DRI Healthcare Trust T.DHT.UN

RBC

[retiredcf]

October 3, 2024

DRI Healthcare Trust

First step on the new counterparty path - announces acquisition of Casgevy stream for US $57MM

TSX: DHT-U | CAD 13.24 | Outperform | Price Target CAD 16.00

Sentiment: Positive

Our initial view: DRI announced the acquisition of payment streams based on the Cas9 gene-editing technology for Casgevy and made an upfront investment of $57MM for these rights. The transaction has a novel deal structure that offers predictable annual cash flows, potential additional annual sales-based milestones and a one-time contingent payment. This transaction highlights DRI's ability to continue to pursue royalty transactions following the abrupt departure of the previous CEO in July, and as such we view it positively. The cash flows to DRI include a share of the annual license fees which VRTX pays to EDIT that can range from $5MM to $40MM, and includes certain sales-based annual license fee increases. DRI is also entitled to receive a mid-DD percentage of EDIT's portion of a $50MM contingent payment. The first payment is expected to be received in January 2025 and the payment streams run until 2034. Assuming a flat $10MM annual payment to DRI in January for the next 10 years (2025-2034) would equate to an estimated IRR of ~14.0% on this transaction. While we are assuming $10MM/yr in cash flows to DRI for simplicity, it would likely be lower in the initial years and higher in later years based on EDIT's releases, which noted a) $10MM of license fee from VRTX in 2024 and b) upfront cash payment of $57MM in exchange for up to 100% of certain future annual license fees payable to EDIT, ranging from $5MM-40MM per year (inclusive of certain sales-based annual license fees that may become due).

Details on Casgevy: Casgevy was approved by the FDA in December 2023 for the treatment of sickle cell disease (SCD) and in January 2024 for the treatment of transfusion-dependent beta thalassemia (TDT). It was approved by the European Medicines Agency (EMA) for the treatment of both SCD and TDT in February 2024. Casgevy is the only approved gene-edited cell therapy for SCD and TDT and is marketed worldwide by Vertex Pharmaceuticals. It was the first treatment approved by the US FDA to utilize CRISPR technology. Visible Alpha consensus forecasts for Casgevy indicate revenues to grow from ~$51MM in 2024E to ~ $1.2B by 2028E.

Transaction details: DRI announced the acquisition of payment streams based on the Cas9 gene-editing technology for Casgevy (exagamglogene autotemcel) for an upfront investment of $57MM. The transaction entitles DRI to specific payments based on a sublicensing agreement between Editas (NASDAQ: EDIT) and Vertex (NASDAQ: VRTX). The payments include a share of the annual license fees that VRTX pays to EDIT that can range from $5MM to $40MM, and includes certain sales-based annual license fee increases. DRI is also entitled to receive a mid double-digit (DD) percentage of EDIT's portion of a $50MM contingent payment for which EDIT is eligible under the VRTX license agreement. The first payment is expected to be received in January 2025 and the payment streams run until 2034. We note that EDIT received a 2024 annual license fee of $10.0MM from VRTX in Q1/24. Assuming a flat $10MM annual payment to DRI in January for the next 10 years (till 2034), would equate to an estimated IRR of ~14.0% on this transaction. While we are assuming $10MM/yr in cash flows to DRI for simplicity, it would likely be lower in the initial years (given DRI will receive some share of the annual license fees) and higher in later years (as drug revenues ramp up). Any contingent payment to DRI would be upside, in our view.