Multiple Raised TargetsLooks like they all agree that this was a very positive announcement. And while it would be nice, I assume that Scotia's target is C$24.00 as opposed to USD. GLTA
Calling a raise to its deployment guidance “eye-opening,” National Bank Financial analyst Zachary Evershed said DRI Healthcare Trust is “launching 2024 with positive headlines.”
On Thursday, the Toronto-based company, which provides financing to life sciences companies, announced the acquisition of an expanded interest in certain royalty payments based on net sales of Omidria, a novel ophthalmic product for use in cataract and lens replacement surgery, in the U.S. from Omeros Corp. ) for $115-million upfront
“With the uptick in expected royalties on Omidria, we believe it will now account for 30 per cent of DHT’s portfolio,” said Mr. Evershed. “The level of concentration this would have created if the initial Omidria I transaction in 2022 included the same uncapped terms as Omidria II is likely a contributing reason why this follow-on royalty purchase is only coming to fruition now, as the portfolio has grown enough to support it.”
DRI has now raising its deployment target for the five years ending 2025 to over $1.25-billion, up from $850-900 million.
“Management notes it continues to see significant opportunities in the market, evidenced by its $3.0-billion-plus pipeline in potential transactions,” said the analyst. “Including the follow-on for Omidria, DHT has thus far deployed $881-million with potential milestones up to $106-million, for total potential deployment of up to $987-million in two dozen transactions since its IPO in 2021.
“We estimate that DRI retains $285-million of dry powder while pro forma Net debt/EBITDA at 2.9 times remains below management’s comfort zone of 3.0-3.2 times. We see FCF of $85-90 million annually knocking 0.6 times off leverage annually, more than sufficient to fund the incremental deployments required to hit new guidance. The company is also increasing its long-term royalty income CAGR guidance (2022 through 2030) to mid- to high-single digits, up from the prior guidance of low-single digits. This measure excludes any new potential acquisition; in our base model, which also excludes unannounced incremental royalties, we calculate a 5-per-cent royalty income CAGR, at the low end of guidance.”
Citing “growth tailwinds supported by the asset-light, defensive nature of the royalty business model,” Mr. Evershed reiterated his “outperform” recommendation for DRI units, raising his target to $22 from $18.50. The average is $20.20.
Elsewhere, Raymond James’ Rahul Sarugaser reiterated DRI as his “2024 Top Pick” and increased his target to $22 from $21 with an “outperform” recommendation.
“The expansion of the Omidria royalty agreement should provide DRI and its shareholders large, immediate, and highly predictable cash-flows for the better part of the next decade, with potential upside associated with sales outperformance by Rayner (we model modest 4-per-cent year-over-year growth to 2031),” he said. “While this deal doesn’t fall into our ‘holy smokes’ category (more than 18-per-cent IRR), we believe the terms are attractive (12-per-cent IRR) and increases DRI’s cash flow yield by 20 per cent, which should prove a powerful tool for ensuring a strong, flexible balance sheet, positioning DRI well for organic (non-dilutive) growth.”
Other changes include:
* Scotia’s George Farmer to US$24 from US$22 with a “sector outperform” rating.
“We believe the company’s royalty acquisition model provides a clever and risk-diversified way to gain exposure the biotechnology drug market,” said Mr. Farmer. “Our NPV of free cash flows based on the current portfolio suggest that units trade at a discount to fair value.”
* Stifel’s Justin Keywood to $21 from $20 with a “buy” rating.
“The portfolio duration is currently in solid shape, in our view, with an expected total income CAGR in the high teens through 2025 and mid-to-high single digits through 2030. As we model DRI, we see a valuation re-rating opportunity towards Royalty Pharma’s multiple, and identify a potential multi-year value creation scenario building,” said Mr. Keywood.
* CIBC’s Scott Fletcher to $19 from $18 with an “outperformer” rating.