Royalty Pharma plc 10-K

Item 8. Financial Statements and Supplementary Data ROYALTY PHARMA PLC Index to Audited Consolidated Financial Statements Report s of Independent Registered Public Accounting Firm (PCAOB ID: 1411 ) 87 Consolidated Balance Sheets at December 31, 2021 and 2020 90 Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020 and 2019 91 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019 92 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2021, 2020 and 2019 93 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019 95 Notes to Consolidated Financial Statements 96 86 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Royalty Pharma plc Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Royalty Pharma plc (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 15, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the 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. 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. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 87 Valuation of Financial Royalty Assets and related Interest Income Description of the Matter As disclosed in Note 6 to the consolidated financial statements, the Company’s total financial royalty assets, net, were carried at $14,332,596 thousand as of December 31, 2021. For the year ended December 31, 2021, the Company recognized income from financial royalty assets of $2,065,083 thousand. As explained in Note 2 to the consolidated financial statements, the Company’s financial royalty assets are measured at amortized cost using the prospective effective interest rate method. Auditing the valuation of the financial royalty assets and related interest income involved complex auditor judgment, because the assumptions used by management to forecast the expected cash flows from the underlying royalties are forward-looking and are therefore affected by future economic and market conditions, such as the impact of the entry of competing or generic products to the market, among other uncertainties. The key assumptions used in the valuation of the financial royalty assets and related interest income are product growth rates applied to forecasted sales in the later years in the royalty life and the royalty duration. How We Addressed the Matter in Our Audit To test the valuation of the financial royalty assets and related interest income, our audit procedures included, among others, evaluating the methodology and completeness and accuracy of the data used to develop the key assumptions identified above. For example, with the support of statistical modelling specialists, we evaluated management’s statistical methodology for sales growth forecasts and performed sensitivity analysis over the resulting forecasted product sales. We also tested the inputs to the model, principally comprising historic product sales and third-party analyst estimates of nearer-term sales amounts, by comparing to analyst reports or published sales information. For royalty duration, among other procedures, we compared management’s assessment of the likely date of expiry of the Company’s cash flows against original purchase agreements, as well as independently assessing the royalty duration against available published information sources, such as those from regulatory bodies, counterparties, and product marketers. We assessed the historical accuracy of management’s estimates by comparing expected cash flows to actual cash receipts. We also evaluated the related disclosures in the consolidated financial statements. /s/ Ernst & Young We have served as the Company’s auditor since 2003. Dublin, Ireland February 15, 2022 88 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Royalty Pharma plc Opinion on Internal Control Over Financial Reporting We have audited Royalty Pharma plc’s (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 15, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young Dublin, Ireland February 15, 2022 89 ROYALTY PHARMA PLC CONSOLIDATED BALANCE SHEETS (In thousands, except par value) As of December 31, 2021 2020 Assets Current assets Cash and cash equivalents $ 1,541,048 $ 1,008,680 Marketable securities 581,872 983,279 Financial royalty assets 614,351 587,193 Accrued royalty receivable 53,286 33,155 Available for sale debt securities 66,000 69,984 Other royalty income receivable 15,023 6,011 Other current assets 6,631 8,596 Total current assets 2,878,211 2,696,898 Financial royalty assets, net 13,718,245 12,368,084 Intangible royalty assets, net 5,670 28,666 Equity securities 269,800 298,689 Available for sale debt securities 204,400 163,016 Investments in non-consolidated affiliates 435,394 454,936 Other assets 4,145 9,997 Total assets $ 17,515,865 $ 16,020,286 Liabilities and equity Current liabilities Distribution payable to non-controlling interest $ 107,934 $ 126,366 Accounts payable and accrued expenses 5,620 10,775 Interest payable 57,696 42,146 Accrued purchase obligation — 110,000 Other current liabilities — 18,600 Total current liabilities 171,250 307,887 Long-term debt 7,096,070 5,816,584 Total liabilities 7,267,320 6,124,471 Commitments and contingencies Shareholders’ equity Class A ordinary shares, $ 0.0001 par value; 432,963 and 388,135 issued and outstanding, respectively 43 39 Class B ordinary shares, $ 0.000001 par value; 174,213 and 218,976 issued and outstanding, respectively — — Class R redeemable shares, £ 1 par value; 50 and 50 issued and outstanding, respectively 63 63 Deferred shares, $ 0.000001 par value, 361,170 and 316,407 issued and outstanding, respectively — — Additional paid-in capital 3,507,533 2,865,964 Retained earnings 2,255,179 1,920,635 Non-controlling interest 4,471,951 5,077,036 Accumulated other comprehensive income 16,491 34,395 Treasury interests ( 2,715 ) ( 2,317 ) Total shareholders’ equity 10,248,545 9,895,815 Total liabilities and shareholders’ equity $ 17,515,865 $ 16,020,286 See accompanying notes to these consolidated financial statements. 90 ROYALTY PHARMA PLC CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Years Ended December 31, 2021 2020 2019 Total income and revenues Income from financial royalty assets $ 2,065,083 $ 1,959,975 $ 1,648,837 Revenue from intangible royalty assets 171,248 143,382 145,775 Other royalty income 53,132 18,996 19,642 Total income and other revenues 2,289,463 2,122,353 1,814,254 Operating expenses Provision for changes in expected cash flows from financial royalty assets 452,842 230,839 ( 1,019,321 ) Research and development funding expense 200,084 26,289 83,036 Amortization of intangible assets 22,996 23,058 23,924 General and administrative expenses 182,826 181,715 103,439 Other operating expenses — 65,053 — Total operating expenses/(income), net 858,748 526,954 ( 808,922 ) Operating income 1,430,715 1,595,399 2,623,176 Other expense/(income) Equity in losses/(earnings) of non-consolidated affiliates 19,490 ( 44,459 ) 32,517 Interest expense 166,142 157,059 268,573 Losses on derivative financial instruments 21,532 42,076 39,138 Losses/(gains) on equity securities 48,066 ( 247,073 ) ( 155,749 ) Unrealized gains on available for sale debt securities ( 17,859 ) ( 18,600 ) — Interest income ( 53,535 ) ( 28,379 ) ( 22,329 ) Other non-operating expense/(income), net 5,678 32,821 ( 393 ) Total other expense/(income), net 189,514 ( 106,555 ) 161,757 Consolidated net income before tax 1,241,201 1,701,954 2,461,419 Income tax expense — — — Consolidated net income 1,241,201 1,701,954 2,461,419 Net income attributable to non-controlling interest 621,473 726,914 112,884 Net income attributable to controlling interest $ 619,728 $ 975,040 $ 2,348,535 Earnings per Class A ordinary share (1): Basic $ 1.49 $ 1.32 N/A Diluted $ 1.49 $ 1.32 N/A Weighted average Class A ordinary shares outstanding (1): Basic 414,794 375,444 N/A Diluted 414,802 375,455 N/A (1) Represents earnings per Class A ordinary share and weighted average Class A ordinary shares outstanding for the period from June 16, 2020 through December 31, 2020 following our initial public offering (“IPO”) in the year ended December 31, 2020. See Note 13–Earnings per Share. See accompanying notes to these consolidated financial statements. 91 ROYALTY PHARMA PLC CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Years Ended December 31, 2021 2020 2019 Consolidated net income $ 1,241,201 $ 1,701,954 $ 2,461,419 Changes in other comprehensive income/(loss): Reclassification of loss on interest rate swaps — 4,066 6,189 Unrealized gains on available for sale debt securities 11,600 83,120 6,159 Reclassification of unrealized gains on available for sale debt securities ( 50,896 ) ( 20,551 ) — Total other comprehensive (loss)/income $ ( 39,296 ) $ 66,635 $ 12,348 Comprehensive income $ 1,201,905 $ 1,768,589 $ 2,473,767 Comprehensive income attributable to non-controlling interest 604,323 739,787 112,884 Comprehensive income attributable to controlling interest $ 597,582 $ 1,028,802 $ 2,360,883 See accompanying notes to these consolidated financial statements. 92 ROYALTY PHARMA PLC CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY ( In thousands ) Class A Ordinary Shares Class B Ordinary Shares Class R Redeemable Shares Deferred Shares Additional Paid-In Capital Unitholders’/ Shareholders’ Contributions Retained Earnings Accumulated Other Comprehensive Income/(Loss) Non-Controlling Interest Treasury Interests Total Equity Shares Amount Shares Amount Shares Amount Shares Amount 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 gains 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 Contributions — — — — — — — — — 307,646 — — 1,174,676 — 1,482,322 Transfer of interests — — — — — — — — — ( 1,037,161 ) — — 1,037,161 — — Cumulative adjustment for adoption of ASU 2016-13 — — — — — — — — — — ( 192,705 ) — — — ( 192,705 ) Distributions — — — — — — — — — — ( 313,408 ) — ( 792,357 ) — ( 1,105,765 ) Initial share issuance upon registration of Royalty Pharma plc — — — — 50 63 — — — — — — — — 63 Net income prior to IPO — — — — — — — — — — 479,842 — 145,043 — 624,885 Issuance of Class B ordinary shares to Continuing Investors Partnerships — — 535,383 1 — — — — — — — — — — 1 Effect of exchange by Continuing Investors of Class B ordinary shares for Class A ordinary shares and reallocation of historical equity 294,176 30 ( 294,176 ) ( 1 ) — — 294,176 — 1,402,762 ( 2,553,001 ) ( 1,261,014 ) ( 24,022 ) 2,433,098 2,147 ( 1 ) Issuance of Class A ordinary shares sold in IPO, net of offering costs 71,652 7 — — — — — — 1,150,383 — — — 758,354 — 1,908,744 Share-based compensation and related issuances of Class A ordinary shares 76 — — — — — — — 5,428 — — — — — 5,428 Other exchanges 22,231 2 ( 22,231 ) — — — 22,231 — 307,391 — — 2,562 ( 309,566 ) ( 198 ) 191 Dividends ($ 0.30 per Class A ordinary share) — — — — — — — — — — ( 112,490 ) — — — ( 112,490 ) Net income subsequent to IPO — — — — — — — — — — 495,198 — 581,871 — 1,077,069 Other comprehensive income/(loss): Reclassification of loss on interest rate swaps — — — — — — — — — — — 4,066 — — 4,066 Unrealized gains on available for sale debt securities — — — — — — — — — — — 60,617 22,503 — 83,120 Reclassification of unrealized gains on available for sale debt securities — — — — — — — — — — — ( 10,921 ) ( 9,630 ) — ( 20,551 ) Balance at December 31, 2020 388,135 $ 39 218,976 $ — 50 $ 63 316,407 $ — $ 2,865,964 $ — $ 1,920,635 $ 34,395 $ 5,077,036 $ ( 2,317 ) $ 9,895,815 See accompanying notes to these consolidated financial statements. 93 ROYALTY PHARMA PLC CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Class A Ordinary Shares Class B Ordinary Shares Class R Redeemable Shares Deferred Shares Additional Paid-In Capital Shareholders’ Contributions Retained Earnings Accumulated Other Comprehensive Income/(Loss) Non-Controlling Interest Treasury Interests Total Equity Shares Amount Shares Amount Shares Amount Shares Amount Balance at December 31, 2020 388,135 $ 39 218,976 $ — 50 $ 63 316,407 $ — $ 2,865,964 $ — $ 1,920,635 $ 34,395 $ 5,077,036 $ ( 2,317 ) $ 9,895,815 Contributions — — — — — — — — — — — — 48,539 — 48,539 Distributions — — — — — — — — — — — — ( 614,973 ) — ( 614,973 ) Dividends ($ 0.68 per Class A ordinary share) — — — — — — — — — — ( 285,184 ) — — — ( 285,184 ) Other exchanges 44,763 4 ( 44,763 ) — — — 44,763 — 639,126 — — 4,242 ( 642,974 ) ( 398 ) — Share-based compensation and related issuances of Class A ordinary shares 65 — — — — — — — 2,443 — — — — — 2,443 Net income — — — — — — — — — — 619,728 — 621,473 — 1,241,201 Other comprehensive income/(loss): Unrealized gains on available for sale debt securities — — — — — — — — — — — 6,335 5,265 — 11,600 Reclassification of unrealized gains on available for sale debt securities — — — — — — — — — — — ( 28,481 ) ( 22,415 ) — ( 50,896 ) Balance at December 31, 2021 432,963 $ 43 174,213 $ — 50 $ 63 361,170 $ — $ 3,507,533 $ — $ 2,255,179 $ 16,491 $ 4,471,951 $ ( 2,715 ) $ 10,248,545 See accompanying notes to these consolidated financial statements. 94 ROYALTY PHARMA PLC CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31, 2021 2020 2019 Cash flows from operating activities: Cash collections from financial royalty assets $ 2,315,854 $ 2,121,923 $ 1,934,092 Cash collections from intangible royalty assets 151,158 143,753 143,298 Other royalty cash collections 44,123 18,305 27,448 Distributions from non-consolidated affiliates 34,384 42,334 14,059 Interest received 3,135 7,704 20,136 Derivative collateral received 34,660 45,252 360 Derivative collateral posted ( 34,660 ) — ( 45,630 ) Termination payments on derivative instruments ( 16,093 ) ( 35,448 ) — Ongoing development-stage funding payments ( 6,876 ) ( 20,479 ) ( 83,036 ) Upfront development-stage funding payments ( 193,208 ) ( 5,810 ) — Payments for operating and professional costs ( 184,511 ) ( 179,709 ) ( 88,524 ) Interest paid ( 130,430 ) ( 103,196 ) ( 254,964 ) Net cash provided by operating activities 2,017,536 2,034,629 1,667,239 Cash flows from investing activities: Distributions from non-consolidated affiliates 523 15,084 — Investments in non-consolidated affiliates ( 34,855 ) ( 40,155 ) ( 27,042 ) Purchases of equity securities ( 135,134 ) ( 50,000 ) ( 78,999 ) Proceeds from equity securities 115,957 384,840 — Purchases of available for sale debt securities ( 70,441 ) — ( 125,121 ) Proceeds from available for sale debt securities 62,500 3,000 150,000 Purchases of marketable securities ( 1,196,579 ) ( 1,705,283 ) ( 817,402 ) Proceeds from sales and maturities of marketable securities 1,597,851 815,440 725,070 Purchase of warrants — — ( 8,840 ) Acquisitions of financial royalty assets ( 2,191,502 ) ( 2,182,246 ) ( 1,721,291 ) Milestone payments ( 18,600 ) — ( 250,000 ) Net cash used in investing activities ( 1,870,280 ) ( 2,759,320 ) ( 2,153,625 ) Cash flows from financing activities: Distributions to shareholders/unitholders — ( 285,353 ) ( 739,276 ) Distributions to non-controlling interest ( 479,604 ) ( 543,952 ) ( 154,084 ) Distributions to non-controlling interest- other ( 153,800 ) ( 181,135 ) — Dividends to shareholders ( 285,184 ) ( 112,490 ) — Contributions from non-controlling interest- R&D 7,339 8,482 — Contributions from non-controlling interest- other 36,874 58,957 — Scheduled repayments of long-term debt — ( 94,200 ) ( 294,000 ) Repayments of long-term debt — ( 11,116,196 ) — Proceeds from issuance of long-term debt, net of discount 1,272,533 11,891,030 — Debt issuance costs and other ( 13,046 ) ( 46,715 ) — Purchase of treasury interests — — ( 4,266 ) Proceeds from issuance of Class A ordinary shares upon IPO, net of offering costs — 1,908,744 — Net cash provided by/(used in) financing activities 385,112 1,487,172 ( 1,191,626 ) Net change in cash and cash equivalents 532,368 762,481 ( 1,678,012 ) Cash and cash equivalents, beginning of year 1,008,680 246,199 1,924,211 Cash and cash equivalents, end of year $ 1,541,048 $ 1,008,680 $ 246,199 See accompanying notes to these consolidated financial statements. 95 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Purpose Royalty Pharma plc is an English public limited company incorporated under the laws of England and Wales that was created for the purpose of consolidating our predecessor entities and facilitating the IPO of our Class A ordinary shares that was completed in June 2020. Following our IPO, we control Royalty Pharma Holdings Ltd. (“RP Holdings”), a private limited company incorporated under the laws of England and Wales and U.K. tax resident through our ownership of RP Holdings’ Class A ordinary shares (the “RP Holdings Class A Interests”) and RP Holdings’ Class B ordinary shares (the “RP Holdings Class B Interests”). We conduct our business through RP Holdings and its subsidiaries and include RP Holdings and its subsidiaries in our consolidated financial statements. RP Holdings is the sole owner of Royalty Pharma Investments 2019 ICAV (“RPI 2019 ICAV”), which is an Irish collective asset management 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. RP Holdings is owned by RPI US Partners 2019, LP, a Delaware limited partnership, RPI International Holdings 2019, LP, a Cayman Islands exempted limited partnership (together, the “Continuing Investors Partnerships”), and Royalty Pharma plc. 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. Prior to the Exchange Offer Transactions, Old RPI was owned by various partnerships (the “Legacy Investors Partnerships”). RP Management, LLC (the “Manager”), a Delaware limited liability company, is an external adviser which is responsible for our management. 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. “Royalty Pharma,” the “Company,” “we,” “us” and “our” refer to Royalty Pharma plc and its subsidiaries on a consolidated basis. After the consummation of the Reorganization Transactions (defined below) and before the consummation of the IPO, “Royalty Pharma,” the “Company,” “we,” “us” and “our” refer to RPI 2019 ICAV. Prior to the Reorganization Transactions, “Royalty Pharma,” the “Company,” “we,” “us” and “our” refer to Old RPI. 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. Reorganization Transactions In connection with our IPO, we consummated an exchange offer on February 11, 2020 (the “Exchange Date”). Through the exchange offer, investors representing 82 % of the aggregate limited partnership in the Legacy Investors Partnerships, exchanged their limited partnership interests in the Legacy Investors Partnerships for limited partnership interests in the Continuing Investors Partnerships. The exchange offer transaction together with (i) the concurrent incurrence of indebtedness under 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 IPO are referred to as the “Exchange Offer Transactions.” 96 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As a result of the Exchange Offer Transactions, we own, through our 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 RPI’s wholly-owned subsidiaries, RPI Finance Trust, a Delaware statutory trust (“RPIFT”) and RPI Acquisitions (Ireland), Limited (“RPI Acquisitions”), an Irish private limited company, and 66 % of Royalty Pharma Collection Trust, a Delaware statutory trust (“RPCT”). The remaining 34 % of RPCT is owned by the Legacy Investors Partnerships and Royalty Pharma Select Finance Trust, a Delaware statutory trust (“RPSFT”), which is wholly owned by Royalty Pharma Select, an Irish unit trust. From the Exchange Date until the expiration of the Legacy Investors Partnerships’ investment period on June 30, 2020 (the “Legacy Date”), the Legacy Investors Partnerships were offered to participate proportionately in any investment made by Old RPI. Following the Legacy Date, Old RPI ceased making new investments and each of Old RPI and the Legacy Investors Partnerships became legacy entities. Since the Legacy Date, we have made and plan to make new investments through our subsidiaries, including RPI Intermediate FT. As part of the Exchange Offer Transactions, the Legacy Investors Partnerships and RPI Intermediate FT entered into new credit facilities in the amount of $ 1.3 billion and $ 6.0 billion, respectively, the proceeds of which were used to repay the $ 6.3 billion outstanding debt of RPIFT and, in the case of RPI Intermediate FT, were also available to be used to fund investments. As part of the new credit facilities, RPI Intermediate FT repaid $ 5.2 billion, its pro rata portion of RPIFT’s outstanding debt and accrued interest. RPIFT also terminated all outstanding interest rate swaps in connection with the debt refinancing. Prior to, and as a condition precedent to the closing of the IPO, various reorganization transactions became effective, including the following: • the Exchange Offer Transactions (as described above); and • the execution of a new management agreement with the Manager (the “Management Agreement”). We refer to these transactions collectively as the “Reorganization Transactions.” As Old RPI is our predecessor for financial reporting purposes, we have recorded Old RPI’s assets and liabilities at the carrying value reflected on Old RPI’s balance sheet as of the Exchange Date. 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. IPO On June 18, 2020, we completed our IPO on the Nasdaq Global Select Market under the ticker symbol “RPRX”, in which we issued 89,334 thousand Class A ordinary shares at a price to the public of $ 28.00 per Class A ordinary share, of which 71,652 thousand Class A ordinary shares and 17,682 thousand Class A ordinary shares were offered by the Company and selling shareholders, respectively. We used the net proceeds from the IPO to acquire RP Holdings Class A Interests and, as a result, we own 100 % of RP Holdings Class A Interests. Upon consummation of the IPO, certain of the Continuing Investors agreed to exchange, pursuant to the Exchange Offer Transactions, interests in the Continuing Investors Partnerships represented by their ownership of 294,176 thousand RP Holdings Class B Interests into an aggregate of 294,176 thousand Class A ordinary shares of Royalty Pharma plc. Upon completion of the exchange, Royalty Pharma plc indirectly owned 294,176 thousand RP Holdings Class B Interests. The remaining investors in the Continuing Investors Partnerships who did not elect to exchange into Class A ordinary shares held 241,207 thousand newly issued Class B ordinary shares of Royalty Pharma plc. As a result, the Continuing Investors Partnerships held a number of our Class B ordinary shares equal to the number of RP Holdings Class B Interests indirectly held by them at such time which are exchangeable on a one-for-one basis for Class A ordinary shares of Royalty Pharma plc. 2. Summary of Significant Accounting Policies Basis of preparation and use of estimates The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). 97 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of income, revenues and expenses during the reporting period. Actual results may differ from those estimates. The precise extent to which the COVID-19 pandemic will impact our operational and financial performance will depend on various factors. To date, certain marketers of some of our portfolio products have commented that the performance of these products have been impacted by the COVID-19 pandemic. However, the COVID-19 pandemic has not resulted in a material effect to our results of operations and liquidity and we do not believe it is reasonably likely to in the future. Due to the nature of our business, the effect of the COVID-19 pandemic may not be fully reflected in certain of our results of operations until future periods. Basis of consolidation The consolidated financial statements include the accounts of Royalty Pharma and all majority-owned and controlled subsidiaries, as well as variable interest entities, where we are the primary beneficiary. We consolidate based upon evaluation of our power, through voting rights or similar rights, to direct the activities of another entity that most significantly impact the entity’s economic performance. For consolidated entities where we own or are exposed to less than 100% of the economics, we record Net income attributable to non-controlling interest in our consolidated statements of operations equal to the percentage of the economic or ownership interest retained in such entities by the respective non-controlling parties. Following management’s determination that a high degree of common ownership existed in Royalty Pharma both before and after the Exchange Date, Royalty Pharma recognized Old RPI’s assets and liabilities at the carrying value reflected on Old RPI’s balance sheet as of the Exchange Date. Prior to the Exchange Offer Transactions, our only historical non-controlling interest was attributable to a de minimis interest in RPCT held by RPSFT. 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. Following the consummation of our IPO in June 2020, two new non-controlling interests were created: (1) a non-controlling interest related to the Continuing Investors Partnerships’ ownership in RP Holdings through their ownership of the RP Holdings Class B Interests, which amounted to approximately 29 % as of December 31, 2021, and (2) a non-controlling interest related to RPI EPA Holdings, LP (“EPA Holdings”), an affiliate of the Manager through its ownership of the RP Holdings’ Class C ordinary share (the “RP Holdings Class C Special Interest”). Income will not be allocated to the latter non-controlling interest until certain conditions are met. All intercompany transactions and balances have been eliminated in consolidation. Adjustment to prior period presentation In connection with the preparation of our condensed consolidated interim financial statements for the three months ended September 30, 2020, we identified an adjustment to the classification of our short-term investments on our consolidated balance sheets, as of December 31, 2019, based on the original maturity dates of the investments. The adjustment resulted in an increase of $ 37.5 million to Marketable securities and a corresponding decrease to Cash and cash equivalents on the consolidated balance sheet as of December 31, 2019. In addition, the adjustment resulted in an increase of $ 388.0 million and $ 350.5 million in cash activity related to Purchases of marketable securities and Proceeds from sales and maturities of marketable securities , respectively, within Net cash used in investing activities for the year ended December 31, 2019, with a net impact on net cash flow from investing of $ 37.5 million. The adjustment had no effect on our reported total income and revenues, consolidated net income, total assets, or shareholders’ equity for any period. In addition, the adjustment does not impact net cash provided by operating activities in any period. We evaluated the adjustment and determined that, based on quantitative and qualitative analysis, it was not material to the consolidated financial statements as of and for the year ended December 31, 2019. Reclassification Certain prior period amounts have been reclassified to conform to the current period presentation. 98 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Concentrations of credit risk Financial instruments that subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, financial royalty assets and receivables. Our cash management and investment policy limits investment instruments to investment-grade securities with the objective to preserve capital and to maintain liquidity until the funds are needed for operations. Our cash and cash equivalents and marketable securities balances at December 31, 2021 and 2020 were held with State Street and Bank of America. Our primary operating accounts significantly exceed the Federal Deposit Insurance Corporation limits. The majority of our financial royalty assets and receivables arise from contractual royalty agreements that entitle us to royalties on the sales of underlying biopharmaceutical products in the United States, Europe and the rest of the world, with concentrations of credit risk limited due to the broad range of marketers responsible for paying royalties to us and the variety of geographies from which our royalties on product sales are derived. The products in which we hold royalties are marketed by leading industry participants, including, among others, AbbVie, Bristol Myers Squibb, Gilead, Johnson & Johnson, Lilly, Merck, Pfizer, Novartis, Biogen, Roche and Vertex. For the years ended December 31, 2021 and 2020, Vertex, as the marketer and payor of our royalties on the cystic fibrosis franchise, accounted for 32 % and 27 % of our current portion of Financial royalty assets, net , respectively, representing the largest individual receivable balance in both years. We monitor the financial performance and creditworthiness of the counterparties to our royalty agreements so that we can properly assess and respond to changes in their credit profile. To date, we have not experienced any significant losses with respect to the collection of income or revenue on our royalty assets. Segment information Our chief operating decision maker is our Chief Executive Officer who reviews financial information presented on a consolidated basis to allocate resources, evaluates financial performance and makes overall operating decisions. As such, we concluded that we operate as one single reportable segment, which is primarily focused on acquiring biopharmaceutical royalties. 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. These contractual cash flow rights have yield components that most closely resemble loans and are classified as financial royalty assets. In the limited instances where we possess 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 financial 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 financial royalty assets. Therefore, such financial royalty assets 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 . 99 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 financial royalty asset by the effective interest rate. The carrying value of a financial royalty asset is made up of the opening balance, or net purchase price for a new financial royalty asset, which is 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 cash flows from financial royalty assets and the carrying value of Financial royalty assets, net is presented net of the cumulative allowance for changes in expected future cash flows. The application of the prospective approach to measure financial royalty assets requires management’s judgment in forecasting the expected future cash flows of the underlying royalties. The amounts and duration of forecasted expected future cash flows used to calculate and measure interest income are largely impacted by sell-side equity research analyst coverage, commercial performance of the product, and 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 rely on sell-side research analysts’ consensus sales forecasts for a product to derive annual sales projections for each financial royalty asset over the periods for which we are entitled to royalties or milestones. These forecasts are based on 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 consensus sales estimates are not available for the full term of the royalty, particularly for the later years in a product’s 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 management’s own expertise. For the majority of the portfolio of financial royalty assets, management utilizes statistical curves based on historical trends to project future sales when sell-side equity research analyst consensus sales estimates end or are not available for the full term of the royalty. In other cases, management may develop and apply growth rate estimates from existing sell-side equity research analysts’ consensus sales forecasts to project future sales for products that cannot be modeled through the statistical curves, such as those where the entrance of a biosimilar is expected to impact future sales. 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. Our contractual royalty terms, rates, and any milestones are then applied to the adjusted sales projections to calculate the expected royalty or milestone payments over the term of the financial royalty asset’s life, forming the basis for our forecast of expected future cash flows used to calculate and measure interest income. • Commercial performance. The approval of a product for use in new indications can extend the date through which we are entitled to royalties or milestones on that product. For certain financial royalty assets, such as the cystic fibrosis franchise, we are entitled to royalties on approved combination products and may be entitled to royalties on future combination products, which, once approved, create new cash flow streams which were not initially contemplated and whose sales were previously not reflected in expected future cash flows. We generally 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’ consensus sales forecasts will reflect the expected drop in sales. Both the new cash flow streams and the cessation of cash flow streams related to a product’s performance in the market over the royalty term can materially affect our forecast of expected future cash flows. 100 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • Royalty duration. The duration of a royalty can be based on a number of factors, such as regulatory and marketing approval dates, patent expiration dates, the number of years from first commercial sale, the first date of manufacture of the patent-protected product, the entry of generics or a contractual date arising from litigation, which are all impacted by the time in the product’s life cycle at which we acquire the royalty. Royalty duration varies by geography as 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 financial royalty asset to be extended, adjusted or replaced with newer dated patents subsequent to our acquisition of a royalty due to new information, resulting in changes to the royalty duration in later periods. Patents may expire earlier than expected at the time of the acquisition due to the loss of patent protection, loss of data exclusivity on intellectual property, contractual licensing terms limiting royalty payments based on time from product launch, due to recent legal developments or litigation. Macroeconomic factors, such as changes in economies or the competitive landscape, including the unexpected loss of exclusivity to the products underlying our portfolio of royalties, changes in government legislation, product life cycles, industry consolidations and other changes beyond our control could result in a positive or negative impact on our forecast of expected future cash flows. As part of the preparation of the forecasted expected future cash flows, which relies on the sources and variables discussed above, management is required to make assumptions around the following forecast inputs: (1) estimates of the duration of the royalty, which includes consideration of the strength of patent protection and anticipated entry of generics, (2) product growth rates and sales trends in outer years, (3) the product and pricing mix for franchised products, and (4) the geographical allocation of annual sales data from sell-side equity research analysts’ models. The most sensitive of these assumptions relates to management’s estimate of the royalty duration in the final years of an asset’s life. 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 its experience and expertise, 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. A shortened royalty term can result in a reduction in the effective interest rate, a decline in the carrying value of the financial royalty asset, a decline in income from financial royalty assets, significant reductions in royalty payments compared to expectations, or a permanent impairment. Additionally, royalty payments may occasionally continue beyond the estimated royalty expiration date 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 financial royalty assets for impairment on an individual basis by comparing the effective interest rate at each reporting date to that of the prior period. If the effective interest rate is lower for the current period than the prior period, and if the gross cash flows have declined (expected and collected), we record a provision for the change in expected cash flows. The provision is measured as the difference between the financial royalty asset’s amortized cost basis and the net present value of the expected future cash flows, calculated based on the prior period’s effective interest rate. The amount recognized as provision expense increases the financial royalty asset’s cumulative allowance, which reduces the net carrying value of the financial royalty asset. 101 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. We also recalculate the amount of accretable yield to be received based on the revised remaining future 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 financial royalty asset by adjusting the effective interest rate used to calculate income. Movements in the cumulative allowance for changes in expected future cash flows, which forms part of the Financial royalty assets, net line item on the consolidated 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 cases, when a financial royalty asset’s 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 operations. 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 financial royalty assets. After acquisition of a financial royalty asset, if we are not able to reliably estimate expected cash flows for a product or if we have not completed the required funding obligations payable over time for an approved product, a financial 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 financial 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. We evaluate such financial royalty assets held at cost for impairment based on, among other factors, a review of development progress, clinical trial results, and publicly available information around regulatory discussions and approval status. An impairment loss is recognized if, based on current information and events, it is probable that we will be unable to collect amounts due according to the contractual terms of the financial royalty asset, and the amount of loss can be reasonably estimated. When royalties are received for financial royalty assets that have been fully amortized, such income is recognized as Other royalty income. Allowance for current expected credit losses On January 1, 2020, we adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which requires earlier recognition of credit losses. We now recognize an allowance for current expected credit losses on our portfolio of financial royalty assets with limited protective rights. The credit loss allowance is estimated using the probability of default and loss given default method. The credit rating, which is primarily based on publicly available data and updated quarterly, is the primary credit quality indicator used to determine the probability of default of the marketers responsible for paying our royalties and the resulting loss given default. The allowance for current expected credit losses 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 operations. Refer to Note 7 –Cumulative Allowance and the Provision for Changes in Expected Cash Flows from Financial Royalty Assets for further information. Intangible royalty assets, net Currently, our only intangible royalty assets are the Januvia and Janumet (“DPP-IV”) patents. The DPP-IV patents are finite-life intangible royalty assets whose cost is amortized using the straight-line method over the expected lives of the patents, the majority of which terminate at various dates through 2022. The amortization period commenced concurrent with the sale of the product underlying the royalty asset. 102 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Management reviews the performance of intangible royalty 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 intangible 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 product’s life cycle stage, recent and prospective sales trends, collectability concerns, and any potential rebate chargebacks that may occur at the end of a royalty’s term. An impairment loss is recognized if the carrying value of the intangible 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 patents that we own. We do not have future performance obligations under these license arrangements. Royalty revenue from sales of 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 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 incoming or outgoing contingent payments based on the commercial, regulatory or clinical performance of the related biopharmaceutical product generally over a multi-year period. For purposes of measuring income from financial royalty assets, commercial milestones payable or receivable are reflected in the cash flows used to forecast expected future cash flows in the period in which the milestone criteria is projected to be satisfied based on sell-side equity research analysts’ consensus sales forecasts. Milestones based on regulatory approval or clinical criteria are generally not reflected in the expected future cash flows until such approval is achieved. Amounts related to outgoing 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 and 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 5 – Fair Value Measurements and Financial Instruments. 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. We invest excess cash in marketable debt securities that are classified as trading securities and reported at fair value. 103 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. Our equity securities represent investments in publicly traded equity securities. Available for sale debt securities are measured at fair value. The unrealized change in fair value of available for sale debt securities for which we elected the fair value option is recorded within Unrealized gains on available for sale debt securities on the consolidated statements of operations. The unrealized change in fair value for the Biohaven Series A Preferred Share is included in Accumulated other comprehensive income (“AOCI”) and are reclassified to earnings as interest income is recognized. Interest income is recognized when we can reliably estimate forecasted cash flows. A decline in the market value of any available for sale debt security below its cost that is deemed to have resulted from a credit loss results in a reduction in carrying amount to fair value and is recognized in earnings. The determination of whether a decline in fair value below the amortized cost basis for an available for sale debt security has resulted from a credit loss requires significant judgment and requires consolidation of available quantitative and qualitative evidence in evaluating the potential impairment. Factors evaluated to determine whether a decline in the fair value below the amortized cost basis has resulted from a credit loss include: the extent to which fair value is less than the amortized cost basis, adverse conditions related to the security, an industry, or geographic area, the payment structure of the security, failure of the issuer to make scheduled payments, any changes to the rating of the security by a rating agency, the remaining payment terms of the security, prepayment speeds, the financial condition of the issuer expected defaults, our intent not to sell, and an evaluation as to whether it is more likely than not that we will have to sell before recovery of the cost basis. Assumptions associated with these factors are subject to future market and economic conditions, which could differ from management’s assessment. We may elect to apply the fair value option for certain investments in debt securities where the fair value option better aligns with the economics of such investment. Upon such election, the entire investment is measured at fair value on a recurring basis, with movements in fair value recognized in earnings. Derivatives All derivatives are measured at fair value on the consolidated balance sheets with movements in fair value recognized in earnings. Prior to 2017, RPIFT applied hedge accounting to its interest rate swap agreements. Upon the discontinuation of hedge accounting, the AOCI previously recorded on the cash flow hedges was reversed out of other comprehensive income in line with terms of the associated swap contract until the termination of all of our interest rate swaps in February 2020. This reclassification adjustment is shown on the consolidated statements of operations as part of Losses on derivative financial instruments . Investment in non-consolidated affiliates Investments in entities that provide us with the ability to exercise significant influence, but not a controlling financial interest, and where we are not the primary beneficiary are accounted for under the equity method. Investments accounted for under the equity method are initially recorded at fair value. If there is a difference between the fair value and the carrying amount of the equity method investment at inception, we quantify the basis difference and amortize it in a rational manner over the life of the investment. Subsequently, we recognize through earnings our proportionate share of the investee’s net income or loss, net of any adjustment to reflect the amortization of basis differences. We generally record our share of the results of our investees one quarter in arrears within Equity in losses/(earnings) of non-consolidated affiliates in the consolidated statements of operations. The investment is reflected as Investments in non-consolidated affiliates on the consolidated balance sheet. 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 we are 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 we are 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. 104 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 fund a portion of the research and development (“R&D”) performed by our partners for products undergoing late-stage clinical trials in exchange for future royalties or milestones if the products are successfully developed and commercialized. In accordance with ASC 730, Research and Development , we account for the funded amounts as R&D expense when we have the ability to obtain the results of the R&D, 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. We may pay funded amounts upfront or over time as the underlying products undergo clinical trials. Royalty payments owed to the Company on successfully commercialized products generated from R&D arrangements 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 for products arising out of our R&D arrangements are also recognized as Other royalty income in the period that the milestone threshold is met. Milestone thresholds are typically not triggered until after all funding obligations have been completed. Income taxes We periodically assess if our activities, as conducted through our subsidiaries, and as currently contemplated, constitute being engaged in the conduct of a trade or business within the United States. Neither the U.S. Internal Revenue Code (“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. Based on our periodic assessment, we believe that we are not engaged in the conduct of a trade or business within the United States, and as such, we do not record a provision for U. S. federal income tax for the years presented in the consolidated financial statements. While we believe we are not engaged in the conduct of a trade or business within the United States or subject to U.S. taxation in that regard, we are subject to U. S. 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 believe our subsidiaries are eligible for benefits under the U.S.-Ireland income tax treaty, and, under that treaty, are not be subject to any U.S. withholding taxes on U.S.-source royalty payments. Consequently, because we believe that we are not engaged in the conduct of a trade or business within the United States and our subsidiaries are eligible for benefits under the U.S.-Ireland tax treaty, we do not record a provision for income taxes. While we do not currently record a provision for income taxes, we are party to certain arrangements that will give rise to a tax provision in the future. We currently have funding arrangements in place that allow our counterparties to draw on capital over a prescribed period of time. When such funding arrangements are drawn and we begin to recognize income from these funding arrangements, such activities will be subject to U.S. taxation and we will record a provision for income taxes in accordance with ASC 740, Income Taxes . We also entered into an arrangement with MSCI during 2021 as discussed in Note 16 – Related Party Transactions that will become subject to U.S. taxation when we begin to recognize revenue from this transaction. We operate so as to be treated solely as resident in the U.K. for tax purposes. As a U.K. tax resident company, we are subject to U.K. corporation tax on our worldwide taxable profits and gains. U.K. tax resident companies are subject to U.K. corporation tax on receipt of dividends or other income distributions in respect of shares held by them, unless those dividends or other distributions fall within an exempt class. We believe that dividends received by us from RP Holdings, and dividends received by RP Holdings from RPI, should fall within such an exempt class and therefore should not be subject to U.K. corporation tax. As such, we do not record a provision for U.K. income taxes with respect to the dividends received from RP Holdings or with respect to the dividends received by RP Holdings from RPI. 105 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS We are also 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. Certain non-U.K. entities in which we hold a greater than 25% interest, including RPI (which is Irish tax resident) and Old 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 are therefore 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 and we therefore do not record a provision for U.K. income taxes. Earnings per share Basic earnings per share (“EPS”) is computed by dividing net income attributable to us by the weighted average number of Class A ordinary shares outstanding during the period. Diluted EPS is computed by dividing net income attributable to us by the weighted average number of Class A ordinary shares outstanding during the period, including the number of Class A ordinary shares that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include the outstanding Class B ordinary shares, Class B ordinary shares contingently issuable to RPI EPA Holdings, LP (“EPA Holdings”) related to Equity Performance Awards and unvested restricted share units (“RSUs”) issued under our 2020 Independent Director Equity Incentive Plan (“Equity Incentive Plan”). We include potentially dilutive shares in the denominator to compute diluted EPS if (i) the inclusion of the ordinary shares is dilutive for the respective reporting periods, and (ii) contingencies are satisfied as of the end of the reporting period for ordinary shares that are contingently issuable. We use the “if-converted” method to determine the potentially dilutive effect of our outstanding Class B ordinary shares, and the treasury stock method to determine the potentially dilutive effect of the unvested RSUs. There were no Class A ordinary shares or Class B ordinary shares outstanding prior to June 16, 2020; therefore, no earnings per share information has been presented for any period prior to that date. Recently adopted accounting standards 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 an expected-loss model (ASU 2016-13). Accordingly, these financial assets are 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. With certain exceptions, adjustments are 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. 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 current expected credit losses on our financial royalty assets. 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). We adopted this standard as of January 1, 2020 with no material impact on our consolidated financial statements and accompanying notes. 106 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. Available for Sale Debt Securities Series A Biohaven Preferred Shares On April 5, 2019, RPIFT funded the purchase of 2,495 Series A Biohaven Preferred Shares from Biohaven Pharmaceutical Holding Company Ltd. (“Biohaven”) at a price of $ 50,100.00 per preferred share, for a total of $ 125.0 million (the “First Tranche”). The approval of Nurtec ODT by the U.S. Food and Drug Administration (“FDA”) in February 2020 results in a payment due to us of two times the original purchase price of the Series A Biohaven Preferred Shares payable in equal quarterly installments beginning in the three months ended March 31, 2021 through the three months ended December 31, 2024. In the three months ended March 31, 2021, we began receiving payments from the quarterly redemption of the Series A Biohaven Preferred Shares. If Biohaven effects any change of control event, then we will have the option to cause Biohaven to redeem, in a single payment, any outstanding Series A Biohaven Preferred Shares at a price equal to two times the original purchase price of the Series A Biohaven Preferred Shares. Biohaven may redeem at their election, any outstanding Series A Biohaven Preferred Shares, in a single payment, at a price equal to two times the original purchase price. In the event that Biohaven defaults on any obligation to redeem Series A Biohaven Preferred Shares when required, the redemption amount shall accrue interest at the rate of 18 % annually until the redemption price for such unredeemed Series A Biohaven Preferred Shares is paid in full, subject to applicable law. If any such default continues for at least one year , we will be entitled to convert all unredeemed Series A Biohaven Preferred Shares into common shares equal to the redemption price, plus accrued interest, divided by the five-day volume-weighted trading price immediately preceding the conversion date. The Series A Biohaven Preferred Shares are classified as Available for sale debt securities in our consolidated balance sheets. The unrealized change in the fair value of the Series A Biohaven Preferred Shares is recorded within Unrealized gains on available for sale debt securities on the consolidated statements of comprehensive income. Series B Biohaven Preferred Shares On August 7, 2020 we entered into a Series B Biohaven Preferred Share Purchase Agreement (“Series B Biohaven Preferred Share Agreement”) with Biohaven where we committed to acquire 3,992 shares of Series B Biohaven Preferred Shares at a price of $ 50,100 per preferred share (the “Commercial Launch Preferred Equity”), for a total of $ 200.0 million payable on a quarterly basis between the three months ended March 31, 2021 and the three months ended December 31, 2024. Our commitment to purchase the Series B Biohaven Preferred Shares is recognized as the Series B Forwards. In return, Biohaven will be required to redeem the Series B Biohaven Preferred Shares in a series of equal fixed quarterly payments between March 31, 2025 and December 31, 2030 at a price equal to approximately 1.8 times the original purchase price of the Series B Biohaven Preferred Shares. If Biohaven effects any change of control event, then we will have the option to cause Biohaven to issue to us all unissued Series B Biohaven Preferred Shares and to redeem, in a single payment, any outstanding Series B Biohaven Preferred Shares at a price equal to approximately 1.8 times the Series B original issue price per share. Biohaven may redeem at their election, any outstanding Series B Biohaven Preferred Shares, in a single payment, at a price equal to approximately 1.8 times the original issue price for the Series B Biohaven Preferred Shares. In the event that Biohaven defaults on any obligation to redeem Series B Biohaven Preferred Shares, the redemption amount shall accrue interest on the applicable original issue price at the rate of 18 % annually until the redemption price for such unredeemed Series B Biohaven Preferred Shares is paid in full, subject to applicable law. If any such default continues for at least one year , we will be entitled to convert any or all unredeemed Series B Biohaven Preferred Shares into common shares equal to the redemption price, plus accrued interest, divided by the five-day volume-weighted trading price immediately preceding the conversion date. In the three months ended March 31, 2021, we began purchasing the Series B Biohaven Preferred Shares. As of December 31, 2021, we have acquired 1,406 shares of Series B Biohaven Preferred Shares. We have elected the fair value option to account for the Series B Forwards and the Series B Biohaven Preferred Shares, which are recorded in aggregate on the consolidated balance sheets as Available for sale debt securities . We believe the fair value option most accurately reflects the nature of these instruments. The unrealized change in fair value of the Series B Biohaven Preferred Shares and Series B Forwards is recorded within Unrealized gains on available for sale debt securities on the consolidated statements of operations. 107 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MorphoSys Development Funding Bonds On June 2, 2021, we announced a long-term strategic funding partnership with MorphoSys AG (“MorphoSys”) to support MorphoSys’ acquisition of Constellation Pharmaceuticals, Inc. (“Constellation”), which closed on July 15, 2021. As part of the funding agreement, we agreed to provide MorphoSys up to $ 350 million of capital (the “Development Funding Bonds”), which MorphoSys may draw over a one-year period from the close of its acquisition of Constellation. MorphoSys is required to draw a minimum of $ 150 million. As of December 31, 2021, MorphoSys has not drawn any amount under the Development Funding Bonds. Our commitment to fund at least $ 150 million of the Development Funding Bonds is recognized as the Development Funding Bond Forward. Once drawn, we expect to receive a return of 2.2 times the amount funded on the Development Funding Bonds payable on a quarterly basis over nine years , with the first payment beginning two years after the funding. We have elected the fair value option to account for the Development Funding Bond Forward as it most accurately reflects the nature of the instrument. The Development Funding Bond Forward is recorded within Available for sale debt securities in our consolidated balance sheet. The unrealized change in fair value of the Development Funding Bond Forward is recorded within Unrealized gains on available for sale debt securities on the consolidated statements of operations. The table below summarizes our available for sale debt securities recorded at fair value as of December 31, 2021 and 2020 (in thousands): Cost (1) Unrealized Gains Fair Value Current Assets Non-Current Assets Total As of December 31, 2021 Series A Biohaven Preferred Shares $ 134,068 $ 29,432 $ 163,500 $ 66,000 $ 97,500 $ 163,500 Series B Biohaven Preferred Shares 70,441 19,759 90,200 — 90,200 90,200 Series B Forwards — 12,300 12,300 — 12,300 12,300 Development Funding Bond Forward — 4,400 4,400 — 4,400 4,400 Total available for sale debt securities $ 204,509 $ 65,891 $ 270,400 $ 66,000 $ 204,400 $ 270,400 As of December 31, 2020 Series A Biohaven Preferred Shares $ 145,647 $ 68,753 $ 214,400 $ 69,984 $ 144,416 $ 214,400 Series B Forwards — 18,600 18,600 — 18,600 18,600 Total available for sale debt securities $ 145,647 $ 87,353 $ 233,000 $ 69,984 $ 163,016 $ 233,000 (1) Cost for Series A Biohaven Preferred Shares represents amortized cost. Cost for Series B Biohaven Preferred Shares represents the amounts paid to purchase the instruments. There were no costs associated with the Series B Forwards and Development Funding Bond Forward. 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 treasury rate lock contracts, interest rate swap contracts and foreign currency forward contracts. Our policy is to use derivatives strategically to hedge existing and future 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. Treasury rate lock contracts In June 2021, we entered into treasury rate lock contracts with notional amounts totaling $ 600.0 million to manage the impact of fluctuations in the underlying benchmark interest rate associated with the 2021 Notes (as further discussed and defined in Note 11–Borrowings). The treasury rate lock contracts were not designated as hedge instruments. All of the treasury rate lock contracts had collateral requirements. The treasury rate lock contracts were unwound and settled in connection with the issuance of the 2021 Notes and the resulting net loss was recognized in earnings in the year ended December 31, 2021. We paid $ 16.1 million in July 2021 to terminate our treasury rate lock contracts. 108 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Interest rate swaps In February 2020, RPIFT terminated all outstanding interest rate swaps in connection with the Exchange Offer Transactions. We paid $ 35.4 million to terminate these swaps and reclaimed $ 45.3 million of collateral that was held by the respective counterparties. During the years ended December 31, 2020 and 2019, we recorded unrealized losses of $ 10.9 million and $ 72.6 million, respectively, on interest rate swaps in the consolidated statements of operations. We did not enter into any interest rate swaps subsequent to the February 2020 termination discussed above and as of December 31, 2021, we do not hold any interest rate swap contracts. 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 the agreement with Epizyme, we 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) Epizyme’s royalty on sales of Tazverik in Japan payable by Eisai Co., Ltd (“Eisai”). In addition, Epizyme had 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. On December 31, 2019, Epizyme notified RPIFT of its intention to exercise the put option. As a result, we recorded a forward purchase contract equal to the difference between the market value and exercise price of $ 11.5 million within Other assets on the consolidated balance sheets at December 31, 2019. The exercise of the put option was settled in February 2020. The warrant was recognized at fair value of $ 5.4 million within Other assets on the consolidated balance sheets at December 31, 2020. The fair value of the warrant was no t material as of December 31, 2021. We recorded an unrealized loss of $ 5.4 million, an unrealized loss of $ 25.4 million and an unrealized gain of $ 22.0 million on derivative contracts related to the change in fair value of the warrant on the consolidated statements of operations for the years ended December 31, 2021, 2020 and 2019, respectively. Summary of derivatives and reclassifications The tables below summarize the change in fair value of the derivatives for the years ended December 31, 2021, 2020 and 2019 and the line items within the consolidated statements of operations where the gains or losses on these derivatives are recorded (in thousands). Years Ended December 31, Location on Consolidated Statements of Operations 2021 2020 2019 Derivatives in hedging relationships (1) Interest Rate Swaps: Amount of loss reclassified from accumulated other comprehensive income into income $ — $ 4,066 $ 6,189 Losses on derivative financial instruments Change in fair value of interest rate swaps — ( 73 ) 16,954 Losses on derivative financial instruments Interest expense/(income) — 114 ( 9,565 ) Interest expense Derivatives not designated as hedging instruments Interest Rate Swaps: Change in fair value of interest rate swaps — 6,908 49,472 Losses on derivative financial instruments Interest expense/(income) — 408 ( 2,681 ) Interest expense Warrant: Change in fair value of warrant 5,439 25,375 ( 21,977 ) Losses on derivative financial instruments Forward purchase contract: Change in fair value of forward purchase contract — 5,800 ( 11,500 ) Losses on derivative financial instruments Treasury rate lock contracts: Change in fair value of treasury rate lock contracts 16,093 — — Losses on derivative financial instruments (1) Certain interest rate swaps were previously designated as cash flow hedges. These swaps became ineffective as debt refinancings occurred between 2013 and 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 Accumulated other comprehensive income were released into earnings. 109 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. Fair Value Measurements and Financial Instruments Fair value hierarchy We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value as follows: • Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. • Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly. • Level 3: Prices or valuation that require inputs that are both significant to the fair value measurement and unobservable. Our financial instruments consist primarily of cash and cash equivalents, marketable securities, equity securities, derivatives, available for sale debt securities and long-term debt. Cash and cash equivalents, marketable securities, equity securities, derivatives and available for sale debt securities are reported at their respective fair values in our consolidated balance sheets. For financial instruments which are carried at fair value, the level in the fair value hierarchy is based on the lowest level of inputs that is significant to the fair value measurement in its entirety. Long-term debt and financial royalty assets are reported at their amortized costs in our consolidated balance sheets but for which fair values are disclosed. The remaining financial instruments are reported in our consolidated balance sheets at amounts that approximate current fair values. Assets and liabilities measured at fair value on a recurring basis The following table summarizes financial assets and financial liabilities that we measured at fair value on a recurring basis at the dates indicated, classified in accordance with the fair value hierarchy described above (in thousands): As of December 31, 2021 As of December 31, 2020 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Cash equivalents Money market funds $ 598,253 $ — $ — $ 598,253 $ 24,302 $ — $ — $ 24,302 Commercial paper — 13,997 — 13,997 — 77,176 — 77,176 Certificates of deposit — 40,954 — 40,954 — 74,502 — 74,502 Marketable securities Corporate debt securities — — — — — 32,754 — 32,754 Commercial paper — 207,457 — 207,457 — 444,554 — 444,554 Certificates of deposit — 374,415 — 374,415 — 505,971 — 505,971 Available for sale debt securities — — 66,000 66,000 — — 69,984 69,984 Total current assets $ 598,253 $ 636,823 $ 66,000 $ 1,301,076 $ 24,302 $ 1,134,957 $ 69,984 $ 1,229,243 Equity securities 226,787 — 43,013 269,800 298,689 — — 298,689 Available for sale debt securities — — 187,700 187,700 — — 144,416 144,416 Forwards (1) — — 16,700 16,700 — — 18,600 18,600 Warrant (2) — — — — — 5,439 — 5,439 Total non-current assets $ 226,787 $ — $ 247,413 $ 474,200 $ 298,689 $ 5,439 $ 163,016 $ 467,144 (1) The balance as of December 31, 2021 includes Series B Forwards and the Development Funding Bond Forward, recorded within Available for sale debt securities in the consolidated balance sheet, related to our obligations to fund acquisitions of the Series B Biohaven Preferred Shares and $ 150 million of the Development Funding Bonds, respectively. The balance as of December 31, 2020 relates to Series B Forwards, recorded within Available for sale debt securities in the consolidated balance sheet. See Note 3–Available for Sale Debt Securities for additional discussion. (2) Related to the Epizyme transaction as described in Note 4–Derivative Instruments and recorded in Other assets in the consolidated balance sheets as of December 31, 2021 and 2020. The fair value of the warrant was no t material as of December 31, 2021. 110 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2021, 2020 and 2019, we recognized a loss of $ 60.1 million, a loss of $ 85.4 million and a gain of $ 104.4 million, on equity securities still held as of December 31, 2021, respectively. The tables presented below summarize the change in the combined fair value (current and non-current) of Level 3 financial instruments, which relate to equity securities and available for sale debt securities, including the underlying debt securities and related forwards (in thousands). Years Ended December 31, 2021 2020 Equity Securities Balance at the beginning of the year $ — $ — Purchases 35,120 — Gains on equity securities 7,893 — Balance at the end of the year $ 43,013 $ — Years Ended December 31, 2021 2020 Debt Securities Balance at the beginning of the year $ 214,400 $ 131,280 Purchases 70,441 — Unrealized gains on available for sale debt securities (1) 12,900 52,725 Settlement of forwards (2) 18,459 — Transfer to Level 2 — ( 184,005 ) Transfer from Level 2 (3) — 198,526 Unrealized gains on available for sale debt securities (1) — 15,874 Redemption ( 62,500 ) — Balance at the end of the year $ 253,700 $ 214,400 Years Ended December 31, 2021 2020 Forwards Balance at the beginning of the year $ 18,600 $ — Unrealized gains (4) 16,559 18,600 Settlement of forwards (2) ( 18,459 ) — Balance at the end of the year $ 16,700 $ 18,600 (1) For the year ended December 31, 2021, the unrealized gains on available for sale debt securities is comprised of $ 11.6 million related to Series A Biohaven Preferred Shares as recorded on the consolidated statements of comprehensive income and $ 1.3 million related to the Series B Biohaven Preferred Shares as recorded on the consolidated statements of operations. For the year ended December 31, 2020, the unrealized gains on available for sale debt securities related to the Series A Biohaven Preferred Shares as recorded on the consolidated statements of comprehensive income, including $ 52.7 million prior to transferring out of Level 3 and then $ 15.9 million after transferring back to Level 3. (2) Reflects the fair value attributed to the Series B Forwards that were settled in the period as the Series B Biohaven Preferred Shares were acquired, which is included in the fair value of the Series B Biohaven Preferred Shares. See Note 3–Available for Sale Debt Securities. (3) Includes $ 14.5 million of unrealized gains on available for sale debt securities included in other comprehensive income while the Series A Biohaven Preferred Shares was classified as a Level 2 asset. (4) Recorded within Unrealized gains on available for sale debt securities on the consolidated statements of operations. 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. 111 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Investment in Series A Biohaven Preferred Shares The fair value of the Series A Biohaven Preferred Shares as of December 31, 2021 and 2020 was based on the cash flows due to us from Biohaven of two times the original purchase price of the Series A Biohaven Preferred Shares payable in equal quarterly installments of $ 15.6 million following the FDA approval and starting one-year after FDA approval, through December 31, 2024. The FDA approved Nurtec ODT in February 2020, at which point we became entitled to receive a fixed payment amount of $ 250.0 million payable in equal quarterly payments from March 31, 2021 through December 31, 2024. The fair value of the Series A Biohaven Preferred Shares as of December 31, 2021 and 2020 was calculated using probability-adjusted discounted cash flow calculations incorporating Level 3 fair value measurements and inputs, including estimated risk-adjusted discount rates and the probability of a change of control event occurring during the investment term, which would result in accelerated payments and redemptions. Assessing the probability that there will be a change of control event over a four-year time period and developing a risk-adjusted discount rate requires significant judgement. Our estimate of a risk adjusted discount rate of 9.5 % and 8.3 % as of December 31, 2021 and 2020, respectively, could reasonably be different than the discount rate selected by a market participant in the event of a sale of the Series A Biohaven Preferred Shares, which would mean that the estimated fair value could be significantly higher or lower. Prior to February 2020, we measured our investment in the Series A Biohaven Preferred Shares using a Black-Derman- Toy lattice model, which included the use of Level 3 fair value measurements and inputs. In February 2020, when Nurtec ODT received FDA approval, we began measuring the fair value of the Series A Biohaven Preferred Shares using a discounted cash flow analysis that relied on observable inputs, and therefore, we transferred the Series A Biohaven Preferred Shares from a Level 3 to a Level 2 asset. During the three months ended December 31, 2020, information pertaining to Biohaven’s issuance of debt and its effective interest rate became available and we refined our valuation of the Series A Biohaven Preferred shares as of December 31, 2020 to incorporate this significant unobservable input. As a result, we reclassified the investment from a Level 2 to a Level 3 asset during the three months ended December 31, 2020. 112 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Investment in Series B Biohaven Preferred Shares The fair value of the Series B Biohaven Preferred Shares and Series B Forwards as of December 31, 2021 and the fair value of the Series B Forwards as of December 31, 2020 were based on probability-adjusted discounted cash flow calculations using Level 3 fair value measurements and inputs, including estimated risk-adjusted discount rates and the probability that there will be a change of control event in different periods of time, which would result in accelerated payments and redemptions. Assessing the probability that there will be a change of control event over the duration of the Series B Biohaven Preferred Shares and developing a risk-adjusted discount rate requires significant judgement. Our expectation of the probability and timing of the occurrence of a change of control event could reasonably be different than the timing of an actual change of control event, and if so, would mean that the estimated fair value could be significantly higher or lower than the fair value determined by management at any particular date. Our estimate of a risk adjusted discount rate could reasonably be different than the discount rate selected by a market participant in the event of a sale of the Series B Biohaven Preferred Shares or the Series B Forwards, which would mean that the estimated fair value could be significantly higher or lower. MorphoSys Development Funding Bonds The fair value of the Development Funding Bond Forward as of December 31, 2021 was based on a discounted cash flow calculation using an estimated risk-adjusted discount rate, which is a Level 3 fair value input. Our estimate of a risk adjusted discount rate could reasonably be different than the discount rate selected by a market participant in the event of a sale of the instrument, which would mean that the estimated fair value could be significantly higher or lower. We have elected the fair value option to account for the Development Funding Bond Forward as it most accurately reflects the nature of the instrument. BioCryst Equity Securities In November 2021, we purchased 3,846 thousand shares of common stock in BioCryst Pharmaceuticals, Inc.(“BioCryst”), which was calculated based on the volume-weighted average price of BioCryst common stock over a period preceding the closing of the transaction. As part of the transaction, we are restricted from selling the common stock for six months following the close of the transaction. The fair value of the BioCryst common stock as of December 31, 2021 was based on the closing stock price and adjusted for the transfer restriction, which was determined by calculating the value of a put option over the common stock to match the duration of the transfer restriction. This methodology includes the use of Level 3 inputs, including the estimated volatility of the BioCryst common stock, which requires the use of significant judgement. Our estimated volatility could be reasonably different than the actual volatility for the common stock which would mean that the estimated fair value for the common stock could be significantly higher or lower than the fair value determined by management at any particular date. Other financial instruments We use third party pricing services for Level 2 inputs used to value cash equivalents, marketable securities, derivative instruments and borrowings, which provide 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. Warrants are valued using a Black-Scholes option pricing model which considers observable and unobservable inputs. 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 fair value of financial royalty assets is calculated by management using the forecasted royalty payments we expect to receive based on the projected product sales for all royalty bearing products as estimated by sell-side equity research analysts’ consensus sales forecasts or, where such consensus sales forecasts are not available, management uses reasonable judgment to make assumptions about the projected product sales. These projected future royalty payments by asset along with any projected incoming or outgoing milestone payments are then discounted to a present value using appropriate individual discount rates. The fair value of our financial royalty assets is classified as Level 3 within the fair value hierarchy since it is determined based upon inputs that are both significant and unobservable. Estimated fair values based on Level 3 inputs and related carrying values for our financial royalty assets as of December 31, 2021 and 2020 are presented below (in thousands). 113 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2021 December 31, 2020 Fair Value Carrying Value, net Fair Value Carrying Value, net Financial royalty assets, net $ 19,047,183 $ 14,332,596 $ 18,718,179 $ 12,955,277 6. Financial Royalty Assets, Net Financial royalty assets, net consist of contractual rights to cash flows relating to royalty payments derived from the expected sales of patent-protected biopharmaceutical products that entitle us and our subsidiaries to receive a portion of income from the sale of such products by third parties. The gross carrying value, cumulative allowance for changes in expected cash flows, exclusive of the allowance for credit losses, and net carrying value for the current and non-current portion of financial royalty assets at December 31, 2021 and 2020 are as follows (in thousands): As of December 31, 2021 Estimated Royalty Duration (a) Gross Carrying Value Cumulative Allowance for Changes in Expected Cash Flows (Note 7) Net Carrying Value (e) Cystic fibrosis franchise 2037 (b) $ 5,335,641 $ ( 48,636 ) $ 5,287,005 Tysabri (c) 1,846,069 ( 16,617 ) 1,829,452 Imbruvica 2027-2032 1,438,730 ( 236,871 ) 1,201,859 Xtandi 2027-2028 1,100,065 ( 172,101 ) 927,964 Tremfya 2031-2032 881,671 — 881,671 Evrysdi 2030-2035 (d) 727,774 — 727,774 Other 2020-2039 4,697,591 ( 909,916 ) 3,787,675 Total $ 16,027,541 $ ( 1,384,141 ) $ 14,643,400 Less: Cumulative allowance for credit losses (Note 7) ( 310,804 ) Total financial royalty assets, net $ 14,332,596 (a) Dates shown represent our estimates as of current reporting date of when a royalty will substantially end, which may depend on clinical trial results, regulatory approvals, contractual terms, commercial developments, estimates of patent expiration dates (which may include estimated patent term extensions) or other factors and may vary by geography. There can be no assurances that our royalties will expire when expected. (b) Royalty is perpetual; year shown represents Trikafta expected patent expiration and potential sales decline based on timing of potential generic entry. (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, which is periodically reviewed. (d) Key patents on Evrysdi in the United States expire in 2035, but our royalty will cease when aggregate royalties paid to us equal $ 1.3 billion. (e) The net carrying value by asset is presented before the allowance for credit losses. Refer to Note 7–Cumulative Allowance and the Provision for Changes in Expected Cash Flows from Financial Royalty Assets for additional information. As of December 31, 2020 Estimated Royalty Duration (a) Gross Carrying Value Cumulative Allowance for Changes in Expected Cash Flows (Note 7) Net Carrying Value (e) Cystic fibrosis franchise 2037 (b) $ 5,274,896 $ — $ 5,274,896 Tysabri (c) 2,003,797 ( 112,720 ) 1,891,077 Imbruvica 2027-2032 1,406,291 ( 46,872 ) 1,359,419 Xtandi 2027-2028 1,150,335 ( 145,565 ) 1,004,770 Promacta 2025-2028 686,129 — 686,129 Evrysdi 2030-2035 (d) 675,440 — 675,440 Other 2020-2039 3,022,213 ( 634,950 ) 2,387,263 Total $ 14,219,101 $ ( 940,107 ) $ 13,278,994 Less: Cumulative allowance for credit losses (Note 7) ( 323,717 ) Total financial royalty assets, net $ 12,955,277 (a) Dates shown represent our estimates as of current reporting date of when a royalty will substantially end, which may depend on clinical trial results, regulatory approvals, contractual terms, commercial developments, estimates of patent expiration dates (which may include estimated patent term extensions) or other factors and may vary by geography. There can be no assurances that our royalties will expire when expected. 114 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (b) Royalty is perpetual; year shown represents Trikafta expected patent expiration and potential sales decline based on timing of potential generic entry. (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, which is periodically reviewed. (d) Key patents on Evrysdi in the United States expire in 2035, but our royalty will cease when aggregate royalties paid to us equal $ 1.3 billion. (e) The net carrying value by asset is presented before the allowance for credit losses. Refer to Note 7–Cumulative Allowance and the Provision for Changes in Expected Cash Flows from Financial Royalty Assets for additional information. 7. Cumulative Allowance and the Provision for Changes in Expected Cash Flows from Financial Royalty Assets The cumulative allowance for changes in expected future cash flows from financial royalty assets is presented net within the non-current portion of Financial royalty assets, net on the consolidated balance sheets and includes the following activities: • the movement in the cumulative allowance related to changes in forecasted royalty payments we expect to receive based on projected product sales for royalty bearing products as estimated by sell-side equity research analysts’ consensus sales forecasts , and • the movement in the cumulative allowance for current expected credit losses. The periodic movement in the cumulative allowance is presented on the consolidated statements of operations as the Provision for changes in expected cash flows from financial royalty assets . 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 current expected credit losses on our portfolio of financial royalty assets with limited protective rights. The current period provision for changes in expected cash flows from financial royalty assets reflects the activity for the period primarily new financial royalty assets 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 – Summary of Significant Accounting Policies 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 cumulative allowance for credit losses, as of the dates indicated (in thousands): Activity for the Year 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 Write-off of cumulative allowance (a) 95,158 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 ( 645,612 ) Decreases to the cumulative allowance for changes in expected cash flows from financial royalty assets 570,959 Write-off of cumulative allowance (a) 2,964 Write-off of credit loss allowance (b) 25,174 Current period provision expense for credit losses, net (c) ( 156,186 ) Balance at December 31, 2020 $ ( 1,263,824 ) Increases to the cumulative allowance for changes in expected cash flows from financial royalty assets ( 912,710 ) Decreases to the cumulative allowance for changes in expected cash flows from financial royalty assets 446,955 Write-off of cumulative allowance (a) 21,721 Current period provision income for credit losses, net (c) 12,913 Balance at December 31, 2021 $ ( 1,694,945 ) (a) Relates to amounts removed from the allowance at the end of a royalty asset’s life to bring the account balance to zero. Write-offs solely impact the asset account and allowance account; there is no impact on the consolidated statements of operations. (b) Relates to amounts reversed out of the credit loss allowance associated with omecamtiv mecarbil as a result of the write-off of the related financial royalty asset balance of $ 90.2 million. (c) In the year ended December 31, 2020, the provision for credit losses was primarily related to certain additions to our portfolio of financial royalty assets with limited protective rights in 2020, mainly the final tranche of Tazverik. In the year ended December 31, 2021,the provision income for credit losses was primarily related to a significant decline in the financial asset value for Tazverik, which was offset by increases in our portfolio of financial royalty assets with limited protective rights in 2021, primarily related to zavegepant. 115 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 8. Intangible Royalty Assets, Net The following schedules of the intangible royalty assets present the cost, accumulated amortization and net carrying value as of December 31, 2021 and 2020 (in thousands). As of December 31, 2021 Cost Accumulated Amortization Net Carrying Value DPP-IV patents $ 606,216 $ 600,546 $ 5,670 Total intangible royalty assets $ 606,216 $ 600,546 $ 5,670 As of December 31, 2020 Cost Accumulated Amortization Net Carrying Value DPP-IV patents $ 606,216 $ 577,550 $ 28,666 Total intangible royalty assets $ 606,216 $ 577,550 $ 28,666 The majority of our DPP-IV patents associated with the intangible royalty assets terminate at various dates through 2022. The weighted average remaining life of the intangible royalty assets is less than one year . We project amortization expense will be $ 5.7 million in 2022. Our revenue is tied to underlying patent protected sales of DPP-IV products of various licensees. Such revenue from royalty assets is earned from sales occurring primarily in the United States 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 us. 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. Individual licensees exceeding 10% or more of revenue from intangible royalty assets accounted for 86 %, 97 % and 91 % of our revenues from intangible royalty assets in the years ended December 31, 2021, 2020 and 2019, respectively. 9. Non-Consolidated Affiliates The Legacy SLP Interest In connection with the Exchange Offer Transactions, we acquired a special limited partnership interest in the Legacy Investors Partnerships (the “Legacy SLP Interest”) from the Continuing Investors Partnerships for $ 303.7 million in exchange for issuing shares in our subsidiary. As a result, we became a special limited partner in the Legacy Investors Partnerships. The Legacy SLP Interest entitles us to the equivalent of performance distribution payments that would have been paid to the general partner of the Legacy Investors Partnerships and an income allocation on a similar basis. Our income allocation is equal to the general partner’s former contractual rights to the income of the Legacy Investors Partnerships, net of amortization of the basis difference. The Legacy SLP Interest is treated as an equity method investment as our Manager is also the Manager of the Legacy Investors Partnerships and has the ability to exercise significant influence. The Legacy Investors Partnerships no longer participate in investment opportunities from June 30, 2020 and, as such, the value of the Legacy SLP Interest is expected to decline over time. The Legacy Investors Partnerships also own a non-controlling interest in Old RPI. The income allocation from the Legacy SLP Interest is based on an estimate, as the Legacy Investors Partnerships are private partnerships that are expected to report on a lag subsequent to the date of this annual report. Management’s estimate of equity in earnings from the Legacy SLP Interest for the current period will be updated for historical results in the subsequent period. During the years ended December 31, 2021 and 2020, we recorded an income allocation of $ 8.9 million and $ 62.0 million, respectively, within Equity in losses/(earnings) of non-consolidated affiliates . We received cash distributions from the Legacy SLP Interest of $ 21.0 million and $ 22.7 million during the years ended December 31, 2021 and 2020, respectively. 116 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 entities. We recorded a loss allocation from the Avillion Entities of $ 28.4 million, $ 17.6 million and $ 32.5 million within Equity in losses/(earnings) of non-consolidated affiliates during the years ended December 31, 2021, 2020 and 2019, respectively. On December 19, 2017, the FDA approved a supplemental New Drug Application for Pfizer’s Bosulif. Avillion I is eligible to receive fixed payments from Pfizer based on this approval. 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 from Avillion I of $ 13.4 million during each of the years ended December 31, 2021 and 2020, and $ 14.1 million in the year ended December 31, 2019 in connection with Avillion I’s receipt of the fixed annual payments due under its co-development agreement with Pfizer. In March 2017, RPIFT entered into an agreement with Avillion II, which was amended in 2019, to invest approximately $ 19.0 million to fund approximately 50 % of the costs of a Phase 2 clinical trial for the use of Merck KGaA’s anti-IL 17 nanobody M1095 (the “Merck KGaA Asset”) for the treatment of psoriasis in exchange for certain milestone and royalty payments. Our involvement in the development for the Merck KGaA Asset ceased in the year ended December 31, 2020, for which we received a distribution of $ 21.3 million from Avillion II. In May 2018, RPIFT entered into an additional agreement, which was amended in July 2021, to increase our investment up to $ 122.5 million from $ 105.0 million in Avillion II over multiple years to fund approximately 44 % of the costs of Phase 2 and 3 clinical trials to advance PT027 through a global clinical development program for the treatment of asthma in exchange for royalties, a series of success-based milestones and other potential payments. As of December 31, 2021 and 2020, RPIFT had $ 11.2 million and $ 28.6 million respectively, of unfunded commitments related to the Avillion Entities. 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 & Development (“R&D”) Funding Expense R&D funding expense consists of upfront and ongoing R&D payments we have made to counterparties to acquire royalties and/or milestones on development-stage product candidates. Ongoing R&D payments are made as the related development-stage product candidates undergo clinical trials with our counterparties. During the year ended December 31, 2021, 2020, and 2019 we did not enter into any new ongoing R&D funding arrangements. We recognized R&D funding expense of $ 200.1 million during the year ended December 31, 2021, comprised of $ 6.9 million in ongoing R&D expenses, primarily under our co-funding agreement with Sanofi, and $ 193.2 million in upfront R&D funding. As part of a long-term strategic funding partnership with MorphoSys, which closed on July 15, 2021 (as further discussed in Note 17 – Commitments and Contingencies), we allocated $ 90.0 million of the upfront payment to R&D funding expense, representing two development-stage products acquired in exchange for future royalties. Additionally, we made an upfront payment of $ 103.2 million to BioCryst to acquire a royalty on a development-stage product in November 2021. We recognized R&D funding expense of $ 26.3 million during the year ended December 31, 2020, of which $ 20.5 million related to ongoing development-stage funding payments, primarily under our co-funding agreement with Sanofi and $ 5.8 million related to upfront funding for a royalty on a development-stage product that we acquired from BioCryst. We recognized $ 83.0 million of R&D funding expense during the year ended December 31, 2019, of which $ 18.2 million and $ 62.8 million related to our funding agreements with both Sanofi and Pfizer, respectively. We completed our funding commitments in the fourth quarter of 2019 under our agreement with Pfizer. We did not have upfront development-stage R&D funding expense in 2019. As of December 31, 2021, we have a remaining commitment of $ 10.7 million related to our R&D funding agreement with Sanofi. 117 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11. Borrowings Our borrowings at December 31, 2021 and 2020 consisted of the following (in thousands): Type of Borrowing Date of Issuance Maturity December 31, 2021 December 31, 2020 Senior Unsecured Notes: $ 1,000,000 , 0.75 % (issued at 99.322 % of par) 9/2020 9/2023 $ 1,000,000 $ 1,000,000 $ 1,000,000 , 1.20 % (issued at 98.875 % of par) 9/2020 9/2025 1,000,000 1,000,000 $ 1,000,000 , 1.75 % (issued at 98.284 % of par) 9/2020 9/2027 1,000,000 1,000,000 $ 1,000,000 , 2.20 % (issued at 97.760 % of par) 9/2020 9/2030 1,000,000 1,000,000 $ 600,000 , 2.15 % (issued at 98.263 % of par) 7/2021 9/2031 600,000 — $ 1,000,000 , 3.30 % (issued at 95.556 % of par) 9/2020 9/2040 1,000,000 1,000,000 $ 1,000,000 , 3.55 % (issued at 95.306 % of par) 9/2020 9/2050 1,000,000 1,000,000 $ 700,000 , 3.35 % (issued at 97.565 % of par) 7/2021 9/2051 700,000 — Unamortized debt discount and issuance costs ( 203,930 ) ( 183,416 ) Total debt carrying value 7,096,070 5,816,584 Less: Current portion of long-term debt — — Total long-term debt $ 7,096,070 $ 5,816,584 Senior Unsecured Notes On July 26, 2021, we issued $ 1.3 billion of senior unsecured notes (the “2021 Notes”) comprised of $ 600.0 million principal amount of notes due September 2031 and $ 700.0 million principal amount of notes due September 2051. Interest on each series of the 2021 Notes accrues at the respective rate per annum and is payable semi-annually in arrears on March 2 and September 2 of each year, beginning on March 2, 2022. The 2021 Notes were issued at a total discount of $ 27.5 million and we capitalized approximately $ 12.3 million in debt issuance costs primarily composed of underwriting fees. The 2021 Notes have a weighted average coupon rate and a weighted average effective interest rate of 2.80 % and 3.06 %, respectively. On September 2, 2020, we issued $ 6.0 billion of senior unsecured notes (the “2020 Notes” and, together with the 2021 Notes, the “Notes”). We used the net proceeds from the 2020 Notes offering, together with available cash on hand, to repay in full the senior secured credit facilities. Interest on each series of the 2020 Notes accrues at the respective rate per annum and is payable semi-annually in arrears on March 2 and September 2 of each year. The 2020 Notes were issued at a total discount of $ 149.0 million and we capitalized approximately $ 40.4 million in debt issuance costs primarily comprised of underwriting fees. The 2020 Notes have a weighted average coupon rate and a weighted average effective interest rate of 2.125 % and 2.50 %, respectively. On August 3, 2021, we completed an exchange offer for the 2020 Notes where certain holders elected to tender their unregistered outstanding notes for freely tradable exchange notes that were registered under the Securities Act of 1933. The Notes may be redeemed at our option at a redemption price equal to the greater of (i) 100 % of the principal amount of the Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis at the treasury rate, plus a make-whole premium as defined in the indenture. In each case, accrued and unpaid interest is also required to be redeemed to the date of redemption. Upon the occurrence of a change of control triggering event and downgrade in the rating of our Notes by two of three credit agencies, the holders may require us to repurchase all or part of their Notes at a price equal to 101 % of the aggregate principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to the date of repurchase. 118 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Our obligations under the Notes are fully and unconditionally guaranteed by RP Holdings, a non-wholly owned subsidiary. We are required to comply with certain covenants under our Notes and, as of December 31, 2021, we were in compliance with all applicable covenants. As of December 31, 2021 and 2020, the estimated fair value of our outstanding Notes using Level 2 inputs was approximately $ 7.2 billion and $ 6.2 billion, respectively. Senior Unsecured Revolving Credit Facility On September 15, 2021, we entered into an amended and restated revolving credit agreement (the “Credit Agreement”). The Credit Agreement amends and restates the existing credit agreement that our subsidiary, RP Holdings, as borrower, entered into on September 18, 2020, which provided for a five-year unsecured revolving credit facility (the “Revolving Credit Facility”) with borrowing capacity of up to $ 1.5 billion for general corporate purposes. The Credit Agreement extends the maturity of the Revolving Credit Facility to September 15, 2026. As of December 31, 2021 and 2020, there were no outstanding borrowings under the Revolving Credit Facility. The Revolving Credit Facility is subject to an interest rate, at our option, of either (a) a base rate determined by reference to the highest of (1) the administrative agent’s prime rate, (2) the federal funds effective rate and the overnight bank funding rate, plus 0.5 % and (3) the one month adjusted LIBOR, plus 1 % or (b) the Eurocurrency Rate or the Alternative Currency Daily Rate (each as defined in the Credit Agreement), plus in each case, the applicable margin. The applicable margin for the Revolving Credit Facility varies based on our public debt rating. Accordingly, the interest rates for the Revolving Credit Facility fluctuates during the term of the facility based on changes in the applicable interest rate and future changes in our public debt rating. The Credit Agreement that governs the Revolving Credit Facility contains certain customary covenants, that among other things, require us to maintain (i) a consolidated leverage ratio at or below 4.00 to 1.00 (or at or below 4.50 to 1.00 following a qualifying material acquisition) of consolidated funded debt to consolidated EBITDA, each as defined and calculated with the ratio level calculated with further adjustments as set forth in the Credit Agreement and (ii) a consolidated coverage ratio at or above 2.50 to 1.00 of consolidated EBITDA to consolidated interest expense, each as defined and calculated with further adjustments as set forth in the Credit Agreement. All obligations under the Revolving Credit Facility are unconditionally guaranteed by us. As of December 31, 2021 , RP Holdings was in compliance with these covenants. Senior Secured Credit Facilities On February 11, 2020, in connection with the Exchange Offer Transactions (as discussed in Note 1–Organization and Purpose) 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 with Bank of America, N.A., as administrative agent, the lenders party thereto from time to time and the other parties thereto. The senior secured credit facilities consisted of a term loan A and term loan B in the amounts of $ 3.20 billion and $ 2.84 billion, respectively. In September 2020, we repaid in full the outstanding principal amounts of term loans under the senior secured credit facilities with net proceeds from the 2020 Notes and available cash on hand. Upon refinancing our senior secured credit facilities in September 2020, we recorded a loss on debt extinguishment of $ 25.1 million as part of Other non-operating expense/(income), net, which primarily consisted of unamortized loan issuance costs and original issue discount related to our senior secured credit facilities. RPIFT Senior Secured Credit Facilities The RPIFT Senior Secured Credit Facilities were repaid in full in February 2020 in connection with the Exchange Offer Transactions. We recorded a loss on debt extinguishment of $ 5.4 million as part of Other non-operating expense/(income), net during the year ended December 31, 2020. Principal Payments on the Notes The future principal payments for our borrowings as of December 31, 2021 over the next five years and thereafter are as follows (in thousands): 119 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Year Principal Payments 2022 $ — 2023 1,000,000 2024 — 2025 1,000,000 2026 — Thereafter 5,300,000 Total (1) $ 7,300,000 (1) Excludes unamortized debt discount and issuance costs of $ 203.9 million as of December 31, 2021, which are amortized through interest expense over the remaining life of the underlying debt obligations. 12. Shareholders’ Equity Capital structure Following the completion of our IPO as discussed in Note 1–Organization and Purpose, we have two classes of voting shares: Class A ordinary shares and Class B ordinary shares, each of which has one vote per ordinary share. The Class A ordinary shares and Class B ordinary shares vote together as a single class on all matters submitted to a vote of shareholders, except as otherwise required by applicable law. Our Class B ordinary shares are not publicly traded and holders of Class B ordinary shares only have limited rights to receive a distribution equal to their nominal value upon a liquidation, dissolution or winding up of the Company. An exchange agreement entered into by us, RP Holdings, the Continuing Investors Partnerships, RPI International Partners 2019, LP and EPA Holdings (the “Exchange Agreement”) governs the exchange of RP Holdings Class B Interests held by the Continuing Investors Partnerships for Class A ordinary shares. Pursuant to the Exchange Agreement, RP Holdings Class B interests are exchangeable on a one-for-one basis for Class A ordinary shares on a quarterly basis. As of December 31, 2021, we have outstanding 432,963 thousand Class A ordinary shares and 174,213 thousand Class B ordinary shares. Each such exchange also results in the re-designation of the same number of our Class B ordinary shares as deferred shares. As of December 31, 2021, we have outstanding deferred shares of 361,170 thousand. In addition, we have in issue 50 thousand Class R redeemable shares, which do not entitle the holder to voting or dividend rights. The 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 to Royalty Pharma plc, as required by the U.K. Companies Act. The Class R redeemable shares may be redeemed at our option in the future. Any such redemption would be at the nominal value of £ 1 each. 120 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Non-controlling interests The only non-controlling interest in the year ended December 31, 2019 related to RPSFT, for which the net change in the related balance is as presented in the statements of shareholders’ equity. The net change in the balance of our four non-controlling interests for the years ended December 31, 2021 and 2020 is as follows (in thousands): RPSFT Legacy Investors Partnerships Continuing Investors Partnerships (1) EPA Holdings Total December 31, 2019 $ 35,883 $ — $ — $ — $ 35,883 Contributions — 1,165,258 9,418 — 1,174,676 Transfer of interests — 1,037,161 — — 1,037,161 Distributions ( 112,339 ) ( 594,592 ) ( 85,426 ) — ( 792,357 ) Net Income prior to IPO 42,151 102,892 — — 145,043 Effect of exchange by Continuing Investors of Class B ordinary shares for Class A ordinary shares and reallocation of historical equity — ( 750 ) 2,433,848 — 2,433,098 Issuance of Class A ordinary shares sold in IPO, net of offering costs — — 758,354 — 758,354 Other exchanges — — ( 309,566 ) — ( 309,566 ) Net income subsequent to IPO 46,741 218,137 316,993 — 581,871 Other comprehensive income/(loss): Unrealized gains on available for sale debt securities — 15,015 7,488 — 22,503 Reclassification of unrealized losses on available for sale debt securities — ( 3,612 ) ( 6,018 ) — ( 9,630 ) December 31, 2020 $ 12,436 $ 1,939,509 $ 3,125,091 $ — $ 5,077,036 (1) Related to the Continuing Investors Partnerships’ ownership of approximately 36 % in RP Holdings through their ownership of the RP Holdings Class B Interests as of December 31, 2020. Royalty Pharma plc owns the remaining 64 % of RP Holdings through its ownership of RP Holdings Class A Interests and Class B Interests as of December 31, 2020. RPSFT Legacy Investors Partnerships Continuing Investors Partnerships (1) EPA Holdings Total December 31, 2020 $ 12,436 $ 1,939,509 $ 3,125,091 $ — $ 5,077,036 Contributions — 35,148 13,391 — 48,539 Distributions ( 56,490 ) ( 425,050 ) ( 133,433 ) — ( 614,973 ) Other exchanges — — ( 642,974 ) — ( 642,974 ) Net Income 57,582 266,570 297,321 — 621,473 Other comprehensive income/(loss): Unrealized gains on available for sale debt securities — 2,038 3,227 — 5,265 Reclassification of unrealized losses on available for sale debt securities — ( 8,946 ) ( 13,469 ) — ( 22,415 ) December 31, 2021 $ 13,528 $ 1,809,269 $ 2,649,154 $ — $ 4,471,951 (1) Related to the Continuing Investors Partnerships’ ownership of approximately 29 % in RP Holdings through their ownership of the RP Holdings Class B Interests as of December 31, 2021. Royalty Pharma plc owns the remaining 71 % of RP Holdings through its ownership of RP Holdings Class A Interests and Class B Interests as of December 31, 2021. 121 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS RP Holdings Class C Special Interest held by EPA Holdings EPA Holdings is entitled to Equity Performance Awards (as defined below) through its RP Holdings Class C Special Interest based on our performance, as determined on a portfolio-by-portfolio basis. Investments made during each two-year period will be grouped together as separate portfolios (each, a “Portfolio”). Subject to certain conditions, at the end of each fiscal quarter, EPA Holdings is entitled to a distribution from RP Holdings in respect of each Portfolio equal to 20% of the Net Economic Profit (defined as the aggregate cash receipts for all new portfolio investments in such Portfolio less Total Expenses (defined as interest expense, operating expense and recovery of acquisition cost in respect of such Portfolio)) for such Portfolio for the applicable measuring period (the “Equity Performance Awards”). The Equity Performance Awards will be allocated and paid by RP Holdings to EPA Holdings as the holder of the RP Holdings Class C Special Interest. The Equity Performance Awards will be payable in RP Holdings Class B Interests for which we will issue the same number of Class B ordinary shares, which may be subsequently exchanged for our Class A ordinary shares. We do not currently expect any material Equity Performance Awards to be payable until the performance conditions discussed above are met. Dividends The holders of Class A ordinary shares are entitled to receive dividends subject to approval by the board of directors. The holders of Class B ordinary shares do not have any rights to receive dividends; however the RP Holdings Class B Interests are entitled to dividends and distributions from RP Holdings, our consolidated subsidiary. In the year ended December 31, 2021, we declared and paid four quarterly cash dividends of $ 0.17 per Class A ordinary share for an aggregate amount of $ 285.2 million to holders of our Class A ordinary shares . 2020 Independent Directors Equity Incentive Plan On June 15, 2020, our 2020 Independent Director Equity Incentive Plan was approved and became effective, whereby 800 thousand Class A ordinary shares have been reserved for future issuance to our independent directors. As of December 31, 2021, approximately 620 thousand shares remain reserved for future issuance under the Equity Incentive Plan. RSU activity and share-based compensation We grant RSUs to our independent directors under the 2020 Independent Director Equity Incentive Plan. Share-based compensation expense is recognized based on estimated fair value of the award on the grant date and amortized on a straight-line basis over the requisite service period of generally one year as part of General and administrative expenses in the consolidated statement of comprehensive income. The estimated fair value of RSUs is based on the closing price of our Class A ordinary shares on the grant date. We recognized share-based compensation of approximately $ 3.1 million and $ 5.7 million for the years ended December 31, 2021 and 2020, which is recorded as part of General and administrative expenses in the consolidated statement of operations. There were no share-based awards or related expenses in periods prior to the IPO. As of December 31, 2021, the total unrecognized share-based compensation expense related to total outstanding RSUs was less than $ 1.0 million, which we expect to recognize in the next six months . 13. Earnings per Share Basic earnings per share (“EPS”) is computed by dividing net income attributable to us by the weighted average number of Class A ordinary shares outstanding during the period. Diluted EPS is computed by dividing net income attributable to us, including the impact of potentially dilutive securities, by the weighted average number of Class A ordinary shares outstanding during the period, including the number of Class A ordinary shares that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include the outstanding Class B ordinary shares, Class B ordinary shares contingently issuable to EPA Holdings related to Equity Performance Awards, and unvested RSUs issued under our Equity Incentive Plan. We use the “if-converted” method to determine the potentially dilutive effect of our outstanding Class B ordinary shares, and the treasury stock method to determine the potentially dilutive effect of the unvested RSUs. 122 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Our Class B ordinary shares, Class R redeemable shares, and deferred shares do not share in the earnings or losses attributable to us and are therefore not participating securities. As such, separate presentation of basic and diluted earnings per share for Class B ordinary shares, Class R redeemable shares, and deferred shares under the two-class method has not been presented. Our Class B ordinary shares are, however, considered potentially dilutive shares of Class A ordinary shares because shares of Class B ordinary shares, together with the related RP Holdings Class B Interests, are exchangeable into Class A ordinary shares on a one -for-one basis. For the years ended December 31, 2021 and 2020, Class B ordinary shares contingently issuable to EPA Holdings were evaluated and were determined not to have any dilutive impact. Additionally, Class B ordinary shares in issue were evaluated under the if-converted method for potential dilutive effects and were determined to be anti-dilutive for the years ended December 31, 2021 and 2020, and therefore were excluded from the computation of diluted earnings per shares of Class A ordinary share. As of December 31, 2021 and 2020, we had 607,176 thousand and 607,111 thousand fully diluted Class A ordinary shares outstanding, respectively. The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per Class A ordinary share for the year ended December 31, 2021 (in thousands, except per share amounts). Year Ended December 31, 2021 Numerator Consolidated net income $ 1,241,201 Less: Net income attributable to Continuing Investors Partnerships 297,321 Less: Net income attributable to Legacy Investors Partnerships and RPSFT 324,152 Net income attributable to Royalty Pharma plc - basic and diluted $ 619,728 Denominator Weighted average Class A ordinary shares outstanding - basic 414,794 Add: Dilutive effect of unvested RSUs 8 Weighted average Class A ordinary shares outstanding - diluted 414,802 Earnings per Class A ordinary share - basic $ 1.49 Earnings per Class A ordinary share - diluted $ 1.49 Prior to the IPO, our capital structure mainly included unitholder interests. We analyzed the calculation of earnings per interest for periods prior to the IPO and determined that the resultant values would not be meaningful to the users of these consolidated financial statements. Therefore, the basic and diluted earnings per share for the year ended December 31, 2020 are only applicable for the period from June 16, 2020 to December 31, 2020, which represents the period in which we had outstanding Class A ordinary shares. The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per Class A ordinary share for the year ended December 31, 2020 (in thousands, except per share amounts). Year Ended December 31, 2020 Numerator Consolidated net income $ 1,701,954 Less: Net income attributable to Continuing Investors Partnerships prior to the IPO (1) 479,842 Less: Net income attributable to Continuing Investors Partnerships subsequent to the IPO 316,993 Less: Net income attributable to Legacy Investors Partnerships and RPSFT 409,921 Net income attributable to Royalty Pharma plc - basic and diluted $ 495,198 Denominator Weighted average Class A ordinary shares outstanding - basic 375,444 Add: Dilutive effect of unvested RSUs 11 Weighted average Class A ordinary shares outstanding - diluted 375,455 Earnings per Class A ordinary share - basic $ 1.32 Earnings per Class A ordinary share - diluted $ 1.32 (1) Reflected as Net income attributable to controlling interest on the consolidated statements of operations . 123 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14. Indirect Cash Flow Adjustments to reconcile consolidated net income to net cash provided by operating activities are summarized below (in thousands). Years Ended December 31, 2021 2020 2019 Cash flow from operating activities: Consolidated net income $ 1,241,201 $ 1,701,954 $ 2,461,419 Adjustments to reconcile consolidated net income to net cash provided by operating activities: Income from financial royalty assets ( 2,065,083 ) ( 1,959,975 ) ( 1,648,837 ) Provision for changes in expected cash flows from financial royalty assets 452,842 230,839 ( 1,019,321 ) Amortization of intangible assets 22,996 23,058 23,924 Amortization of debt discount and issuance costs 20,162 11,715 12,790 Losses on derivative financial instruments 21,532 42,076 39,138 Losses/(gains) on equity securities 48,066 ( 247,073 ) ( 155,749 ) Equity in losses/(earnings) of non-consolidated affiliates 19,490 ( 44,459 ) 32,517 Distributions from non-consolidated affiliates 34,384 42,334 14,059 Loss on extinguishment of debt 358 30,272 — Share-based compensation 2,443 5,428 — Interest income accretion ( 50,896 ) ( 20,551 ) — Unrealized gains on available for sale debt securities ( 17,859 ) ( 18,600 ) — Impairment charge — 65,053 — Termination of derivative financial instruments ( 16,093 ) ( 34,952 ) — Other 4,461 9,621 ( 2,122 ) Decrease/(increase) in operating assets: Cash collected on financial royalty assets 2,315,854 2,121,923 1,934,092 Available for sale debt securities — — ( 150,000 ) Accrued royalty receivable ( 20,131 ) 370 2,471 Other receivables — — 150,000 Other royalty income receivable ( 9,012 ) ( 770 ) 7,390 Other current assets and other assets 1,857 34,986 ( 41,028 ) (Decrease)/increase in operating liabilities: Accounts payable and accrued expenses ( 4,586 ) ( 766 ) 6,496 Interest payable 15,550 42,146 — Net cash provided by operating activities $ 2,017,536 $ 2,034,629 $ 1,667,239 Non-cash investing and financing activities are summarized below (in thousands). Years Ended December 31, Supplemental Schedule of Non-cash Investing/Financing Activities: 2021 2020 2019 Receipt of contribution of investment in Legacy Investors Partnerships (Note 9) $ — $ 303,679 $ — Settlement of Epizyme forward purchase contract — 5,700 — Accrued purchase obligation - Tazverik (Note 17) — 110,000 — Repayments of long-term debt by contributions from non-controlling interest (1) — 1,103,774 — Milestone payable - Erleada (2) — 18,600 — (1) Related to the pro rata portion of RPIFT’s outstanding debt repaid by the Legacy Investors Partnerships. (2) Related to the achievement of a sales-based milestone that was not paid as of December 31, 2020 as recorded within Other current liabilities on the consolidated balance sheet. 124 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15. Accumulated Other Comprehensive Income As of December 31, 2021 and 2020, the only component of accumulated other comprehensive income related to the Unrealized gains on available for sale debt securities on the Series A Biohaven Preferred Shares. 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 Accumulated other comprehensive income were released into earnings. The components of accumulated other comprehensive income as of December 31, 2021 and 2020 are as follows (in thousands): Unrealized Gains on Available for Sale Debt Securities Unrealized Losses on Interest Rate Swaps Total Accumulated Other Comprehensive Income Balance at December 31, 2019 6,159 ( 4,066 ) 2,093 Reclassification to net income ( 10,921 ) 4,066 ( 6,855 ) Activity for the year 60,617 — 60,617 Reclassification to non-controlling interest ( 24,022 ) — ( 24,022 ) Reclassification from non-controlling interest 2,562 — 2,562 Balance at December 31, 2020 34,395 — 34,395 Reclassification to net income ( 28,481 ) — ( 28,481 ) Activity for the year 6,335 — 6,335 Reclassification from non-controlling interest 4,242 — 4,242 Balance at December 31, 2021 $ 16,491 $ — $ 16,491 The total reclassification of unrealized gains on available for sale debt securities of $ 50.9 million in the year ended December 31, 2021 is presented within Interest incom e on the consolidated statements of operations, including $ 28.5 million attributable to controlling interest noted in the table above and $ 22.4 million attributable to the non-controlling interest. The total reclassification of unrealized gains on available for sale debt securities of $ 20.6 million in the year ended December 31, 2020 is presented within Interest incom e on the consolidated statements of operations, including $ 10.9 million attributable to controlling interest noted in the table above and $ 9.6 million attributable to the non-controlling interest. 16. Related Party Transactions The Manager The Manager is the investment manager of Royalty Pharma and its subsidiaries. The Manager is an affiliate of RP Ireland, the administrator of RPIFT, RPI Intermediate FT and RPSFT. The sole member of the Manager, Pablo Legorreta, holds an interest in us and serves as our Chief Executive Officer and Chairman of the board of directors, and as a director on the board of directors of RP Holdings. In connection with the Exchange Offer Transactions (discussed in Note 1–Organization and Purpose), the Manager entered into Management Agreements with us and our subsidiaries, the Continuing Investors Partnerships, and with the Legacy Investors Partnerships. Pursuant to the Management Agreements, we pay quarterly operating and personnel expenses to the Manager or its affiliates (“Operating and Personnel Payments”) equal to 6.5 % of the Adjusted Cash Receipts (both, as defined in the Management Agreement) for such quarter and 0.25 % of the value of our security investments under GAAP as of the end of such quarter. The operating and personnel payments for Old RPI, an obligation of the Legacy Investors Partnerships as a non-controlling interest in Old RPI and for which the expense is reflected in our consolidated net income, is calculated as the greater of $ 1 million per quarter and 0.3125 % of Royalty Investments (as defined in the limited partnership agreements of the Legacy Investor Partnerships) during the previous twelve calendar months. 125 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Prior to the Exchange Date, the Manager received operating and personnel payments payable in equal quarterly installments that increased 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. After the Exchange Date, operating and personnel payments were calculated in accordance with the methodology discussed in the paragraph above. During the years ended December 31, 2021, 2020 and 2019, total operating and personnel payments incurred were $ 145.2 million, $ 112.5 million and $ 60.0 million, respectively, including the amounts attributable to Old RPI, and were recognized within General and administrative expenses on the consolidated statements of operations. Distribution Payable to Non-Controlling Interest The distribution payable to non-controlling interest represents the contractual cash flows required to be distributed based on the Legacy Investors Partnerships’ non-controlling interest in Old RPI and RPSFT’s non-controlling interest in RPCT. The distribution payable to non-controlling interest as of December 31, 2021 and 2020 included the following (in thousands). December 31, 2021 December 31, 2020 Due to Legacy Investors Partnerships $ 92,608 $ 100,047 Due to RPSFT 15,326 26,319 Total distribution payable to non-controlling interest $ 107,934 $ 126,366 Acquisition from Epizyme In November 2019, in connection with a royalty acquisition and an equity investment in Epizyme made by RPIFT, Pablo Legorreta, our Chief Executive Officer, was appointed as a director of Epizyme, for which he received, and continues to receive, compensation in cash and shares of Epizyme, all of which are and will continue to be contributed to the Manager and used to reduce costs and expenses which would otherwise be billed to us or our affiliates. We continue to hold Epizyme common stock as of December 31, 2021. Acquisition from Bristol Myers Squibb In November 2017, RPI Acquisitions, a consolidated subsidiary, entered into a purchase agreement with Bristol Myers Squibb (“BMS”) to acquire from BMS a percentage of its future royalties on worldwide sales of Onglyza, Farxiga and related diabetes products marketed by AstraZeneca (the “Purchase Agreement”). We agreed to make payments to BMS based on sales of the products over 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 (“Assignment Agreement”) with a wholly owned subsidiary of BioPharma Credit PLC (“BPCR”), an affiliate of us. We considered BPCR as a related party due to the sole member of the Manager having significant influence over BPCR’s investment manager. 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 in 2018 and completed our funding requirement, net of the assigned funding obligations, totaling $ 162.4 million in the three months ended March 31, 2020. We began to measure this financial royalty asset using the effective interest method once our installment funding obligation was completed and we received our first royalty payment in the three months ended June 30, 2020. As of December 31, 2021 and 2020, the financial royalty asset of $ 130.9 million and $ 150.6 million, respectively, included in Financial royalty assets, net on the consolidated balance sheets represents only our right to the future payment streams acquired from BMS. 126 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Other transactions Henry Fernandez, the lead independent director of our board of directors, serves as the chairman and chief executive officer of MSCI, Inc (“MSCI”). On April 16, 2021, we entered into an agreement with MSCI with an initial term of seven years to assist MSCI in the design of a classification framework and index methodologies in order to expand MSCI’s thematic index suite with the launch of new indexes. In return, we will receive a percentage of MSCI’s revenues from those indexes. No amounts were due from MSCI as of December 31, 2021. The financial statement impact associated with this transaction was not material for the year ended December 31, 2021. In the year ended December 31, 2020, we reimbursed Pablo Legorreta approximately $ 1.0 million for the cost of purchasing and donating ventilators to hospitals on behalf of Royalty Pharma. In connection with the Exchange Offer Transactions, we acquired the Legacy SLP Interest from the Continuing Investors Partnerships in exchange for issuing shares in our subsidiary. As a result, we became a special limited partner in the Legacy Investors Partnerships. The Legacy Investors Partnerships own a non-controlling interest in Old RPI. Refer to Note 9–Non-Consolidated Affiliates for additional discussion. RPIFT owns 27,210 limited partnership interests in the Continuing Investors Partnership whose only substantive operations are their investment in our subsidiaries. The total investment of $ 4.3 million is recorded as treasury interests, of which $ 1.6 million and $ 1.9 million are held by non-controlling interest as of December 31, 2021 and 2020, respectively. Based on its ownership percentage of RP Holdings relative to the Company, each Continuing Investor Partnership pays a pro rata portion of any costs and expenses in connection with the contemplation of, formation of, listing and ongoing operation of us and any of our subsidiaries, including any third-party expenses of managing us and any of our subsidiaries, such as accounting, audit, legal, reporting, compliance, administration (including directors’ fees), financial advisory, consulting, investor relations and insurance expenses relating to our affairs and those of any subsidiary. 17. 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 us to date and we believe that the likelihood of such proceedings taking place in the future is remote. On June 2, 2021, we announced a long-term strategic funding partnership with MorphoSys to support MorphoSys’ acquisition of Constellation, which closed on July 15, 2021. As part of the funding agreement, we agreed to make additional milestone payments of up to $ 150.0 million and provide up to $ 350.0 million of Development Funding Bonds, which MorphoSys may draw over a one-year period from the close of its acquisition of Constellation. MorphoSys is required to draw a minimum of $ 150.0 million, for which we have recognized the Development Funding Bond Forward within Available for sale debt securities on the consolidated balance sheet as of December 31, 2021 (See Note 3–Available for Sale Debt Securities for additional discussion). Once drawn, we expect to receive a return of 2.2 times the amount funded on the Development Funding Bonds payable on a quarterly basis over nine years , with the first payment beginning two years after the funding. As of December 31, 2021, MorphoSys has not drawn any amount under the Development Funding Bonds. On August 7, 2020, we entered into a funding agreement with Biohaven, including the Series B Biohaven Preferred Share Agreement, to fund the development of zavegepant and the commercialization of Nurtec ODT in exchange for royalties and success-based milestones. Pursuant to the Series B Biohaven Preferred Share Agreement, we agreed to provide further support for the ongoing launch of Nurtec ODT with the purchase of committed, non-contingent Commercial Launch Preferred Equity for a total of $ 200.0 million payable on a quarterly basis between March 31, 2021 and December 31, 2024. In return, Biohaven will be required to redeem the Series B Biohaven Preferred Shares in a series of equal fixed quarterly payments between March 31, 2025 and December 31, 2030. During the three months ended March 30, 2021, we began purchasing the Series B Biohaven Preferred Shares. We have a remaining commitment of $ 129.6 million under the Commercial Launch Preferred Equity, for which we have recognized the Series B Forwards within Available for sale debt securities on the consolidated balance sheet as of December 31, 2021. See Note 3–Available for Sale Debt Securities for additional discussion. 127 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS In November 2019, RPIFT agreed to pay $ 330.0 million to purchase Eisai’s royalties on future worldwide sales of Tazverik, 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 our agreement with Eisai, we acquired Eisai’s 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 second $ 110.0 million tranche in November 2020. On November 4, 2021, we funded the final $ 110.0 million tranche. We have commitments to advance funds to counterparties through our investment in the Avillion Entities and R&D arrangements. Please refer to Note 9–Non-Consolidated Affiliates and Note 10–Research & Development (“R&D”) Funding Expense, 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 16–Related Party Transactions, which are variable and primarily based on cash receipts. Legal Proceedings We are a party to legal actions with respect to a variety of matters in the ordinary course of business. Some of these proceedings may be based on complex claims involving substantial uncertainties and unascertainable damages. Unless otherwise noted, it is not possible to determine the probability of loss or estimate damages, and therefore we have not established accruals for any of these proceedings in our consolidated balance sheets as of December 31, 2021 and 2020. When we determine that a loss is both probable and reasonably estimable, we record a liability, and, if the liability is material, we disclose the amount of the liability reserved. We do not believe the outcome of any existing legal proceedings to which we are a party, either individually or in the aggregate, will adversely affect our business, financial condition or results of operations. 18. Subsequent Events In January 2022, we acquired a royalty interest in aficamten from Cytokinetics, Incorporated (“Cytokinetics”) for $ 150.0 million, comprised of an upfront payment of $ 50 million and two additional $ 50 million payments which are conditional upon the initiation of potential pivotal clinical trials for obstructive hypertrophic cardiomyopathy and nonobstructive hypertrophic cardiomyopathy, respectively. Additionally, we will provide Cytokinetics long-term capital of up to $ 300 million (“Cytokinetics Commercial Launch Funding”) to support further development of aficamten and potential commercialization of omecamtiv mecarbil. The Cytokinetics Commercial Launch Funding is available in five tranches, including an initial tranche of $ 50 million funded upon closing and four additional tranches in the aggregate amount of $ 250 million upon the occurrence of certain regulatory and clinical development milestones. 128 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.