Dri Healthcare Trust T.DHT.UN

RBC Report

[retiredcf]

Their upside scenario target is $24.00; added a few more today. GLTA

July 10, 2023

Outperform

TSX: DHT-U; CAD 11.35

Price Target CAD 18.00 ↑ 17.00

DRI Healthcare Trust

Additional uncapped royalty interest in VONJO acquired - price target to $18

Our view: DRI announced the acquisition of an uncapped additional royalty interest in worldwide sales of VONJO. As a result of this transaction, we now forecast cash royalties in 2030E to be 15% higher than those of 2022A. This compares to our prior estimate of flat cash royalty receipts in 2030 vs. 2022A with existing assets. We estimate an IRR of ~15% on this transaction. We note that the uncapped royalty deal structure provides potential upside to DRI in the event drug performs better than consensus estimates.

Key points:

Second royalty transaction on Vonjo. DRI announced a second royalty acquisition of Vonjo (pacritinib) for an upfront payment of $66MM to S*Bio Pte Ltd. The acquisition entitles DRI Healthcare to an uncapped tiered royalty (more attractive) on the worldwide net sales of Vonjo. After this transaction, management expects to achieve the high end of the target CAGR range of 7-9% for Total Income (Cash royalty receipts plus interest receipts, which were $96.2MM in CY22) through 2025 and expects stable to slightly growing Total Income through 2030. The overall portfolio duration is now extended to over 10 years. The transaction is expected to close by the end of this month. DRI has deployed $636MM in royalty acquisitions since its IPO in Feb 2021 and is tracking ahead of the five-year target of $850-900MM in capital deployment by year end-2025. Management noted a healthy pipeline of over $2.5B.

We estimate an IRR of ~15% on this transaction. We have utilized Visible Alpha consensus forecasts for CTI BioPharma. The consensus forecast indicates US peak sales of $858MM for Vonjo. We have not included EU revenues where consensus estimates indicate EU approval in late 2027/ early 2028. Additionally, we note that SOBI has described a US market opportunity of $1.2-1.4B in the low platelet count patient population. We have modeled a low-single digit tiered royalty rate for Vonjo (1.0% royalty rate for net revenue below $250MM; 2.0% royalty rate for net revenue between $250-500MM and 2.5% royalty rate for net revenues above $500MM) vs. management’s guidance of tiered royalty on the worldwide net sales of Vonjo. DRI is also entitled to receive milestones payments of up to $107.5MM based on the achievement of regulatory and sales performance thresholds. We have modeled a small portion ($35MM) of total milestone payments and expect these when sales milestones are achieved. Based on our assumptions, which we believe are conservative, we forecast an IRR of ~15% on this transaction.

Incorporating Vonjo royalties. We have incorporated the announced Vonjo royalties into our model and have reflected updated consensus/RBC forecasts for the existing portfolio. Vonjo represents ~23% of our gross asset value. We have now excluded $20MM from the cash position to reflect the performance fees paid to DRI Capital as a result of Tzield royalty transactions. Our PT increases from C$17 to C$18