Orserdu Milestone Payments Are An Easy Pill To Swallow Our Conclusion
Milestone payments of $38MM on Orserdu and VONJO weren’t the only
highlights from DRI’s Q4, as a greater-than-expected contribution from
standard Orserdu royalties also led to royalty income that was 15% ahead of
Street expectations. While the milestone payments are lumpy, unpredictable
and non-recurring, they do highlight that DRI is able to structure deals to their
advantage and capture additional upside when royalty assets outperform
baseline expectations. DRI still has somewhere in the range of ~$160MM in
potential milestones receivable from Orserdu and VONJO alone, and with
the milestones not included in our forecast, we see them as a reason DRI
units should continue to close the existing discount to NAV. With $300MM in
dry powder, we continue to expect additional acquisitions in 2024, which we
expect to be accretive to NAV given the recent track record and structural
market tailwinds. We retain our Outperformer rating and increase our price
target from $19 to $19.50, largely as a result of the milestone payments.
Key Points
Orserdu Exceeding Expectations: Even after backing out $33.7MM sales
milestone payments related to Orserdu, the drug notably outperformed our
expectations. After management previously noted that 2023 Orserdu sales
would reach at least $175MM, actual sales significantly exceeded that
threshold. The structure of the Orserdu II deal appears to have been
advantageous to DRI, with $30.3MM of $40MM in potential milestones
achieved less than six months after DRI acquired the royalty. With Orserdu
marketed by privately held Menarini Group, it remains a source of forecast
uncertainty given a lack of public estimates. However, with the drug already
exceeding expectations, we are less concerned with that uncertainty.
Biotech Funding Rebounding; Structural Tailwinds Remain: Despite
equity capital becoming more available to the biotech sector ($6.2B raised by
the sector in January), DRI management remains confident in its pipeline
and ability to source deals. While near-term tailwinds that resulted from the
lack of equity financing may subside, management believes that structural
changes to the market continue to support DRI’s ability to source attractive
deals. The number of new drugs approved by the FDA was up 49% Y/Y from
2022, which should naturally lead to more royalty opportunities, not just on
the new drugs but also on existing drugs where royalties can be sold or
created to help fund new drug development. Additionally, biotech
management teams are much more open to royalty financing, and DRI has
started to field more inbound interest from potential royalty sellers.
Guidance For 2024 In Line With Our Estimate; Likely Conservative:
DRI’s 2024 income guidance of $153MM-$155MM (excluding milestones or
additional royalties) matched our prior $153MM forecast, despite Orserdu
notably exceeding expectations in the quarter. With this being the first time
DRI has provided annual guidance, we believe the target is conservative and
have increased our income forecast to above the range as we take up our
Orserdu forecast after the strength in the quarter.