CIBC ReportEQUITY RESEARCH
October 3, 2024 Earnings Update
DRI HEALTHCARE TRUST
Acquiring Payment Streams Based On CASGEVY For $57MM
Our Conclusion
DRI Healthcare announced the $57MM acquisition of a payment stream
related to CASGEVY, the first FDA approved treatment using CRISPR gene
editing. The payment stream entitles DRI to a share of license and
contingent payments that biotech firm Editas will receive from its
sublicensing agreement with Vertex. The deal is notable for a few reasons,
most importantly that it is the first transaction since DRI’s former CEO was
forced to resign. Investors have raised questions about dealmaking ability in
light of the departure, and we believe a successful deal closing should
alleviate some concerns. While not a particularly large deal for DRI, the
medicine is cutting edge, the treatment area is new to DRI, and the deal
structure differs from a traditional sales royalty, which aligns with recent
commentary from fund manager CEO Ali Hedayat around pursuing novel
deal structures. After adding the CASGEVY streams to our model, our DCF-
based price target goes from $17.50 to $18.50 and we retain our strong
belief that current levels offer an attractive entry point at nearly a 30%
discount to our DCF-based target.
Key Points
Transaction Details: DRI is acquiring a portion of the payment rights that
Editas Medicine is currently entitled to under an existing non-exclusive
agreement with Vertex Pharmaceuticals. Under the pre-existing agreement
between Vertex and Editas, Vertex obtained a license for Editas’ Cas9
(CRISPR) gene editing technology and Editas receives annual license fee
payments from Vertex for the use of the technology. DRI is paying $57MM
upfront for a share of these license fees, the gross amount of which ranges
from $4MM to $40MM annually before payments to Harvard and the Broad
Institute. The payment stream runs until 2034 with DRI receiving its first
payment in 2025. DRI is also entitled to sales-based increases to the license
fees, triggered every year CASGEVY hits a specific sales threshold. In
addition to the annual payments, DRI is also entitled to a “mid-double-digit“
portion of a $50 million contingent payment that Editas is eligible for under
the agreement. With Editas also paying “mid-double-digit” license fees to
Harvard and the Broad Institute, we expect that DRI’s share of this payment
would be well less than 50%.
Contingent Payment Offers IRR Upside: Based on the details currently
available, we calculate that the deal could result in low-double-digit IRR, with
additional 4% - 6% IRR upside in a scenario where the contingent payment
is received. Given the minimal risk associated with the license payments, a
low-double-digit IRR (excluding the contingent payment) seems reasonable
given the upside offered by the contingent payment. In our calculation of
IRR, we have factored in DRI’s share of the net license fees increasing
rateably over the life of the payment stream, and based on discussions with
management and consensus sales estimates for CASGEVY, we expect the
sales-based license fee increases will be triggered starting in 2028.