DRI Healthcare Trust T.DHT.UN

RBC

[retiredcf]

Their upside scenario target is $21.00. GLTA

October 3, 2022
DRI Healthcare Trust

Announces third and largest royalty deal this year - expected to help with cash flow pacing

Our view: DRI announced an attractive third royalty deal of 2022 for ophthalmology drug Omidria (phenylephrine and ketorolac intraocular solution) for an upfront payment of $125MM. The company has deployed $184.5MM on royalty acquisitions this year, surpassing the $150MM annual target of capital deployment. Based on the monthly cap on the royalties, the IRR on this transaction is ~9.6%. We have incorporated Omidria royalties in our model and have reflected updated consensus/RBC forecasts for the existing portfolio. Additionally, we have also lowered the expected royalties from Natpara. After incorporating all these changes, our price target remains unchanged at C$14.

Key points:
Omidria royalty transaction. DRI announced the acquisition of a new royalty interest in Omidria from Omeros for an upfront payment of $125MM. The drug was approved by the FDA in May 2014 and EMA (Europe) in July 2015 for intracameral use during cataract surgery or intraocular lens replacement. The drug is marketed by Rayner Surgical.

Transaction details. The upfront payment of $125MM entitles DRI to monthly royalties until the end of 2030. The royalties are subject to annual caps of $1.67MM for the four months from Sep-22 through Dec-22; $13MM for 2023; $20MM for 2024; $25MM for each of 2025-2028 (inclusive); $26.25MM for 2029; and $27.5MM for 2030. DRI noted that Omeros collected $31.1MM in royalties for H1/22. Management strongly believes that it will be able to collect the capped royalties.

IRR sub-10% but importantly provides cash flow visibility. Assuming DRI receives the capped monthly royalties, the IRR on the transaction is 9.6%. Although the IRR associated with the transaction is below the targeted 12% by management, the pacing of the royalties boosts royalty receipts in future years and offsets the near-term decline in royalty receipts due to expiry of other royalties in the portfolio. Management noted that the company evaluates deals on multiple metrics including cash flow accretion that was relevant in this transaction.

Incorporating Omidria royalties in our model. We incorporate Omidria royalties in our model and have reflected updated consensus/RBC forecasts for the existing portfolio. Omidria represents 23% of our gross asset value. We have also lowered the expected royalties from Natpara based on management's commentary that the issues that led to the 2019 recall of Natpara in the US are likely to remain unresolved for the foreseeable future. Management noted that it is reviewing its options with respect to the Natpara Royalty. The royalties on European and RoW Natpara sales are expected by management to continue in the near term. After incorporating all these changes, our price target remains unchanged at C$14.