Act, the Company or the Board may:
(a) |
fix any date as the record date for any dividend, distribution, allotment or issue, which may be on or at any time before or after any date on which the dividend, distribution, allotment or issue is declared, paid or made; |
(b) |
for the purpose of determining which persons are entitled to attend and vote at a general meeting of the Company, or a separate general meeting of the holders of any class of Shares, and how many votes such persons may cast, specify in the notice of meeting a time, not more than forty-eight (48) hours before the time fixed for the meeting (which shall, if the Board so specifies, be calculated taking no account of any part of a day that is not a working day) by which a person must be entered on the Register in order to have the right to attend or vote at the meeting, changes to the Register after the time specified by virtue of this Article 263 shall be disregarded in determining the rights of any person to attend or vote at the meeting; and |
(c) |
for the purpose of sending notices of general meetings of the Company, or separate general meetings of the holders of any class of Shares, under these Articles, determine that persons entitled to receive such notices are those persons entered on the Register at the close of business on a day determined by the Company or the Board, which day may not be more than twenty-one (21) days before the day that notices of the meeting are sent. |
Rights to inspect records
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264 No member shall (as such) have any right to inspect any accounting records or other book or document of the Company except as conferred by statute or authorised by the Board or by ordinary resolution of the Company or order of a court of competent jurisdiction.
Sending of annual accounts
265 Subject to the Statutes, a copy of the Companys annual accounts and reports for that financial year shall, at least twenty-one (21) clear days before the date of the meeting at which copies of those documents are to be laid in accordance with the provisions of the Statutes, be sent (which for the avoidance of doubt shall include where given in electronic form or by website communication) to every member and to every holder of the Companys debentures, and to every person who is entitled to receive notice of meetings from the Company under the provisions of the Statutes or of these Articles or, in the case of joint holders of any Share or debenture, to one of the joint holders. A copy need not be sent to a person for whom the Company does not have a current address.
Summary financial statements
266 Subject to the Statutes, the requirements of Article 265 shall be deemed satisfied in relation to any person by sending to the person, instead of such copies, a summary financial statement derived from the Companys annual accounts and the directors report, which shall be in the form and containing the information prescribed by the Statutes and any regulations made under the Statutes.
When notice required to be in writing
267 Any notice to be sent to or by any person pursuant to these Articles (other than a notice calling a meeting of the Board) shall be in writing (which for the avoidance of doubt shall include where given in electronic form or by website communication).
Methods of Company sending notice
268 Subject to Article 267 and unless otherwise provided by these Articles, the Company shall send or supply any Shareholder Information that is required or authorised to be sent or supplied to a member or any other person by the Company by a provision of the Statutes or pursuant to these Articles or to any other rules or regulations to which the Company may be subject in such form and by such means as it may in its absolute discretion determine (including, without limitation, by making the document or information available on a website) provided that the provisions of the Statutes which apply to sending or supplying a document or information required or authorised to be sent or supplied by the Statutes shall, the necessary changes having been made, also apply to sending or supplying any document or information required or authorised to be sent by these Articles or any other rules or regulations to which the Company may be subject.
Method of member sending Shareholder Information
269 Subject to Article 268 and unless otherwise provided by these Articles, a member or a person entitled by transmission to a Share shall send any Shareholder Information pursuant to
77
these Articles to the Company in such form and by such means as it may in its absolute discretion determine provided that:
(a) |
the determined form and means are permitted by the Statutes for the purpose of sending or supplying a document or information of that type to a company pursuant to a provision of the Statutes; and |
(b) |
unless the Board otherwise permits, any applicable condition or limitation specified in the Statutes, including without limitation as to the address to which the document or information may be sent, is satisfied. |
Unless otherwise provided by these Articles or required by the Board, such Shareholder Information shall be authenticated in the manner specified by the Statutes for authentication of a document or information sent in the relevant form.
Notice to joint holders
270 In the case of joint holders of a Share:
(a) |
any Shareholder Information shall be given, sent or supplied to the joint holder whose name stands first in the Register in respect of the joint holding and any Shareholder Information so sent shall be deemed for all purposes sent to all the joint holders; and |
(b) |
the agreement of a joint holder whose name stands first in the Register in respect of the joint holding that any Shareholder Information may be given, sent or supplied in electronic form or by being made available on a website shall be binding on all the joint holders. |
Registered address outside the United Kingdom, the EEA or the United States
271 Other than in respect of a Depositary, to which this Article 271 shall not apply, a member whose registered address is not within the United Kingdom, an EEA State or the United States of America and who sends to the Company an address within the United Kingdom, an EEA State or the United States of America at which a document or information may be sent to him shall be entitled to have the document or information sent to him at that address (provided that, in the case of a document or information sent by electronic means, including without limitation any notification required by the Statutes that the document or information is available on a website, the Company so agrees, which agreement the Company shall be entitled to withhold in its absolute discretion including, without limitation, in circumstances in which the Company considers that the sending of the document or information to such address using electronic means would or might infringe the laws of any other jurisdiction) but otherwise:
(a) |
no such member shall be entitled to receive any document or information from the Company; and |
(b) |
without prejudice to the generality of the foregoing, any notice of a general meeting of the Company which is in fact sent or purports to be sent to such member shall be ignored for the purpose of determining the validity of the proceedings at such general meeting. |
Deemed receipt of notice
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272 A member present, either in person or by proxy, at any meeting of the Company or of the holders of any class of Shares shall be deemed to have been sent notice of the meeting and, where requisite, of the purposes for which it was called.
Terms and conditions for electronic communications
273 The Board may from time to time issue, endorse or adopt terms and conditions relating to the use of electronic means for the sending of notices, other documents and proxy appointments by the Company to members or persons entitled by transmission and by members or persons entitled by transmission to the Company.
Notice to persons entitled by transmission
274 Shareholder Information may be sent or supplied by the Company to the person or persons entitled by transmission to a Share by sending it in any manner the Company may choose authorised by these Articles for the sending of a document or information to a member, addressed to them by name, or by the title of representative of the deceased, or trustee of the bankrupt or by any similar description at the address (if any) as may be supplied for that purpose by or on behalf of the person or persons claiming to be so entitled. Until such an address has been supplied, Shareholder Information may be sent in any manner in which it might have been sent if the death or bankruptcy or other event giving rise to the transmission had not occurred.
Transferees bound by prior notice
275 Every person who becomes entitled to a Share shall be bound by any notice in respect of that Share which, before his name is entered in the Register, has been sent to a person from whom he derives his title, provided that no person who becomes entitled by transmission to a Share shall be bound by any direction notice sent under Article 125 to a person from whom he derives title.
Proof of sending/when notices are deemed sent by post
276 Proof that Shareholder Information was properly addressed, prepaid and posted shall be conclusive evidence that the document or information was sent or supplied. Shareholder Information sent by the Company to a member by post shall be deemed to have been received:
(a) |
if sent by first class post or special delivery post from an address in the United Kingdom to another address in the United Kingdom, or by a postal service similar to first class post or special delivery post from an address in another country to another address in that other country, on the day following that on which the notice, document or information was posted; or |
(b) |
if sent by airmail from an address in the United Kingdom to an address outside the United Kingdom, or from an address in another country to an address outside that country (including without limitation an address in the United Kingdom), on the third day following that on which the notice, document or other information was posted; or |
(c) |
in any other case, on the second day following that on which the notice, document or information was posted. |
79
Notices sent in electronic form
277 Subject to the provisions of the Statutes, any notice or other Shareholder Information (excluding a share certificate) will be validly supplied if sent by the Company to any member or person nominated by a member to receive Shareholder Information in electronic form if that person has agreed (generally or specifically) (or, if the member is a company and is deemed by the Statutes to have agreed) that the communication may be sent in that form and:
(a) |
the notice or other Shareholder Information is sent in electronic form to such address (or to one of the addresses if more than one) as may for the time being be notified by the member to the Company (generally or specifically) for that purpose or, if the intended recipient is a company, to such address as may be deemed by a provision of the Statutes to have been so satisfied; |
(b) |
the notice or other Shareholder Information is sent in electronic form; and |
(c) |
in each case that person has not revoked the agreement. |
Notices made available by website
278 Subject to the provisions of the Statutes, any notice or Shareholder Information (excluding a share certificate) will be validly supplied if it is made available by means of a website communication where that person has agreed, or is deemed by the Statutes to have agreed (generally or specifically) that the communication may be supplied to him in that manner and:
(a) |
that person has not revoked the agreement; |
(b) |
that person is notified in a manner for the time being agreed for the purpose between that person and the Company of (i) the publication of the notice or other Shareholder Information on a website, (ii) the address of that website, and (iii) the place on that website where the notice of other Shareholder Information may be accessed and how it may be accessed; |
(c) |
the notice or other Shareholder Information continues to be published on the website throughout the period specified in the Act, provided that if the notice or other Shareholder Information is published on that website for a part but not all of such period, the notice or other Shareholder Information will be treated as published throughout that period if the failure to publish the notice or other Shareholder Information throughout that period is wholly attributable to circumstances that it would not be reasonable to have expected the Company to prevent or avoid. |
When notices deemed received by hand
279 Shareholder Information sent by the Company to a member by hand shall be deemed to have been received by the member when it is handed to the member or left at his registered address.
Proof of sending/when notices are deemed sent by electronic means
280 Proof that a document or information sent or supplied by electronic means was properly addressed shall be conclusive evidence that the document or information was sent or supplied.
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A document or information sent or supplied by the Company to a member in electronic form shall be deemed to have been received by the member on the day following that on which the document or information was sent to the member. Such a document or information shall be deemed received by the member on that day notwithstanding that the Company becomes aware that the member has failed to receive the relevant document or information for any reason and notwithstanding that the Company subsequently sends a hard copy of such document or information by post to the member.
When notices deemed sent by website
281 A notice, document or information sent or supplied by the Company to a member by means of a website shall be deemed to have been received by the member:
(a) |
when the notice, document or information was first made available on the website; or |
(b) |
if later, when the member is deemed by Article 277, 279 or 280 to have received notice of the fact that the notice, document or information was available on the website. Such a notice, document or information shall be deemed received by the member on that day notwithstanding that the Company becomes aware that the member has failed to receive the relevant document or information for any reason and notwithstanding that the Company subsequently sends a hard copy of such notice, document or information by post to the member. |
282 Where in accordance with these Articles a member is entitled or required to give or send to the Company a notice in writing, the Company may, if it in its absolute discretion so decides (and shall, if it is registered to do so or is deemed to have so agreed by any provision of the Statutes), permit such notices to be sent to the Company by such means of electronic communication as may from time to time be specified (or be deemed by the Statutes to be agreed) by the Company, so as to be received at such address as may for the time being be specified (or deemed by the Statutes to be specified) by the Company (generally or specifically) for the purpose. Any means of so giving or sending such notices by electronic communications shall be subject to any terms, limitations, conditions or restrictions that the Board may from time to time prescribe.
When notices deemed sent by advertisement
283 A notice, document or other information sent or supplied by the Company to a member by means of public advertisement shall be deemed to have been received on the day on which the advertisement appears.
When notices deemed sent by Depositary
284 A notice, document or other information sent or supplied by the Company to a member by means of a Relevant System shall be deemed to have been received twenty-four (24) hours after the Company, or person acting on the Companys behalf, sends the instructions to the Relevant System relating to the notice, document or other information.
No entitlement to receive notice if the Company has no current address
285 A member shall not be entitled to receive any notice, document or information that is required or authorised to be sent or supplied to him by the Company by a provision of the
81
Statutes or pursuant to these Articles or to any other rules or regulations to which the Company may be subject if documents or information sent or supplied to that member by post in accordance with these Articles have been returned undelivered to the Company:
(a) |
on at least two (2) consecutive occasions; or |
(b) |
on one occasion and reasonable enquiries have failed to establish the members address. |
Without prejudice to the generality of the foregoing, any notice of a general meeting of the Company which is in fact sent or purports to be sent to such member shall be ignored for the purpose of determining the validity of the proceedings at such general meeting.
A member to whom this Article 285 applies shall become entitled to receive such documents or information when he has given the Company an address to which they may be sent or supplied or shall have informed the Company in such manner as may be specified to the Company of an electronic address to which they may be sent or supplied.
Notice during disruption of services
286 Subject to the Statutes, if at any time the Company is unable effectively to convene a general meeting by notices sent through the post as a result of the suspension or curtailment of postal services, notice of general meetings may be sufficiently given by advertisement. Any notice given by advertisement for the purposes of this Article 286 shall be advertised in at least one newspaper having national circulation in the United Kingdom. If advertised in more than one (1) newspaper, the advertisements shall appear on the same date. Such notice shall be deemed to have been sent to all persons who are entitled to have notice of meetings sent to them on the day when the advertisement appears. In any such case, the Company shall send confirmatory copies of the notice by post, if at least seven (7) days before the meeting the posting of notices to addresses again becomes practicable.
Execution of documents
287 Where a document is required under these Articles to be signed by a member or any other person, if the document is in electronic form, then in order to be valid the document must either:
(a) |
incorporate the electronic signature or personal identification details (which may be details previously allocated by the Company) of that member or other person in such form as the Board may approve; or |
(b) |
be accompanied by such other evidence as the Board may require in order to be satisfied that the document is genuine. |
The Company may designate mechanisms for validating any such document and a document not validated by the user of any such mechanisms shall be deemed as having not been received by the Company. In the case of any document or information relating to a meeting, an instrument or proxy or invitation to appoint a proxy, any validation requirement shall be specified in the relevant notice of meeting in accordance with Articles 85 and 263(b).
Power of Company to destroy documents
82
288 The Company shall be entitled to destroy:
(a) |
all instruments of transfer of Shares in the Company which have been registered, and all other documents on the basis of which any entry is made in the Register, at any time after the expiration of six (6) years from the date of registration; |
(b) |
all dividend mandates, variations or cancellations of dividend mandates, and notifications of change of address at any time after the expiration of one (1) year from the date of recording; |
(c) |
all share certificates which have been cancelled at any time after the expiration of one (1) year from the date of the cancellation; |
(d) |
all paid dividend warrants and cheques at any time after the expiration of one (1) year from the date of actual payment; |
(e) |
all proxy appointments which have been used for the purpose of a poll at any time after the expiration of one (1) year from the date of use; |
(f) |
all proxy appointments which have not been used for the purpose of a poll at any time after one (1) month from the end of the meeting to which the proxy appointment relates and at which no poll was demanded, and |
(g) |
any other document on the basis of which an entry in the Register is made, after six (6) years from the date on which it is made, |
provided that the Company may destroy any such type of document at a date earlier than that authorised by this Article 288 if a copy of such document is made and retained (whether electronically, by microfilm, by digital imaging or by other similar means) until the expiration of the period applicable to the destruction of the original of such document.
Presumption in relation to destroyed documents
289 It shall conclusively be presumed in favour of the Company that:
(a) |
every entry in the Register purporting to have been made on the basis of an instrument of transfer or other document destroyed in accordance with Article 288 was duly and properly made; |
(b) |
every instrument of transfer destroyed in accordance with Article 288 was a valid and effective instrument duly and properly registered; |
(c) |
every share certificate destroyed in accordance with Article 288 was a valid and effective certificate duly and properly cancelled; and |
(d) |
every other document destroyed in accordance with Article 288 was a valid and effective document in accordance with its recorded particulars in the books or records of the Company, |
but
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(e) |
the provisions of this Article 289 and Article 288 apply only to the destruction of a document in good faith and without notice of any claim (regardless of the parties) to which the document might be relevant; |
(f) |
nothing in this Article 289 or Article 288 shall be construed as imposing on the Company any liability in respect of the destruction of any document earlier than the time specified in Article 288 or in any other circumstances which would not attach to the Company in the absence of this Article 289 or Article 288; and |
(g) |
any reference in this Article 289 or Article 288 to the destruction of any document includes a reference to its disposal in any manner. |
290 References in Articles 288 or 289 to instruments of transfer shall include, in relation to Uncertificated Shares, instructions and/or notifications made in accordance with the Relevant System relating to the transfer of such Shares.
Power to dispose of Shares of untraced shareholders
291 The Company shall be entitled to sell, at the best price reasonably obtainable, the Shares of a member or the Shares to which a person is entitled by transmission if:
(a) |
during the period of twelve (12) years before the date of the publication of the advertisements referred to in paragraph (b) of this Article 291 (or, if published on different dates, the first date) (the relevant period) at least three dividends in respect of the Shares in question have been declared and all dividend warrants, cheques or other methods of payment for amounts payable which have been sent in the manner authorised by these Articles in respect of the Shares in question have remained uncashed; |
(b) |
the Company shall as soon as practicable after expiry of the relevant period have inserted advertisements both in a national daily newspaper and in a newspaper circulating in the area of the last known address of such member or other person giving notice of its intention to sell the Shares; and |
(c) |
during the relevant period and the period of three (3) months following the publication of the advertisements referred to in paragraph (b) of this Article 291 (or, if published on different dates, the first date) the Company has received no indication either of the whereabouts or of the existence of such member or person. |
The Company shall also be entitled to sell any additional Shares issued during the relevant period (or the right to any Share so issued) if the criteria in this Article 291 are satisfied in relation to the additional Shares (but as if the words during the period of twelve (12) years were omitted from paragraph (a) and the words after expiry of the relevant period were omitted from paragraph (b)).
Transfer on sale
292 To give effect to any sale pursuant to Article 291, the Board may (a) if the Shares are in certificated form, authorise any person to execute an instrument of transfer of the Shares to,
84
or in accordance with the directions of, the buyer, or (b) where the Shares are held in uncertificated form, in accordance with the Regulations, do all acts and things it considers necessary and expedient to effect the transfer of the Shares to, or in accordance with the directions of, the buyer (including issuing a written notification to the Operator requiring the conversion of the Shares into certificated form).
Effectiveness of transfer
293 An instrument of transfer executed by that person in accordance with Article 292 shall be as effective as if it had been executed by the holder of, or person entitled by transmission to, the Shares. An exercise by the Company of its powers in accordance with Article 291(b) shall be as effective as if exercised by the registered holder of or person entitled by transmission to the Shares. The transferee shall not be bound to see to the application of the purchase money, and his title to the Shares shall not be affected by any irregularity in, or invalidity of, the proceedings in reference to the sale.
Proceeds of sale
294 The net proceeds of sale shall belong to the Company which shall be obliged to account to the former member or other person previously entitled for an amount equal to the proceeds. The Company shall enter the name of such former member or other person in the books of the Company as a creditor for that amount. In relation to the debt, no trust is created and no interest is payable. The Company shall not be required to account for any money earned on the net proceeds of sale, which may be used in the Companys business or invested in such a way as the Board from time to time thinks fit.
Liquidator may distribute in specie
295 If the Company is wound up, the liquidator may, with the sanction of a special resolution of the Company and any other sanction required by the Insolvency Act 1986:
(a) |
divide among the members in specie the whole or any part of the assets, whether they shall consist of property of the same kind or not, of the Company and may, for that purpose, value any assets and determine how the division shall be carried out as between the members or different classes of members; |
(b) |
vest the whole or any part of the assets in trustees for the benefit of the members; and |
(c) |
determine the scope and terms of those trusts, |
but no member shall be compelled to accept any asset on which there is a liability.
Disposal of assets by liquidator
296 The power of sale of a liquidator shall include a power to sell wholly or partially Shares or debentures or other obligations of another body corporate, either then already constituted, or about to be constituted, for the purpose of carrying out the sale.
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Third party indemnity
297 Subject to the provisions of, and so far as permitted by and consistent with, the Act but without prejudice to any indemnity to which he may otherwise be entitled, the Company shall indemnify, out of the assets of the Company, any director or other officer of the Company or of any associated company(other than any person (whether an officer or not) engaged by the Company as an auditor) against all losses, liabilities and expenditures which he may sustain or incur in the execution and discharge of the duties of his office or otherwise in relation thereto, provided that this Article 297 shall only have effect insofar as its provisions are not void under sections 232 or 234 of the Act.
Pension scheme indemnity
298 The Company may also indemnify, out of the assets of the Company, any director or other officer of either the Company or any associated company where the Company or such associated company acts as trustee of a pension scheme, against liability incurred by him in connection with the relevant companys activities as trustee of such scheme, provided that this Article 298 shall only have effect insofar as its provisions are not void under sections 232 or 234 of the Act.
Defending proceedings
299 Subject to section 205 of the Act, the Company may provide a director or other officer of either the Company or an associated company with funds to meet expenditure incurred or to be incurred by him in defending (or seeking relief in respect of) any civil or criminal proceedings brought or threatened against him in connection with any alleged negligence, default, breach of duty or breach of trust by him in relation to the Company or an associated company, and the Company shall be permitted to take or omit to take any action or enter into any arrangement which would otherwise be prohibited under sections 197 to 203 of the Act to enable a director to avoid incurring such expenditure.
300 The Company may also provide a director with funds to meet expenditure incurred or to be incurred by him in defending himself in an investigation by a regulatory authority or against action proposed to be taken by a regulatory authority in connection with any alleged negligence, default, breach of duty or breach of trust by him in relation to the Company or any associated company and the Company shall be permitted to take or omit to take any action or enter into any arrangement which would otherwise be prohibited under section 197 of the Act to enable a director to avoid incurring such expenditure.
Interpretation
301 For the purpose of Articles 297, 298, 299 and 300 the expression associated company shall mean a company which is either a subsidiary or a holding company of the Company or a subsidiary of such holding company, as such terms are defined in the Act.
Alternatives
302 Where any person becomes involved in a situation of any nature in connection with which the Company shall indemnify, may indemnify, may provide funds or may take or omit
86
to take any action or enter into any arrangement which would enable a director or officer to avoid incurring expenditure, in each case in accordance with any of Articles 297 to 301 above (the Alternatives), the Company may undertake to pay to any third party (as a direct and primary obligation of the Company to that third party) any expenses or costs in connection therewith to which any of the Alternatives could apply.
Exclusive jurisdiction
303 Save in respect of any cause of action arising under the Securities Act or the Exchange Act, the courts of England and Wales shall have exclusive jurisdiction to determine any and all disputes brought by a member in that members capacity as such, or as a purported derivative claim in respect of a cause of action vested in the Company or seeking relief on behalf of the Company, against the Company or the Board or any of the directors or officers individually (or against any combination of the foregoing persons), arising out of or in connection with these Articles or any non-contractual obligations arising out of or in connection with these Articles.
304 Unless the Company by ordinary resolution consents in writing to the selection of an alternative forum in the United States, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act or the Exchange Act.
Duties of directors
305 In no situation shall any director or officer owe any duty of any nature whatsoever to any member (in that members capacity as such).
Remedies
306 Damages alone may not be an adequate remedy for any breach of Articles 303, 304 or 305, so that, in the event of a breach or anticipated breach, the remedies of injunction and an order for specific performance would in appropriate circumstances each be available.
Governing law
307 The governing law of the Articles is the substantive law of England and these Articles shall be interpreted in accordance with English law.
Interpretation
308 For the purposes of Articles 303 to 306:
(a) |
a dispute shall mean any dispute, controversy or claim, |
(b) |
references to Company shall be read so as to include each and any of the Companys subsidiary undertakings from time to time, and |
(c) |
director and officer shall be read so as to include each and any director and officer of the Company from time to time in his capacity as such or as an employee of the Company and shall include any former director or officer of the Company. |
87
APPENDIX
SUMMARY OF EXAMPLE TERMS
RIGHTS TO PURCHASE SHARES OF ROYALTY PHARMA PLC
Subject to the provisions of the Companies Act 2006 and every other enactment from time to time in force concerning companies (including any orders, regulations or other subordinate legislation made under the Companies Act 2006 or any such other enactment), so far as they apply to or affect Royalty Pharma plc (the Company), the board of directors of the Company (the Board) may exercise any power of the Company to establish a shareholders rights plan (the Rights Plan). The Rights Plan may be in such form as the Board shall in its absolute discretion decide and may in particular (but without restriction or limitation) include such terms as are described in this Summary of Example Terms.
Pursuant to the Rights Plan, the Board would declare and issue one share purchase right (a Right) for each outstanding voting share in the capital of the Company (each a Voting Share). Each Right would entitle the registered holder, upon payment to the Company of the price per Right specified in the Rights Plan, to have delivered to such holder one Voting Share of the same class as the Voting Shares in respect of which the Right was issued or one share of any other class or series as specified in the Rights Plan (a Share), subject to adjustment.
Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons or persons acting in concert (a group) has acquired beneficial ownership of fifteen (15) per cent. or more of the outstanding Voting Shares (such person or group, an Acquiring Person) and (ii) 10 days (or such later date as may be determined by action of the Board prior to such time as any person or group were to become an Acquiring Person) following the commencement of, or announcement of an intention to make, a takeover offer by a person or group the consummation of which would result in the beneficial ownership of fifteen (15) per cent. or more of the outstanding Voting Shares being acquired by that person or group (the earlier of such dates being called the Distribution Date), each Right would be associated with an individual Voting Share and the Rights would be transferred with and only with the Voting Shares.
After the Distribution Date, separate certificates evidencing the Rights (Right Certificates) would be mailed to (or credited to the account of) holders of record of the Shares as of the close of business on the Distribution Date. Such separate Right Certificates alone would then evidence the Rights and the Rights would then be separately transferable.
The Rights would not be exercisable until the Distribution Date. The Rights would expire on a date to be specified in the Rights Plan, unless the Rights were earlier redeemed or exchanged by the Company.
After the Distribution Date, each holder of a Right, other than Rights held by or on behalf of any Acquiring Person (which would thereupon become void), would thereafter have the right to receive upon exercise of a Right that number of Voting Shares having a market value of two times the exercise price for the Right.
If, after a person or group were to become an Acquiring Person, the Company were to be acquired by a third party (including an Acquiring Person) including, without limitation, by way of merger, amalgamation or other business combination transaction, or by acquisition of 50 per
88
cent. or more of the Companys assets, cash flow or earning power, proper provisions would be made so that each holder of a Right (other than Rights held by or on behalf of an Acquiring Person, which would have become void) would thereafter have the right to receive upon the exercise of a Right that number of shares of such third party (including an Acquiring Person) or its parent that at the time of such acquisition would have a market value of two times the exercise price of the Right.
At any time after any person or group were to become an Acquiring Person and prior to the earlier of one of the events described in the previous paragraph or acquisition by such Acquiring Person of an interest in 50 per cent. or more of the outstanding Voting Shares, the Board would have the authority to exchange or cause to be exchanged the Rights (other than Rights held by or on behalf of such Acquiring Person, which would have become void), in whole or in part, for Shares at an exchange ratio of one Share per Right, subject to the receipt of any consideration required by applicable law to be received by the Company in respect of the same.
At any time until 10 days following the first public announcement that any person or group has become an Acquiring Person, the Board would have the authority to redeem the Rights in whole, but not in part, at a price per Right to be specified in the Rights Plan (the Redemption Price).
So long as the Rights are redeemable, the Board would have the authority, except with respect to the Redemption Price, to amend the Rights Plan in any manner, subject to applicable law and any restrictions set forth in the Articles of Association of the Company. After any person or group became an Acquiring Person, the Board would have the authority, except with respect to the Redemption Price, to amend the Rights Plan in any manner that would not adversely affect the interests of holders of the Rights (other than Rights held by or on behalf of any Acquiring Person, which would have become void) or shorten or lengthen any time period under the Rights Plan (other than the time period within which redemption can occur).
Before the exercise of a Right, a Right would not entitle the holder thereof to any rights as a shareholder of the Company including, without limitation, the right to vote or receive dividends in respect of such Right.
89
Exhibit 3.2
THE COMPANIES ACT 2006
A PRIVATE COMPANY LIMITED BY SHARES
ARTICLES OF ASSOCIATION
OF
ROYALTY PHARMA HOLDINGS LIMITED
(Adopted by special resolution passed on [●] 2020)
Table of Contents
PART 1 |
4 | |||||
INTERPRETATION AND LIMITATION OF LIABILITY |
4 | |||||
1. |
Exclusion of other Regulations and defined terms | 4 | ||||
2. |
Liability of members | 9 | ||||
PART 2 |
10 | |||||
DIRECTORS |
10 | |||||
DIRECTORS POWERS AND RESPONSIBILITIES |
10 | |||||
3. |
Directors general authority | 10 | ||||
4. |
Shareholders reserve power | 10 | ||||
5. |
Directors may delegate | 10 | ||||
6. |
Committees | 10 | ||||
DECISION-MAKING BY DIRECTORS |
11 | |||||
7. |
Directors to take decisions collectively | 11 | ||||
8. |
Unanimous decisions | 11 | ||||
9. |
Calling a Directors meeting | 11 | ||||
10. |
Participation in Directors meetings | 12 | ||||
11. |
Quorum for Directors meetings | 12 | ||||
12. |
Chairing of Directors meetings | 12 | ||||
13. |
Casting vote | 12 | ||||
14. |
Conflicts of interest | 13 | ||||
15. |
Records of decisions to be kept | 17 | ||||
16. |
Directors discretion to make further rules | 17 | ||||
APPOINTMENT OF DIRECTORS |
17 | |||||
17. |
Methods of appointing Directors | 17 | ||||
18. |
Termination of Directors appointment | 17 | ||||
19. |
Directors remuneration | 18 | ||||
20. |
Directors expenses | 19 | ||||
PART 3 |
20 | |||||
SHARES AND DISTRIBUTIONS |
20 | |||||
SHARES |
20 | |||||
21. |
Classes of Shares | 20 | ||||
22. |
A Shares | 20 | ||||
23. |
B Shares | 20 | ||||
24. |
C Share | 20 | ||||
25. |
C Share EPA Advances | 21 | ||||
26. |
Variation of class rights | 22 |
1
27. |
All Shares to be fully paid up | 23 | ||||
28. |
Powers to issue and redesignate different classes of Share | 23 | ||||
29. |
Company not bound by less than absolute interests | 23 | ||||
30. |
Share certificates | 23 | ||||
31. |
Replacement Share certificates | 24 | ||||
32. |
Share transfers | 24 | ||||
33. |
Transmission of Shares | 25 | ||||
34. |
Exercise of Transmittees rights | 25 | ||||
35. |
Transmittees bound by prior notices | 25 | ||||
DIVIDENDS AND OTHER DISTRIBUTIONS |
25 | |||||
36. |
Procedure for declaring dividends | 25 | ||||
37. |
Payment of dividends and other distributions | 26 | ||||
38. |
No interest on distributions | 26 | ||||
39. |
Unclaimed distributions | 27 | ||||
40. |
Non-cash distributions | 27 | ||||
41. |
Waiver of distributions | 27 | ||||
CAPITALISATION OF PROFITS |
28 | |||||
42. |
Authority to capitalise and appropriation of capitalised sums | 28 | ||||
PART 4 |
30 | |||||
DECISION-MAKING BY SHAREHOLDERS |
30 | |||||
ORGANISATION OF GENERAL MEETINGS |
30 | |||||
43. |
Attendance and speaking at general meetings | 30 | ||||
44. |
Quorum for general meetings | 30 | ||||
45. |
Chairing general meetings | 30 | ||||
46. |
Attendance and speaking by Directors and non-Shareholders | 31 | ||||
47. |
Adjournment | 31 | ||||
VOTING AT GENERAL MEETINGS |
32 | |||||
48. |
Voting: general | 32 | ||||
49. |
Errors and disputes | 32 | ||||
50. |
Poll votes | 32 | ||||
51. |
Content of proxy notices | 32 | ||||
52. |
Delivery of proxy notices | 33 | ||||
53. |
Amendments to resolutions | 33 | ||||
PART 5 |
35 | |||||
ADMINISTRATIVE ARRANGEMENTS |
35 | |||||
54. |
Means of communication to be used | 35 | ||||
55. |
Company seals | 35 |
2
56. |
No right to inspect accounts and other records | 36 | ||||
57. |
Provision for employees on cessation of business | 36 | ||||
DIRECTORS INDEMNITY AND INSURANCE |
36 | |||||
58. |
Indemnity | 36 | ||||
59. |
Insurance | 36 | ||||
U.S. TAX MATTERS |
37 | |||||
60. |
U.S. Entity Classification | 37 | ||||
ANNEX A |
38 | |||||
EPAs |
38 | |||||
ANNEX B |
45 | |||||
U.S. TAX ANNEX |
45 | |||||
ANNEX C |
53 | |||||
PARENT BOARD RESERVED MATTERS |
53 |
3
PART 1
INTERPRETATION AND LIMITATION OF LIABILITY
1. |
Exclusion of other Regulations and defined terms |
(1) |
No regulations or model articles contained in any statute or subordinate legislation including, without prejudice to such generality, the regulations contained in Table A to the Companies Act 1985 and the Companies (Model Articles) Regulations 2008, shall apply as the articles of association of the Company. |
(2) |
In these Articles, unless the context requires otherwise: |
A Share means (i) a voting class A ordinary share of US$1 in the capital of the Company from time to time, (ii) any B Shares acquired by the Parent, and (iii) any other shares in the capital of the Company which are designated or re-designated as A Shares, whether with the same or a different nominal value;
Act means the Companies Act 2006, including any modification or re-enactment of it for the time being in force;
Applicable Party means EPA Holdings, the Manager or an executive of EPA Holdings or the Manager (including Mr. Legorreta);
Articles means these articles of association, as amended from time to time, and Article shall be construed accordingly;
Associated Company means in respect of any body corporate: (a) its Subsidiaries; (b) any body corporate of which it is a Subsidiary; and (c) any body corporate that is also a Subsidiary of the same body corporate referenced in sub-paragraph (b) above;
Assumed Income Tax Rate means the highest effective marginal combined U.S. federal, state and local income tax rate (including tax rates under Section 1411 of the Code) for a Fiscal Year (as defined in Annex B) prescribed for an individual residing in New York City, New York, taking into account: (a) the deductibility of state and local income taxes for U.S. federal income tax purposes, if any, and (b) the character of the applicable income (e.g., long-term or short-term capital gain or ordinary or exempt); provided, however, that EPA Holdings shall be permitted to reasonably adjust the calculation of the Assumed Income Tax Rate in an equitable manner after taking into account the status of EPA Holdings and its direct and/or indirect partners, members, shareholders, or other beneficial owners of the C Share as U.S. taxpaying individuals or entities, as applicable, in each case in its good faith discretion;
B Depositary Receipts means the depositary receipts issued by a Depositary to the B DR Holders in respect of the B Shares;
B DR Holders means the holders of the B Depositary Receipts representing the B Shares, to the extent in issue from time to time;
4
B Share means (i) a non-voting class B ordinary share of US$ in the capital of the Company from time to time, and (ii) any other shares in the capital of the Company which are designated as B Shares, whether with the same or a different nominal value;
bankruptcy means any individual insolvency procedure under the Second Group of Parts (Insolvency of Individuals; Bankruptcy) of the Insolvency Act 1986 and includes individual insolvency proceedings in a jurisdiction other than England and Wales which have a similar effect;
C Share means the non-voting class C ordinary share of US$ in the capital of the Company, to be held by EPA Holdings in respect of the EPA Portfolios;
Cause will exist where:
(i) |
an Applicable Party has committed (or in the case of Applicable Parties who are executives, caused EPA Holdings or the Manager to commit) a material breach of the governing documents of the Company, the limited partnership agreement of a Continuing Investors Partnership, or the Management Agreement; |
(ii) |
an Applicable Party has committed (or in the case of Applicable Parties who are executives, caused EPA Holdings or the Manager to commit) wilful misconduct in connection with the performance of its duties under the terms of the governing documents of the Company, the limited partnership agreement of a Continuing Investors Partnership or the Management Agreement; |
(iii) |
there is a declaration of bankruptcy by the Applicable Party; or |
(iv) |
there is a determination by any court with proper jurisdiction that an Applicable Party has committed an intentional felony or engaged in any fraudulent conduct, |
provided that in the case of sub-paragraphs (ii) and (iv) above, which has a material adverse effect on the business, assets or condition (financial or otherwise) or prospects of the Group and its affiliates (taken as a whole), and further provided that the occurrence of any underlying Cause Event has been notified in writing to the Company and the Parent in accordance with Article 24(4);
Cause Event has the meaning given in Article 24(4);
Chairman has the meaning given in Article 12(2);
Chairman of the Meeting has the meaning given in Article 45(3);
Code means the United States Internal Revenue Code of 1986, as amended;
Companies Acts means the Companies Acts (as defined in section 2 of the Act), in so far as they apply to the Company;
Company means Royalty Pharma Holdings Limited;
Continuing Investors Partnership means each of RPI US Partners 2019, LP and RPI International Holdings 2019, LP and, to the extent applicable in the relevant circumstances, RPI International Partners 2019, LP;
Cure has the meaning given in Article 24(8);
Cure Period has the meaning give in Article 24(8);
5
Depositary means any depositary, custodian or nominee approved by the Companys board of Directors that holds legal title to the B Shares in the capital of the Company for the purposes of facilitating beneficial ownership of such Shares by the B DR Holders;
Director means a director of the Company for the time being, and includes any person occupying the position of director, by whatever name called;
Distribution Recipient has the meaning given in Article 37(2);
document includes, unless otherwise specified, any document sent or supplied in electronic form;
electronic form means in a form specified by section 1168(3) of the Act and otherwise complying with the provisions of that section;
EPA Advance has the meaning given in Article 25(1);
EPA Advance Amount has the meaning given in Article 25(2);
EPA B Depositary Receipts means the depositary receipts issued by a Depositary to EPA Holdings in respect of the EPA B Shares;
EPA B Share means a B Share issued upon the satisfaction of any EPAs in accordance with Annex A of these Articles;
EPA Holdings means RPI EPA Holdings, LP, a Delaware limited partnership;
EPA Portfolio means the EPA 1 Portfolio and each New Portfolio of New Portfolio Investments created after the date of adoption of these Articles;
EPA 1 Portfolio means the Portfolio Investments made during the period commencing on the Exchange Date and ending on December 31, 2021;
EPAs means any payment to EPA Holdings, determined on a Portfolio-by-Portfolio basis, in an amount that is determined in accordance with Annex A to these Articles;
Exchange Agreement means the exchange agreement entered into on or around the date of adoption of these Articles between, inter alia, each Continuing Investors Partnership, the Company, the Parent and EPA Holdings;
Exchange Date means 11 February 2020;
fully paid in relation to a Share, means that the nominal value and any premium to be paid to the Company in respect of that Share have been paid to the Company;
Group means (i) the Company and its Associated Companies for the time being, and (ii) for the purposes of Annex A and the definitions of New Portfolio Investments and Portfolio Investments, the Continuing Investors Partnerships, and references to a member of the Group shall be construed accordingly;
Group Company has the meaning given in Article 14(8);
Group Company Interest has the meaning given in Article 14(8);
6
hard copy form has the meaning given in section 1168 of the Act;
holder means, in relation to a Share, the member whose name is entered in the Register of Members as the holder of that Share;
instrument means a document in hard copy form;
Interested Director has the meaning given in Article 14(7);
Management Agreement means the Management Agreement between the Manager and the Company.
Manager means RP Management LLC, in its capacity as manager to certain members of the Group;
Mr. Legorreta means Mr. Pablo Legorreta, the chief executive officer and chairman of the Parent as at the date of adoption of these Articles;
New Portfolio means one or more groupings of New Portfolio Investments that are designated as a separate Portfolio on or after the Exchange Date. The initial New Portfolio shall be the EPA 1 Portfolio which shall consist of New Portfolio Investments made until 31 December 2021. Each New Portfolio that is established after the EPA 1 Portfolio shall consist of New Portfolio Investments made during each two (2) year period thereafter. EPA Holdings shall assign such naming designations to each New Portfolio as it shall deem convenient, but each such Portfolio, however named, shall be deemed a New Portfolio;
New Portfolio Investments means all Portfolio Investments acquired by a member of the Group, directly or indirectly, after the Exchange Date;
Ordinary Resolution has the meaning given in section 282 of the Act;
paid means paid or credited as paid;
Parent means Royalty Pharma plc, the holder of all of the A Shares;
Parent A Shares means the class A ordinary shares of US$0.0001 each in the capital of the Parent from time to time;
Parent Board means the board of directors of Parent, as constituted from time to time;
Parent Board Reserved Matters means the matters specified in Annex C to these Articles which shall, in addition to any statutory approval requirements, require the prior consent of the Parent Board;
participate, in relation to a Directors meeting, has the meaning given in Article 10;
Portfolio means each New Portfolio and the Pre-Exchange Portfolio;
Portfolio Investments has the meaning provided in Annex A;
Pre-Exchange Portfolio means a portfolio of all Pre-Exchange Portfolio Investments;
Pre-Exchange Portfolio Investment means each Portfolio Investment held by the Continuing Investors Partnerships on the Exchange Date;
7
proxy notice has the meaning given in Article 51;
Register of Members means the Companys register of members;
Shareholder means a person who is the holder of a Share;
Shares means shares in the Company, including, for the avoidance of doubt, the A Shares, the B Shares and the C Share;
Situational Conflict has the meaning given in Article 14(7);
Special Resolution has the meaning given in section 283 of the Act;
Statutes means the Act and every other statute (including any orders, regulations or other subordinate legislation made under them) for the time being in force concerning companies and affecting the Company;
Subsidiary has the meaning given in section 1159 of the Act;
Transmittee means a person entitled to a Share by reason of the death or bankruptcy of a Shareholder or otherwise by operation of law; and
writing means the representation or reproduction of words, symbols or other information in a visible form by any method or combination of methods, whether sent or supplied in electronic form or otherwise and written shall be construed accordingly.
(3) |
Words denoting the singular number include the plural number and vice versa, words denoting the masculine gender include the feminine gender and vice versa, and words denoting persons include bodies corporate (wherever resident or domiciled) and unincorporated bodies of persons. |
(4) |
Words or expressions contained in these Articles which are not defined in this Article 1 but are defined in the Act have the same meaning as in the Act (but excluding any modification of the Act not in force at the date these Articles took effect) unless inconsistent with the subject or context. |
(5) |
Subject to paragraphs (3) and (4) above, references to any provision of any enactment or of any subordinate legislation (as defined in section 21(1) of the Interpretation Act 1978) include any modification or re-enactment of that provision for the time being in force. |
(6) |
Any words following the terms including, include, in particular or any similar expression shall be construed as illustrative and shall not limit the sense of the words, description, definition, phrase or term preceding those terms. |
(7) |
References to other and otherwise shall not be construed ejusdem generis where a wider construction is possible. |
(8) |
A reference in these Articles to a holder or holder(s) of any class of Shares, as the case may be, shall, in each case, be deemed to exclude any member holding Shares in treasury. |
(9) |
Headings are inserted for convenience only and do not affect the construction of these Articles. |
(10) |
In these Articles, (a) powers of delegation shall not be restrictively construed but the widest interpretation shall be given to them; (b) the word board in the context of the exercise of any power |
8
contained in these Articles includes any committee consisting of one or more Directors, any Director, any other officer of the Company and any local or divisional board, manager or agent of the Company to which or, as the case may be, to whom the power in question has been delegated; and (c) except where expressly provided by the terms of delegation, the delegation of a power shall not exclude the concurrent exercise of that power by any other body or person who is for the time being authorised to exercise it under these Articles or under another delegation of that power. |
2. |
Liability of members |
The liability of the members is limited to the amount, if any, unpaid on the Shares held by them.
9
PART 2
DIRECTORS
DIRECTORS POWERS AND RESPONSIBILITIES
3. |
Directors general authority |
Subject to the provisions of Article 3A below and the other terms of these Articles, the Directors are responsible for the management of the Companys business, for which purpose they may exercise all the powers of the Company.
3A. |
Parent Board Reserved Matters |
The Directors and the Shareholders shall not, and shall procure that each member of the Group shall not, take any action or decision in relation to any of the Parent Board Reserved Matters without first obtaining written consent from the Parent Board (acting by way of a majority decision).
4. |
Shareholders reserve power |
(1) |
The Shareholders may, by Special Resolution, direct the Directors to take, or refrain from taking, specified action. |
(2) |
No such Special Resolution invalidates anything which the Directors have done before the passing of the resolution. |
5. |
Directors may delegate |
(1) |
Subject to the Articles, the Directors may delegate any of the powers which are conferred on them under the Articles: |
(a) |
to such person or committee; |
(b) |
by such means (including by power of attorney); |
(c) |
to such an extent; |
(d) |
in relation to such matters or territories; and |
(e) |
on such terms and conditions; |
as they think fit.
(2) |
If the Directors so specify, any such delegation may authorise further delegation of the Directors powers by any person to whom they are delegated. |
(3) |
The Directors may revoke any delegation in whole or part, or alter its terms and conditions. |
6. |
Committees |
(1) |
Committees to which the Directors delegate any of their powers must follow procedures which are based as far as they are applicable on those provisions of the Articles which govern the taking of decisions by Directors. |
10
(2) |
The Directors may make rules of procedure for all or any committees, which prevail over rules derived from the Articles if they are not consistent with them. |
DECISION-MAKING BY DIRECTORS
7. |
Directors to take decisions collectively |
(1) |
The general rule about decision-making by Directors is that any decision of the Directors must be either a majority decision at a meeting or a decision taken in accordance with Article 8. |
(2) |
If: |
(a) |
the Company only has one Director, and |
(b) |
no provision of the Articles requires it to have more than one Director, |
the general rule does not apply, and the Director may take decisions without regard to any of the provisions of the Articles relating to Directors decision-making.
8. |
Unanimous decisions |
(1) |
A decision of the Directors is taken in accordance with this Article when (other than at a meeting of Directors) all eligible Directors indicate to each other by any means that they share a common view on a matter. |
(2) |
Such a decision may take the form of a resolution in writing, copies of which have been signed by each eligible Director or to which each eligible Director has otherwise indicated agreement in writing. |
(3) |
References in this Article to eligible Directors are to Directors who would have been entitled to vote on the matter had it been proposed as a resolution at a Directors meeting. |
(4) |
A decision may not be taken in accordance with this Article if the eligible Directors would not have formed a quorum at such a meeting. |
9. |
Calling a Directors meeting |
(1) |
Any Director may call a Directors meeting by giving notice of the meeting to the Directors or by authorising the company secretary (if any) to give such notice. |
(2) |
Notice of any Directors meeting must indicate: |
(a) |
its proposed date and time; |
(b) |
where it is to take place; and |
(c) |
if it is anticipated that Directors participating in the meeting will not be in the same place, how it is proposed that they should communicate with each other during the meeting. |
(3) |
Notice of a Directors meeting must be given to each Director, but need not be in writing. |
(4) |
Notice of a Directors meeting need not be given to Directors who waive their entitlement to notice of that meeting, by giving notice to that effect to the Company not more than seven days after the date on which the meeting is held. Where such notice is given after the meeting has been held, that does not affect the validity of the meeting, or of any business conducted at it. |
11
10. |
Participation in Directors meetings |
(1) |
Subject to the Articles, Directors participate in a Directors meeting, or part of a Directors meeting, when: |
(a) |
the meeting has been called and takes place in accordance with the Articles, and |
(b) |
they can each communicate to the others any information or opinions they have on any particular item of the business of the meeting. |
(2) |
In determining whether Directors are participating in a Directors meeting, it is irrelevant where any Director is or how they communicate with each other. |
(3) |
If all the Directors participating in a meeting are not in the same place, they may decide that the meeting is to be treated as taking place wherever any of them is. |
11. |
Quorum for Directors meetings |
(1) |
At a Directors meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting. |
(2) |
The quorum for Directors meetings may be fixed from time to time by a decision of the Directors, but it must never be less than two, and unless otherwise fixed it is two. |
(3) |
If the total number of Directors for the time being is less than the quorum required, the Directors must not take any decision other than a decision: |
(a) |
to appoint further Directors, or |
(b) |
to call a general meeting so as to enable the Shareholders to appoint further Directors. |
12. |
Chairing of Directors meetings |
(1) |
The Directors may appoint a Director to chair their meetings. |
(2) |
The person so appointed for the time being is known as the Chairman. |
(3) |
The Directors may terminate the Chairmans appointment at any time. |
(4) |
If the Chairman is not participating in a Directors meeting within ten minutes of the time at which it was scheduled to start, the participating Directors must appoint one of themselves to chair it. |
13. |
Casting vote |
(1) |
If the numbers of votes for and against a proposal are equal, the Chairman or other Director chairing the meeting has a casting vote. |
(2) |
But this does not apply if, in accordance with the Articles, the Chairman or other Director is not to be counted as participating in the decision-making process for quorum or voting purposes. |
12
14. |
Conflicts of interest |
(1) |
Subject to Article 14(3), if a proposed decision of the Directors is concerned with an actual or proposed transaction or arrangement with the Company in which a Director is interested, that Director is not to be counted as participating in the decision-making process for quorum or voting purposes. |
(2) |
For the purposes of these Articles (i) a conflict of interest includes (x) a conflict of interest and duty, and (y) a conflict of duties, and (ii) interest includes both direct and indirect interests. |
(3) |
If: |
(a) |
the Company by Ordinary Resolution disapplies the provision of the Articles which would otherwise prevent a Director from being counted as participating in the decision-making process; |
(b) |
the Directors interest cannot reasonably be regarded as likely to give rise to a conflict of interest; |
(c) |
the board of Directors authorises the Directors conflict of interest; or |
(d) |
the Directors conflict of interest arises from a permitted cause, |
a Director who is interested in an actual or proposed transaction or arrangement with the Company is to be counted as participating in the decision-making process for quorum and voting purposes.
(4) |
For the purposes of this Article, the following are permitted causes: |
(a) |
the giving of a guarantee, security or indemnity in respect of money lent to, or an obligation incurred by, a Director at the request of, or for the benefit of, the Company or any of its Subsidiaries; |
(b) |
the giving of a guarantee, security or indemnity in respect of a debt or obligation of the Company or any of its Subsidiaries by a Director for which he has assumed responsibility (in whole or in part and whether alone or jointly with others) under a guarantee or indemnity or by the giving of security; |
(c) |
the giving to a Director of any other indemnity which is on substantially the same terms as indemnities given or to be given to all of the other Directors and/or to the funding by the Company of his expenditure on defending proceedings or the doing by the Company of anything to enable him to avoid incurring such expenditure where all other Directors have been given or are to be given substantially the same arrangements; |
(d) |
a contract, arrangement, transaction or proposal concerning an offer of shares, debentures or other securities of the Company or any of its Subsidiaries for subscription, purchase or exchange, in which offer the Director is or may be entitled to participate as holder of securities or in the underwriting or sub-underwriting of which he is to participate; |
(e) |
a contract, arrangement, transaction or proposal concerning any other undertaking in which a Director or any person connected with him is interested, directly or indirectly, and whether as an officer, shareholder, member, partner, creditor or otherwise if he and any persons connected with him do not to his knowledge hold an interest (as that term is used in sections 820 to 825 of the Act) representing one per cent. or more of either any class of the equity |
13
share capital of such undertaking (or any other undertaking through which his interest is derived) or of the voting rights available to shareholders, members, partners or equivalent of the relevant undertaking (or any interest being deemed for the purpose of this Article 14(4) to be likely to give rise to a conflict with the interests of the Company in all circumstances); |
(f) |
a contract, arrangement, transaction or proposal for the benefit of employees and directors and/or former employees and directors of the Company or any of its Subsidiaries and/or members of their families (including a spouse or civil partner or a former spouse or former civil partner) or any person who is or was dependent on such persons, including but without being limited to a retirement benefits scheme and an employees share scheme, which does not accord to any Director any privilege or advantage not generally accorded to the employees and/or former employees to whom such arrangement relates; and |
(g) |
a contract, arrangement, transaction or proposal concerning any insurance against any liability which the Company is empowered to purchase or maintain for, or for the benefit of, any Directors or for persons who include Directors. |
(5) |
Subject to the provisions of the Statutes and provided that he has disclosed to the board of Directors the nature and extent of his interest (unless the circumstances referred to in section 177(5) or section 177(6) of the Act apply, in which case no such disclosure is required) a Director notwithstanding his office: |
(a) |
may be a party to, or otherwise interested in, any transaction or arrangement with the Company or in which the Company is otherwise (directly or indirectly) interested; |
(b) |
may (or any firm of which he is the member) act in a professional capacity for the Company (otherwise than as auditor) or any other body in which the Company is interested and the relevant Director or his firm shall be entitled to remuneration for professional services as if he were not a Director; and |
(c) |
may be a Director or other officer of, or employed by, or a party to a transaction or arrangement with or otherwise interested in, any undertaking: |
(i) |
in which the Company is (directly or indirectly) interested as shareholder or otherwise; or |
(ii) |
with which he has such a relationship at the request or direction of the Company. |
(6) |
For the purposes of Article 14(5): |
(a) |
a general notice given to the Directors that a Director is to be regarded as having an interest of the nature and extent specified in the notice in any transaction or arrangement in which a specified person or class of persons is interested shall be deemed to be a disclosure that the Director has an interest in any such transaction of the nature and extent so specified; |
(b) |
an interest of which a Director has no knowledge and of which it is unreasonable to expect such Director to have knowledge shall not be treated as an interest of such Director; and |
(c) |
a Director shall be deemed to have disclosed the nature and extent of an interest which consists of him being a director, officer or employee of any undertaking in which the Company is interested. |
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(7) |
The Directors may, in accordance with the requirements set out in this Article 14, authorise any matter or situation proposed to them by any Director, which would, if not authorised, involve a Director (an Interested Director) breaching his duty under section 175 of the Act to avoid conflicts of interest (a Situational Conflict) and the continued performance by the relevant Director of his duties as a Director, on such terms and subject to such conditions as they think fit from time to time. |
(8) |
Subject to compliance by him with his duties as a Director under Part 10 of the Act (other than the duty in section 175(1) of the Act which is the subject of this Article 14(8)), a Director may be an officer of, employed by, or hold shares or other securities (whether directly or indirectly) in, or otherwise be interested in, directly or indirectly, the Company, the Parent or a Subsidiary of the Company or the Parent (in each case, a Group Company Interest and references to a Group Company shall be construed accordingly) and notwithstanding his office or the existence of an actual or potential conflict between any Group Company Interest and the interests of the Company which would fall within the ambit of that section 175(1), the relevant Director: |
(a) |
shall be entitled to attend any meeting or part of a meeting of the Directors at which any matter which may be relevant to the Group Company Interest may be discussed, and to vote on any resolution of the Directors relating to such matter, and any board papers relating to such matter shall be provided to the relevant Director at the same time as the other Directors (save that a Director may not vote on any resolution in respect of matters relating to his employment with the Company or other Group Company); |
(b) |
shall not be obliged to account to the Company for any remuneration or other benefits received by him in consequence of any Group Company Interest; and |
(c) |
will not be obliged to disclose to the Company or use for the benefit of the Company any confidential information received by him by virtue of his Group Company Interest and otherwise than by virtue of his position as a director, if to do so would breach any duty of confidentiality to any other Group Company or third party. |
(9) |
Notwithstanding the provisions of Article 14(8), the Parent may from time to time, at any time, by notice in writing to the Company, authorise, on such terms as the Parent shall think fit and shall specify in the notice, any Group Company Interest or any Situational Conflict notified under Article 14(7), whether or not the matter has already been considered under, or deemed to fall within, Article 14(7) or 14(8), as the case may be. For the avoidance of doubt, the holders of B Shares and the C Share in issue at the relevant time shall not be required to give their consent for the authorisation pursuant to this Article 14(9) to be valid. |
(10) |
No contract entered into shall be liable to be avoided by virtue of: |
(a) |
any director having an interest of the type referred to in Article 14(7) where the relevant situation has been approved as provided by that Article; or |
(b) |
any director having a Group Company Interest which falls within Article 14(8) or which is authorised pursuant to Article 14(9). |
(11) |
Any authorisation under Article 14(8) will be effective only if: |
(a) |
the proposal to be authorised is made by a Director in writing and delivered to the other Directors or made orally at a meeting of the board, in each case setting out particulars of the Situational Conflict; |
15
(b) |
any requirement as to the quorum for consideration of the relevant matter is met without counting the Interested Director or any other Interested Director; and |
(c) |
the matter was agreed to without the Interested Director voting or would have been agreed to if the Interested Directors vote had not been counted. |
(12) |
Any authorisation of a Situational Conflict under this Article 14 may (whether at the time of giving the authorisation or subsequently): |
(a) |
extend to any actual or potential conflict of interest which may reasonably be expected to arise out of the matter or situation so authorised; |
(b) |
provide that the Interested Director be excluded from the receipt of documents and information and the participation in discussions (whether at meetings of the Directors or otherwise) related to the Situational Conflict; |
(c) |
provide that the Interested Director shall or shall not be an eligible Director in respect of any future decision of the Directors in relation to any resolution related to the Situational Conflict; |
(d) |
impose upon the Interested Director such other terms for the purposes of dealing with the Situational Conflict as the Directors think fit; |
(e) |
provide that, where the Interested Director obtains, or has obtained (through his involvement in the Situational Conflict and otherwise than through his position as a Director of the Company), information that is confidential to a third party, he will not be obliged to disclose that information to the Company, or to use it in relation to the Companys affairs where to do so would amount to a breach of that confidence; and |
(f) |
permit the Interested Director to absent himself from the discussion of matters relating to the Situational Conflict at any meeting of the Directors and be excused from reviewing papers prepared by, or for, the Directors to the extent to which they relate to such matters. |
(13) |
Where the Directors authorise a Situational Conflict, the Interested Director will be obliged to conduct himself in accordance with any terms and conditions imposed by the Directors in relation to the Situational Conflict. |
(14) |
The Directors may revoke or vary such authorisation in respect of any Situational Conflict at any time, but this will not affect anything done by the Interested Director, prior to such revocation or variation, in accordance with the terms of such authorisation. |
(15) |
A Director is not required, by reason of being a Director (or because of the fiduciary relationship established by reason of being a Director), to account to the Company for any remuneration, profit or other benefit which he derives from or in connection with a relationship involving a Situational Conflict which has been authorised by the Directors or by the Company in general meeting (subject in each case to any terms, limits or conditions attaching to that authorisation) and no contract shall be liable to be avoided on such grounds. |
(16) |
The provisions of Articles 14(8) to 14(15) shall not apply to a direct or indirect conflict of interest of a Director which arises in relation to an existing or proposed transaction or arrangement with the Company to which the provisions of Articles 14(1) to 14(6) shall apply. |
16
(17) |
For the purposes of this Article, references to proposed decisions and decision-making processes include any Directors meeting or part of a Directors meeting. |
(18) |
Subject to Article 14(19), if a question arises at a meeting of Directors or of a committee of Directors as to the right of a Director to participate in the meeting (or part of the meeting) for voting or quorum purposes, the question may, before the conclusion of the meeting, be referred to the Chairman whose ruling in relation to any Director other than the Chairman is to be final and conclusive. |
(19) |
If any question as to the right to participate in the meeting (or part of the meeting) should arise in respect of the Chairman, the question is to be decided by a decision of the Directors at that meeting, for which purpose the Chairman is not to be counted as participating in the meeting (or that part of the meeting) for voting or quorum purposes. |
15. |
Records of decisions to be kept |
The Directors must ensure that the Company keeps a record, in writing, for at least ten years from the date of the decision recorded, of every unanimous or majority decision taken by the Directors.
16. |
Directors discretion to make further rules |
Subject to the Articles, the Directors may make any rule which they think fit about how they take decisions, and about how such rules are to be recorded or communicated to Directors.
APPOINTMENT OF DIRECTORS
17. |
Methods of appointing Directors |
(1) |
Any person who is willing to act as a Director, and is permitted by law to do so, may be appointed to be a Director: |
(a) |
by Ordinary Resolution, or |
(b) |
by a decision of the Directors. |
(2) |
In any case where, as a result of death, the Company has no Shareholders and no Directors, the personal representatives of the last Shareholder to have died have the right, by notice in writing, to appoint a person to be a Director. |
(3) |
For the purposes of Article 17(2), where two or more Shareholders die in circumstances rendering it uncertain who was the last to die, a younger Shareholder is deemed to have survived an older Shareholder. |
18. |
Termination of Directors appointment |
A person ceases to be a Director as soon as:
(a) |
the period expires, if he has been appointed for a fixed period; |
(b) |
that person ceases to be a Director by virtue of any provision of the Act or is prohibited from being a Director by law; |
17
(c) |
he is deemed unfit or has otherwise been requested to be removed from office by any regulatory authority in any applicable jurisdiction; |
(d) |
a bankruptcy order is made against that person or an application is made for an interim court order under s.253 of the Insolvency Act 1986 in connection with a voluntary arrangement under that statute or any similar legislation in any applicable jurisdiction; |
(e) |
an arrangement or composition is made with that persons creditors generally in satisfaction of that persons debts; |
(f) |
a registered medical practitioner who is treating that person gives a written opinion to the Company stating that that person has become physically or mentally incapable of acting as a Director and may remain so for more than three months; |
(g) |
he has become a patient for the purpose of any statute relating to mental health or any court claiming jurisdiction on the ground of mental health or disorder (however stated) makes an order for his detention or for the appointment of a guardian, receiver or other person (howsoever designated) to exercise powers with respect to his property or affairs and in any such case the Directors resolve that he should cease to be a Director; |
(h) |
notification is received by the Company from the Director that the Director is resigning from office, and such resignation has taken effect in accordance with its terms; |
(i) |
in the case of a Director who holds any executive office, his appointment as such is terminated or expires, and the Directors resolve that he should cease to be a Director; |
(j) |
he is absent for more than six consecutive months without permission of the Directors from meetings of the Directors held during that period and the Directors resolve that he should cease to be a Director; or |
(k) |
that person dies. |
19. |
Directors remuneration |
(1) |
Directors may undertake any services for the Company that the Directors decide. |
(2) |
Directors are entitled to such remuneration as the Directors determine: |
(a) |
for their services to the Company as Directors, and |
(b) |
for any other service which they undertake for the Company. |
(3) |
Subject to the Articles, a Directors remuneration may: |
(a) |
take any form, and |
(b) |
include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that Director. |
(4) |
Unless the Directors decide otherwise, Directors remuneration accrues from day to day. |
18
(5) |
Unless the Directors decide otherwise, Directors are not accountable to the Company for any remuneration which they receive as Directors or other officers or employees of the Companys Subsidiaries or of any other body corporate in which the Company is interested. |
20. |
Directors expenses |
The Company may pay any reasonable expenses which the Directors properly incur in connection with their attendance at:
(a) |
meetings of Directors or committees of Directors, |
(b) |
general meetings, or |
(c) |
separate meetings of the holders of any class of Shares or of debentures of the Company, |
or otherwise in connection with the exercise of their powers and the discharge of their responsibilities in relation to the Company.
19
PART 3
SHARES AND DISTRIBUTIONS
SHARES
21. |
Classes of Shares |
Except as otherwise provided in these Articles, the A Shares, the B Shares and the C Share shall rank pari passu but the A Shares, B Shares and the C Share shall each constitute a separate class of Shares.
22. |
A Shares |
(1) |
The A Shares are voting shares and shall be issued with one (1) vote attached to each A Share. |
(2) |
The holders of A Shares shall have the right to receive pro rata (on a per share basis) and on a pari passu basis with each B Share, any dividends approved from time to time by the Companys board of Directors irrespective of the nominal value of the A Shares and B Shares and irrespective of the amount paid up on any A Share or B Share. |
(3) |
On a return of capital on a winding-up (excluding any reorganisation of the Companys assets and liabilities on an intra-group and solvent basis) each A Share shall be paid pro rata (on a per share basis) and on a pari passu basis with each B Share an amount equal to, after payment or provision for the debts and liabilities of the Company and subject to the provisions of Article 24(11) below, a proportionate share of their respective interests in the assets of the Company remaining for distribution to shareholders. |
23. |
B Shares |
(1) |
The B Shares are non-voting shares. |
(2) |
The holders of B Shares shall have the right to receive pro rata (on a per share basis) and on a pari passu basis with each A Share, any dividends approved from time to time by the Companys board of Directors irrespective of the nominal value of the A Shares and B Shares and irrespective of the amount paid up on any A Share or B Share. |
(3) |
On a return of capital on a winding-up (excluding any reorganisation of the Companys assets and liabilities on an intra-group and solvent basis) each B Share shall be paid pro rata (on a per share basis) and on a pari passu basis with each A Share an amount equal to, after payment or provision for the debts and liabilities of the Company and subject to the provisions of Article 24(11) below, a proportionate share of their respective interests in the assets of the Company remaining for distribution to shareholders. |
(4) |
Upon the Parent being recorded as the holder of any B Shares from time to time, each such B Share shall be automatically re-designated as an A Share. |
24. |
C Share |
(1) |
The C Share is a non-voting share. |
(2) |
Without prejudice to the right to receive EPAs pursuant to Article 24(3) below or any EPA Advances pursuant to Article 25 below, the C Share shall have no right to receive any dividends approved from time to time by the Companys board of Directors. |
20
(3) |
The holder of the C Share shall be entitled, subject to applicable law and subject to sub-paragraphs (4) to (10) below, to receive EPAs in the amount and manner determined in accordance with Annex A to these Articles. |
(4) |
Notwithstanding the provisions of sub-paragraph (3) above, if (A) there is (i) a determination of Cause by a court or governmental body of competent jurisdiction in a final judgment, or (ii) an admission of Cause by EPA Holdings or the Manager (each of (i) and (ii) a Cause Event), then EPA Holdings or the Manager shall provide written notice of such Cause Event to each of the Company and the Parent as soon as reasonably practicable after its occurrence. |
(5) |
Following the occurrence of a Cause Event, the provisions of sub-paragraphs (6) to (10) below shall apply, as and to the extent applicable with respect to such Cause Event. |
(6) |
If a Cause Event is due to an act of Cause that was committed by EPA Holdings or the Manager, then the board of Directors of the Company shall have the right to terminate EPA Holdings. Except as provided herein, EPA Holdings right to receive any EPAs in respect of any Portfolio Investments made after the Exchange Date and prior to the termination of EPA Holdings with or without Cause shall continue following termination. |
(7) |
Subject to the ability to Cure a Cause Event pursuant to sub-paragraph (8) below, in the event that Mr. Legorreta commits an act constituting Cause (while he is acting as chief executive officer of the Parent), such action shall be imputed to EPA Holdings and the Manager and the board of Directors of the Company shall be permitted to terminate EPA Holdings as set forth in sub-paragraph (6) above. |
(8) |
In the event that any executive of EPA Holdings or the Manager commits an act constituting Cause (including Mr. Legorreta if he is no longer acting as chief executive officer of the Parent), then such action shall not be imputed to EPA Holdings and the Manager if the Manager terminates such executives engagement with, employment by or relationship with EPA Holdings and the Manager (a Cure) within such reasonable period of time as may be agreed to by the board of Directors of the Company (a Cure Period), provided that if such executive is not terminated within the Cure Period then such Cause Event shall be imputed to EPA Holdings and the Manager and the board of Directors of the Company shall be permitted to terminate EPA Holdings as set forth in sub-paragraph (6) above. |
(9) |
In the event of a termination for Cause of (i) Mr. Legorreta or (ii) any other executive pursuant to sub-paragraphs (7) or (8) above, respectively, then, in addition to the matters set out herein, Mr. Legorreta or the relevant executive, as applicable, shall no longer be entitled to receive any EPAs in respect of any Portfolio Investments that are made during the two year period prior to the occurrence of the Cause Event. In addition, Mr. Legorreta or such executive shall be required to reimburse the Company for any losses incurred by the Company in connection with the Cause Event. |
(10) |
The termination of the Manager for Cause under the Management Agreement will also result in the termination of EPA Holdings. The termination of EPA Holdings from the Company for Cause will also result in the termination of the Manager for Cause under the Management Agreement. |
(11) |
On a return of capital on a winding-up (excluding any reorganisation of the Companys assets and liabilities on an intra-group and solvent basis) there shall be paid to the holder of the C Share the nominal capital paid up or credited as paid upon the C Share after first paying to the holders of the A Shares and B Shares (i) the nominal capital paid up or credited as paid up on all A Shares and B Shares held by them, respectively, together with (ii) the sum of US$10,000,000 on each A Share and B Share. |
25. |
C Share EPA Advances |
(1) |
In addition to the entitlement to EPAs contemplated in Article 24(2) above, the holder of the C Share shall also, subject to Article 25(2) below, receive a quarterly cash prepayment of any future EPAs to which it may be entitled in accordance with the provisions of Annex A to these Articles (an EPA Advance). |
21
(2) |
EPA Holdings shall be entitled to an EPA Advance to the extent necessary and to the extent permitted by applicable law to allow EPA Holdings or its beneficial owners to pay when due any income tax imposed on it (or its underlying investors) as a result of holding a direct or indirect interest in the C Share, in an amount calculated by the Company in good faith by reference to the Assumed Income Tax Rate, provided that the amount of the EPA Advance shall be restricted to the amount of any such specified tax liability (the EPA Advance Amount). In computing the EPA Advance Amount in respect of any Fiscal Quarter (as defined in Annex A), EPA Holdings shall, if necessary, estimate in good faith its share of the Companys Profits and Losses (as defined in Annex B) for such Fiscal Quarter. The Company shall notify EPA Holdings in writing of each EPA Advance Amount as soon as practicable after calculating it in accordance with this Article 25(2). |
(3) |
If an EPA Advance Amount is paid to EPA Holdings with respect to an EPA Portfolio, such payment shall be made to EPA Holdings in cash, and such EPA Advance Amount shall be taken into account and reduce future EPAs in respect of such EPA Portfolio, in the manner contemplated by Annex A to these Articles. |
26. |
Variation of class rights |
(1) |
Each of the following shall be deemed to constitute a variation of the rights attached to each class of Shares: |
(a) |
any amendment to the rights attaching to any class of Shares under these Articles which would alter or change the powers, preferences or special rights of that class of Shares in a manner which would adversely affect the holders of that class of Shares; |
(b) |
the issuance of any Shares ranking in priority to any existing class of Shares; |
(c) |
any material amendment to the terms of Annex A of these Articles; and |
(d) |
any reduction, subdivision, consolidation or redenomination of its Shares or other alteration in the share capital of the Company or any of the rights attaching to any share capital, save in respect of (i) any reduction of capital undertaken by the Company pursuant to the terms of the Exchange Agreement, (ii) any reduction of capital undertaken by the Company for the purposes of creating distributable reserves, (iii) in respect of those unaffected classes of shares, any reduction of capital that does not affect particular classes of Shares, or (iv) any subdivision or consolidation of the Companys share capital to reflect any equivalent subdivision or consolidation (as applicable) of Parents share capital, |
provided that, for the avoidance of doubt, any redesignation of Shares in accordance with Article 28(3) shall not constitute a variation of the rights attached to any class of Shares for the purposes of these Articles.
(2) |
Subject to the provisions of the Act, if any action is proposed to be undertaken by the Company which would constitute a variation of the rights attached to a class of Shares in accordance with Article 26(1) above, no such action can be undertaken by the Company without the approval by a majority of the votes entitled to be cast by the holders of the relevant class of Shares affected by the amendment, voting as a single class. |
(3) |
For the purposes of Article 26(2) and notwithstanding that the B Shares and the C Share are otherwise non-voting Shares, if either the B Shares and/or the C Share constitute the relevant class of affected Shares, then such class of Shares shall be granted voting rights, with one vote attaching to each Share, solely for the limited purpose of voting in the manner contemplated by Article 26(2) above. |
22
(4) |
Subject to the terms on which any Shares may be issued by the Company, the rights or privileges attached to any class of shares in the capital of the Company shall be deemed not to be varied or abrogated by: |
(i) |
the creation or issue of any new shares ranking pari passu in substantially all respects with any other Shares issued in that class (including for these purposes, any issuance of EPA B Shares); or |
(ii) |
the issue of any A Share, B Share or C Share. |
27. |
All Shares to be fully paid up |
(1) |
No Share is to be issued for less than the aggregate of its nominal value and any premium to be paid to the Company in consideration for its issue. |
(2) |
This does not apply to Shares taken on the formation of the Company by the subscribers to the Companys memorandum. |
28. |
Powers to issue and redesignate different classes of Share |
(1) |
Subject to these Articles, but without prejudice to the rights attached to any existing Share, the Company may issue Shares with such rights or restrictions as may be determined by Ordinary Resolution, including for the avoidance of doubt the EPA B Shares. |
(2) |
The Company may issue Shares which are to be redeemed, or are liable to be redeemed at the option of the Company or the holder, and the Directors may determine the terms, conditions and manner of redemption of any such Shares. |
(3) |
Subject to these Articles, but without prejudice to the rights attached to any existing Share, the Company may redesignate Shares from one class of Shares in the capital of the Company to another class of Shares in the capital of the Company, in such manner as may be determined by Ordinary Resolution. |
29. |
Company not bound by less than absolute interests |
Except as required by law, no person is to be recognised by the Company as holding any Share upon any trust, and except as otherwise required by law or the Articles, the Company is not in any way to be bound by or recognise any interest in a Share other than the holders absolute ownership of it and all the rights attaching to it.
30. |
Share certificates |
(1) |
The Company shall, upon request in writing from any Shareholder, issue each Shareholder, free of charge, with one or more certificates in respect of the Shares which that Shareholder holds. |
(2) |
Every certificate must specify: |
(a) |
in respect of how many Shares, of what class, it is issued; |
(b) |
the nominal value of those Shares; |
23
(c) |
that the Shares are fully paid; and |
(d) |
any distinguishing numbers assigned to them. |
(3) |
No certificate may be issued in respect of Shares of more than one class. |
(4) |
If more than one person holds a Share, only one certificate may be issued in respect of it. |
(5) |
Certificates must: |
(a) |
have affixed to them the Companys common seal, or |
(b) |
be otherwise executed in accordance with the Companies Acts. |
31. |
Replacement Share certificates |
(1) |
If a certificate issued in respect of a Shareholders Shares is: |
(a) |
damaged or defaced, or |
(b) |
said to be lost, stolen or destroyed, |
that Shareholder is entitled to be issued with a replacement certificate in respect of the same Shares.
(2) |
A Shareholder exercising the right to be issued with such a replacement certificate: |
(a) |
may at the same time exercise the right to be issued with a single certificate or separate certificates; |
(b) |
must return the certificate which is to be replaced to the Company if it is damaged or defaced; and |
(c) |
must comply with such conditions as to evidence, indemnity and the payment of a reasonable fee as the Directors decide. |
32. |
Share transfers |
(1) |
Save as otherwise contemplated by this Article 32, the Shares are freely transferable. |
(2) |
Shares may be transferred by means of an instrument of transfer in any usual form or any other form approved by the Directors, which is executed by or on behalf of the transferor. |
(3) |
No fee may be charged for registering any instrument of transfer or other document relating to or affecting the title to any Share. |
(4) |
The Company may retain any instrument of transfer which is registered. |
(5) |
The transferor remains the holder of a Share until the transferees name is entered in the Register of Members as holder of it. |
(6) |
The Directors may refuse to register the transfer of a Share, and if they do so, the instrument of transfer must be returned to the transferee with the notice of refusal unless they suspect that the proposed transfer may be fraudulent. |
24
(7) |
Notwithstanding any other provision of these Articles, the C Share is not transferable. |
33. |
Transmission of Shares |
(1) |
If title to a Share passes to a Transmittee, the Company may only recognise the Transmittee as having any title to that Share. |
(2) |
A Transmittee who produces such evidence of entitlement to Shares as the Directors may properly require: |
(a) |
may, subject to the Articles, choose either to become the holder of those Shares or to have them transferred to another person, and |
(b) |
subject to the Articles, and pending any transfer of the Shares to another person, has the same rights as the holder had. |
(3) |
Transmittees do not have the right to attend or vote at a general meeting, or agree to a proposed written resolution, in respect of Shares to which they are entitled, by reason of the holders death or bankruptcy or otherwise, unless they become the holders of those Shares. |
34. |
Exercise of Transmittees rights |
(1) |
Transmittees who wish to become the holders of Shares to which they have become entitled must notify the Company in writing of that wish. |
(2) |
If the Transmittee wishes to have a Share transferred to another person, the Transmittee must execute an instrument of transfer in respect of it. |
(3) |
Any transfer made or executed under this Article is to be treated as if it were made or executed by the person from whom the Transmittee has derived rights in respect of the Share, and as if the event which gave rise to the transmission had not occurred. |
35. |
Transmittees bound by prior notices |
If a notice is given to a Shareholder in respect of Shares and a Transmittee is entitled to those Shares, the Transmittee is bound by the notice if it was given to the Shareholder before the Transmittees name has been entered in the Register of Members.
DIVIDENDS AND OTHER DISTRIBUTIONS
36. |
Procedure for declaring dividends |
(1) |
The Company may by Ordinary Resolution declare dividends, and the Directors may decide to pay interim dividends. |
(2) |
A dividend must not be declared unless the Directors have made a recommendation as to its amount. Such a dividend must not exceed the amount recommended by the Directors. |
(3) |
No dividend may be declared or paid unless it is in accordance with Shareholders respective rights. |
25
(4) |
Unless the Shareholders resolution to declare or Directors decision to pay a dividend, or the terms on which Shares are issued, specify otherwise, it must be paid by reference to each Shareholders holding of Shares on the date of the resolution or decision to declare or pay it. |
(5) |
If the Companys Share capital is divided into different classes, no interim dividend may be paid on Shares carrying deferred or non-preferred rights if, at the time of payment, any preferential dividend is in arrears. |
(6) |
The Directors may pay at intervals any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment. |
(7) |
If the Directors act in good faith, they do not incur any liability to the holders of Shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on Shares with deferred or non-preferred rights. |
(8) |
Subject to applicable law, but notwithstanding the foregoing provisions of this Article 36, no further approval from Shareholders will be required in connection with (i) the payment of EPAs in accordance with the provisions of Annex A to these Articles, or (ii) the payment of any EPA Advance in accordance with the provisions of Article 25 of these Articles. |
37. |
Payment of dividends and other distributions |
(1) |
Where a dividend or other sum which is a distribution is payable in respect of a Share, it must be paid by one or more of the following means: |
(a) |
transfer to a bank or building society account specified by the Distribution Recipient either in writing or as the Directors may otherwise decide; |
(b) |
sending a cheque made payable to the Distribution Recipient by post to the Distribution Recipient at the Distribution Recipients registered address (if the Distribution Recipient is a holder of the Share), or (in any other case) to an address specified by the Distribution Recipient either in writing or as the Directors may otherwise decide; |
(c) |
sending a cheque made payable to such person by post to such person at such address as the Distribution Recipient has specified either in writing or as the Directors may otherwise decide; or |
(d) |
any other means of payment as the Directors agree with the Distribution Recipient either in writing or by such other means as the Directors decide. |
(2) |
In the Articles, the Distribution Recipient means, in respect of a Share in respect of which a dividend or other sum is payable: |
(a) |
the holder of the Share; or |
(b) |
if the Share has two or more joint holders, whichever of them is named first in the Register of Members; or |
(c) |
if the holder is no longer entitled to the Share by reason of death or bankruptcy, or otherwise by operation of law, the Transmittee. |
38. |
No interest on distributions |
26
The Company may not pay interest on any dividend or other sum payable in respect of a Share unless otherwise provided by:
(a) |
the terms on which the Share was issued, or |
(b) |
the provisions of another agreement between the holder of that Share and the Company. |
39. |
Unclaimed distributions |
(1) |
All dividends or other sums which are: |
(a) |
payable in respect of Shares, and |
(b) |
unclaimed after having been declared or become payable, |
may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed.
(2) |
The payment of any such dividend or other sum into a separate account does not make the Company a trustee in respect of it. |
(3) |
If: |
(a) |
twelve years have passed from the date on which a dividend or other sum became due for payment, and |
(b) |
the Distribution Recipient has not claimed it, |
the Distribution Recipient is no longer entitled to that dividend or other sum and it ceases to remain owing by the Company.
40. |
Non-cash distributions |
(1) |
Subject to the terms of issue of the Share in question, the Company may, by Ordinary Resolution on the recommendation of the Directors, decide to pay all or part of a dividend or other distribution payable in respect of a Share by transferring non-cash assets of equivalent value (including, without limitation, shares or other securities in any company). |
(2) |
For the purposes of paying a non-cash distribution, the Directors may make whatever arrangements they think fit, including, where any difficulty arises regarding the distribution: |
(a) |
fixing the value of any assets; |
(b) |
paying cash to any Distribution Recipient on the basis of that value in order to adjust the rights of recipients; and |
(c) |
vesting any assets in trustees. |
41. |
Waiver of distributions |
Distribution Recipients may waive their entitlement to the whole or part of a dividend or other distribution payable in respect of a Share by giving the Company notice in writing to that effect, but if:
27
(a) |
the Share has more than one holder, or |
(b) |
more than one person is entitled to the Share, whether by reason of the death or bankruptcy of one or more joint holders, or otherwise, |
the notice is not effective unless it is expressed to be given, and signed, by all the holders or persons otherwise entitled to the Share.
CAPITALISATION OF PROFITS
42. |
Authority to capitalise and appropriation of capitalised sums |
(1) |
Subject to Article 42A, the Directors may: |
(a) |
resolve to capitalise any profits of the Company (whether or not they are available for distribution) which are not required for paying a preferential dividend, or any sum standing to the credit of any reserve or fund of the Company (including, without limitation, the Companys share premium account, merger reserve or capital redemption reserve, if any); and |
(b) |
appropriate any sum which they so resolve to capitalise (a capitalised sum) to the persons who would have been entitled to it if it had been distributed by way of dividend or to their designee (the persons entitled) and in the same proportions. |
(2) |
Capitalised sums must be applied: |
(a) |
on behalf of the persons entitled, and |
(b) |
in the same proportions as a dividend would have been distributed to them. |
(3) |
Any capitalised sum may be applied in paying up new Shares of a nominal amount equal to the capitalised sum which are then allotted credited as fully paid to the persons entitled or as they may direct. |
(4) |
A capitalised sum which was appropriated from profits available for distribution may be applied: |
(a) |
in or towards paying up any amounts unpaid on existing Shares held by the persons entitled; or |
(b) |
in paying up new debentures of the Company which are then allotted credited as fully paid to the persons entitled or as they may direct. |
(5) |
Subject to the Articles the Directors may: |
(a) |
apply capitalised sums in accordance with Articles 42(3) and (4) partly in one way and partly in another; |
(b) |
make such arrangements as they think fit to resolve a difficulty arising in the distribution of a capitalised sum and in particular to deal with Shares or debentures becoming distributable in fractions under this Article (including the issuing of fractional certificates, disregarding fractions or the making of cash payments) provided that Shares or debentures representing the fractions may not be sold to a person who is not a holder of Shares; and |
28
(c) |
authorise any person to enter into an agreement with the Company on behalf of all the persons entitled which is binding on them in respect of the allotment of Shares and debentures to them under this Article. |
(6) |
In exercising its authority under this Article 42, the Directors may only resolve to capitalise any profits of the Company (whether or not they are available for distribution) which are not required for paying a preferential dividend, or any sum standing to the credit of any reserve or fund of the Company (including, without limitation, the Companys share premium account, merger reserve or capital redemption reserve, if any) and to issue and allot new Shares as otherwise contemplated by this Article 42 to holders of A Shares and B Shares on an equal per share basis. |
42A |
The Directors shall capitalise any profits of the Company (whether or not they are available for distribution) which are not required for paying a preferential dividend, or any sum standing to the credit of any reserve or fund of the Company (including, without limitation, the Companys share premium account, merger reserve or capital redemption reserve, if any) and to issue and allot EPA B Shares, or other securities, to the holder of the C Share in satisfaction of their entitlement to receive EPAs. |
29
PART 4
DECISION-MAKING BY SHAREHOLDERS
ORGANISATION OF GENERAL MEETINGS
43. |
Attendance and speaking at general meetings |
(1) |
A person is able to exercise the right to speak at a general meeting when that person is in a position to communicate to all those attending the meeting, during the meeting, any information or opinions which that person has on the business of the meeting. |
(2) |
A person is able to exercise the right to vote at a general meeting when: |
(a) |
that person is able to vote, during the meeting, on resolutions put to the vote at the meeting, and |
(b) |
that persons vote can be taken into account in determining whether or not such resolutions are passed at the same time as the votes of all the other persons attending the meeting. |
(3) |
The Directors may make whatever arrangements they consider appropriate to enable those attending a general meeting to exercise their rights to speak or vote at it. |
(4) |
In determining attendance at a general meeting, it is immaterial whether any two or more shareholders attending it are in the same place as each other. |
(5) |
Two or more persons who are not in the same place as each other attend a general meeting if their circumstances are such that if they have (or were to have) rights to speak and vote at that meeting, they are (or would be) able to exercise them. |
44. |
Quorum for general meetings |
(1) |
No business other than the appointment of the Chairman of the Meeting is to be transacted at a general meeting if the persons attending it do not constitute a quorum. |
(2) |
Save as otherwise provided in these Articles, two persons present and entitled to vote shall be a quorum for all purposes. |
(3) |
Where the Company only has one Shareholder, one person present and entitled to vote shall be a quorum for all purposes. |
45. |
Chairing general meetings |
(1) |
If the Directors have appointed a Chairman, the Chairman shall chair general meetings if present and willing to do so. |
(2) |
If the Directors have not appointed a Chairman, or if the Chairman is unwilling to chair the meeting or is not present within ten minutes of the time at which a meeting was due to start: |
(a) |
the Directors present, or |
(b) |
(if no Directors are present), the meeting, |
30
must appoint a Director or Shareholder to chair the meeting, and the appointment of the Chairman of the Meeting must be the first business of the meeting.
(3) |
The person chairing a meeting in accordance with this Article is referred to as the Chairman of the Meeting. |
46. |
Attendance and speaking by Directors and non-Shareholders |
(1) |
Directors may attend and speak at general meetings, whether or not they are Shareholders. |
(2) |
The Chairman of the Meeting may permit other persons who are not: |
(a) |
Shareholders of the Company, or |
(b) |
otherwise entitled to exercise the rights of Shareholders in relation to general meetings, |
to attend and speak at a general meeting.
47. |
Adjournment |
(1) |
If the persons attending a general meeting within half an hour of the time at which the meeting was due to start do not constitute a quorum, or if during a meeting a quorum ceases to be present, the Chairman of the Meeting must adjourn it. |
(2) |
The Chairman of the Meeting may adjourn a general meeting at which a quorum is present if: |
(a) |
the meeting consents to an adjournment, or |
(b) |
it appears to the Chairman of the Meeting that an adjournment is necessary to protect the safety of any person attending the meeting or ensure that the business of the meeting is conducted in an orderly manner. |
(3) |
The Chairman of the Meeting must adjourn a general meeting if directed to do so by the meeting. |
(4) |
When adjourning a general meeting, the Chairman of the Meeting must: |
(a) |
either specify the time and place to which it is adjourned or state that it is to continue at a time and place to be fixed by the Directors, and |
(b) |
have regard to any directions as to the time and place of any adjournment which have been given by the meeting. |
(5) |
If the continuation of an adjourned meeting is to take place more than 14 days after it was adjourned, the Company must give at least seven clear days notice of it (that is, excluding the day of the adjourned meeting and the day on which the notice is given): |
(a) |
to the same persons to whom notice of the Companys general meetings is required to be given, and |
(b) |
containing the same information which such notice is required to contain. |
31
(6) |
No business may be transacted at an adjourned general meeting which could not properly have been transacted at the meeting if the adjournment had not taken place. |
VOTING AT GENERAL MEETINGS
48. |
Voting: general |
A resolution put to the vote of a general meeting must be decided on a show of hands unless a poll is duly demanded in accordance with the Articles.
49. |
Errors and disputes |
(1) |
No objection may be raised to the qualification of any person voting at a general meeting except at the meeting or adjourned meeting at which the vote objected to is tendered, and every vote not disallowed at the meeting is valid. |
(2) |
Any such objection must be referred to the Chairman of the Meeting, whose decision is final. |
50. |
Poll votes |
(1) |
A poll on a resolution may be demanded: |
(a) |
in advance of the general meeting where it is to be put to the vote, or |
(b) |
at a general meeting, either before a show of hands on that resolution or immediately after the result of a show of hands on that resolution is declared. |
(2) |
A poll may be demanded by: |
(a) |
the Chairman of the Meeting; |
(b) |
the Directors; |
(c) |
two or more persons having the right to vote on the resolution; or |
(d) |
a person or persons representing not less than one tenth of the total voting rights of all the Shareholders having the right to vote on the resolution (excluding any voting rights attached to any Shares in the Company held as treasury shares). |
(3) |
A demand for a poll may be withdrawn if: |
(a) |
the poll has not yet been taken, and |
(b) |
the Chairman of the Meeting consents to the withdrawal. |
A demand so withdrawn validates the result of a show of hands declared before the demand was made. If a poll is demanded before the declaration of the result of a show of hands and the demand is duly withdrawn, the meeting will continue as if the demand had not been made.
(4) |
Polls must be taken immediately and in such manner as the Chairman of the Meeting directs. |
51. |
Content of proxy notices |
32
(1) |
Proxies may only validly be appointed by a notice in writing (a proxy notice) which: |
(a) |
states the name and address of the Shareholder appointing the proxy; |
(b) |
identifies the person appointed to be that Shareholders proxy and the general meeting in relation to which that person is appointed; |
(c) |
is signed by or on behalf of the Shareholder appointing the proxy, or is authenticated in such manner as the Directors may determine; and |
(d) |
is delivered to the Company in accordance with the Articles and any instructions contained in the notice of the general meeting to which they relate. |
(2) |
The Company may require proxy notices to be delivered in a particular form, and may specify different forms for different purposes. |
(3) |
Proxy notices may specify how the proxy appointed under them is to vote (or that the proxy is to abstain from voting) on one or more resolutions and the proxy is obliged to vote or abstain from voting in accordance with the specified instructions. However, the Company is not obliged to check whether a proxy votes or abstains from voting as he has been instructed and shall incur no liability for failing to do so. Failure by a proxy to vote or abstain from voting as instructed at a meeting shall not invalidate proceedings at that meeting. |
(4) |
Unless a proxy notice indicates otherwise, it must be treated as: |
(a) |
allowing the person appointed under it as a proxy discretion as to how to vote on any ancillary or procedural resolutions put to the meeting, and |
(b) |
appointing that person as a proxy in relation to any adjournment of the general meeting to which it relates as well as the meeting itself. |
52. |
Delivery of proxy notices |
(1) |
A person who is entitled to attend, speak or vote (either on a show of hands or on a poll) at a general meeting remains so entitled in respect of that meeting or any adjournment of it, even though a valid proxy notice has been delivered to the Company by or on behalf of that person. |
(2) |
An appointment under a proxy notice may be revoked by delivering to the Company a notice in writing given by or on behalf of the person by whom or on whose behalf the proxy notice was given. |
(3) |
A notice revoking a proxy appointment only takes effect if it is delivered before the start of the meeting or adjourned meeting to which it relates. |
(4) |
If a proxy notice is not executed by the person appointing the proxy, it must be accompanied by written evidence of the authority of the person who executed it to execute it on the appointors behalf. |
53. |
Amendments to resolutions |
(1) |
An Ordinary Resolution to be proposed at a general meeting may be amended by Ordinary Resolution if: |
33
(a) |
notice of the proposed amendment is given to the Company in writing by a person entitled to vote at the general meeting at which it is to be proposed not less than 48 hours before the meeting is to take place (or such later time as the Chairman of the Meeting may determine), and |
(b) |
the proposed amendment does not, in the reasonable opinion of the Chairman of the Meeting, materially alter the scope of the resolution. |
(2) |
A Special Resolution to be proposed at a general meeting may be amended by Ordinary Resolution, if: |
(a) |
the Chairman of the Meeting proposes the amendment at the general meeting at which the resolution is to be proposed, and |
(b) |
the amendment does not go beyond what is necessary to correct a grammatical or other non-substantive error in the resolution. |
(3) |
If the Chairman of the Meeting, acting in good faith, wrongly decides that an amendment to a resolution is out of order, the Chairmans error does not invalidate the vote on that resolution. |
34
PART 5
ADMINISTRATIVE ARRANGEMENTS
54. |
Means of communication to be used |
(1) |
Subject to the Articles, anything sent or supplied by or to the Company under the Articles may be sent or supplied in any way in which the Act provides for documents or information which are authorised or required by any provision of the Act to be sent or supplied by or to the Company. |
(2) |
Any notice, document or other information shall be deemed served on or delivered to the intended recipient: |
(a) |
if properly addressed and sent by prepaid United Kingdom first class post to an address in the United Kingdom, 48 hours after it was posted (or five business days after posting either to an address outside the United Kingdom or from outside the United Kingdom to an address within the United Kingdom if (in each case) sent by reputable international overnight courier addressed to the intended recipient, provided that delivery in at least five business days was guaranteed at the time of sending and the sending party receives a confirmation of delivery from the courier service provider); |
(b) |
if properly addressed and delivered by hand, when it was given or left at the appropriate address; |
(c) |
if properly addressed and sent or supplied by electronic means, one hour after the document or information was sent or supplied; and |
(d) |
if sent or supplied by means of a website, when the material is first made available on the website or (if later) when the recipient receives (or is deemed to have received) notice of the fact that the material is available on the website. |
For the purposes of this Article 54, no account shall be taken of any part of a day that is not a business day.
(3) |
In proving that any notice, document or other information was properly addressed, it shall be sufficient to show that the notice, document or other information was delivered to an address permitted this purpose by the Act. |
(4) |
Subject to the Articles, any notice or document to be sent or supplied to a Director in connection with the taking of decisions by Directors may also be sent or supplied by the means by which that Director has asked to be sent or supplied with such notices or documents for the time being. |
(5) |
A Director may agree with the Company that notices or documents sent to that Director in a particular way are to be deemed to have been received within a specified time of their being sent, and for the specified time to be less than 48 hours. |
55. |
Company seals |
(1) |
Any common seal may only be used by the authority of the Directors. |
(2) |
The Directors may decide by what means and in what form any common seal is to be used. |
35
(3) |
Unless otherwise decided by the Directors, if the Company has a common seal and it is affixed to a document, the document must also be signed by at least one authorised person in the presence of a witness who attests the signature. |
(4) |
For the purposes of this Article, an authorised person is: |
(a) |
any Director of the Company; |
(b) |
the company secretary (if any); or |
(c) |
any person authorised by the Directors for the purpose of signing documents to which the common seal is applied. |
56. |
No right to inspect accounts and other records |
Except as provided by law or authorised by the Directors or an Ordinary Resolution of the Company, no person is entitled to inspect any of the Companys accounting or other records or documents merely by virtue of being a Shareholder.
57. |
Provision for employees on cessation of business |
The Directors may decide to make provision for the benefit of persons employed or formerly employed by the Company or any of its Subsidiaries (other than a Director or former Director or shadow Director) in connection with the cessation or transfer to any person of the whole or part of the undertaking of the Company or that Subsidiary.
DIRECTORS INDEMNITY AND INSURANCE
58. |
Indemnity |
(1) |
Subject to Article 58(2), a Relevant Director of the Company or an Associated Company may be indemnified out of the Companys assets against: |
(a) |
any liability incurred by that Director in connection with any negligence, default, breach of duty or breach of trust in relation to the Company or an Associated Company; |
(b) |
any liability incurred by that Director in connection with the activities of the Company or an Associated Company in its capacity as a trustee of an occupational pension scheme (as defined in section 235(6) of the Act); and |
(c) |
any other liability incurred by that Director as an officer of the Company or an Associated Company. |
(2) |
This Article does not authorise any indemnity which would be prohibited or rendered void by any provision of the Companies Acts or by any other provision of law. |
59. |
Insurance |
The Directors may decide to purchase and maintain insurance, at the expense of the Company, for the benefit of any Relevant Director in respect of any loss or liability which has been or may be incurred by a Relevant Director in connection with that Directors duties or powers in relation to the Company, any Associated Company or any pension fund or employees share scheme of the Company or Associated Company.
36
U.S. TAX MATTERS
60. |
U.S. Entity Classification |
(1) |
The Company shall elect, pursuant to section 301.7701-3 of the United States Treasury Regulations, to be classified as a partnership for U.S. federal income tax purposes. As a consequence of such election: |
(a) |
Annex B to these Articles contains certain provisions applicable to such classification, including, but not limited to, provisions concerning the allocation of income, gain and loss and deduction and the establishment of capital accounts; and |
(b) |
the Shareholders will be treated as partners in a partnership for U.S. federal income tax purposes. |
37
ANNEX A
EPAs
Part 1 General
1. |
Subject to the satisfaction of the Conditions, EPA Holdings shall be entitled to EPAs in respect of the C Share in an amount determined in accordance with the terms set forth in this Annex A. |
Part 2 Determination of amount of EPAs
2. |
The amount of the EPA payable to EPA Holdings in respect of each EPA Portfolio from time to time shall be determined in accordance with the provisions of this Part 2 of Annex A. |
3. |
Subject to the satisfaction of each of the three Conditions and any requirements of applicable law, at the end of each Fiscal Quarter (each, a Quarterly Determination Date) EPA Holdings will be entitled to an amount (the EPA), which shall be determined for each EPA Portfolio equal to 20% of the Net Economic Profit for such EPA Portfolio for the Measuring Period ending on the Quarterly Determination Date (the EPA Amount). |
4. |
The payment of any EPA to EPA Holdings in accordance with this Annex A will be subject to each of the following three conditions: |
(1) |
Condition One: Cumulative Net Economic Profit for such EPA Portfolio as of the Quarterly Determination Date is positive. |
(2) |
Condition Two: The aggregate Projected Cash Receipts for all Portfolio Investments in such EPA Portfolio for all periods commencing after such Quarterly Determination Date are equal to or greater than one hundred and thirty-five per cent. (135%) of the Projected Total Expenses for all Portfolio Investments (other than Pre-Exchange Portfolio Investments) in such EPA Portfolio through the respective Termination Dates of such Portfolio Investments. |
(3) |
Condition Three: The Projected Cash Receipts for all EPA Portfolios for all periods commencing after such Quarterly Determination Date are equal to or greater than one hundred and thirty-five per cent. (135%) of the Projected Total Expenses for all EPA Portfolios through the respective Termination Dates of such EPA Portfolios. |
5. |
The Company shall determine the EPA Amount for each EPA Portfolio (if any) in accordance with paragraph 4 above as soon as reasonably practicable following the relevant Quarterly Determination Date. |
6. |
For the avoidance of doubt, EPA Holdings (i) shall not be entitled to an EPA in respect of any Pre-Exchange Portfolio Investment, and (ii) shall be entitled to an EPA in respect of any Portfolio Investments that were made by the Continuing Investors Partnerships from the Exchange Date until the closing date of the initial public offering of the Parent A Shares. |
7. |
The calculation of EPAs made during each Fiscal Year shall be verified by an annual audit of the Companys books of account by an accounting firm selected by EPA Holdings who is acceptable, acting reasonably, to the board of Directors of the Company. To the extent such audit determines that there has been a net over- or under-calculation of EPAs during such Fiscal Year then, subject to applicable law, the Company shall (i) in the case of an under-calculation, distribute an additional amount to EPA Holdings equal to such net under-calculation, and (ii) in the case of an over-calculation in respect of a EPA Portfolio, such over-allocation shall be deducted from future entitlements to any EPAs in respect of such EPA Portfolio, and to the extent that such over-allocation is outstanding as of the final determination of an EPA in respect of such EPA Portfolio, then EPA Holdings shall pay to the Company any remaining over-allocation amount. |
38
8. |
As used herein, the terms Portfolio Investment, New Portfolio Investment, Royalty Investment, Pre-Exchange Portfolio Investment and Security Investment will each include the Companys proportionate interest in investment assets acquired by entities (including trusts) in which a member of the Group has a direct or indirect ownership interest. |
9. |
If EPA Holdings determines in good faith that the terms, calculation and allocation procedures set forth in this Annex A do not appropriately reflect the intention to provide EPA Holdings with EPAs that reflect 20% of the Net Economic Profit of each EPA Portfolio, EPA Holdings may direct the Company to amend the calculation and allocation procedures set forth herein in order to ensure to the extent possible that EPAs do reflect 20% of the Net Economic Profit of each EPA Portfolio. Any such amendments proposed by EPA Holdings shall subject to the approval of the Parent Board acting reasonably. |
Part 3 Satisfaction and distribution of EPAs
10. |
Following the determination of the EPA Amount for each EPA Portfolio in accordance with paragraphs 3 to 9 above, the Company shall, subject to applicable law, satisfy the payment of the relevant EPA Amount for each EPA Portfolio by way of a bonus issue of B Shares (the EPA B Shares) in the manner contemplated by paragraphs 11 and 12 below. Any EPA B Shares issued pursuant to this paragraph 10 shall be treated as an advance against the final year end entitlements as verified under paragraph 7 above, and shall reduce the amount of future distributions that EPA Holdings would otherwise receive pursuant to paragraphs 3 and 4 above. |
11. |
Any EPA B Shares to be issued in satisfaction of an EPA will be issued to the Depositary, as nominee for EPA Holdings, which shall issue EPA B Depositary Receipts to EPA Holdings (in its capacity as a B DR Holder). |
12. |
The number of EPA B Shares to be issued to the Depositary in respect of each EPA Portfolio will be calculated by reference to the following formula: |
A = (B-C-D)/E
Where:
A is the number of EPA B Shares to be issued, provided that any fractions of EPA B Shares arising shall be disregarded;
B is the EPA Amount for the relevant EPA Portfolio (expressed in US Dollars);
C is the amount (expressed in US Dollars) of any EPA Advance Amounts paid by the Company to EPA Holdings in respect of that EPA Portfolio since the last date on which the relevant EPA Portfolio was entitled to be paid an EPA;
D is the amount (expressed in US Dollars) of any prior outstanding over-allocation under paragraph 4;
E is the 10 day trailing VWAP for the Parent A Shares (expressed in US Dollars) ending 2 days prior to the proposed date of issuance of the EPA B Shares.
Part 4 Definitions
13. |
For the purposes of this Annex A, the following terms shall have the meanings set forth below: |
Acquisition Cost means, with respect to any Portfolio Investment, the original purchase price and capitalised acquisition costs, such as expenses incurred in sourcing, developing, negotiating, structuring, acquiring and holding of such Portfolio Investment plus any amounts paid in respect of such Portfolio Investment after the date of acquisition, such as instalment, milestone or other progress or hurdle payments and any other capitalised costs specifically applicable to the Portfolio Investment. The total Acquisition Cost of all Pre-Exchange Portfolio Investments were deemed to be equal to their
39
net present value as of the Exchange Date (calculated using the 50% PTRS methodology, which was determined in accordance with the Managers valuation policies in effect as of the Exchange Date). As of the closing date of the initial public offering of the Parent A Shares, the total Acquisition Cost of all Pre-Exchange Portfolio Investments shall be adjusted to be equal to their value as of such date (calculated based on the pre-money equity value of the Parent as of such date (price-to-public) plus any funded indebtedness. Such amount shall not exceed the net present value of such Pre-Exchange Portfolio Investments using the 100% PTRS methodology, calculated in accordance with the Managers valuation policies in effect as of the Exchange Date). In the event that any Portfolio Investments were made between the Exchange Date and the date of the completion of the initial public offering of the Parent A Shares, the portion of the pre-money equity value of the Parent as of the date of the completion of such initial public offering that is allocated to such Pre-Exchange Portfolio Investments shall be based on the relative value of such Pre-Exchange Portfolio Investments as compared to the value of all Portfolio Investments as of the date of the completion of such initial public offering.
Acquisition Cost Percentage means for each Portfolio Investment, a fraction, the numerator of which is the sum of (i) the Unrecovered Acquisition Cost of such Portfolio Investment as of the Last Completed Quarter, if any, plus (ii) the Cumulative Net Economic Loss for such Portfolio Investment as of the Last Completed Quarter, if any, and the denominator of which is the sum of (i) the Unrecovered Acquisition Cost of all Portfolio Investments as of the Last Completed Quarter, if any, plus (ii) the Cumulative Net Economic Loss for all Portfolio Investments as of the Last Completed Quarter, if any.
Agreed-Upon Analyst means any nationally recognised investment bank selected by EPA Holdings which prepares reports containing royalty revenue estimates in respect of one or more of the Royalty Investments, including Goldman Sachs, JP Morgan Chase & Co., UBS, Credit Suisse, Cowen, Bank of America Merrill Lynch, Morgan Stanley, Citigroup, Royal Bank of Canada, Wells Fargo, Deutsche Bank, Bernstein, SunTrust Robinson Humphrey, Raymond James, Piper Jaffrey, SVB Leerink, Mizuho, Stifel, Jefferies and Guggenheim.
Agreed Value means the agreed value of any Portfolio Investment, as determined pursuant to the policies and procedures established by EPA Holdings and subject to approval by the Parent Board.
Amortisation Completion Date means, with respect to any Royalty Investment, the Quarterly Determination Date that is at least four full Fiscal Quarters before the first date on which the Royalty Investment is expected to stop or substantially reduce cash flowing, as determined by EPA Holdings, as a result of the expiration of the license or patent relating to such Royalty Investment, or otherwise.
Analyst Consensus means the consensus product sales estimates for Royalty Investments from the most recent research report, if any, of each Agreed-Upon Analyst through the Termination Date. Where three or more Agreed-Upon Analysts publish research reports containing product sales estimates for a Royalty Investment, then the Analyst Consensus shall use the median growth rate of the Agreed-Upon Analysts to forecast product sales. For Royalty Investments where there are less than three Agreed-Upon Analysts who forecast product sales, EPA Holdings shall use its discretion to forecast product sales. EPA Holdings shall have the right to adjust the Analyst Consensus for any Royalty Investment to the extent EPA Holdings determines that, based upon EPA Holdings own estimates and its reasonable good faith discretion, such Analyst Consensus over- or under-estimates royalty revenue for such Royalty Investment.
Cash Receipts means with respect to each Portfolio Investment, all cash proceeds received, directly or indirectly, by a member of the Group in respect of such Portfolio Investment during the applicable period.
Conditions means the conditions to the payment of any EPAs, as set out in paragraph 4 of this Annex A.
Continuing Investors Partnership means each of RPI US Partners 2019, LP and RPI International Holdings 2019, LP.
Cumulative Net Economic Profit (Loss) means, for each Portfolio Investment, as of any date, an amount (positive or negative) equal to the difference between (a) the aggregate Cash Receipts for such Portfolio Investment for all Measuring Periods from the Date of Acquisition until such date, minus
40
(b) the Total Expenses allocated to such Portfolio Investment for all Measuring Periods from the Date of Acquisition until such date. A Portfolio is deemed to have positive Cumulative Net Economic Profit if, as of any Quarterly Determination Date, the sum of Cumulative Net Economic Profit (Loss) for all New Portfolio Investments in such Portfolio is positive.
Date of Acquisition means: (i) with respect to each New Portfolio Investment, the date such New Portfolio Investment is acquired, and (ii) with respect to Pre-Exchange Portfolio Investments, the closing date of the initial public offering of the Parent A Shares.
EPA has the meaning provided in paragraph 3 of this Annex A.
EPA Amount has the meaning provided in paragraph 3 of this Annex A.
EPA Portfolio means each New Portfolio which is subject to the payment of EPAs as set forth in this Annex A, including the EPA 1 Portfolio.
EPA 1 Portfolio means the Portfolio Investments made during the period commencing on the Exchange Date and ending on December 31, 2021.
Exchange Date means 11 February 2020;
Exchange Offer means the exchange offer pursuant to which limited partners in a limited partnership managed by the Manager transferred their interests to a Continuing Investors Partnership on the Exchange Date.
Fiscal Quarter means the calendar quarter or, in the case of the first fiscal quarter of the Company, the period commencing on the date of commencement of operations of the Company and ending on the last day of the next following calendar quarter and in the case of the last Fiscal Quarter of the Company ending on the date on which the winding up of the Company is completed, as the case may be.
Fiscal Year means the calendar year, or in the case of the last Fiscal Year, the period commencing on the first date of the relevant calendar year and ending on the date on which the dissolution of the Company is completed.
Group means (i) the Company and its Associated Companies for the time being, and (ii) for the purposes of this Annex A, the Continuing Investors Partnerships, and references to a member of the Group shall be construed accordingly.
Interest Expense means with respect to each Portfolio Investment, for any Measuring Period, the portion of the interest expense attributable to the Total Indebtedness that is allocable to such Portfolio Investment. A Portfolio Investments allocable portion of interest expense shall be determined by multiplying the aggregate amount of interest expense for all Portfolio Investments during the Last Completed Quarter by such Portfolio Investments Acquisition Cost Percentage.
Last Completed Quarter means, for any Measuring Period, the last day of the last full calendar quarter completed immediately prior to the end of such Measuring Period.
Liquid Investments means short-term investments consisting of (a) United States government and agency obligations maturing within one (1) year, (b) commercial paper on corporate debt rated not lower than A-1 by Standard & Poors Corporation or P-1 by Moodys Investor Services, Inc. with maturities of not more than one (1) year and one (1) day, (c) interest-bearing deposits in United States banks and United States branches of French, Japanese, English, Swiss, Irish, German, Cayman Islands, Dutch or Canadian banks, or in Investors Bank & Trust, in any case having one of the ratings referred to above, or the equivalent thereof from an internationally recognised financial information and rating service other than Standard & Poors Corporation or Moodys Investor Services, Inc., maturing within 180 days, and (d) money market mutual funds or prime funds with assets of not less than $250 million ($250,000,000) and all or substantially all of which assets are reasonably believed by EPA Holdings to consist of items described in one or more of the foregoing clauses (a), (b) and (c).
41
Measuring Period means
(a) |
for each New Portfolio, the period starting on the latest of (i) the Exchange Date; (ii) the Date of Acquisition of the first New Portfolio Investment of such New Portfolio; and (iii) the day following the last preceding Measuring Period in respect of which EPA Holdings received an EPA in respect of such New Portfolio and ending on the current Quarterly Determination Date; and |
(b) |
for the Pre-Exchange Portfolio, the period starting on the latest of (i) the Exchange Date; and (ii) the day following the last preceding Measuring Period in respect of which EPA Holdings received an EPA in respect of such Pre-Exchange Portfolio and ending on the current Quarterly Determination Date. |
Net Economic Profit means, with respect to each Portfolio, for any Measuring Period, the excess (if any) of: (a) the aggregate Cash Receipts for all New Portfolio Investments in such Portfolio during such Measuring Period minus (b) the Total Expenses for such Portfolio allocable thereto in accordance with this Annex A during such Measuring Period.
New Portfolio means one or more groupings of New Portfolio Investments that are designated as a separate Portfolio on or after the Exchange Date. The initial New Portfolio shall be the EPA 1 Portfolio which shall consist of New Portfolio Investments made until 31 December 2021. Each New Portfolio that is established after the EPA 1 Portfolio shall consist of New Portfolio Investments made during each two (2) year period thereafter. EPA Holdings shall assign such naming designations to each New Portfolio as it shall deem convenient, but each such Portfolio, however named, shall be deemed a New Portfolio for the purposes of this Annex A.
New Portfolio Investment means all Portfolio Investments acquired by a member of the Group, directly or indirectly, after the Exchange Date.
Operating and Personnel Payments means the quarterly operating and personnel payments that are paid to the Manager from Royalty Pharma Investments 2019 ICAV, an Irish Collective Asset-management Vehicle and any other fees that are paid to the Manager by (i) the Parent, (ii) the Company, and (iii) Royalty Pharma Investments, an Irish Unit Trust (solely in the case of (iii), in respect of the Companys pro rata share of such payment).
Operating Expense means, with respect to any Portfolio Investment for any Measuring Period, the sum of (a) any costs which are specifically allocable to such Portfolio Investment, including the Operating and Personnel Payments derived from such Portfolio Investment but excluding any capitalised costs included in Acquisition Cost, plus (b) such Portfolio Investments allocable portion of all expenses not allocable pursuant to clause (a) hereof payable by a member of the Group and the Groups allocable portion of expenses borne by entities in which a member of the Group has a direct or indirect ownership interest, not including (i) Operating and Personnel Payments, (ii) Interest Expense, or (iii) Recovery of Acquisition Cost. A Portfolio Investments allocable portion of the expenses specified in clause (b) above shall be equal to the product of (i) such expenses multiplied by (ii) a fraction, the numerator of which is the Operating and Personnel Payment derived from such Portfolio Investment during such Measuring Period and the denominator of which is the sum of Operating and Personnel Payments derived from all Portfolio Investments in such Portfolio during such Measuring Period.
Parent means Royalty Pharma plc.
Parent A Shares means the class A ordinary shares of US$0.0001 each in the capital of the Parent from time to time.
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Parent Board means the board of directors of Parent, as constituted from time to time.
Portfolio means each New Portfolio and the Pre-Exchange Portfolio.
Portfolio Investment means all Royalty Investments and Security Investments held, directly or indirectly, by a member of the Group. For the avoidance of doubt, (i) this term will include Portfolio Investments made after the Exchange Date, as well as Portfolio Investments transferred to the Continuing Investors Partnerships in connection with the Exchange Offer, (ii) this term will include the Groups proportionate interest in investment assets held through trusts or other entities in which a member of the Group has a direct or indirect ownership interest, and (iii) this term will not include Liquid Investments. EPA Holdings shall have discretion in its good faith judgment to re-classify a Security Investment as a Royalty Investment to the extent that subsequent to the Date of Acquisition a product, process, device or enabling and delivery technology underlying such Security Investment is approved.
Pre-Exchange Portfolio means a portfolio of all Pre-Exchange Portfolio Investments.
Pre-Exchange Portfolio Investment means each Portfolio Investment held by the Continuing Investors Partnerships on the Exchange Date.
Projected Cash Receipts means, as of any Quarterly Determination Date, (a) for any Royalty Investment, the aggregate Cash Receipts projected to be received by any member of the Group (or the Groups proportionate share of any such Cash Receipts received by a trust or other entity in which a member of the Group has a direct or indirect ownership interest) and (b) for any Security Investment, an amount equal to the Agreed Value of such Security Investment. Projected Cash Receipts for Royalty Investments shall be calculated by EPA Holdings based on the Analyst Consensus of product sales forecasts for the period beginning on the day following such Quarterly Determination Date and ending upon the Termination Date for such Portfolio Investment.
Projected Total Expenses means, as of any Quarterly Determination Date for any Portfolio Investment, the aggregate Total Expenses which are projected to be allocated to such Portfolio Investment. Projected Total Expenses will be measured over a period beginning on the day following such Quarterly Determination Date and ending upon the Termination Date for such Portfolio Investment.
Quarterly Determination Date has the meaning provided in paragraph 3 of this Annex A.
Recovery of Acquisition Cost means:
(a) |
for any Royalty Investment, for any Measuring Period, an amount equal to the portion of Acquisition Cost scheduled to be amortised for such Royalty Investment during such Measuring Period, calculated utilising a quarterly straight line amortisation schedule. Amortisation shall begin as of the Date of Acquisition of a Royalty Investment (or, if later, the date on which the applicable Royalty Investment first generates Cash Receipts (or in the case of Projected Cash Receipts the date the applicable Royalty Investment is expected to generate Cash Receipts) for the Group) and shall end as of the Amortisation Completion Date. EPA Holdings may accelerate the applicable schedule of amortisation for a Royalty Investment if it deems it appropriate to do so, including due to a decline in Projected Cash Receipts for such Royalty Investment; and |
(b) |
for any Security Investment, for any Measuring Period, an amount equal to the Unrecovered Acquisition Cost for such Security Investment. |
Royalties means intellectual property (including patents) or other contractual rights to income derived from the sales of, or revenues generated by, pharmaceutical, biopharmaceutical, medical and/or healthcare products, processes, devices or enabling and delivery technologies that are protected by patents, trademarks or copyrights, governmental or other regulations or otherwise by contract.
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Royalty Investment means (i) Royalties; (ii) ownership interests in any entities formed for the purpose of holding Royalties or substantially all of the assets which consist of Royalties; (iii) any securities, investments or contracts that may provide a hedge for Royalties; and (iv) other assets or investments considered by EPA Holdings to be relevant to the foregoing. For the avoidance of doubt, this term will include the Groups proportionate interest in Royalty Investments acquired or held by trusts or other entities in which a member of the Group has a direct or indirect ownership interest.
Security Investment means (i) the securities (including controlling and non-controlling interests, equity, debt and hybrid securities) of entities in the pharmaceutical, biopharmaceutical, medical or healthcare industry or operating assets thereof (other than Royalties); (ii) any securities, investments or contracts that may provide a hedge for the investments referred to in clause (i); and (iii) other assets and investments determined by EPA Holdings to be related to the investments referred to in clauses (i) and (ii). For the avoidance of doubt, this term will include Security Investments made after the Exchange Date as well as any Security Investments transferred to the Continuing Investors Partnerships in connection with the Exchange Offer.
Termination Date means for each Royalty Investment, the date on which the Royalty Investment is expected to stop cash-flowing as a result of the expiration of the license or patent relating to the Royalty Investment, or otherwise, as determined by EPA Holdings in its reasonable discretion. For each Security Investment, the date which is five (5) years following the Date of Acquisition for such Security Investment, provided, however that EPA Holdings may, in its reasonable good faith discretion, adjust the expected Termination Date for any Security Investment to the extent EPA Holdings projects in its reasonable good faith judgment that such Security Investment may be realised earlier or later than five (5) years following the Date of Acquisition.
Total Expenses means, with respect to any Portfolio Investment, the sum of (a) Operating Expense, (b) Recovery of Acquisition Cost, plus (c) Interest Expense allocable to such Portfolio Investment in accordance with this Annex A.
Total Indebtedness means (i) all financial indebtedness incurred by a member of the Group or (ii) allocable to a member of the Group in respect of financial indebtedness incurred by trusts or other entities holding Portfolio Investments.
Unrecovered Acquisition Cost means, for each Portfolio Investment, as of any date, the excess (if any) of (i) the Acquisition Cost of such Portfolio Investment over (ii) an amount equal to (A) in the case of a Royalty Investment, the cumulative amount of Recovery of Acquisition Costs for such Portfolio Investment for all periods prior to such date, and (B) in the case of a Security Investment, the total amount of Cash Receipts in respect of such Security Investment that have been received as of such date.
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ANNEX B
U.S. TAX ANNEX
Part 1 Capital Accounts
1. |
A separate capital account (the Capital Account) shall be established and maintained in the books of account of the Company for each Shareholder. |
2. |
The initial balance of each Shareholders Capital Account shall equal the amount of such Shareholders initial aggregate capital contributions to the Company. |
3. |
The balance in each Shareholders Capital Account shall be adjusted by: |
(a) |
increasing such balance by (i) the amount of cash and the fair value of any property (as of the date of the contribution thereof and net of any liabilities encumbering such property) contributed by such Shareholder to the Company, and (ii) such Shareholders allocable share of Profits and other items of income or gain allocated to such Shareholder in accordance with Part 2 (Allocations of Profits and Losses) and Part 3 (Special Allocation Provisions) of this Annex B; and |
(b) |
decreasing such balance by (i) the amount of cash and the fair value of any Company property distributed to such Shareholder pursuant to these Articles (net of any liabilities secured by such property), and (ii) such Shareholders allocable share of Losses and other items of loss, deduction, or expense allocated to such Shareholder in accordance with Part 2 (Allocations of Profits and Losses) and Part 3 (Special Allocation Provisions) of this Annex B. |
4. |
No Shareholder shall be required to make up a negative balance in its Capital Account. |
Part 2 Allocations of Profits and Losses
5. |
Except as otherwise provided in this Annex B, Profits and Losses and, to the extent necessary, individual items of income, gain, loss, deduction and credit (determined in accordance with U.S. tax principles as applied to the maintenance of capital accounts) of the Company for each Fiscal Year shall be allocated so as to cause the Capital Account of each Shareholder, after giving effect to the allocations set forth in Part 3 (Special Allocation Provisions) of this Annex B, to equal at the end of each Fiscal Year (after all allocations of income, gain, loss, deduction, or credit) that which such Shareholder would be entitled to receive if the Company sold all of its assets for their Carrying Value at the end of such year and distributed to the Shareholders the proceeds of such sale in accordance with paragraph 5(a) (Hypothetical Distributions) of this Annex B. |
(a) |
Hypothetical Distributions. Subject to EPA Holdings right to receive EPA Amounts (as defined in Part 2 of Annex A), any distributions shall be made to the Shareholders pro rata in proportion to their respective Percentage Interests in the Company. For the avoidance of doubt, for purposes of paragraph 6, EPA Holdings will be entitled to receive the EPA Amount in cash rather than in EPA B Shares. |
Part 3 Special Allocation Provisions
6. |
Notwithstanding any other provision in this Annex B: |
(a) |
Minimum Gain Chargeback. If there is a net decrease in Partnership Minimum Gain or Partner Nonrecourse Debt Minimum Gain (determined in accordance with the principles of Treasury Regulations sections 1.704-2(d) and 1.704-2(i)) during any Company taxable year, the |
45
Shareholders shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to their respective shares of such net decrease during such year, determined pursuant to Treasury Regulations sections 1.704-2(g) and 1.704-2(i)(5). The items to be so allocated shall be determined in accordance with Treasury Regulations section 1.704-2(f). This paragraph is intended to comply with the minimum gain chargeback requirements in such Treasury Regulations sections and shall be interpreted consistently therewith; including that no chargeback shall be required to the extent of the exceptions provided in Treasury Regulations Sections 1.704-2(f) and 1.704-2(i)(4). |
(b) |
Qualified Income Offset. If any Shareholder unexpectedly receives any adjustments, allocations, or distributions described in Treasury Regulations section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Company income and gain shall be specially allocated to such Shareholder as promptly as possible in an amount and manner sufficient to eliminate the deficit balance in his Capital Account at the end of any Fiscal Year which is in excess of the sum of (i) the amount such Shareholder is obligated to restore, if any, pursuant to any provision of this Agreement, and (ii) the amount such Shareholder is deemed to be obligated to restore pursuant to the penultimate sentences of Treasury Regulations sections 1.704-2(g)(1) and 1.704-2(i)(5); provided, that an allocation pursuant to this paragraph (b) shall be made only if and to the extent that such Shareholder would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Annex B have been tentatively made as if this paragraph (b) were not in this Annex B. |
(c) |
Gross Income Allocation. If any Shareholder has a deficit Capital Account at the end of any Fiscal Year which is in excess of the sum of (i) the amount such Shareholder is obligated to restore, if any, pursuant to any provision of this Annex B, and (ii) the amount such Shareholder is deemed to be obligated to restore pursuant to the penultimate sentences of Treasury Regulations sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Shareholder shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible; provided, that an allocation pursuant to this paragraph (c) shall be made only if and to the extent that a Shareholder would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Annex B have been tentatively made as if paragraph (b) (Qualified Income Offset) and this paragraph (c) were not in this Annex B. |
(d) |
Nonrecourse Deductions. Nonrecourse Deductions shall be allocated to the Shareholders in proportion to their Percentage Interests in the Company. |
(e) |
Partner Nonrecourse Deductions. Partner Nonrecourse Deductions shall be specially allocated to the Shareholder who bears the economic risk of loss with respect to the liability to which such Partner Nonrecourse Deductions are attributable in accordance with Treasury Regulations section 1.704-2(j). |
(f) |
Positive Basis Allocations. If the Company realizes net gains or items of gross income from the sale of Company assets for U.S. federal income tax purposes for any Fiscal Year in which one or more Positive Basis Partners withdraws from the Company, the Companys board of Directors may elect: (i) to allocate such net gains or items of gross income among such Positive Basis Partners, pro rata in proportion to the respective Positive Basis of each such Positive Basis Partner, until either the full amount of such net gains or items of gross income shall have been so allocated or the Positive Basis of each such Positive Basis Partner shall have been eliminated; and (ii) to allocate any net gains or items of gross income not so allocated to Positive Basis Partners to the other Shareholders in such manner as shall reflect equitably the amounts credited to such Shareholders Capital Accounts pursuant to Part 1 (Capital Accounts). |
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(g) |
Other Allocation Provisions. The foregoing provisions and the other provisions of this Annex B relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulations section 1.704-1(b) and shall be interpreted and applied in a manner consistent with such regulations. The board of Directors shall be entitled to ignore or supplement the terms and provisions of this Annex B at any time if necessary, in the opinion of tax counsel to the Company, in order to comply with such regulations, so long as any such action does not materially change the relative economic interests of the Shareholders. |
(h) |
Other Profits Allocations. The Company will, from time to time, make allocations of certain Profits and Losses to the extent the Company determines that such allocations are necessary to effect appropriate allocations of such items to direct or indirect owners allocated through the Company (including in respect of the ICAI) but only if such allocations do not adversely affect the economic return of the Parent or the B DR Holders. In the determination of the Company after giving effect to the profits interest allocations in the previous sentence, the Capital Accounts of the Shareholders will be adjusted to reflect the appropriate amounts transferred between the Shareholders based on exchanges pursuant to the Exchange Agreement and in connection with the initial public offering of the Parent A Shares. For these purposes, the parties to these Articles agree that the aforementioned amounts transferred will be deemed effectuated for US federal income tax purposes by a contribution of the Companys Shares by the Shareholders (or the beneficial owners thereof) to Parent in a mechanic similar to that of the Exchange Agreement. |
Part 4 Allocation for Income Tax Purposes
7. |
For income tax purposes only, each item of income, gain, loss and deduction of the Company shall be allocated among the Shareholders in the same manner as the corresponding items of Profits and Losses and specially allocated items are allocated for Capital Account purposes; provided, that in the case of any Company asset the Carrying Value of which differs from its adjusted tax basis for U.S. federal income tax purposes, income, gain, loss and deduction with respect to such asset shall be allocated solely for income tax purposes in accordance with the principles of Sections 704(b) and (c) of the Code (in any manner determined by the Companys board of Directors) so as to take account of the difference between Carrying Value and adjusted basis of such asset. |
(a) |
Notwithstanding the foregoing, the Companys board of Directors may make such allocations as it deems reasonably necessary to give economic effect to the provisions of these Articles and this Annex B, taking into account such facts and circumstances as it deems reasonably necessary for this purpose. All matters concerning allocations for U.S. federal, state and local income tax purposes, including accounting procedures, not expressly provided for by the terms of these Articles and this Annex B shall be determined by the Companys board of Directors. To the extent there is an adjustment by a taxing authority to any item of income, gain, loss, deduction or credit of the Company (or an adjustment to any Shareholders distributive share thereof), the Companys board of Directors may reallocate the adjusted items among each Shareholders or former Shareholder (as determined by the Companys board of Directors) in accordance with the final resolution of such audit adjustment. |
Part 5 Tax Treatment of C Share and EPA B Shares
8. |
The Company and each Shareholder agree to treat the C Share as a separate Profits Interest with respect to the Company within the meaning of Rev. Proc. 93-27, 1993-2 C.B. 343. In accordance with |
47
Rev. Proc. 2001-43, 2001-2 C.B. 191, the Company shall treat EPA Holdings as the owner of such Profits Interest from the date such Profits Interest is granted, and shall file its IRS form 1065, and issue appropriate Schedule K-1s to EPA Holdings. Except as required pursuant to a Determination as defined in Code Section 1313(a), none of the Company nor any Shareholder shall claim a deduction (as wages, compensation or otherwise) for the fair market value of such Profits Interest issued to EPA Holdings in respect of the Company, either at the time of grant of the Profits Interest, or at the time the Profits Interest becomes substantially vested. The undertakings contained in this paragraph 9 shall be construed in accordance with Section 4 of Rev. Proc. 2001-43. The provisions of this paragraph 9 shall apply regardless of whether or not the holder of a Profits Interest files an election pursuant to Section 83(b) of the Code. This paragraph 9 shall only apply to the C Share while Rev. Proc. 93-27, 1993-2 C.B. 343 and Rev. Proc. 2001-43, 2001-2 C.B. 191, remain in effect. |
9. |
The Shareholders agree that, in the event the Safe Harbor Regulation is finalized, the Company shall be authorized and directed to make the Safe Harbor Election, and the Company (to the extent permitted by applicable law) and each Shareholder agrees to comply with all requirements of the Safe Harbor with respect to all interests in the Company transferred in connection with the performance of services while the Safe Harbor Election remains effective. The Companys board of Directors shall be authorized to (and shall) prepare, execute, and file the Safe Harbor Election. The Companys board of Directors shall cause the Company to make any allocations of items of income, gain, loss, deduction, or expense (including forfeiture allocations) necessary or appropriate to effectuate and maintain the Safe Harbor Election. |
10. |
At each subsequent issuance of EPA B Shares pursuant to Part 3 of Annex A, EPA Holdings will be deemed, for U.S. federal income tax purposes, to (i) receive a distribution in an amount equal to the EPA Amount for the relevant EPA Portfolio, net of any EPA Advance Amount also received in respect of that EPA Portfolio (such amount, the Performance Amount, which shall, in accordance with paragraph 10 of Annex A, be treated as an advance against, and shall reduce, the amount of future distributions that EPA Holdings would otherwise receive pursuant to Annex A), and (ii) fund to the Company an amount equal to the Performance Amount in exchange for the issuance of the EPA B Shares, so that EPA Holdings will hold a pro rata share (based on EPA Holdings Percentage Interest in the Company after giving effect to such issuance) of all issued and outstanding B Shares at such date. For the avoidance of doubt, EPA Holdings shall not be required to make any cash payment under this paragraph. |
Part 6 Other U.S. Federal Income Tax Matters
11. |
For purposes of determining the net investment income or losses and net realized securities gains or losses, or any other such items allocable to any period, net investment income or losses and net realized securities gains or losses, and any such other items shall be determined on a daily, monthly, or other basis, as determined by the Companys board of Directors using any permissible method under section 706 of the Code and the Treasury Regulations thereunder. |
12. |
The Company may adopt any accounting method for U.S. federal income tax purposes which the Companys board of Directors determine in their sole discretion is in the best interests of the Company. |
13. |
As soon as reasonably practicable after the close of the Companys Fiscal Year, the Companys board of Directors shall prepare and send, or cause to be prepared and sent, to each person who was a Shareholder at any time during such Fiscal Year copies of such information as may be required for income tax reporting purposes for such person, and such other information as a Shareholder may reasonably request. |
14. |
The Companys board of Directors may in their sole discretion cause the Company to make all elections not otherwise expressly provided for in these Articles and this Annex B required or permitted to be made by the Company under the Code and any U.S. state or local or non-U.S. tax laws (including, but not limited to, making an election under Section 754 of the Code). |
48
15. |
Each Shareholder agrees not to treat, on any U.S. federal, state, local and/or non-U.S. income tax return or in any claim for a refund, any item of income, gain, loss, deduction or credit in a manner inconsistent with the treatment of such item by the Company or which would result in inconsistent treatment. |
16. |
To the extent the Company is required by law to withhold or to make tax payments on behalf of or with respect to any Shareholder (e.g., withholding under FATCA or the amount of any taxes assessed or collected under any BBA provision) (Tax Withholding Advances), the Company may withhold such amounts and make such tax payments as so required. All Tax Withholding Advances made on behalf of a Shareholder shall be repaid by reducing the amount of the current or next succeeding distribution or distributions which would otherwise have been made to such Shareholder or, if such distributions are not sufficient for that purpose, by so reducing the proceeds of liquidation of the Company otherwise payable to such Shareholder. For all other purposes of these Articles and this Annex B, such Shareholder shall be treated as having received all distributions (whether before or upon liquidation of the Company) unreduced by the amount of such Tax Withholding Advance. To the fullest extent permitted by law, but only from amounts distributable in the future to such Shareholder, each Shareholder hereby agrees to indemnify and hold harmless the Company and the other Shareholder from and against any liability (including, without limitation, any liability for taxes, penalties, additions to tax or interest) with respect to income attributable to or distributions or other payments to such Shareholder. FATCA means the legislation known as the U.S. Foreign Account Tax Compliance Act, Sections 1471 through 1474 of the Code, and any regulations (whether proposed, temporary or final), including any subsequent amendments and administrative guidance promulgated thereunder (or which may be promulgated in the future), any intergovernmental agreements and related statutes, regulations or rules and other guidance thereunder, any governmental authority pursuant to the foregoing, and any agreement entered into with respect thereto. |
17. |
The Companys board of directors shall have the exclusive authority to appoint and designate the partnership representative within the meaning of Section 6223 of the Code, and any equivalent or similar role under state, local, or non-U.S. law (the Partnership Representative), of the Company and any of its subsidiaries that are treated as a partnership for U.S. federal income tax purposes (each, a Reviewed Entity), in each case subject to approval by the Parent Board. If the Partnership Representative is an entity, the Companys board of directors shall (subject to approval by the Parent Board) have the exclusive authority to appoint and designate the individual through whom such Partnership Representative will act for all BBA purposes (the Designated Individual). All references to the Partnership Representative herein shall include the Designated Individual, unless the context requires otherwise. The Partnership Representative shall be permitted to take any and all actions under any BBA provision and to act as the Partnership Representative, and shall have any powers necessary to perform fully in such capacity, in each case following the direction of the Companys board of directors. The Partnership Representative shall be reimbursed by the Company for all costs and expenses incurred by it in its capacity as such, and shall be indemnified by the Company with respect to any action brought against it, in its capacity as the Partnership Representative, except in the case of the Partnership Representatives own fraud, bad faith, willful misconduct, gross negligence (as such concept is interpreted under the laws of the State of Delaware, United States), or material breach of this Agreement. |
(a) |
The Shareholders agree that any and all actions taken by the Partnership Representative shall be binding on any Reviewed Entity and all of the Shareholders, and the Shareholders shall reasonably cooperate with any Reviewed Entity and the Partnership Representative in connection with any elections made by the Partnership Representative or as determined to be reasonably necessary by the Partnership Representative under any BBA provision. All expenses in connection with any administrative or judicial proceedings relating to the determination of Reviewed Entity items at the Reviewed Entity level, or expenses otherwise incurred by the Partnership Representative, shall be borne by the Company. The cost of any |
49
resulting audits or adjustments of a Shareholders tax return will be borne solely by the affected Shareholder. The Companys board of directors shall cause the Partnership Representative, when acting in its capacity as such, to use its commercially reasonable efforts (taking into account the best interests of the Company and the Shareholders taken as a whole) to either (i) make an election under Section 6226 of the Code on behalf of the Reviewed Entity with respect to any imputed underpayment imposed on the Reviewed Entity, or (ii) take such other actions to take into account the status of the Shareholders as described in Sections 6225 and 6232 of the Code, in each case following the direction of the Companys board of directors. To the extent that: (i) the Partnership Representative is successful in having the amount of any imputed underpayment reduced by reason of Section 6225(c) of the Code, and (ii) the amount of any such reduction is attributable to a particular Shareholders status, the Companys board of Directors agrees to use commercially reasonable efforts to allocate the benefit of such reduction to such Shareholder. |
(b) |
To the fullest extent permitted by law, any transferring Shareholder agrees to (a) reasonably cooperate with the Company (or the Partnership Representative, as applicable), and (b) remain liable to file income tax returns and to pay or bear income taxes, including any interest and penalties, under any BBA provision, in each case with respect to any pre-transfer taxable years (or any portion thereof). |
(c) |
Except as required otherwise by applicable law, each Shareholder further agrees that such Shareholder will not independently act with respect to tax audits or tax litigation affecting the Company, unless previously authorized to do so in writing in the sole discretion of the Companys board of Directors. |
(d) |
The obligations and covenants of the Shareholders set forth in paragraph 16 hereof shall survive the transfer or withdrawal by any Shareholder of the whole or any portion of its interests in the Company, the death or legal disability of any Shareholder, and the dissolution or termination of the Company. |
Part 7 Definitions
18. |
For purposes of this Annex B, the following terms shall have the meanings set forth below: |
Agreed Value means the agreed value of any Portfolio Investment, as determined pursuant to the policies and procedures established by EPA Holdings and subject to approval by the Parent Board.
BBA means Subchapter C of Chapter 63 of the Code (Sections 6221 through 6241 of the Code), as enacted by the Bipartisan Budget Act of 2015, Pub. L. No. 114-74, as amended from time to time, and the regulations thereunder (whether proposed, temporary or final), including any subsequent amendments, successor provisions or other guidance thereunder, and any equivalent provisions for state, local or non-U.S. tax purposes.
Capital Account shall have the meaning set forth in paragraph 1 of this Annex.
Carrying Value shall mean, with respect to any Company asset, the assets adjusted basis for U.S. federal income tax purposes, except that the Carrying Values of all Company assets may be adjusted to equal their respective Agreed Values (as determined by the Companys board of Directors), in accordance with the rules set forth in Treasury Regulations section 1.704-1(b)(2)(iv)(f), except as otherwise provided herein, immediately prior to: (a) the date of the acquisition of any additional interest in the Company by any Shareholder in exchange for more than a de minimis capital contribution; (b) the date of the distribution of more than a de minimis amount of Company property (other than a pro rata distribution) to a Shareholder; or (c) the date of
50
the grant of more than a de minimis interest in the Company as consideration for the provision of services to or for the benefit of the Company by one acting in a partner capacity; provided, that adjustments pursuant to clauses (a), (b), and (c) above shall be made only if the Companys board of Directors determines in its sole discretion that such adjustments are necessary or appropriate to reflect the relative economic interests of the Shareholders. The Carrying Value of any Company asset distributed to any Shareholder shall be adjusted immediately prior to such distribution to equal its Agreed Value. In the case of any asset that has a Carrying Value that differs from its adjusted tax basis, Carrying Value shall be adjusted by the amount of depreciation calculated for purposes of the definition of Profits and Losses rather than the amount of depreciation determined for U.S. federal income tax purposes.
Designated Individual has the meaning provided in paragraph 17 of this Annex B.
FATCA has the meaning provided in paragraph 16 of this Annex B.
Fiscal Year means the calendar year, or in the case of the last Fiscal Year, the period commencing on the first date of the relevant calendar year and ending on the date on which the dissolution of the Company is completed.
ICAI means the ICAI Restricted Interests and the ICAI Transferred Interests, each as defined in the limited partnership agreements of the Continuing Investors Partnerships.
Nonrecourse Deductions shall have the meaning set forth in Treasury Regulations section 1.704-2(b).
Parent means Royalty Pharma plc.
Parent Board means the board of directors of Parent, as constituted from time to time.
Partner Nonrecourse Debt shall have the meaning set forth in Treasury Regulations section 1.704-2(b)(4).
Partner Nonrecourse Debt Minimum Gain shall mean an amount with respect to each Partner Nonrecourse Debt equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a nonrecourse liability (as defined in Treasury Regulations section 1.752-1(a)(2)) determined in accordance with Treasury Regulations section 1.704-2(i)(3).
Partner Nonrecourse Deductions shall have the meaning set forth in Treasury Regulations section 1.704-2(i)(2).
Partnership Minimum Gain shall have the meaning set forth in Treasury Regulations section 1.704-2(b)(2) and 1.704-2(d).
Partnership Representative has the meaning provided in paragraph 17 of this Annex B.
Percentage Interest of a Shareholder shall mean the percentage established from time to time for each Shareholder on the Companys books equal to the ratio of the number of such Shareholders A Shares and/or B Shares, as applicable, to the total number of A Shares and B Shares of the Company outstanding.
Performance Amount has the meaning provided in paragraph 10 of this Annex B.
Positive Basis means, with respect to any Shareholder and as of any time of calculation, the excess of the amount which such Shareholder is entitled to receive upon withdrawal from or liquidation of the Company over such Shareholders adjusted tax basis in its Company interest at such time (determined without regard to any adjustments made to such adjusted tax basis by reason of any transfer or assignment of such interest, including by reason of death).
51
Positive Basis Partner shall mean any Shareholder who withdraws from the Company and who has Positive Basis as of the effective date of such withdrawal, but such Shareholder shall cease to be a Positive Basis Partner at such time as it shall have received allocations pursuant to paragraph 6(g) (Positive Basis Allocations) equal to such Partners Positive Basis as of the effective date of the withdrawal.
Profits and Losses shall mean, for each Fiscal Year or other period, the taxable income or loss of the Company, or particular items thereof, determined in accordance with the accounting method used by the Company for U.S. federal income tax purposes with the following adjustments: (a) all items of income, gain, loss or deduction allocated other than pursuant to Part 2 (Allocations of Profits and Losses) shall not be taken into account in computing such taxable income or loss; (b) any income of the Company that is exempt from U.S. federal income taxation and not otherwise taken into account in computing Profits and Losses shall be added to such taxable income or loss; (c) if the Carrying Value of any asset differs from its adjusted tax basis for U.S. federal income tax purposes, any gain or loss resulting from a disposition of such asset shall be calculated with reference to such Carrying Value; (d) upon an adjustment to the Carrying Value of any asset (other than an adjustment in respect of depreciation), pursuant to the definition of Carrying Value, the amount of the adjustment shall be included as gain or loss in computing such taxable income or loss; (e) if the Carrying Value of any asset differs from its adjusted tax basis for U.S. federal income tax purposes, the amount of depreciation, amortization or cost recovery deductions with respect to such asset shall for purposes of determining Profits and Losses be an amount which bears the same ratio to such Carrying Value as the U.S. federal income tax depreciation, amortization or other cost recovery deductions bears to such adjusted tax basis; provided, that if the U.S. federal income tax depreciation, amortization or other cost recovery deduction is zero, the Companys board of directors may use any reasonable method for purposes of determining depreciation, amortization or other cost recovery deductions in calculating Profits and Losses; and (f) except for items in (a) above, any expenditures of the Company not deductible in computing taxable income or loss, not properly capitalizable and not otherwise taken into account in computing Profits and Losses pursuant to this definition shall be treated as deductible items.
Profits Interests shall have the meaning set forth in paragraph 9 of this Annex B.
Safe Harbor the election described in the Safe Harbor Regulation, pursuant to which a partnership and all of its partners may elect to treat the fair market value of a partnership interest that is transferred in connection with the performance of services as being equal to the liquidation value of that interest.
Safe Harbor Election means the election by a partnership and its partners to apply the Safe Harbor, as described in the Safe Harbor Regulation and IRS Notice 2005-43, issued on May 20, 2005.
Safe Harbor Regulation means Proposed Treasury Regulations Section 1.83-3(l) issued on May 24, 2005.
Shareholder means each holder of A Shares, B Shares and/or the C Share, provided that where the B Shares are held by the Depositary the holders of the B Depositary Receipts or the EPA B Depositary Receipts, as applicable, to the extent known to the Company shall be treated as Shareholders in place of the Depositary.
Treasury Regulations shall mean the United States Treasury regulations promulgated under the Code.
52
ANNEX C
PARENT BOARD RESERVED MATTERS
1 |
The declaration and payment of any dividends and the amount of any such dividends; |
2 |
The approval of the annual accounts of the Company; |
3 |
Any changes to the composition of the board of Directors of the Company or any of its committees; |
4 |
The treatment of any disputes arising with the Manager under any applicable management agreement between the Manager and any member of the Group; |
5 |
Any amendments to the terms of any management agreement between the Manager and any member of the Group pursuant to which the Manager is appointed to act as manager with respect to any member of the Group; |
6 |
Any decision to terminate the Manager under any applicable management agreement between the Manager and any member of the Group; |
7 |
Any amendment to the terms of the EPAs contemplated in paragraph 9 of Annex A of these Articles. |
8 |
Any decision under paragraph 17 of Annex B to propose, consent to or otherwise enter into any agreement with the IRS (including waivers or extension of statutes of limitations and settlement agreements) that would result in a material tax liability for the Parent. |
9 |
Any decision under paragraph 17 of Annex B to refrain from electing the alternative procedure under Code Section 6226 on behalf of a Reviewed Entity for any tax year of the Reviewed Entity that ends prior to or within the taxable year of the Parent in which the public offering of the Parent occurs. |
53
Exhibit 4.1
ZQ|CERT#|COY|CLS|RGSTRY|ACCT#|TRANSTYPE|RUN#|TRANS# CLASS A ORDINARY SHARES NOMINAL VALUE $0.0001 CLASS A ORDINARY SHARES Certificate Number ZQ00000000 Shares * * 000000 ****************** * * * 000000 ***************** **** 000000 **************** ***** 000000 *************** ****** 000000 ************** ROYALTY PHARMA PLC INCORPORATED UNDER THE LAWS OF ENGLAND AND WALES WITH COMPANY NUMBER 12446913 THIS CERTIFIES THAT SEE REVERSE FOR CERTAIN DEFINITIONS ** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr MR . Alexander. David SAMPLE Sample **** Mr. Alexander David &Sample MRS **** Mr. Alexander . SAMPLE David Sample **** Mr. Alexander & David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander MR David Sample . SAMPLE **** Mr. Alexander David Sample **** &Mr . Alexander MRS David Sample . SAMPLE **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Sample **** Mr. Sample is the owner of **000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares*** *000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares**** 000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****0 00000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****00 ***ZERO HUNDRED THOUSAND 0000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000 000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****0000 00**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****00000 0**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000 ZERO HUNDRED AND ZERO*** **Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000* *Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000** Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**S THIS CERTIFICATE IS TRANSFERABLE IN CITIES DESIGNATED BY THE TRANSFER AGENT, AVAILABLE ONLINE AT www.computershare.com FULLY-PAID SHARES OF CLASS A ORDINARY SHARES OF Royalty Pharma plc transferable in accordance with, and subject to, the Companys articles of association on the books of the Company in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile signatures of its duly authorized officers.DATED DD-MMM-YYYY FACSIMILE SIGNATURE TO COME COUNTERSIGNED AND REGISTERED: COMPUTERSHARE TRUST COMPANY, N.A. Pablo Legorreta TRANSFER AGENT AND REGISTRAR, CEO, Director & Chairman of the Board FACSIMILE SIGNATURE TO COME Errol De Souza By AUTHORIZED SIGNATURE Director 1234567 Royalty Pharma plc PO BOX 43004, Providence, RI 02940-3004 MR A SAMPLE DESIGNATION (IF ANY) ADD 1 ADD 2 ADD 3 ADD 4 CUSIP XXXXXX XX X Holder ID XXXXXXXXXX Insurance Value 00.1,000,000 Number of Shares 123456 DTC 12345678901234512345678 Certificate Numbers Num/No Denom. Total. 1234567890/1234567890 111 1234567890/1234567890 222 1234567890/1234567890 333 1234567890/1234567890 444 1234567890/1234567890 555 1234567890/1234567890 666 Total Transaction 7
ROYALTY PHARMA PLC A FULL STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF SHARES OF THE COMPANY OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS WILL BE FURNISHED BY THE COMPANY WITHOUT CHARGE TO ANY SHAREHOLDER WHO SO REQUESTS UPON APPLICATION TO THE TRANSFER AGENT NAMED ON THE FACE HEREOF OR TO THE OFFICE OF THE SECRETARY OF THE COMPANY. THE TRANSFER OF THESE SHARES REPRESENTED BY THIS CERTIFICATE REQUIRES THE COMPLETION OF A SPECIALIZED STOCK TRANSFER FORM AND MAY BE SUBJECT TO THE UNITED KINGDOMS HM REVENUE AND CUSTOMS STAMP DUTY. PLEASE CONTACT THE TRANSFER AGENT FOR ADDITIONAL INFORMATION.For US purposes the following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian (Cust) (Minor)TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act (State) JT TEN - as joint tenants with right of survivorship UNIF TRF MIN ACT - Custodian (until age ) and not as tenants in common (Cust) under Uniform Transfers to Minors Act (Minor) (State) Additional abbreviations may also be used though not in the above list.The IRS requires that the named transfer agent (we) report the cost basis of certain shares or units acquired after January 1, 2011. If your shares or units are covered by the legislation, and you requested to sell or transfer the shares or units using a specific cost basis calculation method, then we have processed as you requested. If you did not specify a cost basis calculation method, then we have defaulted to the first in, first out (FIFO) method. Please consult your tax advisor if you need additional information about cost basis. If you do not keep in contact with the issuer or do not have any activity in your account for the time period specified by state law, your property may become subject to state unclaimed property laws and transferred to the appropriate state. SECURITY INSTRUCTIONS THS IS WATERMARKED PAPER, DO NOT ACCEPT WITHOUT NOTHING WATERMARK HOLD TO LIGHT TO VERIFY WATERMARK.1234567
Exhibit 5.1
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Davis Polk & Wardwell London LLP
5 Aldermanbury Square
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020 7418 1300 tel 020 7418 1400 fax |
11 June 2020
Royalty Pharma plc
The Pavilions
Bridgwater Road
Bristol BS13 8AE
United Kingdom
Ladies and Gentlemen
Royalty Pharma plc (the Company) Registration Statement on Form S-1
We have acted as advisers as to English law to the Company, a public limited company incorporated under the laws of England and Wales with company number 12446913, in connection with the Registration Statement on Form S-1 (as amended through the date hereof, the Registration Statement) filed by the Company on 11 June 2020 with the U.S. Securities and Exchange Commission (the SEC) under the U.S. Securities Act of 1933, as amended (the Securities Act), for the offering of new class A ordinary shares (the New Shares) in the capital of the Company (the Offering).
Scope
This opinion is confined to matters of English law as at the date of this opinion, and this opinion and any non-contractual obligations arising out of or in relation to it are governed by and shall be construed in accordance with English law. Accordingly, we express no opinion with regard to any system of law other than English law as currently applied by the English courts. In particular, we express no opinion on European Union law as it applies to any jurisdiction other than England and Wales, the federal laws of the United States of America or the laws of the State of New York. To the extent that any such laws or the laws of any other jurisdiction may be relevant, we have made no independent investigation thereof and our opinion is subject to the effect of such laws.
By accepting this opinion you irrevocably agree and accept that the courts of England shall have exclusive jurisdiction to hear and determine any dispute or claim arising out of or in connection with this opinion or its formation, including without limitation, (i) the creation, effect or interpretation of, or the legal relationships established by, this opinion and (ii) any non-contractual obligations arising out of or in connection with this opinion.
We assume no obligation to notify you of any future changes in law (including any changes occurring as a result of the United Kingdom withdrawing from the European Union), which may affect the opinions expressed herein, or otherwise to update this opinion in any respect.
Royalty Pharma plc | 11 June 2020 |
Opinion
On the basis of our examination of the documents listed in Schedule 1 to this opinion and the other matters referred to above, and subject to the assumptions set out in Schedule 2 to this opinion, the qualifications set out in Schedule 3 to this opinion and any matters not disclosed to us, we are of the opinion that the New Shares will be duly and validly issued and non-assessable if and when (i) the Registration Statement, as finally amended, shall have become effective under the Securities Act, (ii) the New Shares shall have been issued against payment therefor, in accordance with the Underwriting Agreement and the articles of association of the Company, in an amount of cash consideration (as such term is defined in section 583(3) of the Companies Act 2006) of not less than the nominal value of each such New Share, and (iii) valid entries in the books and registers of the Company shall have been made.
For the purposes of this opinion, the term non-assessable in relation to the New Shares, which has no recognised meaning in English law, means that, under the Companies Act 2006, the articles of association of the Company and any resolution taken under the articles of association of the Company approving the issue of the New Shares, no holder of such New Shares is liable, by reason solely of being a holder of such New Shares, for additional payments or calls for further funds by the Company or any other person.
General
This opinion is addressed to you in relation to the Registration Statement and may not be used or relied upon for any other purpose.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and further consent to the reference to Davis Polk & Wardwell London LLP under the caption Legal Matters in the prospectus included in the Registration Statement. In giving this consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the SEC thereunder.
Capitalised terms used in this opinion shall, unless otherwise defined, have the meaning given to them in the Schedules to this opinion.
Yours faithfully
/s/ Davis Polk & Wardwell London LLP
2
Royalty Pharma plc | 11 June 2020 |
SCHEDULE 1
DOCUMENTS EXAMINED
For the purposes of this opinion, we have examined the following documents:
1. |
a copy of the Registration Statement filed with the SEC on 11 June 2020; |
2. |
a draft of the underwriting agreement referred to in the prospectus which is a part of the Registration Statement, to be entered into by the Company in connection with the Offering (the Underwriting Agreement); |
3. |
a certificate from the general counsel of the Company dated 11 June 2020 (the Certificate) having attached to it: |
(a) |
a copy of the certificate of incorporation of the Company, certified to be a true and correct copy; |
(b) |
a copy of the certificate of incorporation on re-registration as a public limited company of the Company, certified to be a true and correct copy; |
(c) |
a copy of the articles of association of the Company, certified to be a true and correct copy as at the date hereof; |
(d) |
a copy of a draft of the articles of association to be adopted by the Company in connection with the initial public offering of its Class A ordinary shares, certified to be a true and correct copy as at the date hereof; and |
(e) |
a copy of a draft of the shareholder resolutions of the Company and of the resolutions of the board of directors of the Company or a committee of the board of directors of the Company to be passed in connection with the initial public offering of Class A ordinary shares in the capital of the Company (together, the resolutions); |
4. |
the results of an on-line search of the entries shown on the Companies House Direct online service on 10 June 2020 with respect to the Company (the Company Search); and |
5. |
the results of a telephone search with the Companies Court in London of the Central Index of Winding Up Petitions on 10 June 2020 with respect to the Company (the Central Registry Search), |
and we have relied upon the statements as to factual matters contained in or made pursuant to each of the above-mentioned documents and search results.
Except as stated above we have not examined any contracts, instruments or other documents or any corporate records of any party and have not made any other enquiries.
3
Royalty Pharma plc | 11 June 2020 |
SCHEDULE 2
ASSUMPTIONS
For the purposes of this opinion, we have assumed:
1. |
all documents submitted to us as originals are authentic and complete; |
2. |
all documents submitted to us as copies, whether in physical or electronic form, conform to authentic, complete originals and, where a document (including, without limitation, the Underwriting Agreement and each of the resolutions) has been examined by us in draft or specimen form, it will be or has been executed, or will or has become effective, in the form of that draft or specimen; |
3. |
all signatures, stamps and seals on all documents that we reviewed are genuine; |
4. |
the capacity, power and authority to execute, deliver and perform each of the documents listed in Schedule 1 to this opinion by or on behalf of each of the parties to such documents; |
5. |
none of the documents examined by us has been amended or modified in any way, and there are no other arrangements or course of dealings which modify, supersede or otherwise affect any of the terms thereof, and no unknown facts or circumstances (and no documents, agreements, instruments or correspondence) which are not apparent from the face of the documents listed in Schedule 1 to this opinion or which have not been disclosed to us that may affect the conclusions in this opinion; |
6. |
the words and phrases used in the Underwriting Agreement have the same meaning and effect as they would have if it were governed by English law; |
7. |
each of the statements contained in the Certificate is true and correct as at the date of the Certificate and as at the date hereof and will be as at the time of the allotment and issue of the New Shares; |
8. |
that the directors of the Company, in authorising the allotment and issue of the New Shares, will exercise their powers in accordance with their duties under all applicable laws and the articles of association of the Company in force at the relevant time; |
9. |
that the name of the relevant allottees and the New Shares allotted are duly entered in the register of members of the Company and all filings required to be filed with the Registrar of Companies or otherwise in connection therewith will be filed within, in each such case, the relevant time limits; |
10. |
the information revealed by the Company Search (i) was accurate in all respects and has not since the time of such search been altered, and (ii) was complete and included all relevant information which should properly have been submitted to the Registrar of Companies; |
11. |
the information revealed by the Central Registry Search was accurate in all respects and has not since the time of such enquiry been altered; and |
12. |
the Company has complied with and will comply with all applicable provisions of Regulation (EU) No 596/2014 on market abuse (MAR), Regulation (EU) No. 2017/1129 (the Prospectus Regulation), the Financial Services and Markets Act 2000 (the FSMA), the Financial Services Act 2012 (the FSA) and the Alternative Investment Fund Managers Regulations (SI 2013/1773) (the AIFM Regulations), and any regulations made under any of MAR, the Prospectus Regulation, the FSMA, the FSA and the AIFM Regulations with respect to anything done or to be done by it in connection with |
4
Royalty Pharma plc | 11 June 2020 |
the New Shares, any other securities of the Company, any of the documents listed in Schedule 1 to this opinion or the offer or issue of ordinary shares in the capital of the Company in, from, or otherwise involving the United Kingdom including, without limitation, Article 14 (prohibition of insider dealing etc.) and Article 15 (prohibition of market manipulation) of MAR, section 19 (the general prohibition) and section 21 (restrictions on financial promotion) of the FSMA, section 89 (misleading statements), section 90 (misleading impressions) and section 91 (misleading statements etc in relation to benchmarks) of the FSA, and Article 59 (marketing under Article 42 of the Directive) of the AIFM Regulations. |
5
Royalty Pharma plc | 11 June 2020 |
SCHEDULE 3
QUALIFICATIONS
Our opinion is subject to the following qualifications:
1. |
the Company Search is not capable of revealing conclusively whether or not, inter alia,(i) a winding-up order has been made or a resolution passed for the winding up of a company; or (ii) an administration order has been made; or (iii) a receiver, administrative receiver, administrator or liquidator has been appointed; or (iv) a court order has been made under the Cross-Border Insolvency Regulations 2006, since notice of these matters may not be filed with the Registrar of Companies immediately and, when filed, may not be entered on the electronic records of the relevant company immediately. In addition, the Company Search is not capable of revealing, prior to the making of the relevant order or the appointment of an administrator otherwise taking effect, whether or not a winding-up petition or an application for an administration order has been presented or notice of intention to appoint an administrator under paragraphs 14 or 22 of Schedule B1 to the Insolvency Act 1986 has been filed with the court; |
2. |
the Central Registry Search relates only to the presentation of (i) a petition for the making of a winding-up order or the making of a winding-up order by the Court; (ii) an application to the High Court of Justice in London for the making of an administration order and the making by such court of an administration order; and (iii) a notice of intention to appoint an administrator or a notice of appointment of an administrator filed at the High Court of Justice in London. It is not capable of revealing conclusively whether or not such a winding-up petition, application for an administration order, notice of intention or notice of appointment has been presented or winding-up or administration order granted; |
3. |
this opinion is subject to all applicable laws relating to bankruptcy, insolvency, liquidation, administration, voluntary arrangement, scheme of arrangement, moratorium, reorganisation, rescheduling, fraudulent transfer, preference, transactions at undervalue or other laws of general application relating to or affecting the rights of creditors; |
4. |
we have not been responsible for investigating or verifying the accuracy of the facts, including the statements of foreign law or the reasonableness of any statement or opinion or intention contained in or relevant to the Registration Statement or any other document referred to therein, or that no material facts have been omitted therefrom; and |
5. |
we express no opinion as to whether the Registration Statement (or any part of it) contains all the information required to be contained in it or whether the persons responsible for the Registration Statement have discharged their obligations thereunder. |
6
Exhibit 8.1
June 11, 2020
Royalty Pharma plc
Suite 1
3rd Floor
11 - 12 St. Jamess Square
London
United Kingdom
SW1Y 4LB
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Royalty Pharma plc (the Company), in connection with the preparation and filing of the registration statement on Form S-1 (Registration No. 238632) (the Registration Statement) filed with the Securities and Exchange Commission (the Commission) pursuant to the Securities Act of 1933, as amended (the Securities Act). The Registration Statement has been filed in connection with the Companys initial public offering (the IPO) of its Class A shares representing the Companys ordinary shares.
For purposes of this opinion, we have reviewed originals, or copies certified or otherwise identified to our satisfaction, of the Registration Statement and the exhibits thereto, and such other documents and matters of law and fact as we have considered necessary or appropriate. In addition, we have not made an independent investigation or audit of the facts set forth in the above referenced documents or otherwise provided to us. We have assumed (i) the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as copies, (ii) that the IPO will be consummated as described in the Registration Statement; (iii) that the statements concerning the terms of the IPO set forth in the Registration Statement are true, complete and correct and will remain true, complete and correct at all relevant times; and (iv) that any such statements made in the Registration Statement qualified by knowledge, intention, belief or any other similar qualification are true, complete and correct, and will remain true, complete and correct at all relevant times, in each case as if made without such qualification. If any of the above described assumptions are untrue for any reason or if the IPO is consummated in a manner that is different from the manner described in the Registration Statement, our opinion as expressed below may be adversely affected.
Based upon and subject to the foregoing, and our consideration of such other matters of fact and law as we have considered necessary or appropriate, the statements set forth under the captions Material Tax Considerations-Material U.K. Tax Considerations and Material Tax ConsiderationsMaterial U.S. Federal Income Tax Considerations in the Registration Statement, to the extent such statements summarize U.K. tax law and U.S. federal income tax law, and subject to the limitations, qualifications, exceptions, and assumptions set forth herein and therein, set forth the material U.K. tax considerations and the material U.S. federal income tax considerations related to the purchase, ownership and disposition of the Companys Class A ordinary shares as of the date hereof in our opinion.
We express no opinion on any issue relating to the tax consequences of the transactions contemplated by the Registration Statement other than the opinion set forth above and we intimate no view on any other matter that may be relevant to your interests. Our opinion set forth above is based on U.K. tax law and the generally published practice of HM Revenue & Customs and the Internal Revenue Code of 1986, as amended, Treasury Regulations promulgated thereunder, administrative pronouncements and judicial precedents, in each case all as of the date hereof. The foregoing authorities may be repealed, revoked or modified, and any such change may have retroactive effect. Any change in applicable laws or facts and circumstances surrounding the IPO, or any inaccuracy in the statements, facts, assumptions and representations on which we have relied may affect the validity of the opinion set forth herein. We assume no responsibility to inform the Company of any such change or inaccuracy that may occur or come to our attention.
Our opinion is not binding on HM Revenue & Customs, the Internal Revenue Service or a court. There can be no assurance that HM Revenue & Customs or the Internal Revenue Service will not take a contrary position or that a court would agree with our opinion if litigated.
We are furnishing this opinion in connection with the filing of the Registration Statement and this opinion is not to be relied upon for any other purpose without our prior written consent. We hereby consent to the use of our name under the caption Legal Matters in the Prospectus included in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not hereby admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours, |
/s/ Akin Gump Strauss Hauer & Feld LLP and Akin Gump LLP |
Exhibit 10.6
LETTER OF APPOINTMENT FOR A NON-EXECUTIVE DIRECTOR
M. Germano Giuliani
Villa Hermosa
9, Boulevard de Suisse
Monaco, MC98000
June 9, 2020
Dear Mr. Giuliani:
Letter of appointment
The board of directors (the Board) of Royalty Pharma plc (the Company) is pleased to confirm your appointment to the Board as a non-executive director.
This letter sets out the main terms of your appointment. If you have any questions about or are concerned with any of the terms, or need any more information, please let me know.
By accepting this appointment, you agree that this letter is a contract for services as a director and is not a contract of employment and you confirm that you are not subject to any restrictions which prevent you from holding office as a director.
1. |
Appointment and Termination |
1.1 |
Subject to the remaining provisions of this letter, your appointment under this letter shall be effective from the completion of the Companys initial public offering (the IPO) until the earliest of (a) termination by you giving the Company prior written notice; (b) your removal as a director pursuant to the terms of the Companys articles of association, as amended from time to time (the Articles); and (c) subject to paragraph 1.6 below, your retirement at the next annual general meeting of the Companys shareholders (AGM), unless the appointment is renewed at such AGM. It is expressly acknowledged and understood that this appointment is contingent upon the IPO and, if the IPO does not occur, this letter of appointment shall be null and void. |
1.2 |
Your appointment is subject to the Articles. Nothing in this letter shall be taken to exclude or vary the terms of the Articles as they apply to you as a director of the Company. The Articles require all the directors to retire annually and seek re-election at each AGM. |
1.3 |
Continuation of your appointment is contingent on your continued satisfactory performance, re-nomination by the nomination and corporate governance committee and approval of the Board, and re-election by the shareholders and any relevant statutory provisions and provisions of the Articles relating to removal of a director. If you are not re-nominated or approved by the Board, the shareholders do not re-elect you as a director, or you are retired from office under the Articles, your appointment shall terminate automatically, with immediate effect and without further compensation. |
1.4 |
Subject to paragraph 1.6, any term renewal is subject to the recommendation of the nomination and corporate governance committee and review and approval of the Board as well as AGM re-election. |
1.5 |
You may be requested to serve on one or more Board committees. In such case you will be provided with the relevant terms of reference on your appointment to such a committee. |
1.6 |
Subject to clauses 1.1(a) and 1.1(b), applicable law and conditional upon your continued compliance with the terms contained in paragraph 1.12 and for so long as (a) the ordinary shares of the Company owned by you and your Affiliates represent at least 5% of the outstanding shares of the Company (on an aggregate basis treating the Class A ordinary shares and Class B voting shares of the Company as a single class); and (b) you maintain voting control over at least 5% of the outstanding shares of the Company (on an aggregate basis treating the Class A ordinary shares and Class B voting shares of the Company as a single class), the Company will put you forward for re-election by the Company shareholders at the next two AGMs (following the date of this letter). For the purposes of this paragraph 1.6, you will be deemed to have ownership and control over trusts of which you are the primary beneficiary. For purposes of this letter, Affiliate of any person shall mean any person who or which, directly or indirectly, controls, or is controlled by, or is under common control with such person from time to time, and control (together with its correlative meanings, controlled by and under common control with) means, with respect to any other person, the possession, directly or indirectly, of power to direct or cause the direction of management or policies of such person (through ownership of voting securities or other ownership interests, by contract or otherwise). |
1.7 |
Notwithstanding paragraph 1.1 to paragraph 1.6, the Company may terminate your appointment with immediate effect if you have: |
1.7.1 |
committed a material breach of your obligations under this letter, including a breach of any provision of paragraph 1.12; |
1.7.2 |
committed any serious or repeated breach or non-observance of your obligations to the Company (which include an obligation not to breach your statutory, fiduciary and/or common-law duties); |
1.7.3 |
been guilty of any fraud or dishonesty or acted in any manner which, in the Companys opinion, acting reasonably, brings or is likely to bring you or the Company into disrepute or is materially adverse to the Companys interests; |
1.7.4 |
been convicted of an arrestable criminal offence other than a road traffic offence for which a fine or non-custodial penalty is imposed; |
1.7.5 |
been declared bankrupt or have made an arrangement with or for the benefit of your creditors or you have a county court administration order made against you under the County Court Act 1984 or equivalent regulations in any other jurisdiction; |
1.7.6 |
been disqualified from acting as a director; |
1.7.7 |
not complied with the Companys anti-corruption and anti-bribery policy and procedures; |
1.7.8 |
been removed as a director by a shareholder resolution duly passed in accordance with the Articles or the Companies Act 2006 or, if a shareholder resolution is proposed for your re-election at an annual general meeting and is not duly passed; |
1.7.9 |
committed an act in any manner which, in the opinion of the Board, brings any company in the Companys group into disrepute; |
1.7.10 |
a conflict of interest with the interests of any company in the Companys group which the Board determines (acting reasonably, and having consulted you) cannot be resolved to the Boards satisfaction; or |
1.7.11 |
been absent for more than six months (whether or not an alternate director attends in your place), without special leave of absence from the Board, from Board meetings held during that period. |
1.8 |
Upon termination of your appointment, you shall, unless agreed otherwise with the Board: |
1.8.1 |
immediately resign, without any claim for compensation, from all offices which you may hold in the Company or any of its group companies and, in the event of any failure to do so, the Company is hereby irrevocably authorised to sign and deliver such resignation to the Board and do all things necessary to give effect to the resignation; and |
1.8.2 |
immediately deliver to the Company, to any place the Company may reasonably nominate, all property of the Company or any of its group companies which may be in your possession or control including, without limitation, keys, security pass, and all lists of clients or customers, correspondence and all other documents, papers, memoranda, notes and records (including, where practicable, any records stored by electronic means) which may have been prepared by you or have come into your possession as a non-executive director relating to the business or affairs of the Company or any of its group companies. You shall not knowingly retain copies of confidential information. |
1.9 |
On or following the service of notice by you for any reason to terminate your appointment, the Company may, in its sole and absolute discretion, terminate your appointment at any time and with immediate effect. |
1.10 |
You and the Company agree that neither you nor the Company will, at any time following termination of your appointment, make to any third party any misleading, untrue or derogatory statements (whether orally or in writing) regarding the Company, its subsidiaries or Affiliates, which, for the avoidance of doubt, shall include RP Management, LLC. |
1.11 |
If matters arise which cause you concern about your role, you should discuss these matters with the chief executive officer. If you have any concerns which cannot be resolved, and you choose to resign for that, or any other, reason, you should provide an appropriate written statement to the chief executive officer for circulation to the Board. |
1.12 |
During your appointment, you agree, and in respect of your Affiliates you agree to use your best efforts to procure, that: |
1.12.1 |
each of you and your Affiliates who or which now or hereafter own or have the right to vote or direct the vote of any Class A ordinary shares of the Company shall, in respect of any election of directors or at any meeting of the shareholders of the Company called expressly for the removal of directors, cause all Class A ordinary shares of the Company that you or they are entitled to vote, whether now owned or hereafter acquired, to be present for quorum purposes and to be voted in favor of any nominee or director designated by the nominating and governance committee of the Board and against the removal of any director designated by the nominating and governance committee of the Board, at all such shareholders meetings or at any adjournments or postponements thereof; |
1.12.2 |
none of you or your Affiliates shall: |
(a) |
directly or indirectly, acquire (i) any equity of the Company (in addition to any equity owned by you and your Affiliates on the date hereof), excluding any acquisitions of Company equity by you or your Affiliates in one or more |
transactions for all periods following the date hereof which have an aggregate acquisition cost for all such transactions of up to $10,000,000 USD, or (ii) any debt or convertible securities of the Company (including any derivative, synthetic or other securities based on or related to any Company securities), or any interest therein without the prior written approval of the Board in its sole discretion; |
(b) |
solicit proxies or written consents of shareholders or conduct any other type of referendum (binding or non-binding) with respect to, or from the holders of, the Class A ordinary shares of the Company, or become a participant (as such term is defined in Instruction 3 to Item 4 of Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act)) in or knowingly assist any third party in any solicitation of any proxy, consent or other authority (as such terms are defined under the Exchange Act) to vote any Class A ordinary shares of the Company (other than such encouragement, advice or influence that is consistent with Company managements recommendation in connection with such matter); |
(c) |
grant any proxy, consent or other authority to vote any Class A ordinary shares of the Company with respect to any matters (other than to the named proxies included in the Companys proxy card for any annual meeting or special meeting of shareholders) or deposit any Class A ordinary shares of the Company in a voting trust or subject them to a voting agreement or other arrangement of similar effect with respect to any annual meeting except as provided in paragraph 1.12.1 above, special meeting of shareholders or action by written consent (excluding customary brokerage accounts, margin accounts, prime brokerage accounts and the like); |
(d) |
knowingly encourage, advise or influence any other person or assist any third party in encouraging, assisting or influencing any person with respect to the giving or withholding of any proxy, consent or other authority to vote or in conducting any type of referendum (other than such encouragement, advice or influence that is consistent with Company managements recommendation in connection with such matter); |
(e) |
present at any annual meeting or any special meeting of the Companys shareholders any proposal for consideration for action by shareholders or seek the removal of any member of the Board or, except as otherwise expressly contemplated by this letter, propose any nominee for election to the Board or seek representation on the Board; |
(f) |
without the prior written approval of the Board, separately or in conjunction with any other person or entity in which you or your Affiliates are or propose to be either a principal, partner or financing source or are acting or propose to act as broker or agent for compensation, propose (publicly, privately or to the Company) or effect any tender offer or exchange offer, merger, acquisition, reorganization, restructuring, recapitalization or other business combination involving the Company or a material amount of the assets or businesses of the Company or actively encourage, initiate or support any other third party in any such activity; |
(g) |
form or join in a partnership, limited partnership, syndicate or other group, including a group as defined under Section 13(d) of the Exchange Act, with respect to the Class A ordinary shares of the Company (for the avoidance of doubt, excluding any group composed solely of you and your Affiliates) or otherwise support or participate in any effort by a third party with respect to the matters set forth in this paragraph 1.12.2; |
1.12.3 |
other than in market transactions where the identity of the ultimate purchaser is not known, none of you or your Affiliates shall sell, offer or agree to sell directly or indirectly, through swap or hedging transactions or otherwise, any Class A ordinary shares of the Company or any rights decoupled from the underlying Class A ordinary shares of the Company held by you or your Affiliates to any third party unless such sale, offer, or agreement to sell would not knowingly result in such third party, together with its Affiliates, owning, controlling or otherwise having any beneficial or other ownership interest in the aggregate of 5% or more of the shares of the Class A ordinary shares of the Company outstanding at such time or would increase the beneficial or other ownership interest of any third party who, together with its Affiliates, has a beneficial or other ownership interest in the aggregate of 5% or more of the Class A ordinary shares of the Company outstanding at such time, except in each case in a transaction approved by the Board in its sole discretion; |
1.12.4 |
none of you or your Affiliates shall enter into any negotiations, agreements, arrangements or understandings with any third party with respect to the matters set forth in this paragraph 1.12; and |
1.12.5 |
in the event of a breach of any provision of this paragraph 1.12, you agree that the Companys obligations under paragraphs 1.1 and 1.6 shall terminate immediately and you shall promptly deliver your written resignation from the Board and any committees thereof in accordance with paragraph 1.8. |
2. |
Time Commitment |
2.1 |
You will be expected to devote such time as is necessary for the proper performance of your duties. |
2.2 |
The nature of the role makes it impossible to be specific about the maximum time commitment. You may be required to devote additional time to the Company in respect of preparation time and ad hoc matters which may arise and particularly when the Company is undergoing a period of increased activity. At certain times it may be necessary to convene additional Board, committee or shareholder meetings. |
2.3 |
By accepting this appointment, you confirm that, taking into account all of your other commitments, you are able to allocate sufficient time to the Company to discharge your responsibilities effectively. |
3. |
Role and Duties |
3.1 |
The Board as a whole is collectively responsible for the success of the Company. The Boards role is to set the Companys strategic aims and ensure that the necessary financial and human resources are in place for the Company to meet its objectives. The Board also reviews management performance and ensures that the Company meets its obligations to its shareholders and others. As a non-executive director you shall have the same general legal responsibilities to the Company as any other director. You are expected to perform your duties (whether statutory, fiduciary or common law) faithfully, diligently and to a standard commensurate with the functions of your role and your knowledge, skills and experience. |
3.2 |
You shall exercise your powers in your role as a non-executive director having regard to relevant obligations under prevailing law and regulation, including the Companies Act 2006, U.S. securities laws and the listing standards of the Nasdaq Global Select Market. In addition |
to complying with the Companys Articles and all other applicable Company policies, you shall have particular regard to the general duties of directors in Part 10, chapter 2 of the Companies Act 2006, including the duty to promote the success of the Company under which all directors must act in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole. |
3.3 |
Unless the Board specifically authorises you to do so, you shall not enter into any legal or other commitment or contract on behalf of the Company. |
3.4 |
You shall be entitled to request all relevant information about the Companys affairs as you believe is reasonably necessary to enable you to discharge your responsibilities as a non-executive director. |
4. |
Expenses |
4.1 |
Expenses incurred in connection with the performance of your duties as a director, including but not limited to reasonable travel expenses, shall be reimbursed by the Company in accordance with reimbursement policies as adopted by the Board from time to time. |
5. |
Insurance |
5.1 |
The Company has directors and officers liability insurance and it intends to maintain such cover for the full term of your appointment. A copy of the policy document is available from the General Counsel. The Company shall grant you a deed of indemnity against certain liabilities that may be incurred as a result of your office to the extent permitted by applicable law. |
6. |
Outside Interests |
6.1 |
You have already disclosed to the Board the significant commitments you have outside your role in the Company. You must inform the chief executive officer in advance of any changes to these commitments. You must seek the Boards agreement before accepting further commitments which might (a) give rise to a conflict of interest, (b) conflict with any of your duties to the Company, or (c) substantially affect the time that you are able to devote to your role at the Company. |
6.2 |
It is accepted and acknowledged that you have business interests other than those of the Company and have declared any conflicts that are apparent at present. If you become aware of any further potential or actual conflicts of interest, these should be disclosed to the chief executive officer as soon as you become aware of them. The Board retains full discretion to determine whether the identified conflict is material and to take action with respect to such conflict as appropriate. |
7. |
Confidentiality |
7.1 |
You acknowledge that all information acquired during your appointment is confidential to the Company and should not be released, communicated or disclosed to third parties or used for any reason other than in the interests of the Company, either during your appointment or following termination (by whatever means), without prior clearance from the chief executive officer. This restriction shall cease to apply to any confidential information which may (other than by reason of your breach) become available to the public generally. |
7.2 |
You acknowledge the need to hold and retain Company information (in whatever format you may receive it) under appropriately secure conditions. |
7.3 |
Nothing in this paragraph 7 shall prevent you from disclosing information which you are entitled to disclose under the Public Interest Disclosure Act 1998 or which you are required to disclose under applicable U.S. securities laws, provided that the disclosure is made in accordance with the provisions of such Act or applicable U.S. securities laws and you have complied with the Companys policy from time to time in force regarding such disclosures. |
8. |
Inside Information and Dealings in the Companys Shares |
8.1 |
You will at all times comply with all laws, rules and regulations relating to the disclosure and use of inside information, including applicable U.S. securities laws. You will also comply with the Companys insider trading policy, as it may be amended from time to time. You should avoid making any statements that might risk a breach of these requirements. If in doubt, please contact the chief executive officer or General Counsel. |
9. |
Changes to Personal Details |
9.1 |
You shall advise the General Counsel of any change in your address or other personal contact details. |
10. |
Moral Rights |
10.1 |
You hereby irrevocably waive any moral rights in all works prepared by you, in the provision of your services to the Company, to which you are now or may at any future time be entitled under Chapter IV of the Copyright Designs and Patents Act 1988, the Visual Artists Rights Act of 1990, 17 U.S.C. §106A, in the United States, or any similar provisions of law in any jurisdiction, including (but without limitation) the right to be identified, the right of integrity and the right against false attribution, and agree not to institute, support, maintain or permit any action or claim to the effect that any treatment, exploitation or use of such works or other materials, infringes your moral rights. |
11. |
Data Protection |
11.1 |
The Company is committed to protecting your data and in the course of your duties to the Company it will be necessary for the Company to collect and retain information about you. The Company will do so in accordance with its data protection and privacy / confidential information policy. With your explicit consent, the Company may collect sensitive personal data, which is known as special categories of personal data under the European Unions General Data Protection Regulation (Regulation (EU) 2016/679) and the Data Protection Act 2018, as applicable and as in force from time to time. Examples include your race or ethnicity, religious beliefs, sexual orientation and political opinions, trade union membership, health and sickness records. |
11.2 |
The Company may make such information available to any of its group companies, those who provide products or services to the Company or any company in the Companys group (such as advisers and payroll administrators), regulatory authorities and governmental or quasi-governmental organisations. You consent to the transfer of such information to the Company (or any of its group companies) outside the European Economic Area, in particular to the United States, and even where the country or territory in question does not maintain adequate data protection standards, in each case in the manner and for the purposes described in the Companys data protection and privacy / confidential information policy, privacy notices and any other applicable policies. |
11.3 |
You shall comply with the Companys data protection and privacy / confidential information policy, compliance manual, anti-corruption and anti-bribery policy, privacy notices and any other applicable policies, copies of which are available from the Companys General Counsel. |
12. |
Third Party Rights |
12.1 |
No third party shall have any right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this letter. |
13. |
Entire Agreement |
13.1 |
This letter and any document referred to in it constitutes the entire terms and conditions of your appointment and supersedes and extinguishes all previous agreements, promises, assurances, warranties, representations and understandings between you and the Company, whether written or oral, relating to its subject matter. |
13.2 |
You and the Company agree that neither party shall have any remedies in respect of any representation, assurance or warranty (whether made innocently or negligently) that is not set out in this letter and neither you nor the Company shall have any claim for innocent or negligent misrepresentation or negligent misstatement based on any statement in this letter. |
14. |
Assignment |
14.1 |
You may not assign or otherwise transfer all or any of your rights and obligations under this letter without the prior written consent of the Company. |
15. |
Counterparts |
15.1 |
This letter may be executed in any number of counterparts, each of which shall constitute an original of this letter agreement, but all the counterparts shall together constitute the same agreement. |
16. |
Severability |
16.1 |
In the event that any part of this letter shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this letter shall remain in full force and effect to the fullest extent permitted by law. |
17. |
Amendment |
17.1 |
No amendment or variation of this letter shall be effective unless it is in writing and signed by you and the Company (or respective authorised representatives). |
18. |
Governing Law and Jurisdiction |
18.1 |
Your appointment with the Company and any dispute or claim arising out of or in connection with it or its subject matter or formation (including non-contractual disputes or claims) shall be governed by and construed in accordance with the law of England and Wales and you and the Company irrevocably agree that the courts of England and Wales shall have non-exclusive jurisdiction to settle any dispute or claim that arises out of or in connection with this appointment or its subject matter or formation (including non-contractual disputes or claims). |
Please indicate your agreement and acceptance of these terms by signing and returning the attached copy of this letter to George Lloyd, General Counsel.
Yours sincerely
/s/ Pablo Legorreta |
Pablo Legorreta |
Director |
For and on behalf of Royalty Pharma plc
I confirm and agree to the terms of my appointment as a non-executive director of Royalty Pharma plc as set out in this letter.
/s/ M. Germano Giuliani |
Signed on June 9, 2020 |
by M. Germano Giuliani |
Exhibit 10.15
ROYALTY PHARMA PLC
2020 INDEPENDENT DIRECTOR EQUITY INCENTIVE PLAN
Section 1. Purpose. The purpose of the Royalty Pharma plc 2020 Independent Director Equity Incentive Plan (the Plan) is to motivate and reward those Independent Directors of Royalty Pharma plc (the Company) to further the best interests of the Company and its shareholders. Capitalized items not otherwise defined herein are defined in Section 21.
Section 2. Eligibility. Any Independent Director of the Company shall be eligible to be selected to receive an Award under the Plan.
Section 3. Administration.
(a) The Plan shall be administered by the Committee. The Committee may designate one or more directors as a subcommittee who may act for the Committee if necessary to satisfy the requirements of this Section. The Committee may issue rules and regulations for administration of the Plan.
(b) Subject to the terms of the Plan and applicable law, the Committee (or its delegate) shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards (including Replacement Awards) to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights or other matters are to be calculated in connection with) Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent and under what circumstances Awards may be settled or exercised in cash, Shares, other Awards, other property, net settlement (including broker-assisted cashless exercise) or any combination thereof, or canceled, forfeited or suspended, and the method or methods by which Awards may be settled, exercised, canceled, forfeited or suspended; (vi) determine whether, to what extent and under what circumstances cash, Shares, other Awards, other property and other amounts payable with respect to an Award under the Plan shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (viii) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan.
(c) All decisions of the Committee shall be final, conclusive and binding upon all parties, including the Company, its shareholders and Participants and any Beneficiaries thereof.
Section 4. Shares Available for Awards.
(a) Subject to adjustment as provided in Section 4(c), the maximum number of Shares available for issuance under the Plan shall be 800,000. Shares underlying Replacement
Awards and Shares remaining available for grant under a plan of an acquired company or of a company with which the Company combines, appropriately adjusted to reflect the acquisition or combination transaction, shall not reduce the number of Shares remaining available for grant hereunder.
(b) For purposes of determining the number of Shares available for issuance under the Plan:
(i) all Shares covered by SARs shall be counted against the number of Shares available for issuance under the Plan; provided, however, that (A) SARs that may be settled only in cash shall not be so counted and (B) if the Company grants a SAR in tandem with an Option for the same number of Shares and provides that only one such Award may be exercised (a Tandem SAR), only the Shares covered by the Option, and not the Shares covered by the Tandem SAR, shall be so counted, and the expiration of one in connection with the others exercise shall not restore Shares to the Plan;
(ii) to the extent that an Award may be settled only in cash, no Shares shall be counted against the number of Shares available for issuance under the Plan;
(iii) if any Award (A) expires or is terminated, surrendered or cancelled without having been fully exercised or is forfeited in whole or in part (including as the result of Shares subject to such Award being repurchased by the Company at or below the original issuance price pursuant to a contractual repurchase right) or (B) results in any Shares not being issued (including as a result of an Award that was settleable either in cash or in Shares actually being settled in cash), the unused Shares covered by such Award shall again be available for issuance under the Plan; provided, however, that (1) in the case of the exercise of a SAR, the number of Shares counted against the Shares available for issuance under the Plan shall be the full number of Shares subject to the SAR multiplied by the percentage of the SAR actually exercised, regardless of the number of Shares actually used to settle such SAR upon exercise and (2) the Shares covered by a Tandem SAR shall not again become available for issuance under the Plan upon the expiration or termination of such Tandem SAR;
(iv) Shares delivered (either by actual delivery, attestation, or net exercise) to the Company by a Participant to (i) exercise an Award or (ii) satisfy tax withholding obligations with respect to Options or SARs (including Shares retained from the Option or SAR creating the tax obligation) shall not be added back to the number of Shares available for issuance under the Plan; and
(v) Shares repurchased by the Company on the open market using the proceeds from the exercise of an Award shall not increase the number of Shares available for issuance under the Plan.
(c) In the event that, as a result of any dividend or other distribution (whether in the form of cash, Shares or other securities), recapitalization, stock split, reverse stock split,
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reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to acquire Shares or other securities of the Company, issuance of Shares pursuant to the anti-dilution provisions of securities of the Company, or other similar corporate transaction or event affecting the Shares, or of changes in applicable laws, regulations or accounting principles, an adjustment is necessary in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan (an Adjustment Event), then the Committee shall, subject to Section 18, adjust equitably any or all of:
(i) the number and type of Shares (or other securities) which thereafter may be made the subject of Awards, including the aggregate and individual limits specified in Section 4(a);
(ii) the number and type of Shares (or other securities) subject to outstanding Awards; and
(iii) the grant, acquisition, exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award;
provided, however, that the number of Shares subject to any Award denominated in Shares shall always be a whole number.
(d) Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or Shares acquired by the Company.
Section 5. American Depositary Shares. Notwithstanding anything herein to the contrary, the Committee may, in its discretion, make any Awards authorized hereunder subject to ADSs. In such cases, any applicable references hereunder to Shares shall be deemed references to ADSs.
Section 6. Options. The Committee is authorized to grant Options to Participants with the following terms and conditions and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine.
(a) The exercise price per Share under an Option shall be determined by the Committee; provided, however, that, except in the case of Replacement Awards, such exercise price shall not be less than the Fair Market Value of a Share on the date of grant of such Option.
(b) The term of each Option shall be fixed by the Committee but shall not exceed 10 years from the date of grant of such Option.
(c) The Committee shall determine the time or times at which an Option may be exercised in whole or in part.
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(d) The Committee shall determine the methods by which, and the forms in which payment of the exercise price with respect thereto may be made or deemed to have been made, including cash, Shares, other Awards, other property, net settlement (including broker-assisted cashless exercise) or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price.
Section 7. Share Appreciation Rights. The Committee is authorized to grant SARs to Participants with the following terms and conditions and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine.
(a) SARs may be granted under the Plan to Participants either alone (freestanding) or in addition to other Awards granted under the Plan (tandem).
(b) The exercise price per Share under a SAR shall be determined by the Committee; provided, however, that, except in the case of Replacement Awards, such exercise price shall not be less than the Fair Market Value of a Share on the date of grant of such SAR (or if granted in connection with an Option, on the grant date of such Option).
(c) The term of each SAR shall be fixed by the Committee but shall not exceed 10 years from the date of grant of such SAR.
(d) The Committee shall determine the time or times at which a SAR may be exercised or settled in whole or in part.
(e) Upon the exercise of a SAR, the Company shall pay to the Participant an amount equal to the number of Shares subject to the SAR multiplied by the excess, if any, of the Fair Market Value of one Share on the exercise date over the exercise price of such SAR. The Company shall pay such excess in cash, in Shares valued at Fair Market Value, or any combination thereof, as determined by the Committee.
Section 8. Restricted Shares and RSUs. The Committee is authorized to grant Awards of Restricted Shares and RSUs to Participants with the following terms and conditions and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine.
(a) The applicable Award Document shall specify the vesting schedule and, with respect to RSUs, the delivery schedule (which may include deferred delivery later than the vesting date) and whether the Award of Restricted Shares or RSUs is entitled to dividends or dividend equivalents, voting rights or any other rights.
(b) Restricted Shares and RSUs shall be subject to such restrictions as the Committee may impose (including any limitation on the right to vote Restricted Shares or the right to receive any dividend, dividend equivalent or other right), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise, as the
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Committee may deem appropriate. Without limiting the generality of the foregoing, if the Award relates to Shares on which dividends are declared during the period that the Award is outstanding, the Award shall not provide for the payment of such dividend (or a dividend equivalent) to the Participant prior to the time at which such Award, or applicable portion thereof, becomes nonforfeitable, unless otherwise provided in the applicable Award Document.
(c) Any Restricted Share granted under the Plan may be evidenced in such manner as the Committee may deem appropriate, including book-entry registration or issuance of a share certificate or certificates. In the event that any share certificate is issued in respect of Restricted Shares granted under the Plan, such certificate shall be registered in the name of the Participant and shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Shares.
(d) The Committee may determine the form or forms (including cash, Shares, other Awards, other property or any combination thereof) in which payment of the amount owing upon settlement of any RSU Award may be made.
Section 9. Performance Awards. The Committee is authorized to grant Performance Awards to Participants with the following terms and conditions and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine.
(a) Performance Awards may be denominated as a cash amount, a number of Shares or a combination thereof and are Awards which may be earned upon achievement or satisfaction of performance conditions specified by the Committee. In addition, the Committee may specify that any other Award shall constitute a Performance Award by conditioning the right of a Participant to exercise the Award or have it settled, and the timing thereof, upon achievement or satisfaction of such performance conditions as may be specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions. Subject to the terms of the Plan, the performance goals to be achieved during any Performance Period, the length of any Performance Period, the amount of any Performance Award granted and the amount of any payment or transfer to be made pursuant to any Performance Award shall be determined by the Committee. If the Performance Award relates to Shares on which dividends are declared during the Performance Period, the Performance Award shall not provide for the payment of such dividend (or dividend equivalent) to the Participant prior to the time at which such Performance Award, or the applicable portion thereof, is earned.
(b) Performance criteria may be measured on an absolute (e.g., plan or budget) or relative basis, and may be established on a corporate-wide basis or with respect to one or more business units, divisions, subsidiaries or business segments. Relative performance may be measured against a group of peer companies, a financial market index or other acceptable objective and quantifiable indices. If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which the Company conducts its business, or other events or circumstances render the performance
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objectives unsuitable, the Committee may modify the minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable. Performance objectives may be adjusted for material items not originally contemplated in establishing the performance target for items resulting from discontinued operations, extraordinary gains and losses, the effect of changes in accounting standards or principles, acquisitions or divestitures, changes in tax rules or regulations, capital transactions, restructuring, nonrecurring gains or losses or unusual items. Performance measures may vary from Performance Award to Performance Award, and from Participant to Participant, and may be established on a stand-alone basis, in tandem or in the alternative. The Committee shall have the power to impose such other restrictions on Awards subject to this Section 9(b) as it may deem necessary or appropriate to ensure that such Awards satisfy all requirements of any applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations.
(c) Settlement of Performance Awards; Other Terms. Settlement of Performance Awards shall be in cash, Shares, other Awards, other property, net settlement or any combination thereof, as determined in the discretion of the Committee. Performance Awards will be settled only after the end of the relevant Performance Period. The Committee may, in its discretion, increase or reduce the amount of a settlement otherwise to be made in connection with a Performance Award.
Section 10. Other Share-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Shares or factors that may influence the value of Shares, including convertible or exchangeable debt securities, other rights convertible or exchangeable into Shares, acquisition rights for Shares, Awards with value and payment contingent upon performance of the Company or business units thereof or any other factors designated by the Committee. The Committee shall determine the terms and conditions of such Awards.
Section 11. Effect of Termination of Service or a Change in Control on Awards.
(a) The Committee may provide, by rule or regulation or in any Award Document, or may determine in any individual case, the circumstances in which, and the extent to which, an Award may be exercised, settled, vested, paid or forfeited in the event of a Participants Termination of Service prior to the vesting, exercise or settlement of such Award or the end of a Performance Period.
(b) In the event of a Change in Control, outstanding Awards shall be treated as described below.
(i) If in connection with the Change in Control, any outstanding Award is continued in effect or converted into an award or right with respect to securities of the successor or surviving corporation (or a parent or subsidiary thereof) (in the case of Options and SARs awarded to a Participant to whom Section 18 applies, in a manner that complies with Sections 424 and 409A of the Code if those sections apply to the Award),
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then upon the occurrence of a Termination of Service of a Participant by the Company without Cause within 24 months following the Change in Control, on the date of such Termination of Service, such Award held by such Participant shall immediately vest and settle, and with respect to Options and SARs, shall become exercisable and shall remain exercisable for one year.
(ii) If outstanding Awards are not continued or converted as described in subsection (i) above, then on the Change in Control, such Awards shall immediately vest and settle and, in the case of Options and SARs, shall become fully exercisable.
For purposes of subsections (i) and (ii) above, no Option, SAR, Restricted Share or RSU shall be treated as continued or converted on a basis consistent with the requirements of subsection (i) or (ii), as applicable, unless the securities underlying such award after such continuation or conversion are of a class that is widely held and publicly traded on a recognized United States or International securities exchange.
(c) In addition, in the event of a Change in Control or other Adjustment Event and to the extent permitted under applicable law and not inconsistent with the provisions of Section 11(a) above or the applicable Award Document, the Committee, in its sole discretion, and on such terms and conditions as it deems appropriate, either by the terms of the Award or by action taken prior to the occurrence of such Change in Control or other Adjustment Event, may take any one or more of the following actions whenever the Committee determines that such action is appropriate or desirable in order to prevent the dilution or enlargement of the benefits intended to be made available under the Plan or to facilitate the Change in Control transaction or other Adjustment Event:
(i) to terminate or cancel any outstanding Award in exchange for a cash payment (and, for the avoidance of doubt, if as of the date of the Change in Control or other Adjustment Event, the Committee determines that no amount would have been realized upon the exercise of the Award or other realization of the Participants rights, then the Award may be cancelled by the Company without payment of consideration);
(ii) to provide for the assumption, substitution, replacement or continuation of any Award by the successor or surviving corporation (or a parent or subsidiary thereof) with cash, securities, rights or other property to be paid or issued, as the case may be, by the successor or surviving corporation (or a parent or subsidiary thereof), and to provide for appropriate adjustments with respect to the number and type of securities (or other consideration) of the successor or surviving corporation (or a parent or subsidiary thereof), subject to any replacement awards, the terms and conditions of the replacement awards (including, without limitation, any applicable performance targets or criteria with respect thereto) and the grant, exercise or purchase price per share for the replacement awards;
(iii) to make any other adjustments in the number and type of securities (or other consideration) subject to outstanding Awards and in the terms and conditions of outstanding Awards (including the grant or exercise price and performance criteria with respect thereto) and Awards that may be granted in the future;
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(iv) to provide that any Award shall be accelerated and become exercisable, payable and/or fully vested with respect to all Shares covered thereby, notwithstanding anything to the contrary in the Plan or the applicable Award Document; and
(v) to provide that any Award shall not vest, be exercised or become payable as a result of such event.
Section 12. General Provisions Applicable to Awards.
(a) Awards shall be granted for no cash consideration or for such minimal cash consideration as may be required by applicable law unless otherwise determined by the Committee.
(b) Awards may, in the discretion of the Committee, be granted either alone or in addition to or in tandem with any other Award or any award granted under any other plan of the Company. Awards granted in addition to or in tandem with other Awards, or in addition to or in tandem with awards granted under any other plan of the Company, may be granted either at the same time as or at a different time from the grant of such other Awards or awards.
(c) Subject to the terms of the Plan and Section 18, payments or transfers to be made by the Company upon the grant, exercise or settlement of an Award may be made in the form of cash, Shares, other Awards, other property, net settlement or any combination thereof, as determined by the Committee in its discretion, and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of dividend equivalents in respect of installment or deferred payments.
(d) Except as may be permitted by the Committee or as specifically provided in an Award Document, (i) no Award and no right under any Award shall be assignable, alienable, saleable or transferable by a Participant otherwise than by will or pursuant to Section 12(e) and (ii) during a Participants lifetime, each Award, and each right under any Award, shall be exercisable only by the Participant or, if permissible under applicable law, by the Participants guardian or legal representative. The provisions of this Section 12(d) shall not apply to any Award that has been fully exercised or settled, as the case may be, and shall not preclude forfeiture of an Award in accordance with the terms thereof.
(e) A Participant may designate a Beneficiary or change a previous Beneficiary designation at such times prescribed by the Committee by using forms and following procedures approved or accepted by the Committee for that purpose.
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(f) All certificates for Shares and/or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the Securities and Exchange Commission, any stock market or exchange upon which such Shares or other securities are then quoted, traded or listed, and any applicable securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.
(g) Without limiting the generality of Section 12(h), the Committee may impose restrictions on any Award with respect to noncompetition, confidentiality and other restrictive covenants, or requirements to comply with minimum share ownership requirements, as it deems necessary or appropriate in its sole discretion.
(h) The Committee may specify in an Award Document that the Participants rights, payments and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events may include a Termination of Service with or without Cause (and, in the case of any Cause that is resulting from an indictment or other non-final determination, the Committee may provide for such Award to be held in escrow or abeyance until a final resolution of the matters related to such event occurs, at which time the Award shall either be reduced, cancelled or forfeited (as provided in such Award Document) or remain in effect, depending on the outcome), violation of material policies, breach of noncompetition, confidentiality or other restrictive covenants that may apply to the Participant, or other conduct by the Participant that is detrimental to the business or reputation of the Company and/or its Affiliates.
(i) Rights, payments and benefits under any Award shall be subject to repayment to or recoupment (clawback) by the Company in accordance with such policies and procedures as the Committee or Board may adopt from time to time, including policies and procedures to implement applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations.
Section 13. Amendments and Termination.
(a) Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Document or in the Plan, the Board may amend, alter, suspend, discontinue or terminate the Plan or any portion thereof at any time; provided, however, that no such amendment, alteration, suspension, discontinuation or termination shall be made without (i) shareholder approval, if such approval is required by applicable law or the rules of the stock market or exchange, if any, on which the Shares are principally quoted or traded or (ii) the consent of the affected Participant, if such action would materially adversely affect the rights of such Participant under any outstanding Award, except to the extent any such amendment, alteration, suspension, discontinuance or termination is made to cause the Plan to comply with applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations, or to impose any recoupment provisions on any Awards in accordance with Section
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12(i). Notwithstanding anything to the contrary in the Plan, the Committee may amend the Plan in such manner as may be necessary to enable the Plan to achieve its stated purposes in any jurisdiction in a tax-efficient manner and in compliance with local laws, rules and regulations.
(b) The Committee may waive any conditions or rights under, amend any terms of, or amend, alter, suspend, discontinue or terminate any Award theretofore granted, prospectively or retroactively, without the consent of any relevant Participant or holder or Beneficiary of an Award; provided, however, that, subject to Section 4(c) and Section 18, no such action shall materially adversely affect the rights of any affected Participant or holder or Beneficiary under any Award theretofore granted under the Plan, except to the extent any such action is made to cause the Plan to comply with applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations, or to impose any recoupment provisions on any Awards in accordance with Section 12(i); provided further that, except as provided in Section 4(c), the Committee shall not without the approval of the Companys shareholders (a) lower the exercise price per Share of an Option or SAR after it is granted or take any other action that would be treated as a repricing of such Award under the rules of the principal stock market or exchange on which the Companys Shares are quoted or traded, or (b) cancel an Option or SAR when the exercise price per Share exceeds the Fair Market Value in exchange for cash or another Award (other than in connection with a Change in Control).
(c) Except as provided in Section 9(b), the Committee shall be authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of events (including the events described in Section 4(c)) affecting the Company, or the financial statements of the Company, or of changes in applicable law, stock market or exchange rules and regulations or accounting or tax rules and regulations, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.
(d) The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry the Plan into effect.
Section 14. Prohibition on Option and SAR Repricing. Except as provided in Section 4(c), the Committee may not, without prior approval of the Companys shareholders, seek to effect any re-pricing of any previously granted underwater Option or SAR by: (i) amending or modifying the terms of the Option or SAR to lower the exercise price; (ii) cancelling the underwater Option or SAR and granting either (A) replacement Options or SARs having a lower exercise price or (B) Restricted Share, RSU, Performance Award or Other Share-Based Award in exchange; or (iii) cancelling or repurchasing the underwater Options or SARs for cash or other securities. An Option or SAR will be deemed to be underwater at any time when the Fair Market Value of the Shares covered by such Award is less than the exercise price of the Award.
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Section 15. Miscellaneous.
(a) No director, Participant or other person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of directors, Participants or holders or Beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to each recipient. Any Award granted under the Plan shall be a one-time Award that does not constitute a promise of future grants. The Company, in its sole discretion, maintains the right to make available future grants under the Plan.
(b) The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of, or to continue to provide services to, the Company or any Affiliate. Further, the Company or the applicable subsidiary may at any time dismiss a Participant, free from any liability, or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Document or in any other agreement binding the parties. The receipt of any Award under the Plan is not intended to confer any rights on the receiving Participant except as set forth in the applicable Award Document.
(c) Nothing contained in the Plan shall prevent the Company from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases.
(d) The Company shall be authorized to withhold from any Award granted or any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other Awards, other property, net settlement or any combination thereof) of applicable withholding taxes or par value amounts (to the extent required to be paid in cash) due in respect of an Award, its exercise or settlement or any payment or transfer under such Award or under the Plan and to take such other action (including providing for elective payment of such amounts in cash or Shares by the Participant) as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes or par value amounts (to the extent required to be paid in cash).
(e) If any provision of the Plan or any Award Document is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction, or as to any person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award Document, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the Plan and any such Award Document shall remain in full force and effect.
(f) Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and a Participant or any other person. To the extent that any person acquires a right to receive payments from the Company pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company.
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(g) No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash or other securities shall be paid or transferred in lieu of any fractional Shares, or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated.
(h) Awards may be granted to Participants who are non-US nationals or engaged to provide services outside the US, or both, on such terms and conditions different from those applicable to Awards to Participants who are engaged to provide services in the US as may, in the judgment of the Committee, be necessary or desirable to recognize differences in local law, tax policy or custom. The Committee also may impose conditions on the exercise or vesting of Awards in order to minimize the Companys obligation with respect to tax equalization for Participants on assignments outside their home country.
Section 16. Effective Date of the Plan. The Plan is effective as of the Effective Date.
Section 17. Term of the Plan. No Award shall be granted under the Plan after the earliest to occur of (i) the ten-year anniversary of the Effective Date; provided that to the extent permitted by the listing rules of any stock exchanges on which the Company is listed, such ten-year term may be extended indefinitely so long as the maximum number of Shares available for issuance under the Plan have not been issued, (ii) the maximum number of Shares available for issuance under the Plan have been issued or (iii) the Board terminates the Plan in accordance with Section 13(a). However, unless otherwise expressly provided in the Plan or in an applicable Award Document, any Award theretofore granted may extend beyond such date, and the authority of the Committee to amend, alter, adjust, suspend, discontinue or terminate any such Award, or to waive any conditions or rights under any such Award, and the authority of the Board to amend the Plan, shall extend beyond such date.
Section 18. Section 409A of the Code. With respect to Awards subject to Section 409A of the Code, the Plan is intended to comply with the requirements of Section 409A of the Code, and the provisions of the Plan and any Award Document shall be interpreted in a manner that satisfies the requirements of Section 409A of the Code, and the Plan shall be operated accordingly. If any provision of the Plan or any term or condition of any Award would otherwise frustrate or conflict with this intent, the provision, term or condition will be interpreted and deemed amended so as to avoid this conflict. If an amount payable under an Award as a result of the Participants Termination of Service (other than due to death) occurring while the Participant is a specified employee under Section 409A of the Code constitutes a deferral of compensation subject to Section 409A of the Code, then payment of such amount shall not occur until six months and one day after the date of the Participants Termination of Service, except as permitted under Section 409A of the Code. If the Award includes a series of installment payments (within the meaning of Section 1.409A-2(b)(2)(iii) of the Treasury Regulations), the Participants right to the series of installment payments shall be treated as a right to a series of separate payments and not as a right to a single payment, and if the Award includes dividend equivalents (within the meaning of Section 1.409A-3(e) of the Treasury Regulations), the Participants right to the dividend equivalents shall be treated separately from the right to other amounts under the Award. Notwithstanding the foregoing, the tax treatment of the benefits
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provided under the Plan or any Award Document is not warranted or guaranteed, and in no event shall the Company be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Participant on account of non-compliance with Section 409A of the Code.
Section 19. Data Protection. By participating in the Plan, the Participant consents to the holding and processing of personal information provided by the Participant to the Company or any Affiliate, trustee or third party service provider, for all purposes relating to the operation of the Plan. These include, but are not limited to:
(i) administering and maintaining Participant records;
(ii) providing information to the Company, Affiliates, trustees of any employee benefit trust, registrars, brokers or third party administrators of the Plan;
(iii) providing information to future purchasers or merger partners of the Company or any Affiliate, or the business in which the Participant works; and
(iv) transferring information about the Participant to any country or territory that may not provide the same protection for the information as the Participants home country.
Section 20. Governing Law. The Plan and each Award Document shall be governed by the laws of England and Wales. The Company, its Affiliates and each Participant (by acceptance of an Award) irrevocably submit, in respect of any suit, action or proceeding related to the implementation or enforcement of the Plan, to the exclusive jurisdiction of the competent courts in England and Wales.
Section 21. Definitions. As used in the Plan, the following terms shall have the meanings set forth below:
(a) ADS means an American Depositary Share representing a Share.
(b) Affiliate means (i) any entity that, directly or indirectly, is controlled by the Company, (ii) any entity in which the Company, directly or indirectly, has a significant equity interest, in each case as determined by the Committee and (iii) any other entity which the Committee determines should be treated as an Affiliate.
(c) Award means any Option, SAR, Restricted Share, RSU, Performance Award or Other Share-Based Award granted under the Plan.
(d) Award Document means any agreement, contract or other instrument or document, which may be in electronic format, evidencing any Award granted under the Plan, which may, but need not, be executed or acknowledged by a Participant.
(e) Beneficiary means a person entitled to receive payments or other benefits or exercise rights that are available under the Plan in the event of the Participants death.
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If no such person is named by a Participant, or if no Beneficiary designated by the Participant is eligible to receive payments or other benefits or exercise rights that are available under the Plan at the Participants death, such Participants Beneficiary shall be such Participants estate.
(f) Board means the board of directors of the Company.
(g) Cause means, except as otherwise provided in such Participants Award Document, such Participants:
(i) indictment for any crime (A) constituting a felony, or (B) that has, or could reasonably be expected to result in, an adverse impact on the performance of a Participants duties as a member of the Board, or otherwise has, or could reasonably be expected to result in, an adverse impact to the business or reputation of the Company or any of its subsidiaries;
(ii) having been the subject of any order, judicial or administrative, obtained or issued by the Securities and Exchange Commission (or any other competent authority) for any securities violation involving fraud, including, for example, any such order consented to by the Participant in which findings of facts or any legal conclusions establishing liability are neither admitted nor denied;
(iii) conduct, in connection with his or her service on the Board, which is not taken in good faith and has, or could reasonably be expected to result in, material injury to the business or reputation of the Company or any of its subsidiaries.
The occurrence of any such event described in clauses (i) through (iii) that is susceptible to cure or remedy shall not constitute Cause if such Participant cures or remedies such event within 30 (thirty) days after the Company provides notice to such Participant.
(h) Change in Control means the occurrence of any one or more of the following events:
(i) a direct or indirect change in ownership or control of the Company effected through one transaction or a series of related transactions within a 12-month period, whereby any Person other than the Company, directly or indirectly acquires or maintains beneficial ownership of securities of the Company constituting more than 50% of the total combined voting power of the Companys equity securities outstanding immediately after such acquisition;
(ii) at any time during a period of 12 consecutive months, individuals who at the beginning of such period constituted the Board cease for any reason to constitute a majority of members of the Board; provided, however, that any new member of the Board whose election or nomination for election was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was so approved, shall be considered as
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though such individual were a member of the Board at the beginning of the period, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board;
(iii) the consummation of a merger or consolidation of the Company or any of its subsidiaries with any other corporation or entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity or, if applicable, the ultimate parent thereof) at least 50% of the combined voting power and total fair market value of the securities of the Company or such surviving entity or parent outstanding immediately after such merger or consolidation; or
(iv) the consummation of any sale, lease, exchange or other transfer to any Person (other than an Affiliate of the Company), in one transaction or a series of related transactions within a 12-month period, of all or substantially all of the assets of the Company and its subsidiaries.
Notwithstanding the foregoing or any provision of any Award Document to the contrary, for any Award to which Section 18 applies that provides for accelerated distribution on a Change in Control of amounts that constitute deferred compensation (as defined in Section 409A of the Code), if the event that constitutes such Change in Control does not also constitute a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the Companys assets (in either case, as defined in Section 409A of the Code), such amount shall not be distributed on such Change in Control but instead shall vest as of the date of such Change in Control and shall be paid on the scheduled payment date specified in the applicable Award Document, except to the extent that earlier distribution would not result in the Participant who holds such Award incurring any additional tax, penalty, interest or other expense under Section 409A of the Code.
(i) Code means the United States Internal Revenue Code of 1986, as amended from time to time, and the rules, regulations and guidance thereunder. Any reference to a provision in the Code shall include any successor provision thereto.
(j) Committee means the Compensation Committee of the Board or such other committee as may be designated by the Board. If the Board does not designate the Committee, references herein to the Committee shall refer to the Board.
(k) Disability means total and permanent disability as determined by the Committee in its discretion in accordance with uniform and non-discriminatory standards adopted by the Committee from time to time, or such other definition as is required under applicable law.
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(l) Effective Date means June [ ], 2020.
(m) Exchange Act means the United States Securities Exchange Act of 1934, as amended from time to time, and the rules, regulations and guidance thereunder. Any reference to a provision in the Exchange Act shall include any successor provision thereto.
(n) Fair Market Value means (i) with respect to a Share or ADS, as applicable, the closing price of a Share or ADS, as applicable, on the date in question (or, if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) on the principal stock market or exchange on which the Shares or ADSs, as applicable, are quoted or traded, or if Shares or ADSs, as applicable, are not so quoted or traded, the fair market value of a Share or ADS, as applicable, as determined by the Committee, and (ii) with respect to any property other than Shares or ADSs, the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee.
(o) Independent Director means a member of the Board who (i) is not a full- or part-time officer or employee of the Company, the Manager or any affiliate or subsidiary of either; (ii) is independent for purposes service on the Board within the meaning of the listing rules of the principal stock market or exchange on which the Shares or ADSs, as applicable, are quoted or traded from time to time; and (iii) was not appointed to the Board by the exercise of a power of appointment by a shareholder of the Company.
(p) Manager means RP Management LLC.
(q) Option means an option representing the right to acquire Shares from the Company, granted in accordance with the provisions of Section 6.
(r) Other Share-Based Award means an Award granted in accordance with the provisions of Section 10.
(s) Participant means the recipient of an Award granted under the Plan.
(t) Performance Award means an Award granted in accordance with the provisions of Section 9.
(u) Performance Period means the period established by the Committee at the time any Performance Award is granted or at any time thereafter during which any performance goals specified by the Committee with respect to such Award are measured.
(v) Person means a natural person or a partnership, company, association, cooperative, mutual insurance society, foundation or any other body which operates externally as an independent unit or organisation.
(w) Replacement Award means an Award granted in assumption of, or in substitution for, an outstanding award previously granted by a company or business acquired by the Company or with which the Company, directly or indirectly, combines.
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(x) Restricted Share means any Share granted in accordance with the relevant provisions of Section 8.
(y) RSU means a contractual right granted in accordance with the relevant provisions of Section 8 that is denominated in Shares. Each RSU represents a right to receive the value of one Share. Awards of RSUs may include the right to receive dividend equivalents.
(z) SAR means any right granted in accordance with the provisions of Section 7 to receive upon exercise by a Participant or settlement the excess of (i) the Fair Market Value of one Share on the date of exercise or settlement over (ii) the exercise price of the right on the date of grant, or if granted in connection with an Option, on the date of grant of the Option.
(aa) Share means a Class A ordinary share, par value $0.0001, of the Company.
(bb) Termination of Service means a cessation of the Participants service as a member of the Board.
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Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption Experts and to the use of our report dated March 26, 2020 with respect to the consolidated financial statements of Royalty Pharma Investments and subsidiaries, in Amendment No.3 to the Registration Statement (Form S-1 No. 333-238632) and related Prospectus of Royalty Pharma plc for the registration of shares of its common stock.
/s/ Ernst & Young
Dublin, Ireland
June 11, 2020