CIBC Initiate CoverageEQUITY RESEARCH
November 22, 2022 Initiating Coverage
DRI HEALTHCARE TRUST
Pharma Royalties At A Discount: Initiating At Outperformer
Our Conclusion
We view DRI Healthcare Trust (DHT) units as an attractive way to provide
exposure to the pharmaceutical and biotech industry without taking on the risks inherent to the drug development and marketing process. DHT owns a portfolio of top-line royalties on approved, medically necessary drugs that are price inelastic and relatively immune to economic cycles. With a fund manager that has a long history of successful royalty investments and a limited cost profile that leads to 80%+ adjusted EBITDA margins and strong cash flow conversion, we have confidence that DHT will reinvest cash flow in new, attractive royalty opportunities over time. As of November 22, we initiate coverage with an Outperformer rating and C$11.50 price target. Our target is based on a DCF valuation using our estimate of DHT’s future cash flows on the existing royalty portfolio and a 1.0x P/NAV multiple.
Key Points
Lower-risk Exposure To Pharma & Biotech Markets: Through a portfolio
of 21 royalties on 17 drugs, DHT units allow investors to benefit from the sale of medically necessary, approved drugs without exposure to the risks and costs involved with developing, selling, and marketing those products. Global prescription drug sales are expected to grow at a 6.4% CAGR from 2021 to 2026E, owing to an aging population and increased investment in medical research. Additionally, the current state of capital markets has made access to capital difficult for higher-risk pharma and biotech firms, leading to an increase in the number of royalty investment opportunities for DHT.
Strong Track Record & Deep Expertise: Fund manager DRI Capital (DRI)
has over 19 years of experience in drug royalty investing, having realized an 18.9% aggregate gross unlevered IRR on over $2 billion of capital deployed. That experience has led to an investment team with deep industry knowledge as well as a proprietary database of royalty information, royalty owners, and potential acquisition opportunities that we view as a notable competitive differentiator. A focus on small to medium transactions has also led to DRI being considered a partner of choice when it comes to transactions in the range of $25 million-$150 million. On the strength of its royalty database and conviction in its deployment capabilities, the fund is well on track to exceed its target of $650 million-$750 million deployed in the first five years post IPO,
having spent $295 million in the first 21 months post-IPO.
Trading At A Steep Discount To NAV: DHT units are trading at 0.60x our
calculated NAV, a notable discount to a group of CIBC-covered royalty
companies trading at an average of 1.3x NAV. With EBITDA and FCF
margins in the 85%+ range, we view the current discount to NAV as an
attractive entry point and believe the units should trade at a much narrower discount to NAV. Additionally, DHT aims to pay out 20%-30% of available cash as distributions, with the mid-point of that range implying a distribution yield of 9.7%, another compelling reason to own DHT units at current levels.