Royalty Pharma plc 10-K

Item 8. Financial Statements and Supplementary Data ROYALTY PHARMA PLC Index to Audited Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 88 Consolidated Balance Sheets as of December 31, 2022 and 2021 91 Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020 92 Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021 and 2020 93 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2022, 2021 and 2020 94 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020 96 Notes to Consolidated Financial Statements 97 87 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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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, 2023 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. 88 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 $14,184,425 thousand as of December 31, 2022. For the year ended December 31, 2022, the Company recognized income from financial royalty assets of $2,125,096 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 We obtained an understanding, evaluated the design and tested the operating effectiveness of controls related to the valuation of financial royalty assets and related interest income. This included testing controls over management’s review of the significant assumptions and other inputs used in estimating the royalty duration and product growth rates. 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 LLP We have served as the Company’s auditor since 2022. New York, New York February 15, 2023 89 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 internal control over financial reporting as of December 31, 2022, 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, Royalty Pharma plc (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, 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, 2022 and 2021, 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, 2022, and the related notes and our report dated February 15, 2023 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 LLP New York, New York February 15, 2023 90 ROYALTY PHARMA PLC CONSOLIDATED BALANCE SHEETS (In thousands, except par value) As of December 31, 2022 2021 Assets Current assets Cash and cash equivalents $ 1,710,751 $ 1,541,048 Marketable securities 24,421 581,872 Financial royalty assets 691,319 614,351 Accrued royalty receivable 16,830 53,286 Available for sale debt securities 1,300 66,000 Other royalty income receivable 19,767 15,023 Other current assets 90,520 6,631 Total current assets 2,554,908 2,878,211 Financial royalty assets, net 13,493,106 13,718,245 Intangible royalty assets, net — 5,670 Equity securities 112,348 269,800 Available for sale debt securities 226,300 204,400 Equity method investments 397,175 435,394 Other assets 29,629 4,145 Total assets $ 16,813,466 $ 17,515,865 Liabilities and shareholders’ equity Current liabilities Distributions payable to legacy non-controlling interests $ 94,803 $ 107,934 Accounts payable and accrued expenses 7,906 5,620 Interest payable 54,162 57,696 Current portion of long-term debt 997,512 — Other current liabilities 12,400 — Total current liabilities 1,166,783 171,250 Long-term debt 6,118,810 7,096,070 Other liabilities 2,500 — Total liabilities 7,288,093 7,267,320 Commitments and contingencies Shareholders’ equity Class A ordinary shares, $ 0.0001 par value; 443,166 and 432,963 issued and outstanding, respectively 44 43 Class B ordinary shares, $ 0.000001 par value; 164,058 and 174,213 issued and outstanding, respectively — — Class R redeemable shares, £ 1 par value; 50 and 50 issued and outstanding, respectively 63 63 Deferred shares, $ 0.000001 par value, 371,325 and 361,170 issued and outstanding, respectively — — Additional paid-in capital 3,666,160 3,507,533 Retained earnings 1,964,689 2,255,179 Non-controlling interests 3,897,223 4,471,951 Accumulated other comprehensive income — 16,491 Treasury interests ( 2,806 ) ( 2,715 ) Total shareholders’ equity 9,525,373 10,248,545 Total liabilities and shareholders’ equity $ 16,813,466 $ 17,515,865 See accompanying notes to these consolidated financial statements. 91 ROYALTY PHARMA PLC CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Years Ended December 31, 2022 2021 2020 Income and other revenues Income from financial royalty assets $ 2,125,096 $ 2,065,083 $ 1,959,975 Revenue from intangible royalty assets 37,484 171,248 143,382 Other royalty income 74,635 53,132 18,996 Total income and other revenues 2,237,215 2,289,463 2,122,353 Operating expenses Provision for changes in expected cash flows from financial royalty assets 904,244 452,842 230,839 Research and development funding expense 177,106 200,084 26,289 Amortization of intangible assets 5,670 22,996 23,058 General and administrative expenses 227,303 182,826 181,715 Financial royalty asset impairment 615,827 — 65,053 Total operating expenses, net 1,930,150 858,748 526,954 Operating income 307,065 1,430,715 1,595,399 Other expense/(income) Equity in losses/(earnings) of equity method investees 8,973 19,490 ( 44,459 ) Interest expense 187,961 166,142 157,059 (Gains)/losses on derivative financial instruments ( 96,610 ) 21,532 42,076 Losses/(gains) on equity securities 33,442 48,066 ( 247,073 ) Losses/(gains) on available for sale debt securities 6,815 ( 17,859 ) ( 18,600 ) Interest income ( 78,335 ) ( 53,535 ) ( 28,379 ) Other non-operating expense, net 14,755 5,678 32,821 Total other expenses/(income), net 77,001 189,514 ( 106,555 ) Consolidated net income before tax 230,064 1,241,201 1,701,954 Income tax expense — — — Consolidated net income 230,064 1,241,201 1,701,954 Net income attributable to non-controlling interests 187,232 621,473 726,914 Net income attributable to Royalty Pharma plc $ 42,832 $ 619,728 $ 975,040 Earnings per Class A ordinary share (1): Basic $ 0.10 $ 1.49 $ 1.32 Diluted $ 0.10 $ 1.49 $ 1.32 Weighted average Class A ordinary shares outstanding (1): Basic 437,963 414,794 375,444 Diluted 437,972 414,802 375,455 (1) In 2020, amounts 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”). See Note 13–Earnings per Share. See accompanying notes to these consolidated financial statements. 92 ROYALTY PHARMA PLC CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Years Ended December 31, 2022 2021 2020 Consolidated net income $ 230,064 $ 1,241,201 $ 1,701,954 Changes in other comprehensive income/(loss): Reclassification of loss on interest rate swaps — — 4,066 Unrealized gains on available for sale debt securities 24,000 11,600 83,120 Reclassification of unrealized gains on available for sale debt securities ( 53,432 ) ( 50,896 ) ( 20,551 ) Other comprehensive (loss)/income $ ( 29,432 ) $ ( 39,296 ) $ 66,635 Comprehensive income $ 200,632 $ 1,201,905 $ 1,768,589 Comprehensive income attributable to non-controlling interests 175,418 604,323 739,787 Comprehensive income attributable to Royalty Pharma plc $ 25,214 $ 597,582 $ 1,028,802 See accompanying notes to these consolidated financial statements. 93 ROYALTY PHARMA PLC CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY ( In thousands, except for share amounts ) 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 Non-Controlling Interests Treasury Interests Total Equity Shares Amount Shares Amount Shares Amount Shares Amount 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. 94 ROYALTY PHARMA PLC CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY ( In thousands, except for share amounts ) Class A Ordinary Shares Class B Ordinary Shares Class R Redeemable Shares Deferred Shares Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income Non-Controlling Interests Treasury Interests Total Equity Shares Amount Shares Amount Shares Amount Shares Amount Balance at December 31, 2020 388,135 $ 39 218,976 $ — 50 $ 63 316,407 $ — $ 2,865,964 $ 1,920,635 $ 34,395 $ 5,077,036 $ ( 2,317 ) $ 9,895,815 Contributions — — — — — — — — — — — 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 Contributions — — — — — — — — — — — 11,596 — 11,596 Distributions — — — — — — — — — — — ( 604,248 ) — ( 604,248 ) Dividends ($ 0.76 per class A ordinary share) — — — — — — — — — ( 333,322 ) — — — ( 333,322 ) Other exchanges 10,155 1 ( 10,155 ) — — — 10,155 — 156,457 — 1,127 ( 157,494 ) ( 91 ) — Share-based compensation and related issuances of Class A ordinary shares 48 — — — — — — — 2,170 — — — — 2,170 Net income — — — — — — — — — 42,832 — 187,232 — 230,064 Other comprehensive income/(loss): Unrealized gains on available for sale debt securities — — — — — — — — — — 14,262 9,738 — 24,000 Reclassification of unrealized gains on available for sale debt securities — — — — — — — — — — ( 31,880 ) ( 21,552 ) — ( 53,432 ) Balance at December 31, 2022 443,166 $ 44 164,058 $ — 50 $ 63 371,325 $ — $ 3,666,160 $ 1,964,689 $ — $ 3,897,223 $ ( 2,806 ) $ 9,525,373 See accompanying notes to these consolidated financial statements. 95 ROYALTY PHARMA PLC CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31, 2022 2021 2020 Cash flows from operating activities: Cash collections from financial royalty assets $ 2,507,236 $ 2,315,854 $ 2,121,923 Cash collections from intangible royalty assets 72,943 151,158 143,753 Other royalty cash collections 69,891 44,123 18,305 Distributions from equity method investees 39,142 34,384 42,334 Interest received 24,982 3,135 7,704 Derivative collateral received — 34,660 45,252 Derivative collateral posted — ( 34,660 ) — Termination payments on derivative instruments — ( 16,093 ) ( 35,448 ) Development-stage funding payments - ongoing ( 2,106 ) ( 6,876 ) ( 20,479 ) Development-stage funding payments - upfront and milestone ( 175,000 ) ( 193,208 ) ( 5,810 ) Payments for operating and professional costs ( 222,969 ) ( 184,511 ) ( 179,709 ) Interest paid ( 170,139 ) ( 130,430 ) ( 103,196 ) Net cash provided by operating activities 2,143,980 2,017,536 2,034,629 Cash flows from investing activities: Distributions from equity method investees — 523 15,084 Investments in equity method investees ( 9,896 ) ( 34,855 ) ( 40,155 ) Purchases of equity securities ( 87,785 ) ( 135,134 ) ( 50,000 ) Proceeds from equity securities 211,158 115,957 384,840 Purchases of available for sale debt securities ( 479,559 ) ( 70,441 ) — Proceeds from available for sale debt securities 542,044 62,500 3,000 Purchases of marketable securities ( 234,869 ) ( 1,196,579 ) ( 1,705,283 ) Proceeds from sales and maturities of marketable securities 792,341 1,597,851 815,440 Acquisitions of financial royalty assets ( 1,741,640 ) ( 2,191,502 ) ( 2,182,246 ) Acquisitions of other financial assets ( 21,215 ) — — Milestone payments — ( 18,600 ) — Net cash used in investing activities ( 1,029,421 ) ( 1,870,280 ) ( 2,759,320 ) Cash flows from financing activities: Distributions to shareholders/unitholders — — ( 285,353 ) Distributions to legacy non-controlling interests - royalty receipts ( 441,963 ) ( 479,604 ) ( 543,952 ) Distributions to legacy non-controlling interests - other ( 31,301 ) ( 20,367 ) ( 67,654 ) Distributions to continuing non-controlling interests ( 144,115 ) ( 133,433 ) ( 113,481 ) Dividends to shareholders ( 333,322 ) ( 285,184 ) ( 112,490 ) Contributions from legacy non-controlling interests - R&D 1,059 7,339 8,482 Contributions from non-controlling interests - other 6,133 36,874 58,957 Scheduled repayments of long-term debt — — ( 94,200 ) 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 ( 1,347 ) ( 13,046 ) ( 46,715 ) Proceeds from issuance of Class A ordinary shares upon IPO, net of offering costs — — 1,908,744 Net cash (used in)/provided by financing activities ( 944,856 ) 385,112 1,487,172 Net change in cash and cash equivalents 169,703 532,368 762,481 Cash and cash equivalents, beginning of year 1,541,048 1,008,680 246,199 Cash and cash equivalents, end of year $ 1,710,751 $ 1,541,048 $ 1,008,680 See accompanying notes to these consolidated financial statements. 96 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Purpose Royalty Pharma plc is a public limited company incorporated under the laws of England and Wales that was created to facilitate the IPO of our Class A ordinary shares. 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, and is the successor to Royalty Pharma Investments, an Irish unit trust (“Old RPI”). 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. Prior to the Exchange Offer (defined below), Old RPI was owned by various partnerships (the “Legacy Investors Partnerships”). RP Management, LLC (the “Manager”), a Delaware limited liability company, is responsible for our management, including our day-to-day operations, pursuant to advisory and management agreements (collectively, the “Management Agreement”) . “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 Exchange Offer (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 Exchange Offer, “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. Exchange Offer Transactions We consummated an exchange offer on February 11, 2020 (the “Exchange Offer”) to facilitate the IPO. Through the Exchange Offer, investors which represented 82 % of the aggregate limited partnership in the Legacy Investors Partnerships exchanged their limited partnership interests in the Legacy Investors Partnerships for limited partnership interests in the Continuing Investors Partnerships. The Exchange Offer together with (i) the concurrent incurrence of indebtedness under senior credit facilities and (ii) the issuance of additional interests in Continuing Investors Partnerships to satisfy performance payments payable in respect of assets acquired prior to the date of the IPO are referred to as the “Exchange Offer Transactions.” As a result of the Exchange Offer Transactions, we own indirectly an 82 % economic interest in Old RPI through our subsidiary RPI 2019 Intermediate Finance Trust, a Delaware statutory trust (“RPI Intermediate FT”). We are entitled to 82 % of the economics of Old RPI’s wholly-owned subsidiar y RPI Finance Trust, a Delaware statutory trust (“RPIFT”) , and, 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 date of the Exchange Offer until the expiration of the Legacy Investors Partnerships’ investment period on June 30, 2020 (the “Legacy Date”), the Legacy Investors Partnerships could 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. 97 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As part of the Exchange Offer, the Legacy Investors Partnerships and RPI Intermediate FT entered into senior 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 senior 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. 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 100 % of RP Holdings Class A Interests. Upon consummation of the IPO, certain of the Continuing Investors agreed to exchange, according 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. Refer to Note 12–Shareholders’ Equity for additional information. 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”). 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 COVID-19 pandemic has not had a material impact on our results of operations and liquidity and we do not believe it is reasonably likely to in the future. Basis of consolidation The 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 interests 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 Old RPI both before and after the date of the Exchange Offer, Royalty Pharma recognized Old RPI’s assets and liabilities at the carrying value reflected on Old RPI’s balance sheet as of the date of the Exchange Offer. In 2022, we became an indirect owner of an 82 % economic interest in RPI ICAV, which previously was owned directly by Old RPI. 98 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS We report four non-controlling interests: (1) the Legacy Investors Partnerships’ ownership of approximately 18 % in Old RPI and RPI ICAV and (2) a de minimis interest in RPCT held by RPSFT (together, the “legacy non-controlling interests”). The legacy non-controlling interests are the only historical non-controlling interests existing prior to our IPO. Additionally, following the consummation of our IPO, we also report non-controlling interests related to (3) the Continuing Investors Partnerships’ ownership in RP Holdings through their ownership of RP Holdings Class B Interests and (4) RPI EPA Holdings, LP’s (“EPA Holdings”) ownership of the RP Holdings’ Class C ordinary share (the “RP Holdings Class C Special Interest”). The Continuing Investors Partnerships are referred to as the “continuing non-controlling interests.” Income will not be allocated to EPA Holdings until certain performance conditions are met. All intercompany transactions and balances have been eliminated in consolidation. Reclassification Certain prior period amounts have been reclassified to conform to the current period presentation. Concentrations of credit risk Financial instruments that subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, available for sale debt securities, financial royalty assets, derivatives and receivables. Our cash management and investment policy limits investment instruments to investment-grade securities with the objective to preserve capital and to maintain liquidity until the funds are needed for operations. Our cash and cash equivalents and marketable securities balances as of December 31, 2022 and 2021 were held with State Street , Bank of America, US Bank and Scotiabank . Our primary operating accounts significantly exceed the Federal Deposit Insurance Corporation limits. The majority of our financial royalty assets and receivables arise from contractual royalty agreements that entitle us to royalties on the sales of underlying biopharmaceutical products in the United States, Europe and the rest of the world, with concentrations of credit risk limited due to the broad range of marketers responsible for paying royalties to us and the variety of geographies from which our royalties on product sales are derived. The products in which we hold royalties are marketed by leading industry participants, including, among others, Vertex, Biogen, AbbVie, Johnson & Johnson, Merck & Co, Pfizer, Astellas, Novartis, and Gilead. As of December 31, 2022 and 2021, Vertex, as the marketer and payor of our royalties on the cystic fibrosis franchise, accounted for 31 % and 32 % of our current portion of financial royalty assets, respectively, and represented the largest individual marketer and payor of our royalties. 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, evaluate financial performance and make 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 and passive 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 . 99 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 royalty assets. The cost of an intangible royalty asset is amortized over the expected life of the asset on a straight-line basis . 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 . 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 recalculated 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 periodic 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 accrued interest income 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 our financial royalty assets at amortized cost 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 to derive annual sales projections for each financial royalty asset over the periods for which we are entitled to royalties or milestones. These forecasts are based on market research that analyzes factors such as growth in global economies, industry trends and product life cycles. For the majority of the portfolio of financial royalty assets, management utilizes statistical curves to project future sales for a portion of the royalty duration when sell-side equity research coverage ends or when estimates are not available for the duration of the royalty. The statistical curves are modelled from a combination of historical trends and available sell-side equity research analyst consensus sales estimates . In limited cases when the statistical curve is not used, management may develop and apply growth rate estimates from existing sell-side equity research analysts’ consensus sales forecasts to project future sales for products. Based o n 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 . 100 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • Commercial performance. The approval of a product for use in new indications can extend the date through which we are entitled to royalties or milestones on that product. For certain financial royalty assets, such as the cystic fibrosis franchise, we are entitled to royalties on approved combination products and may be entitled to royalties on future combination products, which, once approved, create new cash flow streams which were not initially contemplated and for which sales were previously not reflected in expected future cash flows. We generally do not recognize income from, or forecast sales for, unapproved products 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. • Royalty duration. The duration of a royalty can be based on a variety of factors, such as regulatory and marketing approval dates, patent expiration dates, the number of years from first commercial sale, the first date of manufacture of the patent-protected product, the entry of generics or a contractual date arising from litigation, which are all impacted by the point in time in the product’s life cycle at which we acquire the royalty. Royalty duration varies by geography as the United States, European Union and other jurisdictions may be subject to different country-specific patent protection terms or exclusivity based on contractual terms. Products may be covered by a number of patents and, for products whose royalty term is linked to the existence of valid patents, management is required to make judgments about the patent providing the strongest patent protection to align the period over which management forecasts expected future cash flows to the royalty term. It is common for the latest expiring patent in effect at the date we acquire a 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, generally projected through statistical curves, (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 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. 101 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 provision expense 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 . 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, resulting in non-cash provision income recorded through the Provision for changes in expected cash flows from financial royalty assets on the consolidated statements of operations. 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 sheets, are accompanied by corresponding provision income or expense. 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 . 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 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 on the consolidated balance sheets. Any subsequent provision 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 . 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. An acquisition of a royalty on a development-stage product classified as a financial royalty asset is generally placed in non-accrual status. In these cases, the financial royalty asset is held at cost and no income is recognized until we are able to reliably estimate expected cash flows, generally when the product receives regulatory approval. We evaluate such financial royalty assets held at cost for impairment based on, among other factors, a review of development progress and publicly available information around regulatory discussions , clinical trial results and approval status. An impairment loss is recognized if, based on available information, it is prob able that we will be unable to recover the carrying value of the financial royalty asset held at cost, 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. 102 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Revenue from intangible royalty assets We earn royalties on sales by our licensees of Januvia and Janumet (“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. 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 forecast ed 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. We assess all milestone payments to determine whether we must account for these arrangements as derivatives instruments under ASC 815 – Derivatives and Hedging . 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 and Fair value measurements Our financial instruments consist primarily of cash and cash equivalents, marketable securities, equity securities, derivatives, available for sale debt securities, royalty interests and long-term debt. Cash and cash equivalents, marketable securities, equity securities, derivatives, available for sale debt securities and certain royalty interests are reported at their respective fair values on our consolidated balance sheets. Outstanding borrowings and non-current financial royalty assets are reported at their amortized costs on our consolidated balance sheets, for which fair values are disclosed. The remaining financial instruments are reported on our consolidated balance sheets at amounts that approximate fair values. For financial instruments 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. We determine the fair value of assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value as follows: • Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. • Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly. • Level 3: Prices or valuation that require inputs that are both significant to the fair value measurement and unobservable. 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 primarily consist of investments in publicly traded equity securities. The equity securities are measured and recorded at fair value with unrealized gains and losses recorded in earnings. Investments classified as available for sale debt securities are recorded at fair value. We may elect to apply the fair value option for available for sale debt securities where the fair value option better aligns with the economics of the investment. Upon such election, the entire investment is measured at fair value on a recurring basis, with movements in fair value recognized in earnings. For available for sale debt securities for which we did not elect the fair value option, the unrealized change in fair value is recorded within in Accumulated other comprehensive income (“AOCI”) and is reclassified to earnings as 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 . Derivatives All derivatives are measured at fair value on the consolidated balance sheets with movements in fair value recognized in earnings. 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 or as equity securities for which we have elected the fair value option with the movements in fair value of the equity securities recognized within Losses/(gains) on equity securities in the consolidated statements of operations. 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 equity method investees in the consolidated statements of operations. The investment is reflected as Equity method investments on the consolidated balance sheets . 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 . 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. If these conditions are not met, we may record the funded amounts as a financial royalty asset. We may fund R&D upfront or over time as the underlying products undergo clinical trials. 104 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 o f contractual criteria for pr oducts 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 as 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. income taxes with respect to effectively connected income for the years presented in the consolidated financial statements . We have funding arrangements in place where our counterparties have drawn on capital or are allowed to draw on capital over a prescribed period of time. Income from these funding arrangements are subject to U.S. taxation and we record a provision for U.S. income taxes in accordance with ASC 740, Income Taxes, with respect to this income . Additionally, we entered into an arrangement with MSCI during 2021 as discussed in Note 16–Related Party Transactions that will be subject to U.S. taxation when we begin to recognize revenue . At that time, we will record a provision for U.S. income taxes in accordance with ASC 740, Income Taxes , with respect to revenue from the MSCI 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 2019 ICAV, 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 . We are also subject to the U.K.’s “controlled foreign companies” rules (the “U.K. CFC Rules”). The U.K. CFC Rules, broadly, applies to 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 2019 ICAV (which is an Irish tax resident) and Old RPI (which is an Irish tax resident and is held indirectly by us through our participation in RP Holdings), are considered Controlled Foreign Companies for U.K. tax purposes. We are therefore required to apply the U.K. CFC Rules in respect of our direct and indirect interests in these entities on an ongoing basis. We do not expect material tax charges to arise under the U.K. CFC Rules with respect to our direct and indirect interests in these entities and we therefore do not record a provision for U.K. income taxes related to this matter . Other taxation matters We are subject to U.S. federal withholding tax on certain fixed or determinable annual or periodic 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 subject to any U.S. withholding taxes on U.S.-source royalty payments. 105 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Earnings per share Basic earnings per share (“EPS”) is calculated by dividing net income attributable to us by the weighted average number of Class A ordinary shares outstanding during the period. Diluted EPS is calculated by dividing net income attributable to us by the weighted average number of Class A ordinary shares outstanding during the period, including the number of Class A ordinary shares that would have been outstanding if the potentially dilutive securities had been issued. Our Class B ordinary shares, Class R redeemable shares and deferred shares do not share in the earnings or losses attributable to us and are therefore not participating securities. Our outstanding Class B ordinary shares are, however, considered potentially dilutive shares of Class A ordinary shares because Class B ordinary shares, together with the related RP Holdings Class B Interests, are exchangeable into Class A ordinary shares on a one -for-one basis. Potentially dilutive securities also include Class B ordinary shares contingently issuable to EPA Holdings related to Equity Performance Awards and unvested RSUs issued under our 2020 Independent Director Equity Incentive Plan. We 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 have been presented for any period prior to that date. 3. Available for Sale Debt Securities Cytokinetics Commercial Launch Funding On January 7, 2022, we entered into a long-term funding agreement with Cytokinetics, Incorporated (“Cytokinetics”) to support further development of aficamten and potential commercialization of omecamtiv mecarbil, both development-stage products. During 2022, we amended the funding agreement to increase the required draw amount, extend the draw period and modify the return for the second and third tranches. As part of the funding agreement, we agreed to provide capital (“Cytokinetics Commercial Launch Funding”) of up to $ 300 million, which is comprised of five tranches, including an initial tranche of $ 50 million that was funded upon closing. Cytokinetics is required to draw $ 50 million if a certain contingency is met and has the option to draw the remaining $ 200 million upon the occurrence of certain regulatory and clinical development milestones (“Cytokinetics Funding Commitments”). Each tranche has an interest-free and payment-free period of six calendar quarters, followed by 34 calendar quarters of installment re-payments totaling 1.9 times the amount drawn, except for the second and third tranches, which each total 2.0 times the amount drawn. As of December 31, 2022, we expect $ 125 million of the optional $ 200 million to remain available under the Cytokinetics Commercial Launch Funding due to the likelihood that certain regulatory milestones will not be met by March 31, 2023. We elected the fair value option to account for the Cytokinetics Commercial Launch Funding, recorded within Available for sale debt securities on the consolidated balance sheets, as it most accurately reflects the nature of the funding arrangement. The Cytokinetics Funding Commitments, which include options and forwards over the subsequent tranches, are recognized at fair value within Other liabilities as of December 31, 2022 on the consolidated balance sheets. The changes in the fair value of the funded Cytokinetics Commercial Launch Funding and the Cytokinetics Funding Commitments are recorded within Losses/(gains) on available for sale debt securities in the consolidated statements of operations. 106 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 its acquisition of Constellation Pharmaceuticals, Inc. which closed on July 15, 2021. As part of the funding agreement, we agreed to provide MorphoSys up to $ 350 million of capital (the “Development Funding Bonds”), of which MorphoSys was required to draw a minimum of $ 150 million. Our commitment to fund at least $ 150 million of the Development Funding Bonds was recognized as the Development Funding Bond Forward as of December 31, 2021. In September 2022, we funded $ 300 million of the Development Funding Bonds, which represents additional funding of $ 150 million above the minimum funding commitment (“Additional Funding”) and the Development Funding Bond Forward was settled at the same time. 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 in the fourth quarter of 2024. As of December 31, 2022, we have no remaining funding commitment under the Development Funding Bonds. We elected the fair value option to account for the funded amount of the Development Funding Bonds and the Development Funding Bond Forward as it most accurately reflects the nature of the instruments. The funded amount of the Development Funding Bonds and the Development Funding Bond Forward are recorded within Available for sale debt securities on the consolidated balance sheets. The changes in the fair values of the funded amount of the Development Funding Bonds and the Development Funding Bond Forward are recorded within Losses/(gains) on available for sale debt securities in the consolidated statements of operations. Biohaven Preferred Shares Series A Biohaven Preferred Shares On April 5, 2019, RPIFT purchased 2,495 Series A Biohaven Preferred Shares from Biohaven Pharmaceutical Holding Company Ltd (“Biohaven”) at a price of $ 50,100 per preferred share, for a total of $ 125 million. The approval of Nurtec ODT by the U.S. Food and Drug Administration (“FDA”) in February 2020 resulted in a payment due to us of two times the original purchase price of the Series A Biohaven Preferred Shares beginning in the first quarter of 2021 through the fourth quarter of 2024. In the first quarter of 2021, we began receiving payments of $ 15.6 million from the quarterly redemption of the Series A Biohaven Preferred Shares. The Series A Biohaven Preferred Shares were classified as Available for sale debt securities on the consolidated balance sheet as of December 31, 2021. The unrealized changes in the fair value of the Series A Biohaven Preferred Shares were recorded within Unrealized gains on available for sale debt securities in the consolidated statements of comprehensive income. In 2022, 2021 and 2020, $ 53.4 million, $ 50.9 million and $ 20.6 million of unrealized gains were reclassified from other comprehensive income to Interest income on the consolidated statements of operations, respectively. Series B Biohaven Preferred Shares On August 7, 2020, we entered into the Series B Biohaven Preferred Share Purchase Agreement (“Series B Biohaven Preferred Share Agreement”) with Biohaven where we committed to acquire 3,992 shares of Series B Biohaven Preferred Shares at a price of $ 50,100 per preferred share (the “Commercial Launch Preferred Equity”), for a total of $ 200 million payable on a quarterly basis between the first quarter of 2021 and the fourth quarter of 2024. Our commitment to purchase the Series B Biohaven Preferred Shares was recognized as the Series B Forwards. We elected the fair value option to account for the Series B Biohaven Preferred Shares and the Series B Forwards, which were recorded within Available for sale debt securities on the consolidated balance sheet as of December 31, 2021. We believe the fair value option most accurately reflects the nature of these instruments. The changes in fair value of the Series B Biohaven Preferred Shares and Series B Forwards were recorded within Losses/(gains) on available for sale debt securities in the consolidated statements of operations. In 2022, 2021 and 2020, we recognized gains of $ 122.5 million, $ 13.5 million and $ 18.6 million, respectively, related to Series B Biohaven Preferred Shares within Losses/(gains) on available for sale debt securities in the consolidated statements of operations. 107 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS On October 3, 2022, Pfizer Inc. (“Pfizer”) acquired Biohaven, which was a change of control event that accelerated the issuance of all unissued Series B Biohaven Preferred Shares and the redemption of all outstanding Series A Biohaven Preferred Shares and Series B Biohaven Preferred Shares. We purchased all remaining unissued Series B Biohaven Preferred Shares simultaneously with the redemption of all outstanding Series B Biohaven Preferred Shares at a price equal to approximately 1.8 times the original purchase price. The Series A Biohaven Preferred Shares were redeemed at a price equal to two times the original purchase price. As of December 31, 2022, we no longer hold any Series A Biohaven Preferred Shares or Series B Biohaven Preferred Shares. The table below summarizes our available for sale debt securities recorded at fair value as of December 31, 2022 and 2021 (in thousands): Cost Unrealized (Losses)/Gains Fair Value Current Assets Non-Current Assets Current Liabilities Non-Current Liabilities Total As of December 31, 2022 Debt securities (1) $ 359,400 $ ( 131,800 ) $ 227,600 $ 1,300 $ 226,300 $ — $ — $ 227,600 Funding commitments (2) ( 9,400 ) 6,900 ( 2,500 ) — — ( 2,500 ) ( 2,500 ) Total available for sale debt securities $ 350,000 $ ( 124,900 ) $ 225,100 $ 1,300 $ 226,300 $ — $ ( 2,500 ) $ 225,100 As of December 31, 2021 Debt securities (3) $ 204,509 $ 49,191 $ 253,700 $ 66,000 $ 187,700 $ — $ — $ 253,700 Forwards (4) — 16,700 16,700 — 16,700 — — 16,700 Total available for sale debt securities $ 204,509 $ 65,891 $ 270,400 $ 66,000 $ 204,400 $ — $ — $ 270,400 (1) The cost associated with the funded Cytokinetics Commercial Launch Funding reflects the fair value on the purchase date. The cost of the Development Funding Bonds represents the amounts funded. (2) The cost associated with the Cytokinetics Funding Commitments represents the fair value on the purchase date. (3) The cost for the Series A Biohaven Preferred Shares represents amortized cost. The cost for the Series B Biohaven Preferred Shares represents the amounts paid to purchase the instruments. These instruments were fully redeemed during 2022. (4) There are no costs associated with the forwards. 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. Milestone Acceleration Option On August 7, 2020, we entered into an expanded funding agreement with Biohaven, which included the Series B Biohaven Preferred Share Agreement, to fund the development of zavegepant and the commercialization of Nurtec ODT in exchange for royalties and success-based milestones payable over time. Upon a change of control event, we have the option to cause Biohaven to accelerate the payment of zavegepant milestone payments, if triggered, in a lump sum amount (“Milestone Acceleration Option”). The Milestone Acceleration Option is an embedded derivative instrument for which the associated fair value was not material prior to the second quarter of 2022, when Pfizer announced its intended acquisition of Biohaven. On October 3, 2022, Pfizer acquired Biohaven and we elected to accelerate the zavegepant success-based milestone payments, if triggered, in a lump sum amount. As of December 31, 2022, the fair value of the Milestone Acceleration Option was $ 96.6 million, of which $ 86.2 million was recorded within Other current assets and $ 10.5 million was recorded within Other assets on the consolidated balance sheets. 108 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 had collateral requirements and were not designated as hedge instruments. We paid $ 16.1 million in July 2021 to terminate our treasury rate lock contracts in connection with the issuance of the 2021 Notes. 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. We did not enter into any interest rate swaps subsequent to the February 2020 termination discussed above. 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 in exchange 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. We recorded the put option as a forward purchase contract as of December 31, 2019. The exercise of the put option was settled in February 2020. As of December 31, 2021, the fair value of the warrant was immaterial. The warrant remained unexercised and was terminated upon Ipsen’s acquisition of Epizyme in 2022. Summary of derivatives and reclassifications The tables below summarize the changes in fair value of the derivatives for 2022, 2021 and 2020 and the line items within the consolidated statements of operations where the gains or losses on these derivatives were recorded (in thousands): Years Ended December 31, Location on Consolidated Statements of Operations 2022 2021 2020 Derivatives in hedging relationships (1) Interest rate swaps: Amount of loss reclassified from accumulated other comprehensive income into net income $ — $ — $ 4,066 (Gains)/losses on derivative financial instruments Change in fair value of interest rate swaps — — ( 73 ) (Gains)/losses on derivative financial instruments Interest expense — — 114 Interest expense Derivatives not designated as hedging instruments Interest rate swaps: Change in fair value of interest rate swaps — — 6,908 (Gains)/losses on derivative financial instruments Interest expense — — 408 Interest expense Changes in fair value of other instruments: Warrant — 5,439 25,375 (Gains)/losses on derivative financial instruments Forward purchase contract — — 5,800 (Gains)/losses on derivative financial instruments Treasury rate lock contracts — 16,093 — (Gains)/losses on derivative financial instruments Milestone Acceleration Option ( 96,610 ) — — (Gains)/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 Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table summarizes assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands): As of December 31, 2022 As of December 31, 2021 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets: Cash equivalents Money market funds $ 5,068 $ — $ — $ 5,068 $ 598,253 $ — $ — $ 598,253 Commercial paper — — — — — 13,997 — 13,997 Certificates of deposit — — — — — 40,954 — 40,954 Marketable securities Commercial paper — — — — — 207,457 — 207,457 Certificates of deposit — 11,501 — 11,501 — 374,415 — 374,415 U.S. government securities — 12,920 — 12,920 — — — — Available for sale debt securities Debt securities (1) — — 1,300 1,300 — — 66,000 66,000 Derivative instruments (2) — — 86,150 86,150 — — — — Total current assets $ 5,068 $ 24,421 $ 87,450 $ 116,939 $ 598,253 $ 636,823 $ 66,000 $ 1,301,076 Equity securities 103,876 — 8,472 112,348 226,787 — 43,013 269,800 Available for sale debt securities Debt securities (1) — — 226,300 226,300 — — 187,700 187,700 Forwards (3) — — — — — — 16,700 16,700 Derivative instruments (2) — — 10,460 10,460 — — — — Royalty at fair value (4) — — 14,500 14,500 — — — — Total non-current assets $ 103,876 $ — $ 259,732 $ 363,608 $ 226,787 $ — $ 247,413 $ 474,200 Liabilities: Available for sale debt securities Funding commitments (5) — — ( 2,500 ) ( 2,500 ) — — — — Total non-current liabilities $ — $ — $ ( 2,500 ) $ ( 2,500 ) $ — $ — $ — $ — (1) As of December 31, 2022, amounts reflect the fair value of the funded portion of the Cytokinetics Commercial Launch Funding and the funded portion of the Development Funding Bonds. As of December 31, 2021, amounts reflect the fair value of the Series A Biohaven Preferred Shares and Series B Biohaven Preferred Shares. (2) Reflects the fair value of the Milestone Acceleration Option . (3) Reflects the fair value of our obligations to fund the acquisitions of the Series B Biohaven Preferred Shares and our obligations to fund the Development Funding Bonds. (4) Recorded within Other assets on the consolidated balance sheet. See Note 9–Non-Consolidated Affiliates for additional discussion. (5) Related to the fair value of the Cytokinetics Funding Commitments. For 2022 and 2021, we recognized losses of $ 39.1 million and $ 41.4 million, respectively, on equity securities still held as of December 31, 2022. There were no gains or losses in 2020 associated with the equity securities still held as of December 31, 2022. 110 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The table presented below summarizes the change in the combined fair value (current and non-current) of Level 3 financial instruments (in thousands): Year Ended December 31, 2022 Year Ended December 31, 2021 Equity Securities Debt Securities Forwards Funding Commitments Derivative Instruments Royalty at Fair Value Equity Securities Debt Securities Forwards Balance at the beginning of the year $ 43,013 $ 253,700 $ 16,700 $ — $ — $ — $ — $ 214,400 $ 18,600 Purchases (1) 28,785 479,559 — — — 21,215 35,120 70,441 — Gains/(losses) on initial recognition (2) — 600 — ( 9,400 ) — — — — — (Losses)/gains on equity securities ( 22,634 ) — — — — — 7,893 — — Gains on derivative financial instruments — — — — 96,610 — — — — Unrealized gains on available for sale debt securities included in other comprehensive losses — 24,000 — — — — — 11,600 — (Losses)/gains on available for sale debt securities included in earnings (3) — ( 67,800 ) 62,885 6,900 — — — 1,300 16,559 Other non-operating expense — — — — — ( 6,715 ) — — — Settlement of forwards (4) — 79,585 ( 79,585 ) — — — — 18,459 ( 18,459 ) Transfer out of Level 3 (5) ( 40,692 ) — — — — — — — — Redemptions (1) — ( 542,044 ) — — — — — ( 62,500 ) — Balance at the end of the year $ 8,472 $ 227,600 $ — $ ( 2,500 ) $ 96,610 $ 14,500 $ 43,013 $ 253,700 $ 16,700 (1) Following Pfizer’s acquisition of Biohaven in October 2022, we purchased all remaining unissued Series B Biohaven Preferred Shares and we received accelerated redemption payments for all outstanding Series A Biohaven Preferred Shares and Series B Biohaven Preferred Shares. (2) Reflects the purchase price allocation for the long-term funding agreement entered into with Cytokinetics to arrive at the appropriate fair value of the Cytokinetics Funding Commitments on initial recognition. Amounts also reflect the losses on initial recognition of debt securities related to the difference in (a) the fair value of the Additional Funding of the Development Funding Bonds and (b) the actual additional funded amount of $ 150 million. (3) Amounts reflect changes in the fair values of the Series B Biohaven Preferred Shares, Series B Forwards and the Development Funding Bond Forward. For 2022, amounts also reflect the change in the fair value of the funded portion of the Cytokinetics Commercial Launch Funding, the funded portion of the Development Funding Bonds and the Cytokinetics Funding Commitments. (4) Amounts reflect the fair value attributed to the Series B Forwards that were settled as we acquired the Series B Biohaven Preferred Shares. Amounts in 2022 also reflect the fair value attributed to the Development Funding Bond Forward that was settled upon funding the Development Funding Bonds. (5) Related to the expiration of the transfer restriction on BioCryst common stock. 111 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Valuation Inputs for Recurring Fair Value Measurements Below is a discussion of the valuation inputs used for financial instruments classified as Level 2 and Level 3 measurements in the fair value hierarchy. ApiJect Investment We utilized the discounted cash flow method using Level 3 inputs, including forecasted cash flows and the weighted average cost of capital, to estimate the fair value as of December 31, 2022 of the equity securities and revenue participation right that we acquired from ApiJect Holdings, Inc. (“ApiJect”), a private company, in April 2022. Our estimate of the forecasted cash flows and the weighted average cost of capital could reasonably be different than those selected by a market participant, which would mean that the estimated fair value could be significantly higher or lower. Refer to Note 9–Non-Consolidated Affiliates for additional discussion. Cytokinetics Commercial Launch Funding & Funding Commitments We estimated the fair value of the funded Cytokinetics Commercial Launch Funding as of December 31, 2022 by utilizing probability-adjusted discounted cash flow calculations using Level 3 inputs, including an estimated risk-adjusted discount rate and the probability that there will be a change of control event, which would result in accelerated payments. Developing a risk-adjusted discount rate and assessing the probability that there will be a change of control event over the duration of the Cytokinetics Commercial Launch Funding require significant judgement. Our estimate of the risk-adjusted discount rate could reasonably be different than the discount rate selected by a market participant, which would mean that the estimated fair value could be significantly higher or lower. Our expectation of the probability and timing of the occurrence of a change of control event could reasonably be different than the timing of an actual change of control event, and if so, would mean that the estimated fair value could be significantly higher or lower than the fair value determined by management at any particular date. We estimated the fair value of the Cytokinetics Funding Commitments as of December 31, 2022 using a Monte Carlo simulation methodology that includes simulating the interest rate movements using a Geometric Brownian Motion-based pricing model. This methodology simulates the likelihood of future discount rates exceeding the counterparty’s assumed cost of debt, which would impact Cytokinetics’ decision to exercise its option to draw on each respective tranche. This methodology incorporates Level 3 fair value measurements and inputs, including an assumed interest rate volatility of 30 % and an assumed risk-adjusted discount rate of 13.5 %. We also assumed probabilities for the occurrence of each regulatory or clinical milestone, which impacts the availability of each future tranche of funding. Our estimate of the risk-adjusted discount rate, the interest rate volatility and the probabilities of each underlying milestone could reasonably be different than the assumptions selected by a market participant, which would mean that the estimated fair value could be significantly higher or lower. BioCryst Common Stock In November 2021, we purchased 3,846 thousand shares of common stock of BioCryst Pharmaceuticals, Inc. (“BioCryst”). As part of the transaction, we were restricted from selling the BioCryst common stock for six months following the close of the transaction. We determined the fair value of the BioCryst common stock as of December 31, 2021 based on the closing stock price and adjusted for the transfer restriction, which was determined by calculating the value of a put option over the common stock to match the duration of the transfer restriction. This methodology incorporated Level 3 inputs, including the estimated volatility of the BioCryst common stock, which required significant judgement. Our estimated volatility could be reasonably different than the actual volatility of BioCryst’s common stock, which would mean that the estimated fair value for the common stock could be significantly higher or lower than the fair value determined by management at any particular date. During the second quarter of 2022, the transfer restriction expired and the BioCryst common stock was transferred from a Level 3 to a Level 1 asset. MorphoSys Development Funding Bonds & Forward The fair values of the Development Funding Bonds and the Development Funding Bond Forward as of December 31, 2022 and 2021 were based on a discounted cash flow calculation using estimated risk-adjusted discount rates, which are Level 3 fair value inputs. Our estimate of the risk adjusted discount rates could reasonably be different than the discount rates selected by a market participant, which would mean that the estimated fair values could be significantly higher or lower. 112 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Series A Biohaven Preferred Shares The Series A Biohaven Preferred Shares were redeemed following Pfizer’s acquisition of Biohaven in October 2022. The fair value of the Series A Biohaven Preferred Shares as of December 31, 2021 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 results 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 require significant judgement. Our estimate of a risk adjusted discount rate of 9.5 % as of December 31, 2021 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. Series B Biohaven Preferred Shares & Forwards All remaining unissued Series B Biohaven Preferred Shares were purchased simultaneously with the redemption of all outstanding Series B Biohaven Preferred Shares following Pfizer’s acquisition of Biohaven in October 2022. The fair value of each of the Series B Biohaven Preferred Shares and Series B Forwards as of December 31, 2021 was 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 require significant judgement. Our estimate of a risk adjusted discount rate, expectation of the probability and timing of the occurrence of a change of control event could reasonably be different than those determined by a market participant, which would mean that the estimated fair value could be significantly higher or lower. Milestone Acceleration Option We estimated the fair value of the Milestone Acceleration Option as of December 31, 2022 using the “with-and-without” methodology, which is a variation of the income approach and is based on the difference between cash flows for two different scenarios. The prospective cash flows for the success-based milestone payments include the Milestone Acceleration Option in the first scenario. For the second scenario, the prospective cash flows are estimated assuming they remain payable over time. The difference between the fair value of these two scenarios represents the fair value of the Milestone Acceleration Option. This methodology includes the use of Level 3 fair value measurements and inputs, including estimated risk-adjusted discount rate which was primarily based on Pfizer’s cost of debt and management’s estimated probabilities of achieving the success-based milestones. Assessing the likelihood that the success-based milestones are achieved over the duration of the Milestone Acceleration Option and developing a risk-adjusted discount rate require significant judgement. Our estimate of a risk adjusted discount rate and the probabilities of achieving marketing approval could reasonably be different than those determined by a market participant, which would mean that the estimated fair value could be significantly higher or lower. The fair value associated with this instrument was not material prior to the second quarter of 2022, when Pfizer announced its intended acquisition of Biohaven. Other Financial Instruments Financial instruments whose fair values are measured on a recurring basis using Level 2 inputs primarily consist of commercial paper, certificates of deposit and U.S. government securities. We measure the fair value of these financial instruments with the help of third-party pricing services that provide quoted market prices in active markets for similar securities or observable inputs for their pricing without applying significant adjustments. 113 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Financial Assets Not Measured at Fair Value Financial royalty assets are measured and carried on the consolidated balance sheets at amortized cost using the effective interest method. The current portion of financial royalty assets approximates fair value. Management calculates the fair value of financial royalty assets using the forecasted royalty payments that are expected to be received based on the projected product sales for all royalty bearing products which are estimated using sell-side equity research analysts’ consensus sales forecasts. These projected future royalty payments by asset, along with any projected incoming or outgoing milestone payments, are then discounted to a present value using appropriate individual discount rates. The fair value of financial royalty assets is classified as Level 3 within the fair value hierarchy since it is determined based upon inputs that are both significant and unobservable. The estimated fair values and related carrying values of the non-current portion of financial royalty assets as of December 31, 2022 and 2021 are presented below (in thousands): As of December 31, 2022 As of December 31, 2021 Fair Value Carrying Value, net Fair Value Carrying Value, net Financial royalty assets, net $ 17,314,094 $ 13,493,106 $ 19,047,183 $ 13,718,245 6. Financial Royalty Assets Financial royalty assets consist of contractual rights to cash flows relating to royalty payments derived from the expected sales of patent-protected biopharmaceutical products that entitle us and our subsidiaries to receive a portion of income from the sale of such products by third parties. The gross carrying value, cumulative allowance for changes in expected cash flows, exclusive of the allowance for credit losses, and net carrying value for the current and non-current portion of financial royalty assets as of December 31, 2022 and 2021 are as follows (in thousands): As of December 31, 2022 Estimated Royalty Duration (1) Gross Carrying Value Cumulative Allowance for Changes in Expected Cash Flows (Note 7) Net Carrying Value (4) Cystic fibrosis franchise 2037 (2) $ 5,333,535 $ ( 10,908 ) $ 5,322,627 Tysabri (3) 1,683,441 ( 212,283 ) 1,471,158 Trelegy 2029-2030 1,284,054 ( 24,126 ) 1,259,928 Tremfya 2031-2032 894,160 — 894,160 Imbruvica 2027-2032 1,436,969 ( 660,703 ) 776,266 Xtandi 2027-2028 1,009,168 ( 235,625 ) 773,543 Other 2023-2041 5,134,980 ( 1,332,815 ) 3,802,165 Total $ 16,776,307 $ ( 2,476,460 ) $ 14,299,847 Less: Cumulative allowance for credit losses (Note 7) ( 115,422 ) Total current and non-current financial royalty assets, net $ 14,184,425 (1) Durations shown represent our estimates as of the current reporting date of when a royalty will substantially end, which may depend on clinical trial results, regulatory approvals, contractual terms, commercial developments, estimates of patent expiration dates (which may include estimated patent term extensions) or other factors and may vary by geography. There can be no assurances that our royalties will expire when expected. (2) Royalty is perpetual; year shown represents Trikafta expected patent expiration and potential sales decline based on timing of potential generic entry. (3) RPIFT acquired a perpetual royalty on net sales of Tysabri. We have applied an end date of 2031 for purposes of accreting income over the royalty term, which is periodically reviewed. (4) The net carrying value by asset is presented before the allowance for credit losses. Refer to Note 7–Cumulative Allowance and the Provision for Changes in Expected Cash Flows from Financial Royalty Assets for additional information. 114 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS During the fourth quarter of 2022, we recorded $ 160.1 million and $ 273.6 million of non-cash impairment charges for otilimab and gantenerumab, respectively, both unapproved financial royalty assets held at cost. The impairment charges were recorded as a result of GSK plc’s announcement that it has decided not to progress with regulatory submissions for otilimab and Roche’s statement that it would discontinue clinical trials of gantenerumab. Included in the total financial royalty assets balance of $ 14.2 billion as of December 31, 2022, is $ 533.8 million related to unapproved financial assets held at cost: zavegepant, seltorexant and olpasiran. Additionally, during the fourth quarter of 2022, we impaired our financial royalty asset related to Gavreto and recorded a non-cash impairment charge of $ 182.1 million due to the uncertainty of Gavreto’s commercial outlook. These impairment charges were recorded within Financial royalty asset impairment in the consolidated statements of operations. As of December 31, 2021 Estimated Royalty Duration (1) Gross Carrying Value Cumulative Allowance for Changes in Expected Cash Flows (Note 7) Net Carrying Value (5) Cystic fibrosis franchise 2037 (2) $ 5,335,641 $ ( 48,636 ) $ 5,287,005 Tysabri (3) 1,846,069 ( 16,617 ) 1,829,452 Imbruvica 2027-2032 1,438,730 ( 236,871 ) 1,201,859 Xtandi 2027-2028 1,100,065 ( 172,101 ) 927,964 Tremfya 2031-2032 881,671 — 881,671 Evrysdi 2030-2035 (4) 727,774 — 727,774 Other 2023-2041 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 current and non-current financial royalty assets, net $ 14,332,596 (1) Durations shown represent our estimates as of the current reporting date of when a royalty will substantially end, which may depend on clinical trial results, regulatory approvals, contractual terms, commercial developments, estimates of patent expiration dates (which may include estimated patent term extensions) or other factors and may vary by geography. There can be no assurances that our royalties will expire when expected. (2) Royalty is perpetual; year shown represents Trikafta expected patent expiration and potential sales decline based on timing of potential generic entry. (3) RPIFT acquired a perpetual royalty on net sales of Tysabri. We have applied an end date of 2031 for purposes of accreting income over the royalty term, which is periodically reviewed. (4) Key patents on Evrysdi in the United States expire in 2035, but our royalty will cease when aggregate royalties paid to us equal $ 1.3 billion. (5) The net carrying value by asset is presented before the allowance for credit losses. Refer to Note 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 on the consolidated balance sheets and includes the following activities: • the movement in the cumulative allowance related to changes in forecasted royalty payments expected to be received based on projected product sales for royalty bearing products which are estimated using sell-side equity research analysts’ consensus sales forecasts, • the write-off of cumulative allowance at the end of a royalty asset’s life which only impacts the consolidated balance sheets, and • the movement in the cumulative allowance for current expected credit losses, primarily associated with new financial royalty assets with limited protective rights and changes in the underlying cash flow forecasts of financial royalty assets with limited protective rights . 115 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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, 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 2,964 Write-off of credit loss allowance (1) 25,174 Provision for credit losses, net (2) ( 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 21,721 Provision for credit losses, net (2) 12,913 Balance at December 31, 2021 $ ( 1,694,945 ) Increases to the cumulative allowance for changes in expected cash flows from financial royalty assets ( 1,394,679 ) Decreases to the cumulative allowance for changes in expected cash flows from financial royalty assets 296,637 Write-off of cumulative allowance 5,723 Write-off of credit loss allowance 1,584 Provision for credit losses, net (2) 193,798 Balance at December 31, 2022 $ ( 2,591,882 ) (1) Relates to amounts reversed out of the credit loss allowance associated with omecamtiv mecarbil as a result of the gross write-off of the related financial royalty asset balance of $ 90.2 million. (2) For 2020, the provision for credit losses was primarily related to certain additions to our portfolio of financial royalty assets with limited protective rights, mainly the final tranche of Tazverik. For 2021, the provision income for credit losses was primarily related to a significant decline in value of Tazverik, which was offset by increases in the value of zavegepant. For 2022, the provision income for credit losses was primarily related to further declines in the value of Tazverik and changes in the payors for certain products with stronger credit profiles, which were partially offset by the addition of Trelegy to our portfolio of financial royalty assets with limited protective rights. 8. Intangible Royalty Assets, Net As of December 31, 2022, the intangible royalty assets were fully amortized as our royalties on Januvia and Janumet expired in the first quarter of 2022. Our royalties on the other DPP-IV products have also substantially ended. As of December 31, 2021, the cost, accumulated amortization and net carrying value of our intangible royalty assets are summarized as below (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 Revenue from intangible assets is tied to underlying patent protected sales of DPP-IV products of various licensees. Such revenue is earned from sales occurring primarily in the United States and Europe; however, we do not have the ability to disaggregate such revenue from licensees based on the geography of the underlying sales as this information may not be provided to us by marketers. Individual licensees exceeding 10% or more of revenue from intangible royalty assets accounted for 90 %, 86 % and 97 % of revenues from intangible royalty assets in 2022, 2021 and 2020, respectively. 116 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 9. Non-Consolidated Affiliates We have equity investments in certain entities at a level that provide us with significant influence. We account for such investments as equity method investments or as equity securities over which we have elected the fair value option. ApiJect In 2022, we acquired common stock and a revenue participation right from ApiJect. We elected the fair value option to account for our investments in ApiJect because it is more reflective of current values for such investments. We are also required to purchase additional common stock from ApiJect if certain milestones are achieved. The fair value of our equity investment in ApiJect was recorded within Equity securities as of December 31, 2022 and the change in fair value was recorded within (Gains)/losses on equity securities for 2022. The fair value of the revenue participation right was recorded within Other assets as of December 31, 2022 and the change in fair value was recorded within Other non-operating expense, net for 2022. No amounts were due from ApiJect as of December 31, 2022. The Legacy SLP Interest In connection with the Exchange Offer Transactions, we acquired a special limited partnership interest in the Legacy Investors Partnerships (the “Legacy SLP Interest”) from the Continuing Investors Partnerships for $ 303.7 million in exchange for issuing shares in our subsidiary. As a result, we became a special limited partner in the Legacy Investors Partnerships. The Legacy SLP Interest entitles us to the equivalent of performance distribution payments that would have been paid to the general partner of the Legacy Investors Partnerships and an income allocation on a similar basis. Our income allocation is equal to the general partner’s former contractual rights to the income of the Legacy Investors Partnerships, net of amortization of the basis difference. The Legacy SLP Interest is accounted for under the equity method as our Manager is also the Manager of the Legacy Investors Partnerships and has the ability to exercise significant influence. The Legacy Investors Partnerships no longer participate in investment opportunities from June 30, 2020 and, as such, the value of the Legacy SLP Interest is expected to decline over time. The Legacy Investors Partnerships also indirectly own a non-controlling interest in Old RPI and RPI ICAV. 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. We recorded income allocations of $ 3.0 million, $ 8.9 million and $ 62.0 million within Equity in losses/(earnings) of equity method investees in 2022, 2021 and 2020, respectively. We collected cash receipts from the Legacy SLP Interest of $ 25.7 million, $ 21.0 million and $ 22.7 million during 2022, 2021 and 2020, respectively. The Avillion Entities We account for our partnership interests in Avillion Financing I, LP and its related entities (“Avillion I”) and BAv Financing II, LP and its related entities (“Avillion II” and, together with Avillion I, the “Avillion Entities”) as equity method investments because RPIFT has the ability to exercise significant influence over the Avillion Entities. We recorded loss allocations from the Avillion Entities of $ 12.0 million, $ 28.4 million and $ 17.6 million within Equity in losses/(earnings) of equity method investees in 2022, 2021 and 2020, 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 under its co-development agreement with Pfizer. The only operations of Avillion I are the collection of cash and unwinding of the discount on the series of fixed annual payments due from Pfizer. We received distributions from Avillion I of $ 13.4 million in each of 2022, 2021 and 2020. In May 2018, RPIFT entered into an agreement with Avillion II, which was amended in July 2021 and June 2022, to fund a total of $ 150.0 million over multiple years for a portion of the costs of Phase 2 and 3 clinical trials to advance Airsupra, formerly known as PT027, which was approved by the FDA in January 2023. Avillion II is a party to a co-development agreement with AstraZeneca to develop Airsupra for the treatment of asthma in exchange for royalties, a series of success-based milestones and other potential payments. In January 2023, AstraZeneca notified Avillion II that it elected to pay a fee of $ 80 million to Avillion II to exercise an option to commercialize Airsupra in the United States. We expect to receive our pro rata portion of the exercise fee of approximately $ 35 million, subject to any holdback for expenses, in 2023. 117 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Our maximum exposure to loss at any particular reporting date is limited to the carrying value of our equity method investments plus the unfunded commitments. As of December 31, 2022 and 2021, RPIFT had unfunded commitments related to the Avillion Entities of $ 28.8 million and $ 11.2 million, respectively. 10. Research & Development (“R&D”) Funding Expense R&D funding expense consists of payments that we have made to counterparties to acquire royalties or milestones on product candidates. It includes development-stage funding payments that are made upfront or upon pre-approval milestones and development-stage funding payments that are made over time as the related product candidates undergo clinical trials with our counterparties. We recognized R&D funding expense of $ 177.1 million in 2022 , primarily related to upfront and milestone development-stage funding payments of $ 100.0 million, $ 25.0 million and $ 50.0 million to acquire royalties on development-stage products from Cytokinetics, Theravance Biopharma, Inc., and MSD International Business GmbH, respectively. We recognized R&D funding expense of $ 200.1 million in 2021, comprised of $ 193.2 million in upfront R&D funding expense and $ 6.9 million in ongoing R&D funding expense, primarily under our co-funding agreement with Sanofi. The upfront R&D funding expense included $ 103.2 million and $ 90.0 million in exchange for an incremental royalty on a development-stage product from BioCryst and future royalties on two development-stage products from MorphoSys, respectively. We recognized R&D funding expense of $ 26.3 million in 2020, comprised of $ 20.5 million in ongoing R&D funding expense, primarily under our co-funding agreement with Sanofi, and $ 5.8 million in upfront R&D funding expense for a royalty on a development-stage product that we acquired from BioCryst. 11. Borrowings Our borrowings as of December 31, 2022 and 2021 consisted of the following (in thousands): Type of Borrowing Date of Issuance Maturity As of December 31, 2022 As of December 31, 2021 Senior Unsecured Notes: $ 1,000,000 , 0.75 % (issued at 99.322 % of par) 9/2020 9/2023 $ 1,000,000 $ 1,000,000 $ 1,000,000 , 1.20 % (issued at 98.875 % of par) 9/2020 9/2025 1,000,000 1,000,000 $ 1,000,000 , 1.75 % (issued at 98.284 % of par) 9/2020 9/2027 1,000,000 1,000,000 $ 1,000,000 , 2.20 % (issued at 97.760 % of par) 9/2020 9/2030 1,000,000 1,000,000 $ 600,000 , 2.15 % (issued at 98.263 % of par) 7/2021 9/2031 600,000 600,000 $ 1,000,000 , 3.30 % (issued at 95.556 % of par) 9/2020 9/2040 1,000,000 1,000,000 $ 1,000,000 , 3.55 % (issued at 95.306 % of par) 9/2020 9/2050 1,000,000 1,000,000 $ 700,000 , 3.35 % (issued at 97.565 % of par) 7/2021 9/2051 700,000 700,000 Unamortized debt discount and issuance costs ( 183,678 ) ( 203,930 ) Total debt carrying value 7,116,322 7,096,070 Less: Current portion of long-term debt ( 997,512 ) — Total long-term debt $ 6,118,810 $ 7,096,070 Senior Unsecured Notes On July 26, 2021, we issued $ 1.3 billion of senior unsecured notes (the “2021 Notes”) comprised of $ 600.0 million principal amount of notes due September 2031 and $ 700.0 million principal amount of notes due September 2051. Interest on each series of the 2021 Notes accrues at the respective rate per annum and is payable semi-annually in arrears on March 2 and September 2 of each year, which began on March 2, 2022. The 2021 Notes were issued at a total discount of $ 27.5 million and we capitalized approximately $ 12.3 million in debt issuance costs primarily composed of underwriting fees. The 2021 Notes were issued with a weighted average coupon rate and a weighted average effective interest rate of 2.80 % and 3.06 %, respectively. 118 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS On September 2, 2020, we issued $ 6.0 billion of senior unsecured notes (the “2020 Notes” and, together with the 2021 Notes, the “Notes”). We used the net proceeds from the 2020 Notes offering, together with available cash on hand, to repay in full the outstanding principal amounts of term loans under our prior senior secured credit facilities. Interest on each series of the 2020 Notes accrues at the respective rate per annum and is payable semi-annually in arrears on March 2 and September 2 of each year. The 2020 Notes were issued at a total discount of $ 149.0 million and we capitalized approximately $ 40.4 million in debt issuance costs primarily comprised of underwriting fees. The 2020 Notes were issued with a weighted average coupon rate and a weighted average effective interest rate of 2.13 % and 2.50 %, respectively. On August 3, 2021, we completed an exchange offer for the 2020 Notes where certain holders elected to tender their unregistered outstanding notes for freely tradable exchange notes that were registered under the Securities Act of 1933. The Notes may be redeemed at our option at a redemption price equal to the greater of (i) 100 % of the principal amount of the Notes to be redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis at the treasury rate, plus a make-whole premium as defined in the indenture. In each case, accrued and unpaid interest is also required to be redeemed to the date of redemption. Upon the occurrence of a change of control triggering event and downgrade in the rating of our Notes by two of three credit agencies, the holders may require us to repurchase all or part of their Notes at a price equal to 101 % of the aggregate principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to the date of repurchase. Our obligations under the Notes are fully and unconditionally guaranteed by RP Holdings, a non-wholly owned subsidiary. We are required to comply with certain covenants under our Notes and as of December 31, 2022, we were in compliance with all applicable covenants. As of December 31, 2022 and 2021, the fair value of our outstanding Notes using Level 2 inputs was approximately $ 5.7 billion and $ 7.2 billion, respectively. Senior Unsecured Revolving Credit Facility On September 15, 2021, we entered into an amended and restated revolving credit agreement, which was further amended on October 31, 2022 (the “Credit Agreement”). The Credit Agreement amended and restated the prior credit agreement that our subsidiary, RP Holdings, as borrower, entered into on September 18, 2020, which provided for a five-year unsecured revolving credit facility (the “Revolving Credit Facility”) with borrowing capacity of up to $ 1.5 billion for general corporate purposes. The Revolving Credit Facility has a maturity date of October 31, 2027. As of December 31, 2022 and 2021, there were no outstanding borrowings under the Revolving Credit Facility. The Revolving Credit Facility is subject to an interest rate, at our option, of either (a) a base rate determined by reference to the highest of (1) the administrative agent’s prime rate, (2) the federal funds rate plus 0.5 % and (3) Term SOFR plus 1 % or (b) Daily SOFR, Term SOFR, the Alternative Currency Term Rate or the Alternative Currency Daily Rate (each as defined in the Credit Agreement), plus in each case, the applicable margin. The applicable margin for the Revolving Credit Facility varies based on our public debt rating. Accordingly, the interest rates for the Revolving Credit Facility fluctuates during the term of the facility based on changes in the applicable interest rate and future changes in our public debt rating. The Credit Agreement that governs the Revolving Credit Facility contains certain customary covenants, that among other things, require us to maintain (i) a consolidated leverage ratio at or below 4.00 to 1.00 (or at or below 4.50 to 1.00 following a qualifying material acquisition) of consolidated funded debt to consolidated EBITDA, each as defined and calculated with the ratio level calculated with further adjustments as set forth in the Credit Agreement and (ii) a consolidated coverage ratio at or above 2.50 to 1.00 of consolidated EBITDA to consolidated interest expense, each as defined and calculated with further adjustments as set forth in the Credit Agreement. All obligations under the Revolving Credit Facility are unconditionally guaranteed by us. Noncompliance with the leverage ratio and interest coverage ratio covenants under the Credit Agreement could result in our lenders requiring us to immediately repay all amounts borrowed. The Credit Agreement includes customary covenants for credit facilities of this type that limit our ability to engage in certain activities, such as incurring additional indebtedness, paying dividends, making certain payments and acquiring and disposing of assets. As of December 31, 2022, RP Holdings was in compliance with these covenants. 119 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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, 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, net in 2020. Principal Payments on the Notes The future principal payments for our borrowings as of December 31, 2022 over the next five years and thereafter are as follows (in thousands): Year Principal Payments 2023 $ 1,000,000 2024 — 2025 1,000,000 2026 — 2027 1,000,000 Thereafter 4,300,000 Total (1) $ 7,300,000 (1) Excludes unamortized debt discount and issuance costs of $ 183.7 million as of December 31, 2022, 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. As of December 31, 2022, we have 443,166 thousand Class A ordinary shares and 164,058 thousand Class B ordinary shares outstanding. An exchange agreement entered into in connection with the IPO by us, RP Holdings, the Continuing Investors Partnerships, RPI International Partners 2019, LP and EPA Holdings (the “Exchange Agreement”) governs the exchange of RP Holdings Class B Interests held by the Continuing Investors Partnerships for Class A ordinary shares. Pursuant to the Exchange Agreement, RP Holdings Class B interests are exchangeable on a one -for-one basis for Class A ordinary shares on a quarterly basis. Each such exchange also results in the re-designation of the same number of our Class B ordinary shares as deferred shares. As of December 31, 2022, we have 371,325 thousand deferred shares outstanding. In addition, we have in issue 50 thousand Class R redeemable shares, which do not entitle the holder to voting or dividend rights.The Class R redeemable shares may be redeemed at our option in the future. Any such redemption would be at the nominal value of £ 1 each. 120 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Non-Controlling Interests The changes in the balance of our four non-controlling interests for 2022, 2021 and 2020 are 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 gains 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 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 gains 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 Contributions — 6,343 5,253 — 11,596 Distributions ( 24,687 ) ( 435,446 ) ( 144,115 ) — ( 604,248 ) Other exchanges — — ( 157,494 ) — ( 157,494 ) Net Income 10,562 152,895 23,775 — 187,232 Other comprehensive income/(loss): Unrealized gains on available for sale debt securities — 4,218 5,520 — 9,738 Reclassification of unrealized gains on available for sale debt securities — ( 9,392 ) ( 12,160 ) — ( 21,552 ) December 31, 2022 $ ( 597 ) $ 1,527,887 $ 2,369,933 $ — $ 3,897,223 (1) Related to the Continuing Investors Partnerships’ ownership of approximately 27 %, 29 % and 36 % in RP Holdings through their ownership of RP Holdings Class B Interests as of December 31, 2022, 2021 and 2020, respectively. Royalty Pharma plc owns the remaining and 73 %, 71 % and 64 % of RP Holdings through its ownership of RP Holdings Class A Interests and RP Holdings Class B Interests as of December 31, 2022, 2021 and 2020, respectively. 121 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS RP Holdings Class C Special Interest Held by EPA Holdings EPA Holdings, an affiliate of the Manager, is entitled to Equity Performance Awards (as defined below) through its RP Holdings Class C Special Interest based on our performance, as determined on a portfolio-by-portfolio basis. Investments made during each two-year period are grouped together as separate portfolios (each, a “Portfolio”). Subject to certain conditions, at the end of each fiscal quarter, EPA Holdings is entitled to a distribution from RP Holdings in respect of each Portfolio equal to 20% of the Net Economic Profit (defined as the aggregate cash receipts for all new portfolio investments in such Portfolio less Total Expenses (defined as interest expense, operating expense and recovery of acquisition cost in respect of such Portfolio)) for such Portfolio for the applicable measuring period (the “Equity Performance Awards”). The Equity Performance Awards will be allocated and paid by RP Holdings to EPA Holdings as the holder of the RP Holdings Class C Special Interest. The Equity Performance Awards will be payable in RP Holdings Class B Interests that will be exchanged upon issuance for Class A ordinary shares. EPA Holdings may also receive a periodic cash advance in respect of the RP Holdings Class C Special Interest to the extent necessary for EPA Holdings or any of its beneficial owners to pay when due any income tax imposed on it or them as a result of holding such RP Holdings Class C Special Interest. We do not expect any material Equity Performance Awards to be payable until certain performance conditions discussed above are met. Similarly, we do not expect any material income to be allocated to EPA Holdings until such performance conditions are met. Dividends The holders of Class A ordinary shares are entitled to receive dividends subject to approval by our board of directors. The holders of Class B ordinary shares do not have any rights to receive dividends; however, RP Holdings Class B Interests are entitled to dividends and distributions from RP Holdings. During 2022, we declared and paid four quarterly cash dividends of $ 0.19 per Class A ordinary share for an aggregate amount of $ 333.3 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, 2022, approximately 565 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 statements of operations. In 2022, 2021 and 2020, respectively, we did not recognize material share-based compensation expense. As of December 31, 2022, 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 For 2022, 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 2022, 2021 and 2020, and therefore were excluded from the computation of diluted earnings per shares of Class A ordinary share. 122 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following tables set forth reconciliations of the numerators and denominators used to calculate basic and diluted earnings per Class A ordinary share for 2022, 2021 and 2020 (in thousands, except per share amounts): Years Ended December 31, 2022 2021 Numerator Consolidated net income $ 230,064 $ 1,241,201 Less: Net income attributable to Continuing Investors Partnerships 23,775 297,321 Less: Net income attributable to Legacy Investors Partnerships and RPSFT 163,457 324,152 Net income attributable to Royalty Pharma plc - basic and diluted $ 42,832 $ 619,728 Denominator Weighted average Class A ordinary shares outstanding - basic 437,963 414,794 Add: Dilutive effect of unvested RSUs 9 8 Weighted average Class A ordinary shares outstanding - diluted 437,972 414,802 Earnings per Class A ordinary share - basic $ 0.10 $ 1.49 Earnings per Class A ordinary share - diluted $ 0.10 $ 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 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. 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 Royalty Pharma plc 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, 2022 2021 2020 Cash flow from operating activities: Consolidated net income $ 230,064 $ 1,241,201 $ 1,701,954 Adjustments to reconcile consolidated net income to net cash provided by operating activities: Income from financial royalty assets ( 2,125,096 ) ( 2,065,083 ) ( 1,959,975 ) Provision for changes in expected cash flows from financial royalty assets 904,244 452,842 230,839 Amortization of intangible assets 5,670 22,996 23,058 Amortization of debt discount and issuance costs 21,356 20,162 11,715 (Gains)/losses on derivative financial instruments ( 96,610 ) 21,532 42,076 Losses/(gains) on equity securities 33,442 48,066 ( 247,073 ) Equity in losses/(earnings) of equity method investees 8,973 19,490 ( 44,459 ) Distributions from equity method investees 39,142 34,384 42,334 Loss on extinguishment of debt 419 358 30,272 Share-based compensation 2,170 2,443 5,428 Interest income accretion ( 53,432 ) ( 50,896 ) ( 20,551 ) Losses/(gains) on available for sale debt securities 6,815 ( 17,859 ) ( 18,600 ) Financial royalty asset impairment 615,827 — 65,053 Termination of derivative financial instruments — ( 16,093 ) ( 34,952 ) Other 11,098 4,461 9,621 Decrease/(increase) in operating assets: Cash collected on financial royalty assets 2,507,236 2,315,854 2,121,923 Accrued royalty receivable 36,456 ( 20,131 ) 370 Other royalty income receivable ( 4,744 ) ( 9,012 ) ( 770 ) Other current assets 2,198 1,857 34,986 Increase/(decrease) in operating liabilities: Accounts payable and accrued expenses 2,286 ( 4,586 ) ( 766 ) Interest payable ( 3,534 ) 15,550 42,146 Net cash provided by operating activities $ 2,143,980 $ 2,017,536 $ 2,034,629 Non-cash investing and financing activities are summarized below (in thousands). Years Ended December 31, Supplemental Schedule of Non-cash Investing/Financing Activities: 2022 2021 2020 Receipt of contribution of investment in Legacy Investors Partnerships (Note 9) $ — $ — $ 303,679 Settlement of Epizyme forward purchase contract (Note 4) — — 5,700 Accrued purchase obligation - Tazverik (1) — — 110,000 Repayments of long-term debt by contributions from non-controlling interests (2) — — 1,103,774 Milestone payable - Erleada (3) 12,400 — 18,600 (1) Related to our obligation under our agreement with Eisai to fund the final tranche of the Tazverik royalty for $ 110.0 million following the June 2020 FDA approval of additional indications of Tazverik. (2) Related to the pro rata portion of RPIFT’s outstanding debt repaid by the Legacy Investors Partnerships. (3) Related to the achievement of sales-based milestones that were not paid as of December 31, 2022 and 2020. 124 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 15. Commitments and Contingencies Funding Commitments We have various funding commitments as of December 31, 2022 and 2021. See Note 3–Available for Sale Debt Securities for discussion of the respective arrangements. Cytokinetics Commercial Launch Funding As of December 31, 2022, $ 250 million of the Cytokinetics Commercial Launch Funding remained unfunded. Cytokinetics is required to draw $ 50 million if a certain contingency is met and has the option to draw the remaining $ 200 million upon the occurrence of certain regulatory and clinical development milestones. As of December 31, 2022, we expect $ 125 million of the optional $ 200 million to remain available under the Cytokinetics Commercial Launch Funding due to the likelihood that certain regulatory milestones will not be met by March 31, 2023. Other Commitments We have commitments to advance funds to counterparties through our investment in the Avillion Entities. Please refer to Note 9–Non-Consolidated Affiliates for details of these arrangements. We also have requirements to make Operating and Personnel Payments over the life of the Management Agreement as described in Note 16–Related Party Transactions. Indemnifications In the ordinary course of our business, we may enter into contracts or agreements that contain customary indemnifications relating to such things as confidentiality agreements and representations as to corporate existence and authority to enter into contracts. The maximum exposure under such agreements is indeterminable until a claim, if any, is made. However, no such claims have been made against us to date and we believe that the likelihood of such proceedings taking place in the future is remote. Legal Proceedings We are a party to legal actions with respect to a variety of matters in the ordinary course of business. Some of these proceedings may be based on complex claims involving substantial uncertainties and unascertainable damages. Unless otherwise noted, it is not possible to determine the probability of loss or estimate damages, and therefore we have not established accruals for any of these proceedings on our consolidated balance sheets as of December 31, 2022 and 2021. 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. 16. Related Party Transactions The Manager The Manager is the investment manager of Royalty Pharma plc and its subsidiaries. The sole member of the Manager, Pablo Legorreta, holds an interest in us and serves as our Chief Executive Officer and Chairman of our board of directors. In connection with the Exchange Offer Transactions (discussed in Note 1–Organization and Purpose), the Manager entered into the Management Agreement with us and our subsidiaries, the Continuing Investors Partnerships, and with the Legacy Investors Partnerships. Pursuant to the Management Agreement, we pay a quarterly operating and personnel payment to the Manager or its affiliates (“Operating and Personnel Payments”) equal to 6.5 % of the cash receipts from royalty investments 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 payment for Old RPI, an obligation of the Legacy Investors Partnerships as a non-controlling interest in Old RPI and for which the expense is reflected on our consolidated net income, is calculated as the greater of $ 1 million per quarter and 0.3125 % of royalties from Royalty Investments (as defined in the limited partnership agreements of the Legacy Investor Partnerships) during the previous twelve calendar months. Additionally, we also pay certain costs and expenses of the Manager. 125 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Prior to the date of the Exchange Offer, 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. The Manager or its affiliates receive 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. During 2022, 2021 and 2020, total operating and personnel payments incurred were $ 188.4 million, $ 145.2 million and $ 112.5 million, respectively, including the amounts attributable to Old RPI, and were recognized within General and administrative expenses in the consolidated statements of operations. Distributions Payable to Legacy Non-Controlling Interests The distributions payable to legacy non-controlling interests represent the contractual cash flows required to be distributed based on the Legacy Investors Partnerships’ non-controlling interest in Old RPI and RPI ICAV and RPSFT’s non-controlling interest in RPCT. The distributions payable to legacy non-controlling interests as of December 31, 2022 and 2021 include the following (in thousands): As of December 31, 2022 As of December 31, 2021 Due to Legacy Investors Partnerships $ 87,522 $ 92,608 Due to RPSFT 7,281 15,326 Total distributions payable to legacy non-controlling interests $ 94,803 $ 107,934 Acquisition from Bristol Myers Squibb In November 2017, RPI Acquisitions (Ireland), Limited (“RPI Acquisitions”) , a consolidated subsidiary, entered into a purchase agreement with Bristol Myers Squibb (“BMS”) to acquire from BMS a percentage of its future royalties on worldwide sales of Onglyza, Farxiga and related diabetes products marketed by AstraZeneca (the “Purchase Agreement”). On December 8, 2017, RPI Acquisitions entered into a purchase, sale and assignment agreement (“Assignment Agreement”) with a wholly owned subsidiary of BioPharma Credit PLC (“BPCR”), an entity related to us. Under the terms of the Assignment Agreement, RPI Acquisitions assigned the benefit of 50 % of the payment stream acquired from BMS to BPCR in consideration for BPCR meeting 50 % of the funding obligations owed to BMS under the Purchase Agreement. As of December 31, 2022 and 2021, the financial royalty asset of $ 103.4 million and $ 130.9 million, respectively, on the consolidated balance sheets represents only our right to the future payment streams acquired from BMS. Other Transactions Henry Fernandez, the lead independent director of our board of directors, serves as the chairman and chief executive officer of MSCI, Inc (“MSCI”). On April 16, 2021, we entered into an agreement with MSCI with an initial term of seven years to develop thematic life sciences 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, 2022 and 2021. The financial impact associated with this transaction has not been material to date. During 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, 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 and RPI ICAV. Refer to Note 9–Non-Consolidated Affiliates for additional discussion of the Legacy SLP Interest and our investments in other non-consolidated entities. RPIFT owns 27,210 limited partnership interests in the Continuing Investors Partnerships, whose only substantive operations are their investment in our subsidiaries. The total investment of $ 4.3 million was recorded as treasury interests, of which $ 1.5 million and $ 1.6 million were held by non-controlling interests as of December 31, 2022 and 2021, respectively. 126 ROYALTY PHARMA PLC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. Subsequent Events In January 2023, we acquired an interest in Ionis Pharmaceuticals, Inc.’s royalty in Biogen’s Spinraza (nusinersen) and Novartis’ pelacarsen, a development-stage product, for up to $ 1.125 billion, including an upfront payment of $ 500 million and up to $ 625 million in additional pelacarsen milestone payments. 127 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None.