DRI Healthcare Trust (CA:DHT.UN, CA:DHT.U) announced on July 19 it had completed a $98 million bought deal, issuing 9.223 million units of its stock at $10.60, a 6% discount to the drug royalty investor’s unit price. 

The bought deal was led by CIBC Capital Markets, Scotiabank and RBC Capital Markets with help from several other firms, including National Bank Financial and Canaccord Genuity. 

The trust intends to use the net proceeds to fund current and future royalty transactions and repay debt. In addition, it noted that it may draw on its secured credit facility to fund its royalty transactions. The credit facility balance was $163.1 million as of June 30. 

The bought deal prompted several analysts to make changes to their target prices. However, the resumption of coverage by National Bank Financial analyst Endri Leno suggests investors could start returning to the stock in the second half of 2023. 

The question is whether they will.

Ready to Restock Royalty Portfolio

If you’re unfamiliar with drug royalty companies, their bread and butter is royalty income generated from drug development and commercialization. They get these royalties by providing funding to drug companies. 

Investing in small-cap drug companies is a challenging task. The risks are significant, with so many drugs failing to make it to the commercialization stage. Like any income-generating portfolio, drug royalty investors only generate income when funds are lent to drug companies. 

Some of the drugs that DRI Capital (which manages DRI Healthcare Trust) has acquired royalties on include Remicade, Keytruda and Stelara. 

The bought deal looks to accelerate the restocking of DRI’s portfolio. That’s good news for investors. Here’s what National Bank Financial’s Leno had to say, according to The Globe and Mail:

“DRI’s future performance will primarily rely on its ability to replenish the royalty portfolio, which we believe it can due to 1) multiple macro tailwinds (increasing pharma sales and R&D, many new drugs originating and being brought to market by smaller biopharma companies, royalty pharma transactions increasing, etc.); and 2) a highly experienced management team with a strong track record and deal-generating ability.”

As a result of the bought deal, Leno resumed coverage on DRI Healthcare’s stock with a ‘buy’ rating and a $11.50 price target. (All figures in U.S. dollars.) That was nearly 40% higher than where it was trading on Wednesday, before yesterday’s 7.5% surge to the equivalent of $9.18 (CAD$12.09).

Other analysts making changes: Canaccord Genuity analyst Tania Armstrong-Whitworth cut her target by $1.75 to $16.75. That’s still 49% higher than its unit price. Also, CIBC World Markets analyst Scott Fletcher dropped his price target by $4 to $17, significantly higher than its current unit price. 

Latest Transactions

On July 7, the trust announced that it would acquire a royalty interest in the future worldwide net sales of VONJO from S*Bio Pte Ltd for $66 million.   

“VONJO is an oral, small-molecule JAK2 inhibitor currently marketed by Swedish Orphan Biovitrum AB (“Sobi”), used for the treatment [of] myelofibrosis (“MF”) patients with severe thrombocytopenia. It was approved by the U.S. Food and Drug Administration (“FDA”) in February 2022 and is the only approved treatment for the indication,” stated the Trust’s press release announcing the transaction.

The trust expects to receive its first royalty payment in the third quarter. The oral drug is under patent protection until January 2034. In addition to royalty payments, it’s entitled to receive up to $107.5 million in milestone payments for VONJO sales reaching certain sales hurdles in the future.

The National Bank analyst estimates that its existing portfolio's latest transaction and other royalty agreements have a net asset value (NAV) of $9.25 a unit. He estimates future growth is worth $2.25 in NAV, which is how he arrives at his US$11.50 target price.  

DRI Healthcare acquired another royalty interest on June 30, a few days before the VONJO announcement. 

The trust purchased a royalty interest in the worldwide sales of Orserdu from Esai Co. Ltd. for $85 million. The FDA approved Orserdu in January of this year. 

“It is the first and only approved targeted therapy used in the treatment of postmenopausal women or adult men with ESR1-mutated ER+/HER2- metastatic breast cancer,” the trust’s June 30 press release stated. 

Orserdu is patent-protected through January 2038. The trust will be entitled to a mid- to single-digit tiered royalty paid quarterly starting in the third quarter. 

Since going public in February 2021, DRI Healthcare has made royalty transactions totalling $570 million, with an additional $55 million in potential milestone payments. 

When it went public, the average royalty transaction lasted approximately eight years. Today, it’s more than 10 years. The analysts have noticed.