Also have a $20.00 target. GLTA
DRI HEALTHCARE TRUST
Acquiring A Second Xenpozyme Royalty
Our Conclusion
DRI Healthcare announced it had acquired a second royalty on Xenpozyme,
an FDA-approved drug that treats non-central nervous system manifestations
of acid sphingomyelinase deficiency (ASMD), also known as Niemann-Pick
disease. DRI is paying $13.25MM upfront with the potential to spend another
$32.5MM based on the drug meeting certain performance-based thresholds.
The total purchase price is relatively small for DRI, and we expect the initial
payment will be funded through the credit line and will have minimal impact
on total leverage ratios. Although on the smaller side, the Xenpozyme II
transaction highlights DRI’s ability to leverage its existing due diligence and
familiarly with drugs already in the portfolio to create additional value. We
calculate a mid-20% IRR using current Xenpozyme consensus sales,
excluding milestone payments, which we do not expect to be triggered
unless global sales exceed current consensus.
Key Highlights
Transaction Details: The total purchase price of $45.75MM is comprised of
a $13.25MM upfront payment, and up to $32.5MM in performance-based
outbound milestone payments. The transaction entitles DRI to an
approximately 1% royalty on worldwide sales (100%) of Xenpozyme, with the
royalty capped at $6.3MM in royalties receivable per calendar year, stepping
down to 1% on 50% of sales thereafter. Based on current consensus
estimates, we do not model DRI hitting the royalty cap over the duration of
the royalty, which ends in 2036. The royalty is very similar to Xenpozyme I;
where DRI is also entitled to ~1% of the worldwide net sales of Xenpozyme
paid semi-annually, with the main difference being Xenpozyme I is uncapped
vs. Xenpozyme II capped at $6.3MM. With DRI having paid $30MM upfront
for the original Xenpozyme royalty vs. $13.25MM upfront for the second one,
the market for royalties and DRI’s ability to negotiate attractive deals look to
have improved.
Credit Capacity Largely Unchanged: With only $13.25MM in upfront
proceeds, the Xenpozyme II transaction leaves DRI’s leverage capacity
largely unchanged. After speaking with management, we note that DRI’s
near- to medium-term pipeline consists of 10 opportunities that total ~$1B.
Based on management’s leverage target of a low-3x EBITDA on the
company’s bank debt (currently 1.2x net of cash), as well as an additional 1x
EBITDA on the preferred securities (0.9x), we estimate DRI could add
~$300MM of additional debt to finance royalty acquisitions, before factoring
in additional cash flow and royalties receivable.
Milestone Payments Move The Needle: We calculate a mid-20% IRR
excluding future milestone payments, which are payable upon achieving
certain sales thresholds which were not disclosed. While we do not have
details on the exact sales thresholds, we note that the current consensus
estimates for Xenpozyme sales are not expected to trigger the milestone
payments.