National Bank Following better-than-expected second-quarter results, National Bank Financial analyst Endri Leno thinks investors are not currently giving DRI Healthcare Trust credit for its current portfolio nor pricing in further growth.
“Thus, in addition to the multiple (macro and company-specific) tailwinds and the defensive nature of pharmaceutical royalties, we find the units fundamentally undervalued prompting an Outperform rating,” he said in a research note Continues to Execute.
With its Monday earnings release, the Toronto-based company announced the acquisition of a second royalty stream in breast cancer treatment of Orserdu for US$130-million from Radius Health. It entitles DRI to a low-to-high single digit tiered royalty on global net sales. DRI is also entitled to receive milestone payments of up to US$40-million on sales performance thresholds.
“Following the second Orserdu royalty, DRI has now deployed approximately US$766-million into royalties and is, likely, one or two further deals away (pipeline deals in the US$75-US$150-million range) from achieving the high end of its US$850-US$900-million deployment guidance,” said Mr. Leno. “While we believe there is a very reasonable probability that this guidance is increased (it would likely prompt us to revisit the growth portion of our NAV) post the next royalty acquisition, DRI is keeping it unchanged at the moment as it further evaluates pipeline opportunities.”
Believing DRI’s pipeline “remains robust,” he added: “The current pipeline is valued at US$2.8-billion with some 28 opportunities of which 16 are near term (could close in 6 months) and valued at US$1.8-billion. The remaining 12 opportunities are longer term and valued at US$1-billion. We would not be surprised to see some near-term opportunities having moved to exclusivity by the Q3 update in Nov. 2023.”
After adding the second Orserdu valuation to his forecast, Mr. Leno raised his target for DRI shares to US$11.75 from US$11.50, reiterating his “outperform” recommendation. The average on the Street is $18.64 (Canadian).