DRI Healthcare Trust (DHTUN) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the DRI Healthcare Trust 2022 Second Quarter Earnings Call. Listeners are reminded that certain statements made in this earnings call presentation include responses to questions, may contain forward-looking statements within the meaning of the safe harbor provisions of Canadian provincial securities laws. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that may cause actual results to differ materially from exceptions and about material factors or assumptions applied in making forward-looking statements, please consult the MD&A for this quarter, the Risk Factors section of the Annual Information Form and DRI Healthcare Trust's other filings with Canadian security regulators. DRI Healthcare Trust does not undertake to update any forward-looking statements. Such statements speak only as of the date made. The presentation today also references certain non-GAAP measures, including total cash receipts, total cash royalty receipts and adjusted EBITDA and certain non-GAAP ratios including adjusted EBITDA margins and adjusted cash earnings per unit. These measures are not recognized measures under the IFRS and do not have standardized meaning prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other issuers. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of DRI Healthcare Trust's financial performance from management's perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysts or financial information reported under IFRS. Please note that all dollar amounts discussed today are in U.S. currency unless otherwise specified. I'd like to remind everyone that this conference call is being recorded today, Thursday, August 4, 2022. I would now like to introduce Mr. Behzad Khosrowshahi, Chief Executive Officer of DRI Healthcare Trust. Please go ahead.

Thank you, operator, and good morning, everyone, and thank you for taking the time to join us today. We very much appreciate it. With me today are Chris Anastasopoulos, our Chief Financial Officer; and Stewart Busbridge, our Chief Operating Officer. We're excited to share our second quarter results and update you on our key priorities for 2022. As many of you know, our strategy is to purchase royalty streams on pharmaceutical products that will generate sustainable growth for our investors. Consistent with our strategy, we were very pleased to announce the completion of a transaction to purchase royalties on the worldwide sales of Empaveli for $24.5 million, combined with an option to deploy more capital and purchase a greater portion of the royalties in the future. Empaveli is approved for the treatment of PNH, a rare blood disorder, and is currently under review for the treatment of other indications, including geographic atrophy, also known as GA. GA is an ophthalmic condition for which there is no effective treatment and, should it get approved, Empaveli will be the first treatment for this condition. Stewart will discuss the transaction in more detail a bit later on through our presentation. It is expected to provide approximately 10 years cash flow, and the addition of the transaction extends the duration of our portfolio back up to 9 years as of June 30, 2022. As we mentioned on last quarter's call, in April, we enhanced our ability to act on the significant opportunities for additional royalty transactions when we increased the size of our credit facility to $350 million. Currently, we have capacity of $283 million on the facility and combined with our free cash flow, we are well positioned to act on our active pipeline, which sits at about $1 billion across 8 different potential transactions. Importantly, we look forward to the possibility of announcing new deals in the near term. Finally, we continue to deliver unitholder returns and last night declared a $0.075 per unit distribution for the quarter. Not considering any special distributions, this represented an annualized distribution of $0.30 per unit at a current yield of over 4%. Our portfolio continues to perform well, generating $21.3 million in royalty and interest income, total cash receipts of $25.3 million, $21.4 million in adjusted EBITDA. We generated adjusted cash earnings per unit of $0.43 in the quarter. I will now turn it over to Stewart to discuss our recent asset performance.

Thank you, Behzad. I'll start by discussing our recent transactions to acquire royalty on Empaveli. Empaveli is used to treat paroxysmal nocturnal hemoglobinuria, or PNH, a rare chronic life-threatening genetic disorder characterized by the destruction of red blood cells. About half of patients with PNH currently require regular transfusions. The median survival rate is cited as being 10 years after diagnosis. The FDA and European Medicines Agency approved Empaveli for the treatment of adults with PNH in 2021, and it is available in the U.S. and the EU. In the EU, it is marketed under the brand name Aspaveli. This transaction entitles us to a royalty of a little under 1% on the worldwide net sales of all formulations of Empaveli, up to an annual cap of $500 million. The transaction further demonstrates our ability to structure and execute flexible transactions. As part of this deal, DRI has the option to increase the sales cap from $500 million to $1.1 billion for an additional onetime payment of $21 million, giving us the flexibility to increase our exposure to Empaveli should we choose to do so. We will receive royalty payments quarterly for all sales of Empaveli beginning from this past January and expect that there will be a 3-quarter lag between sales and the resulting royalty receipts. We anticipate receiving our first royalty payment on Empaveli in Q4 of this year. Our royalty entitlement will step down as patents expire in each jurisdiction, and ultimately, the royalty term is expected to expire in the U.S. in the fourth quarter of 2031, and in Europe, in the second quarter of 2032. As Behzad mentioned, this transaction extends our portfolio duration to about 9 years. We are also excited with the potential for Empaveli to be approved for the treatment of other indications. It has been granted priority review by the FDA for the treatment of geographic atrophy, or GA, an advanced form of dry age-related macular degeneration with a PDUFA target date of November 26, 2022. If approved, it would be the first drug approved for the treatment of GA. There are also Phase III trials under way for the use of Empaveli in treating cold agglutinin disease, a rare autoimmune disorder, and C3 glomerulopathy, a rare kidney disease. This slide shows the breakdown of cash royalty receipts by asset for Q2 2022 compared to Q2 2021 and Q1 2022. Cash royalty receipts from our core portfolio decreased by 9% to $23 million for the quarter compared to Q2 2021. This decline was primarily driven by a decrease in the royalty entitlements from Eylea I as the stream reached the anticipated contractual step down starting last quarter as well as the impact on Spinraza over the past year of competitive products, an impact that seems to be stabilizing as seen by the growth of 7% for Spinraza receipts over Q1 of this year. Royalty entitlements for Rydapt also declined due to a onetime positive adjustment in the second quarter of last year that caused the comparative to be unusually large. As expected, royalty receipts from the mature products continue to decline due to the expiry of royalty entitlements from the rilpivirine portfolio in Q2 of last year and the continued expirations of royalty entitlements in certain geographies in the autoimmune portfolio. Going forward, we expect to realize growing royalty receipts from Vonjo, our acquisition from Q1 of this year, and our first royalty received from Empaveli in Q4 2022 as well as cash flows resulting from the execution of acquisition opportunities in our pipeline. I will now turn the call over to Chris to discuss our financial status. Chris?

Thank you, Stewart. We continue to generate strong cash flows from our assets. In the first half of 2022, our total cash receipts were $46.2 million, including total cash royalty receipts of $43.7 million and interest receipts of $2.5 million on the loan from -- loan to CTI. Applying operating expenses and management fees totaling $6.9 million over the same period results in an adjusted EBITDA of $39.3 million for the year-to-date and an adjusted EBITDA margin of 85%. For the 6 months ended June 30, we generated $0.91 in adjusted cash earnings per unit. As of June 30, we had cash and cash equivalents of $43 million, along with $27 million of royalties receivables. As a result of the substantial cash position, we were able to close the Empaveli transaction using cash on hand. As mentioned, our credit facility was expanded in April through the addition of the delayed draw term loan tranche of $150 million and now stands at a total size of $350 million. As of June 30, we had drawn $67 million on the facility, resulting in $283 million of capacity available to fund our growth. Combining our cash on hand, the cash we generate each quarter, and the funds available from our credit facility, we have significant resources to deploy to continue to grow our portfolio. I will now turn the call back over to Behzad.

Thank you, Chris. I'll now sum up our key priorities. First, growing our asset base. We are poised for growth with a pipeline of targets with attractive royalty streams. Our cash on hand, available credit and rigorous due diligence processes keep us well positioned to capitalize on the right opportunities. I'll add that our extensive one-of-a-kind proprietary database and ability to create transactions that are beneficial to all parties makes us a very attractive partner in the biotech and pharmaceutical industries. We have completed 3 transactions to date and are on pace to meet or exceed our target of making between $650 million and $750 million in royalty acquisitions over the first 5 years as a public issuer. Second, achieving accretive growth. Our acquisition strategy focus on targets with the potential to generate long-term royalty revenue for medically necessary products with long patent lives and potential for expansion through new indications or geographies. Finally, we are committed to providing solid and reliable unitholder returns by distributing between 20% to 30% of our available cash flows. With this, I'll now turn it over for your questions. Thank you very much.

[Operator Instructions] Your first question comes from Adam Buckham with Scotiabank.

Maybe to start, I was hoping to get an update on the pipeline. Any color you can provide in terms of number of deals, stage and size would be helpful.

Good morning, Adam, thank you very much for the question, and I appreciate you taking the time to join the call. Our pipeline continues to develop quite well. As you know, we sort of divide our pipeline into near-term and later-stage deals, meaning deals that we're going to look at later on this year and early next year. Our near-term pipeline is comprised of about 13-or-so different transactions right now and over $1.5 billion in size in total, obviously, factoring out the Empaveli transaction that we had recently closed. Of those transactions in total, first of all, sort of meet our investment criteria, meet our financial criteria. So they're down the middle of the fairway in terms of the kinds of assets that we'd like to look at. We have about 3 transactions that are at or near exclusivity that we hope to be able to close in the near term. And then we have another 4 transactions that we're working hard on sort of in the middle process of our diligence and then the balance of the transactions that we're looking at are in the earlier stages of our diligence. I would say, just as a general matter, the pipeline that we have right now is very strong. It's probably one of the strongest iterations of our pipeline that I've seen in many years. And we're being very disciplined about the kinds of deals that we're looking at and making sure that we're looking at quality as we look to expand the pipeline -- or expand the asset base, I should say.

Great. That's fantastic color. Maybe just moving on to another topic that's come up. So the -- in the news, there's been drug price reform. As of late that's been pushed through. I'm just wondering if there's any impact to your portfolio. And then if it changes the sort of investment criteria, what you guys are looking at based on that? What's been proposed at this point?

That's something -- I appreciate the question, and that's something that we've been following pretty closely. As of last night, I'm not sure if it's actually going to happen given the senator from Arizona's misgivings about the reform package, but we'll see. I think the Drug Price Reform bill that has been crafted, first of all, won't really impact our portfolio and certainly won't impact the assets that we look to acquire, given that the negotiation provisions that the federal government will have in place won't really apply to biologics until 12 years or later after they've been launched into small molecules 8 years or so after they've been launched, which is obviously much later than when we get involved in transactions. And so we don't think it will have a particular impact on our acquisition activities and on our portfolio. We've always been very careful about drug price reform. We've always believed -- over for a long time, we believe that drug price reform was going to happen in the United States. And so as we underwrite these deals, we tend to factor that in, in our underwriting. So we're not concerned as far as our business is concerned.

Your next question comes from Paul Stewardson with iA Capital Markets.

Just calling in for Chelsea. Could you give some color on how the sales ramp of Vonjo is going? if you guys get any sort of look at feedback from prescribers or any of these sorts of factors that we could look at to see how the uptake is going beyond the $699,000 of royalty receipts -- royalty and commercial [ data ] in the quarter?

Paul, thank you very much for the question. It's nice to meet you. We don't get a ton of information other than what's available publicly to everyone. I think that certainly, the launch of the product was very strong. We believe that momentum from that launch will continue. We haven't seen any indications in prescription data or anything like that, that would suggest any kind of let-up in that. I'd say that CTI, I believe, is reporting at the -- after the close of markets on Monday. So we'll have a much better picture of the performance of the product at that time.

Okay. Yes. Fair enough. And the other question is on Natpara. In terms of your new estimate of the fourth quarter in 2025 for reaching the contractual royalty cap, is that assuming that it never returns to the U.S.? Or is that assuming just a later return to the U.S?

Chris, do you want to take that one?

Yes, that assumes a later return to the U.S.

Okay. And can you give us some color on -- if it doesn't work out and Takeda ends up indefinitely suspending the commercial return to the U.S. So what would that kind of take the time line for meeting that contractual royalty cap?

I think we'd have to calculate that and get back to you. I think that we certainly don't expect Takeda to give up on the product. And we believe that they're working on resolving the CRL issues, which we believe is related to the auto-injector and bringing the drug to market in the very sort of difficult scenario or downside scenario that Takeda does give up on the product. Our expectation is that someone will pick up the product and pick up where Takeda left off and bring it to market themselves. So it's an attractive product that addresses a patient population for whom there's not a lot of treatments available. So we think that it will come to market under another marketer, should Takeda make the decision not to continue with it, but we don't believe that that's going to be the case.