DRI Healthcare Trust
DRI announces attractive, small royalty deal that increases duration of asset pool
TSX: DHT-U | CAD 9.01 | Outperform | Price Target CAD 14.00
Sentiment: Positive
Our view: While at the smaller end of the targeted $25-$200MM range for royalty transactions, we believe the pegcetacoplan deal is attractive for several reasons including, (i) the drug treats a very serious disease and materially improves the standard of care; (ii) the drug was only recently approved (2021); (iii) it has a long expected duration (~2031/2032 patent expirations); (iv) new, large indications may be added to the label; and (v) an option was negotiated to increase the sales cap from $500MM to $1.1B for $21MM.
Acquired royalty interest in Empaveli/Aspaveli (pegcetacoplan): DRI announced the acquisition of a new royalty interest in pegcetacoplan for an upfront payment of $24.5MM, with an option to increase its interest in future. The drug is marketed under the brand name Empaveli in the US by Apellis (APLS) and Aspaveli outside the US (including EU) by Swedish Orphan Biovitrum (SOBI) AB, a rare disease-focused biopharmaceutical company.
Transaction details: The upfront payment of $24.5MM entitles DRI to a <1% royalty (likely in the 75-90 bps range) on worldwide net sales of pegcetacoplan, subject to a net annual revenue cap of $500MM. However, DRI has an option to increase the annual sales cap to $1.1B for a one-time payment of $21.0MM. DRI will receive quarterly royalty payments on global net sales of pegcetacoplan commencing 1-Jan-22. Royalties will be paid on a two-quarter lag, which is similar to other royalty streams. DRI's royalty entitlement will step down upon the expiry of the relevant patents in each jurisdiction and the royalty term is expected to expire in the US in Q4/31 and in the EU in Q2/32.
Consensus revenues for Empaveli/Aspaveli: Significant ramp expected. Drug revenues are expected to climb rapidly over the next several years at Apellis. FactSet consensus revenues stand at $83MM, $269MM, $680MM and $1.3B in 2022, 2023, 2024 and 2025, respectively. We note that Apellis consensus revenues include royalty revenues from SOBI and, as such, under-represent the total global sales at a wholesale level for Aspaveli.
Greater detail on Empaveli/Aspaveli (Pegcetacoplan). Pegcetacoplan is the first targeted C3 therapy for adult use in patients with Paroxysmal Nocturnal Hemoglobinuria ("PNH") The drug was approved by the US FDA and the EMA in 2021. Pegcetacoplan is also in development for several new pipeline indications including Geographic Atrophy ("GA"), Cold Agglutinin Disease and C3 Glomerulopathy. The FDA has granted fast-track status and has accepted and granted priority review of a New Drug Application submitted by Apellis for pegcetacoplan for the treatment of GA, with a Prescription Drug User Fee Act (PDUFA) target action date of November 26, 2022. Notably, no review committee was scheduled for the PDUFA. If approved, pegcetacoplan would represent the first drug approved for GA treatment.