TSX:DHT.UN - Post by User
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retiredcfon May 19, 2022 8:34am
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TSX: DHT-U; CAD 7.04
Price Target CAD 14.00
DRI Healthcare Trust
Highlights from the RBC Global Healthcare Conference
Our view: Behzad Khosrowshahi, CEO of DRI Healthcare Trust, presented at our conference this morning. Our discussion primarily focused on: a) DRI's competitive advantages, b) the deal pipeline, c) macro environment, and d) capital allocation. The company expects to beat the $150MM in capital deployment this year and expects to close one of the near-term deals in its pipeline by 30-Jun. We rate DRI Outperform with a $14 PT.
IPO and historical returns. DRI was established in 1989. The company was taken private in the early 2000s and was publicly listed again last year. DRI has done ~60 different transactions on ~40 different products. The company targets royalties on drugs which have the following characteristics: a) already launched and have been on the market for 12-24 months, b) generate cash flows, c) are moving up the commercialization curve and d) mostly risk-free as it relates to the clinical trial risks. The company noted that as a PE fund manager, it generated net returns in the low ~20% range for its investors. The company acquires assets with a conservative base case assumption of 12% returns and gets upside from several factors such as: a) failure of competition to come to the market, b) approval of the product in new indications and/or new markets, c) price increases. DRI noted that the company has not changed its underwriting framework after becoming a public company.
Competitive advantages. DRI conducts royalty transactions in the $25-200MM deal value range. The company believes that this particular segment of the market is underserved given the larger competitors do not focus on transactions of this size. Over the past 15+ years, DRI has built a proprietary database that tracks royalties on 2,000+ products and 6,500+ different royalty streams. The company has an established team with strong institutional knowledge to source royalty deals.
Deal environment. The company is seeing very strong demand for royalty deals across all three verticals (individual inventors, academic institutions and corporates). On competition, DRI noted a relatively muted competitive environment as two of its competitors are raising funds which will likely put them out of market from executing deals over the next 9-12 months. Some other smaller competitors have exited on a permanent basis. DRI noted that, on average, it had deployed capital of ~$150MM per year over the last ~15 years. DRI aims to deploy $650-750MM of capital in the first five years as a public company. The company anticipates that it will beat the $150MM annual target of capital deployment in 2022.
Macro environment. DRI utilizes a discount rate based on the risk-free rate (US 10Y yields) when evaluating investment opportunities. Due to the increase in rates, the company now expects base case returns in the ~12-14% range higher, than the historical range (~10-12%).
Pipeline. DRI divides its pipeline into two buckets — near term (deals expected to close in 9 months) and long term. The company's near-term pipeline consists of 10 deals with transaction value of $1.6B. All the near-term deals meet or exceed the company's investment criteria. Of the 10 deals, three deals are under exclusivity (~$100MM in aggregate) and the company aims to close on one of those deals by 30-Jun.
Capital allocation. The company noted its bias towards deploying more capital in the current environment where it is seeing strong demand for royalty transactions. However, if the deal flow were limited, the company could complete share buy-backs conditional on the share price. The company plans to distribute ~30% of its FCF to investors as dividends on an ongoing basis.
VONJO. DRI noted better than anticipated launch of VONJO based on CTI BioPharma's Q1/22 results and comments made on the earnings call. VONJO has been approved for patients with less than 50,000 platelets, however, CTI noted spontaneous use of VONJO for patients with greater than 50,000 platelets, which suggests better than anticipated peak revenues and/or earlier achievement of the peak revenues. DRI noted that during the underwriting of the royalty transaction on VONJO, the company's base case assumed a patient population with less than 50,000 platelets.