CEO Resigns Due To Expense Irregularities Our Conclusion
DRI announced this morning that its Board had demanded and received
CEO Behzad Khosrowshahi’s resignation in light of “irregularities related to
certain alleged consulting and other expenses.” The news comes as a major
surprise, and the sharply negative share price reaction is understandable
given the nature of DRI’s business. Investors in DRI need to be able to trust
that management will effectively invest their capital given the opaqueness of
the pharma royalty market, and having the CEO unexpectedly removed will
likely have a major impact on that trust. We expect shares to remain in the
penalty box in the near-term as the interim management team rebuilds
credibility. While we do not expect the departure to meaningfully impact deal
sourcing, diligence, or execution, we note that there are new uncertainties
around counterparty willingness to transact, the ability to grow the portfolio
through new deals and the potential for additional concerns to be unearthed.
With our financial model based on the PV of the existing royalty portfolio, we
have not made any changes to our model but have reduced our price target
from $20 to $18.50 by applying a 0.9x multiple (previously 1.0x) to our DCF-
based target to reflect those uncertainties. Following the selloff, we retain our
Outperformer rating, as we continue to see upside from the existing portfolio
assets while understanding that it will take time, and attractive royalty
acquisitions without Mr. Khosrowshahi’s involvement, to rebuild investor
trust.
Loss Of CEO Not Likely To Impact Dealmaking: In the post-IPO period
DRI has made notable efforts to build out its investment team, led by CIO
Navin Jacob. The investment team is responsible for each step of the
dealmaking process, and Mr. Khosrowshahi would typically participate in
later stages of the process, offering insights related to contracting, IP and
legal, in addition to his presence on the investment committee. While
removing Mr. Khosrowshahi from the equation will have an impact to some
extent, we are comfortable that the investment team can operate at a high
level without his input.
Interim Management Update: Board Chair Gary Collins has been appointed
interim CEO of the Trust and Board member Ali Hedayat has been appointed
interim CEO of fund manager DRI Capital. Mr. Collins has been Chair of the
Board since 2021, and is a member of the audit committee while Mr.
Hedayat is Board member of both the Trust and DRI Capital, and has taken
on a more public-facing role at the Trust in recent months. Having Mr.
Hedayat remain in a management role is encouraging, in our view, given his
familiarity with DRI’s business, his background and expertise within the
capital markets, and his work as an advisor with Persis Holdings, owner of
the Fund Manager. CFO Chris Anastasopoulos has also been suspended
with pay, pending the outcome of the investigation. VP Finance Sandy Kwan
has been appointed interim CFO of both DRI Capital and the Trust.