DRI Healthcare Trust (DHTUN) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to DRI Healthcare Trust 2023 Third Quarter Earnings Call. Listeners are reminded that certain statements made in this earnings call presentation including 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 expectations 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. Today's presentation also references non-GAAP measures, including total cash receipts, normalized total cash receipts, total cash royalty receipts and adjusted EBITDA and certain non-GAAP ratios including adjusted EBITDA margin and adjusted cash earnings per unit. These measures and ratios are not recognized measures under IFRS and do not have standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures disclosed by other issuers. Rather these measures and ratios are provided as additional information to complement those IFRS measures by providing a 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 analysis of financial information reported under IFRS. Please note that all dollar amounts discussed today are in U.S. currency unless otherwise specified. I want to remind everyone that this conference call is being recorded today, Tuesday, November 14, 2023. I would now like to introduce Mr. Behzad Khosrowshahi, Chief Executive Officer of DRI Healthcare Trust. Please go ahead, Mr. Khosrowshahi.

Thank you, operator and good morning everyone. Thank you for taking the time to join us today. With me today are Chris Anastasopoulos, our Chief Financial Officer; and Navin Jacob, our Chief Investment Officer. In the past quarter our teams continued to do a phenomenal job executing [indiscernible] strategy of generating long-term growth and value for our unit-holders. In July, we deployed $66 million to acquire an additional royalty on the sales of VONJO, which is a groundbreaking treatment for patients suffering from mild fibrosis. This new transaction entitles us to a tiered royalty on the worldwide sales of VONJO and unlike the first royalty our entitlement is uncapped. We are also entitled to receive up to $107.5 million in potential milestone payments. The change in the economic profile of this VONJO deal versus the original deal we transacted on some time ago is indicative of the more fertile investing environment we are currently in. In August we deployed $130 million to acquire an additional royalty on the sales of ORSERDU, which is a highly effective therapy for the treatment of certain kinds of breast cancer. The transaction entitles us to a low- to high-single-digit tiered royalty on worldwide sales. In the quarter we further bolstered our ability to act on opportunities in the market by completing 2 follow-on offerings for total proceeds of $151 million. The funds from these offerings along with our credit facility will provide us with adequate funding for our normal course transactions. And we continue to deliver value to our unit-holders with our regular quarterly distribution of $0.075 per unit. Our third quarter results underscore the growth trajectory of the company. We recorded $25.2 million in normalized total cash receipts, a 34% increase over the same period last year. We recognized $34.1 million in total income, a 29% increase over the same period last year. And we recognized $20.3 million in adjusted EBITDA, a 28% increase over the same period last year all of which translates to an adjusted EBITDA margin of 80% bringing our 12 month to date adjusted EBITDA margin to 86%. Finally we delivered $0.46 in adjusted cash earnings per unit and as mentioned, declared cash distributions of $0.075 per unit. At the end of October, we increased our available dry powder by expanding the total available credit under our credit facility to $500 million. The facility consists of $375 million for acquisitions, $25 million for working capital and $100 million term loan. It is important to note that our ability to expand our credit facility is based on the financial contributions from the deals that we have recently completed. As such, while our absolute amount of debt may increase in line with the increase in our cash receipts and EBITDA, none of our leverage ratios will increase. We will continue to target the leverage ratio between 2 to 3x debt-to-trailing EBITDA. Combined with our equity issuances and the cash flow from our royalty streams, we now have over $300 million in dry powder to deploy in near-term transactions. With this increased capacity, we can operate the business organically for the foreseeable future. At the quarter end we decided -- we announced our Q4 normal distribution of $0.075 cents per unit per unit-holders of record on December 31, 2023. We also received approval from the Toronto Stock Exchange to purchase up to 3.1 million units under a normal course issuer bid. In the 9 months ended September 30, we acquired and cancelled approximately 326,000 units under our previous NCIB and created roughly $14.5 million in value for our unit-holders in doing so when compared to the current market price. This table shows the individual royalty receipts for the quarter in comparison to the same period in 2022. At a high level, we are pleased the total cash royalty received increased by 44% compared to a year ago. This was primarily driven by royalties on the sales of ORSERDU, XENPOZYME, OMIDRIA and VONJO. ORSERDU's launch is progressing well and we expect it to continue now that it has received European approval. OMIDRIA performed as expected in this quarter reaching revenues well beyond our royalty cap. XENPOZYME saw 34% quarter-over-quarter growth as it continues reaching new ASMD patients. The portfolio also benefited from a full quarter of royalties on the sales of Zejula compared to only 1 month in third quarter of 2022. Zejula saw 21% year-over-year growth mainly attributed to increased U.S. sales, which outpaced ex-U.S. sales for the first time this year. This increase in sales is due to the switch from a capsule to a tablet formulation, leading to an improved patient experience and increased compliance. The diversity of our portfolio is one of our main strengths and we continue to see success from other tenured, stable assets as well as our new growth assets. Xolair saw year-over-year growth of 2% with third quarter sales of $634 million primarily driven by uptake in chronic hives. Roche secured U.S. approval for the Xolair auto-injector in the quarter providing an option for patients with added convenience. Roche anticipates news from the Phase III trial of Xolair and food allergies by the end of the year. Oracea saw a strong quarter following Galderma's new agreement with Mayne Pharma to market the authorized generic. Spinraza saw 4% year-over-year global revenue growth in third quarter driven by U.S. patient growth and benefited from the timing of shipments in certain ex-U.S. markets. Biogen sees Spinraza returning to consistent growth over time. These increases were partially offset by the expected contractual step-downs in expires in our royalties on Eylea, FluMist, Rydapt and Stelara, Simponi and Laris. Looking forward to the next several quarters, we remain very excited about the value and growth we can deliver to our unit-holders as we capitalize on our strong position in our target market. We will continue to use our 34-year track record of systematic data-driven sourcing and execution to capitalize on both short-term and long-term tailwinds that we anticipate will lead to a generational growth opportunity in our industry. We believe our ability to execute with this backdrop will allow us to continue enhancing our leading portfolio and generate uncorrelated and high-yielding and high-margin returns for our investors. Our flywheel leverages our exceptional team. Disciplined capital allocation, proactive sourcing and strong execution to deliver value for our unit-holders. You can see the effect of this flywheel on the results that we have posted so far this year. Our seasoned investment team is comprised of specialist investment professionals with deep skills and expertise in the life sciences industry. Our rare combination of skills has allowed us to deliver great results. Our disciplined capital allocation model based on a set of investment criteria we have developed and refined over more than 20 years has generated a 22% net return across 3 private equity funds before going public. This is the level of performance that we intend to replicate as a public company. Over the reason -- one of the reasons we can achieve these returns is that our long tenure in the industry has enabled us to build an active sourcing model for royalties that combines our global network with a proprietary database of more than 7,500 known or potential royalties on over 2,500 different drugs. Having evaluated thousands of potential transactions, we have the systems and experience to conduct exhaustive, rapid ground-up diligence on each of the assets that we consider, which allows us to provide our counterparties with the certainty of execution that few can replicate. Our goal is to continue to press hard on these competitive advantages and barriers to entry as we grow the business for the future. As we source opportunities to continue deployment in the growth -- growing royalty market, we designed a business model to deliver efficient and optimum unit-holder value. This model enables us -- enables both regular and reliable distributions to unit holders and reinvestment of cash flows from royalty proceeds into new assets. Reinvesting in the portfolio and creating a permanent capital vehicle was one of the main drivers of going public and is at the core of our business model. The cash generated by the assets currently in the portfolio allows us to redeploy and fund future acquisitions, grow the portfolio organically and ultimately secure long-term returns for our unit-holders. Over time, the continued reinvestment compounds and leads to exponential growth. Using the return profile, illustrative of a typical deal on our historical averages highlights the power of compounding. As we continue moving forward we anticipate organic portfolio growth at a rapid pace to deliver value for our unit-holders. I will now turn the call over to Navin.

Thank you, Behzad. The long-term growth of the pharmaceutical industry is providing us with many opportunities to acquire high-quality royalty assets. We're on the cusp of what is anticipated to be a generational industry growth driven by the development of therapeutics that will improve the lives of patients throughout the world. The number of products developed between Phase I trials and registration has increased nearly 50% over the past 5 years. This pipeline is growing not only in quantity, but also in quality and diversity due to decades of scientific progress and innovation. In 2023, the FDA is expected to approve 57 new drugs, the highest number in the past 5 years. Several of these have the potential to be the first available treatments in their indications. As a result of this growth, spending on pharmaceutical R&D is forecast to grow by 17% over the next 5 years. This will be driven by the pace of innovation, the increasing complexity of modalities and the requests from regulators and payers for more extensive clinical and real world outcomes. These trends and innovation along with increased life expectancy and improved access in emerging markets are ultimately expected to drive growth in worldwide medical spending. It is forecasted to grow to $2 trillion in 2027, from about $1.5 trillion in 2022. Together these trends make up a positive outlook for the royalty financing sector with a long-term opportunity for us to acquire attractive royalty streams from diverse sources. In an environment where capital markets remain slow and interest rates are high, many biotech companies have limited options to secure their next tranche of capital. As a result, companies are turning increasingly towards royalty financing to support their operations. We take time to understand the needs of our counterparties and structure bespoke proprietary win-win transactions. No 2 deals are the same and each tailored to address both the immediate and long-term objectives of royalty-holders. In this context, royalty financing is now a core part of the capital strategy for biotech executive teams. Over the past 5 years, both the number of royalty deals and the quantum of capital provided have doubled. We expect this growth trend to continue. These trends can also be seen in our performance since the IPO as we have been one of the most active players in our industry over the last 2.5 years. At the time of the IPO, we said our target was to deploy between $650 million and $750 million over the first 5 years as a public company. We have already surpassed that goal, having deployed $766 million in royalty transactions with a further $51 million to be deployed in potential milestones. Because of our strong pace of development earlier this year, we revised our deployment targets to $850 million to $900 million by the end of 2025 and we are well on our way to achieving and surpassing that target. Our cash flow profile has changed dramatically since the IPO. Our initial group of assets were declining over the long term. With the transactions and the growth assets we added to the portfolio, we anticipate mid-teens CAGR for our total income through 2025 and low-single-digit CAGR through 2030 and these CAGR expectations are excluding new transactions. We have also extended the portfolio's duration to over 10 years in line with our target for 2025. Most importantly, we have positioned ourselves for continued strong execution. Our recent follow-on offerings and newly expanded credit facility provide us with over $300 million of deployment capacity to continue to execute on our growth strategy. As of today, our portfolio consists of 26 royalty streams on 20 products. Since going public, we have completed 11 acquisitions. In just 2.5 years, we have already surpassed our 5-year target as stated at the time of the IPO. Now I'd like to provide more detail on our transactions in the quarter. At the end of our second quarter, we announced that we acquired a royalty interest in ORSERDU for $85 million. ORSERDU is the first and only approved targeted therapy used in treating postmenopausal women or adult men with ESR1 mutated ER-positive HER2-negative metastatic breast cancer who have experienced disease progression despite prior endocrine therapy. Since being introduced, ORSERDU has performed better than our expectations at the time of underwriting the first deal. Based on the drug's steep sales ramp, we are excited to increase our exposure to this transformative and long-duration asset. In August, we purchased a second royalty interest on the global sales of ORSERDU for $130 million upfront and $10 million in event-based milestone payments. The first ORSERDU royalty entitles the Trust to a mid-single-digit tiered royalty payable quarterly with a 1-quarter lag based on sales beginning on April 1, 2023. We are also entitled to receive up to $55 million in both sales and regulatory-based milestone payments. The EMA approval of ORSERDU in September triggered a $2.75 million milestone royalty payment, which we expect to receive in the fourth quarter. The second ORSERDU royalty entitles the trust to an additional low- to high-single-digit tiered royalty payable with a 1-quarter lag based on sales beginning July 1, 2023. In addition to the royalty payments, we are also entitled to receive up to $40 million in milestone payments when the drug achieves certain sales thresholds. ORSERDU continued its strong launch with significant sales in the third quarter, ahead of our expectations at the time of underwriting the second deal. The short payback period and significant near-term cash flows of these investments will allow us to redeploy significant cash flows into new investments, allowing us to diversify our portfolio further. In July, we acquired an additional royalty stream on VONJO for $66 million. VONJO is currently marketed by Sobi and is used by -- used for treating myelofibrosis patients with severe thrombocytopenia. It is the only approved treatment for this indication. Since its approval, VONJO has successfully addressed the unmet needs of cytopenic myelofibrosis patients and has grown faster than our initial expectations. Since the acquisition of CTI by Sobi, VONJO has continued exhibiting strong growth with sales performance that is in line with our expectations. This aspired transaction entitles us to a tiered royalty on worldwide sales of VONJO and quarterly payments based on sales beginning April 1, 2023. Unlike the first synthetic CTI VONJO royalty, our S-Bio entitlement of VONJO is uncapped on worldwide sales. We received our first payment for the S-Bio transaction this quarter. We are also entitled to receive up to $107 million in milestone payments. Sobi reported U.S. net sales of $32 million in the quarter, indicating 13% quarter-over-quarter growth. With the integration of CTI now complete, Sobi holds a strong outlook for VONJO, with Sobi management noting that they expect "significant acceleration into 2024." The conditions required for the second milestone payment for VONJO I of $18.5 million were not met by the end of the third quarter and the additional milestone payment was not made. We continue to execute our strategy against a pipeline that is more robust than we have seen for decades, with approximately $3 billion in opportunities. The deals we are looking at are all high-quality and meet or exceed our qualitative and quantitative investment criteria. Our focus will remain on acquiring royalties on products that have the potential to change and improve health outcomes and quality of life for patients. We will also require these therapies to be marketed by life science companies that can successfully launch and grow the treatment in their target markets. We intend to acquire those therapies that benefit from solid and long-lasting intellectual property protection. This aligns with our target of a weighted average portfolio duration of over 10 years. Our near-term pipeline, which includes deals that could close within 6 months, stands at 12 opportunities with a total potential value of over $1.4 billion. These deals range from $35 million to $250 million and cover a diversified set of disease areas. The back end of our pipeline is comprised of 19 opportunities with a total potential value of over $1.6 billion and similar characteristics. While opportunities are growing in the market, there are still significant barriers to entry for potential new entrants and we hold a solid competitive advantage. The royalty market is relatively opaque and complex to access. Concentrated ground-up due diligence is needed to understand each asset and successfully execute a deal. We have not seen any new firms trying to enter the market over the recent months. I will turn the presentation over to Chris.

Thank you, Navin. As at September 30, we had cash and cash equivalents of $28.2 million and $40.9 million of royalty as receivable. After the end of the quarter, we expanded our total available credit under our credit facilities to $500 million, with $148.3 million outstanding. We have $351.7 million available. This clearly shows that we are well-capitalized to act on the attractive opportunities in the market, as previously outlined by Behzad and Navin. We continue to generate strong cash flow from our assets. For the 12 months ended September 30, our normalized total cash receipts were $110.1 million, including total cash royalty receipts of $105.3 million and interest and other income of $4.8 million. Our operating expenses and management fees for the 12 months ended September 30 totaled $16 million, resulting in an adjusted EBITDA of $94.1 million and an adjusted EBITDA margin of 86%. For the 12 months ended September 30, we generated $1.74 in adjusted cash earnings per unit. I'll now turn the call back over to Behzad.

Thank you, Chris. In 2023 and beyond, we intend to remain focused on our 3 key priorities: First, we plan to continue to invest in our people and continue to help them build their skills and competencies. DRI Healthcare has been a pioneer and leader in royalty financing for over 30 years and our team's skill and identifying and closing accretive transactions is vital to our success. Next, we aim to execute against our robust pipeline, the largest we've seen in the company's history. With the current market constraints on biotech financings and the high demand for our new and -- high demand for new and innovative treatments combined with our skills in sourcing and closing deals, we continue to operate at what we consider peak performance in all aspects of our business and see multiple opportunities to deploy our capital. Finally, this volume lets us pick high-quality transactions that we believe will deliver long-term accretive value for our unit-holders. We intend to continue to be a critical partner in advancing innovation in the life sciences sector by providing funding to parties across the pharmaceutical value chain. With that, we will now take your questions. Thank you.

[Operator Instructions] Our first question comes from Leszek Sulewski from Truist Securities.

I have 2. First, on the $3 billion pipeline and this appears $1.4 billion is at the front end. Is there a pecking order for certain therapeutic categories on the front end? And essentially, are there any long-term opportunities in the GLP-1 space? And I have a follow-up.

Les, thank you very much for the question. I appreciate it. Navin, I'll turn it over to you to talk about the pipeline.

Sure. Thanks, Behzad, and thanks, Les, for the question. So our pipeline is strong and filled with high-quality assets, both near-term and long-term, as you mentioned, at $3 billion. We are excited about the therapeutic areas that we have in that pipeline. We're -- as you may know and as we've stated before, Les, we are therapeutic area-agnostic. And we just try to find assets that we believe will add value to society that have a good pharmacoeconomic benefit or have a good efficacy-to-risk ratio and benefit-to-risk ratio. And importantly, also will be financially attractive for DRI, but also allow for the counterparty, the seller to also do well for themselves. And so we try to create win-win solutions, which are not easy to do. And with regards to your question about exposure to GLP-1 or the GIP/GLP-1 space, that's not something that we are going to talk about at this time. We don't talk about any specific opportunity in our pipeline until post-deal. It doesn't help anyone -- it doesn't help us nor the counterparty, especially if we're close to -- if we're in confidentiality discussions with them. With that said, we don't necessarily chase a specific area that may be hot today because, as you know, it could very well turn around tomorrow and I'll leave it at that.

Makes sense. Appreciate the color on that. And then in regards to the recent unit repurchase program, is there an accelerated component to this? And essentially, is this just sort of a housekeeping item? And how does this impact your capital allocation strategy given the recent follow-on offerings? And then I guess a follow-up to that is, are there certain thresholds that you can share that would qualify for execution?

Les, thanks very much for the second question. So we've had a normal course issuer bid or NCIB program for 2.5 years or so now. And we've been disciplined in how we allocate capital towards repurchasing and canceling shares versus towards doing deals. I would say at this point in the market and the deals that we're seeing, we feel that is more accretive to buy royalty streams on the deals that are in the pipeline as opposed to repurchasing our shares just because of the returns that we're getting and the structural advantages of those deals that we're seeing. But obviously, that we evaluate this on a regular basis. And for us, it's a very disciplined decision to make. But right now we're buying royalties as opposed to buying shares.

The next question comes from Doug Miehm from RBC Capital Markets.

So a couple of questions. First one just has to do with ORSERDU. Now the data that we received both from [ Acuvi ] and Symphony is off a little bit. So maybe you could talk about what you're seeing on the ground and if you're still as enthused about the opportunity with that product, particularly given the EMA approval and what might happen there? And then if there are any new trial readouts that you would be looking for as it relates to that specific drug?

Go ahead, Navin.

Yes. Thanks, Doug. So with regards to third-party sales data, I mean, we don't -- we try not to comment too much on them. On the other hand, I mean, generally speaking, those data are trending in the right direction and similar to what we're seeing. But I wouldn't look at any one given month, as you know, Doug, these data are not super-precise, directionally speaking, are they good? Sure. And what we see there as well as what we're seeing with the real sales that are coming in is that the sales are strong and certainly coming -- certainly relative to when we did the first deal, much stronger than we anticipated and in line with our expectations at the time of conducting the second deal. So we're happy about the performance thus far. With regards to near-term trial readouts, nothing specific that we are worried about or overly excited about. Everything is on track with our expectations. It's only been a couple of months since -- I know it feels like a while, but it's only been a couple of months since we acquired the asset. So nothing new to speak to.

Okay. And then just on the deal pipeline, $1.4 billion sounds good. But can you tell us how many of those would be...

Sorry, Doug, you still there or is it just me...

Yes, that line has disconnected, unfortunately, if you join back in getting to join again. I will move on to the next question. The next question is from Scott Fletcher from CIBC.

I have a feeling Doug was about to ask about the near-term pipeline and how many of those deals might be in exclusivity. So that was helpful on my list. So I'll ask the question.

Scott, I appreciate your question. I'll turn it over to Navin to talk a little bit about that.

Yes. So with regard to near-term opportunities, we do have a few deals that are -- about 3 to 4 deals that are near exclusivity right now. All those opportunities are consistent with deals that you've seen us do in the past, both in terms of the quality and in terms of the type -- the size of the type of deals that we do and they match the investment criteria that we have internally. We're doing our diligence on each of those opportunities. We hope to be able to choose from one or more of those transactions in the next 60 to 90 days.

Yes. And Scott, the one thing I would add to what Navin is saying is also that we're continuing to see, based on the comments you heard from us on the call, we're continuing to see sort of deals that are attractive from a return standpoint as well as attractive from a structural standpoint and we're pretty excited about the opportunities that are ahead of us.

Okay. And then something of a follow-up. I mean, I wanted to ask about the timing of the equity raise. After the last raise -- the first raise this year, you had an acquisition announcing pretty close after that. This time where it's looking like there's going to be a longer lag. Was there anything that drove the longer time line to a deal there? Just trying to understand what drove the timing really on the second raise?

On the second raise, I mean, we raised, I think it was roughly around the middle of September. And at that time and what continues today is that we have 4 or so deals that are in active diligence in our pipeline. We didn't want or we couldn't at that point handicap which was going to close first and when it was going to close. And we felt that it would be more prudent to raise the capital and have it in our pocket, so to speak, so that we could deploy against these deals on a rolling basis as they close. And that was the rationale behind the equity raise.

The next question comes from Ash Verma from UBS.

I have 2. So one was just on Empaveli, we're hearing incidents of vasculitis. That seems to be an evolving safety update. I know the innovator has talked about different type of data here on severe -- or severe events or the absolute number. Just wanted to see, like from your vantage point, like what do you see this? And how does this impact the commercial opportunity? That's the first one. And just a second, so like in a rising interest rate environment and like, is that shaping your view of how you are approaching the portfolio construction? Are there certain opportunities here that might be -- you might pass on versus the others? And anything that you can provide color on does that change the calculation on focusing on more commercial or pipeline assets?

Ash, thank you very much for the question. Navin, why don't you take the first part and I can jump in on the second part.

Sure. Thanks for your question. On Empaveli, Syfovre, a couple of things. Number one, the discontinuation rates as reported by [indiscernible] remain quite low. The rate of retinal vasculitis is 0.01% as seen with Empaveli. This is in line with the natural rate seen or -- the background rates seen in geographic atrophy. There are no new cases since the last update in September of 2022. So in September, so we're not concerned about the retinal vasculitis cases, particularly given the fact that if you -- as you know, our entitlement on Empaveli is capped at $500 million. On Empaveli/Syfovre on pegcetacoplan, the molecule. And so it doesn't take a significant amount of geographic atrophy penetration in order to reach our cap. And so we're not -- it has a minimal impact on our entitlement overall.

And Ash, I'll take your question about the rising interest rate environment and for portfolio construction and questions like that. I think what you're hearing from Navin and myself is on the deals that we're looking at, really sort of the spreads over interest rates, so to speak, have remained pretty constant, so 3 years ago, 4 years ago, when interest rates were much lower, we had a certain spread over interest rates and that's the rate at which we were doing deals. And today, that rate is consistent, which is why you're seeing us do transactions with much more attractive sort of IRR characteristics associated with them. The other factor is that the structural elements of the transactions that we're seeing, so transactions that are uncapped and give us access to the upside associated with these various drugs are pretty attractive for us as well right now. And we're continuing to see that going forward. I think Navin, myself and a couple of other people on our team work very closely with each other on capital allocation and capital allocation decisions. And what you heard from Navin is that we have a very, sort of, strong pipeline that him and his team have developed and that puts us in a position where we can allocate our capital into what we believe are going to be the smartest deals to do. And so we're happy with where things stand on that basis as well.

The next question comes from George Farmer from Scotiabank.

A couple. Regarding ORSERDU, can you speak to any other near-term milestones that you might be expecting, say, this quarter or into next year? And then more broadly, can you talk about the climate of your deal negotiations? It seems that there does seem to be this mix of capped versus unlimited deal structures regarding royalty income. Is this a trend that's going to go forward? Is this going to be more on the cap side or more on the unlimited side? How do you see that happening over time?

George, thanks very much. Thanks very much for the question. Navin, I can turn that over to you.

Yes. So on ORSERDU, yes, we do anticipate a sales-based milestone in the near-term. We can't give you exact details yet. There is some -- until we have 100% clarity on that. And -- but over the next 3 to 6 months, you should -- we anticipate to be paid a near-term sales-based milestone. And on -- with regards to the cap versus uncapped, it's a good question, George, and an important one because -- and I didn't fully appreciate this till I joined DRI 2 years ago at this point. And once internal, I realized that royalty transactions or royalty financing is not as simple as it sounds. There's a very wide gamut of types of structures that can be created. On the one hand, on the very extreme is highly structured cap deals, which are much more fixed income-like and on the other extreme is uncapped deals that are more equity-like. And counterparties -- and part of our job, my job and my sourcing team's job is to educate the counterparties on the differences of the 2. We are more along the side of uncapped equity type deals, which have some significant benefits to the counterparties, depending on the counterparty. And on the other end, there are other good aspects to cap deals. So they're very different. It really depends on the counterparty and their strategic needs for them to decide what type of deal they want. But they are quite different either end of the deal. And structurally, with regards to the type of deal that's constructed and the type of contract that's created with the counterparties, they're both very different. They have different implications towards the counterparty's balance sheets. We see an increase in both types of deals and there's everything in between, by the way. It's not one or the other. There are ways to do things that are in between. I think what's most important and this goes -- this goes back to a question that was asked earlier as well, is that royalty transactions and financings are increasing in not only number, but also in terms of comfort level with the C-suite of these biotech companies because at some point, not near-term, we don't anticipate, but at some point, the capital markets will stabilize and we'll get the natural question of, oh, with the capital markets better now is that -- does that make things more difficult for you? And we don't believe so simply because I think CEOs and CFOs and this is based on our conversations, but also based on hard data of the transactions that are happening is that the CEOs and CFOs of these biopharma companies are now becoming increasingly more comfortable with royalty deals and are being educated on them and understand the gamut of types of structures that can be created. And it will -- and royalty deals will just be another option alongside fixed income deals or equity deals that biopharma management teams have and can use in order to meet their strategic goals. I don't know if we lost George or if I -- if we...

The line seems to have disconnected, yes. And the next question comes from Rahul Sarugaser from Raymond James.

And hopefully, my line doesn't get disconnected as well. So my first question is we've seen OrbiMed recently raised a relatively large fund to receive drug royalty monetization. So there is some sort of increasing competition in the space. Could you speak to that and how you guys are looking at the space more broadly in terms of competition?

Yes. Thank you very much for the question. I appreciate it. Hopefully, you don't get disconnected. I don't know what's going on. So I just want to be clear that we're not disconnecting anybody. I saw the announcement that OrbiMed made about the fund that they had raised. One thing that I want to -- one thing that's not clear to me is if that's old news or new news because they had raised about $1.25 billion or something like that I want to say, about 2 years ago. And so I'm not sure if they're recycling some old news and creating a bigger number. But having said that, look, we've competed with OrbiMed for decades, something that people don't know is that OrbiMed invested in our first bond. And I think OrbiMed is an organization, has great strength and certainly, as an organization that we want to learn from as time goes on. But we've competed with them for a very long time and we know how to do it and we've been largely successful at it. Other competitors that are coming to market, as Navin noted earlier, we're not really seeing a lot of new competitors enter the market in any way. And so we're just -- we're generally pretty happy with the competitive environment that we're in.

Terrific. That's very helpful. So a second question is we recently saw Menarini out-license [ obicetrapib ] rights in China. So was this something that was calculated into the licensing agreement? Or should we be looking into more sort of upside on the original agreement?

Yes. No. I mean we had not included that in our valuation. That would be upside for us.

Great. And then just one very quick housekeeping question. We've seen the days of royalty receivables sort of jump a little bit this one -- this quarter. It's not completely out of the normal. We've seen it happen before. Is this something that we should be expecting sort of going forward? Or do we look at -- could this stabilize, particularly as you grow the portfolio?

Let us calculate that and get back to you. I mean, that's going to fluctuate a little bit based on just the normal trends in our business and the normal cycle in our business. And certainly, we're not seeing any red flags on our radar in terms of royalties overdue or days of royalty receivables coming in sort of higher than we expect. And certainly, that's something that we monitor fairly closely. But let us look into that in more detail and we can give you a shot on that.

The next question comes from Tania Armstrong-Whitworth from Canaccord Genuity.

First, just a follow-on on George's question about upcoming or ORSERDU milestones. The one that you did mention, can you just clarify, is that with respect to ORSERDU I? I believe there's another sales-based milestone due there? Or ORSERDU II? And is there any way to give us a sense of sizing of that?

Yes. Tania, that would be with regards to ORSERDU I and we can't exactly give you that number. We're in the process of determining that. And -- but in due course, we will certainly provide that as soon as there's some clarity on that. But it's all -- it's a good thing. That's for sure.

Yes, absolutely. And then secondly, if you could just provide more color on your partnership with Mayo Clinic, I noticed you made a payment to them this quarter.

So the Mayo Clinic in -- with this primary facility in Rochester, Minnesota and secondary facilities elsewhere engages in a lot of sort of scientific research on regenerative medicines or cell therapies and gene therapies and diseases and treatments for various rare diseases. And we made a donation to them as part of a multiyear program really as part of our mandate to advance science and research in our sector. We're going to be making a formal sort of PR announcement around it sometime in Q1. But that's sort of the objective behind it.

Okay. Perfect. I will wait for that PR announcement then. And then lastly, on performance fees, I know you made the sizable performance fee payment last quarter with respect to the [ deal ] sale. Are you able to provide an update at this time when we can anticipate more regular performance fees commencing?

Performance fee payments, look, as you know, are tied to the performance of the assets in the sense that there's no performance fee if the assets don't perform. And at this point, we do not expect any material performance fees in the near- to medium-term. The assets that we are acquiring right now have to mature and show their results. And then after that, there may be performance fees that are due to us. But we don't expect anything in the near- to medium-term.

The next question comes from Justin Keywood from Stifel Canada.

Just trying to square the targeted capital deployment target, I believe I heard $850 million to $900 million. And just with the wide pipeline and inflection of royalty opportunities that you're seeing, I believe the pipeline is $3 billion.

The math doesn't make sense to you, Justin? I'm joking. Look, I think that's a great observation and I appreciate you asking the question. As Navin said, we initially started at the time of the IPO with a much lower target. We beat that handily. And our current target is around $850 million to $900 million. We've deployed about $766 million against that target. And so we're coming awfully close to it. We want to be thoughtful about the next target that we put out there and it's something that we're working on. But we will update the target with our -- in the next couple of months, but certainly with our Q1 results at the latest.

Understood. And then on ORSERDU, just if there's any concern on concentration risk, obviously, a pretty unique product and I understand that most of the competing options are in IV form versus oral. But any comments around that?

Navin, do you want to take that and I can add to it to the extent...

Sure. Sure. Just on concentration, I mean, that was something that we had assessed very deeply, Justin, and we certainly had specifically looked at competition for ORSERDU in depth and have assumed significant competition, particularly in the tail from other oral sorts, not just the IVs that are currently approved, but future competition has been significantly built into our estimates. And so we are fully expecting competition from the likes of AstraZeneca's camizestrant or others, including [indiscernible] product. But rest assured that that has been built into our expectations and therefore, our valuation. And with -- I just want to go back to your question about the pipeline and $3 billion versus our deployment target. Our pipeline, quite frankly, could be bigger than $3 billion if we wanted it to. We capped at that because that's the amount -- those are the assets near-term that we're going to be going after or looking to go after. But not all of them are ones as we continue to due diligence, some of them will fall out of our pipeline because we feel like after our first glance, they look good, but upon deeper look they don't look quite as attractive, so they move out or conversely, perhaps the counterparty has chosen someone else to work with or doesn't have the strategic need anymore. So our pipeline always fluctuates, but the near -- although the near-term pipeline is pretty stable. But the point there being is you can't necessarily look at the size of our pipeline relative to our deployment targets. We can make the pipeline as big as we wanted it to be because, quite frankly, the amount of deals that are incoming to us as well as the ones that we are able to find ourselves is significant. And we are quite -- we're limiting that size right now so that we can focus and not get too distracted with the various potential deals that are out there.

The next question comes from David Martin from Bloom Burton.

My first question is you mentioned an $18.5 million milestone that wasn't earned. Can that still be collected in future quarters? Or was it time-dependent?

David, thanks for the question. That was actually an $18.5 million milestone that we would have had to pay based on results. So we did not have to pay it because the results were not achieved and it was sort of a one and done kind of thing. So we don't have to -- it wouldn't come due later if results changed.

Okay. Great. You designate your pipeline, the front end and the back end. Is that based on the time you spent on the assets or the quality of the assets?

That's based on when we anticipate deals may close. So the front end of our pipeline is tough that Navin and his team are working on in the near-term that we hope will close in the sort of next 6 to 9-month period and then the back end of our pipeline are deals that are coming in after that.

Okay. And my last question is, most of your royalties have been negotiated for drugs that are commercial and on the market, but I think you've done 1 or 2 where they're clinical stage. Are you reaching more for some clinical stage assets and maybe build triggers in that the deal will be active contingent on approval of the drugs? Or is it still vast majority commercial products?

I think our portfolio allocation is as it has been for a long time is focused on commercial assets, which is not to say that if we find an attractive asset that is near-approval and we do our diligence and we have a lot of conviction in it and everything else from a financial and qualitative characteristic perspective meets our criteria, we wouldn't do the transaction. But I think the vast majority of our capital deployment is going to be geared towards commercial-stage assets.

There are no further questions at this time. I will hand the call back to Mr. Khosrowshahi.

Thank you very much, everybody, for your questions and for listening to our call. We really appreciate it and look forward to staying in touch. Thank you.

Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.