DRI Healthcare Trust (DHTUN) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to DRI Healthcare Trust's Conference Call on the tavapadon transaction. Listeners are reminded that certain statements made in this conference 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. All statements regarding the tavapadon royalty assume closing of the transaction, which is subject, among other things, to approval of tavapadon by the U.S. Food and Drug Administration. Statements regarding expected deployment, adjusted EBITDA growth and the timing of royalties are forward-looking and assume, among other things, that tavapadon is approved by the FDA and successfully launched and that the U.S. net sales are in line with management's expectations. 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's other filings with Canadian securities regulators. DRI Healthcare 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. The definitions of these measures and reconciliations to measures recognized under IFRS are included in our earnings news release as well as in our MD&A for this quarter, both of which are available on our website and on SEDAR+. Unless otherwise specified, all dollar amounts discussed today are in U.S. dollars. I want to remind everyone that this conference call is being recorded today, Monday, September 21, 2026. DRI Healthcare's news release and the slides from today's call will be available on the Investor page of the company's website at drihealthcare.com. I would now like to introduce Mr. Ali Hedayat, CEO of DRI Healthcare. Please go ahead, Mr. Hedayat.

Thank you, operator, and good morning, everyone, and thank you for taking the time to join us today. With me on the call are Navin Jacob, our Chief Investment Officer; and Zaheed Mawani, our Chief Financial Officer. We are very excited to announce that we have entered into an agreement to acquire royalty rights related to tavapadon. We believe this is a transformational transaction for the trust, which sets the stage for a significant inflection upwards in our growth trajectory. On the call today, I will provide the key strategic and financial highlights of the transaction. Navin will then discuss the transaction and product overview and share insights into the market outlook before moving on to Q&A. This morning, we announced that DRI Healthcare has agreed to acquire a royalty interest in tavapadon, an oral once-daily therapy for Parkinson's disease that is expected to be commercialized by AbbVie. We are investing $316 million in a single upfront payment that will be made on approval of the drug. In return, we will be entitled to tiered royalties on U.S. net sales of tavapadon. We will also be entitled to cumulative sales milestones and four annual fixed payments with aggregate receipts payable to DRI capped at $437.5 million. I want to spend a moment on how the deal is put together because the structure is a story here. The deal combines four contracted annual payments summing to $93.75 million, together with tiered royalties and cumulative sales milestones. Notably, the annual payments will occur on each of the four anniversaries of regulatory approval and are not dependent on how the product performs. As I mentioned, we closed only on FDA approval, so the trust takes no pre-approval risk. The transaction has a hard cap on total receipts, which, based on management's current sales expectations, we anticipate reaching before longer-dated commercial and patent risks become relevant. The financial implications to DRI Healthcare are significant. Tavapadon delivers a well-defined set of near- to medium-term cash flows that we can reinvest into new future royalty acquisitions across the balance of the decade. Put simply, we believe this transaction will allow us to hit or exceed our previously announced aspirations for adjusted EBITDA through 2030 in isolation before the impact of any further deals over the coming years. As the transaction is highly cash generative, it frees up meaningful financing capacity, which adds to the impact of the recently announced EKTERLY disposition, leaving our remaining investment capacity through 2030 at the high end of the previously announced deployment targets even after factoring in the impact of the acquisition itself. This has positioned us exceptionally well, and we now expect our capital deployment targets over 2026 to 2030 to come in above the multiyear aspiration we previously communicated and our adjusted EBITDA CAGR aspirations for the same period to meaningfully exceed the prior ranges we communicated. Our 2026 adjusted EBITDA guidance remains at or above the high end of our previously communicated range despite the disposition of EKTERLY and the corresponding drag on second half receipts. We intend to provide you with a full guidance update at year-end, but felt that the impact of the transaction was meaningful enough to warrant some directional comments now. Strategically, the transaction strengthens the balance sheet and sets the company up very well to execute on several exciting pipeline opportunities that we are actively working on. Contracted fixed payments and near-term royalty receipts improve our access to leverage over time, and that supports a larger volume of transactions without changing how we think about balance sheet risk. In the near term, we intend to direct that capacity towards pre-approval opportunities where we see the most compelling risk-adjusted returns and where DRI has built a differentiated sourcing and diligence capability. The cash flow characteristics of tavapadon are a natural complement to those longer-dated assets, predictable receipts today, funding duration tomorrow. This transaction will add a differentiated in-market asset to our portfolio with a combination of fixed payments, commercial milestones and tiered royalties. The acquisition will provide meaningful value to unitholders, both through its stand-alone returns and also by allowing us to optimize our balance sheet capacity, opening space for us to shape the portfolio for strong growth with our future anticipated deployment. Now let me pass the call over to our Chief Investment Officer, Navin Jacob.

Thank you, Ali. Parkinson's disease is a chronic, progressive and incurable neurodegenerative disorder. Approximately 1 million people in the United States live with it, with roughly 90,000 new diagnoses each year, and there's no disease-modifying therapies available. Motor symptoms, including tremor, bradykinesia and rigidity are accompanied by cognitive decline, sleep disorders and depression, all of which worsen over time. As the disease progresses, existing therapies fail to control symptoms and patients require higher and more frequent doses of levodopa or adjunct therapies. Tavapadon is an oral once-daily partial dopamine agonist and its mechanism is what sets it apart. It selectively activates the D1 and D5 receptors while sparing D2 and D3, the receptors associated with somnolence, impulse control disorders and edema. Current dopamine agonists act on D2 and D3 and their use has declined over time because of those side effects. The clinical data support the thesis. The Phase III TEMPO-1 and TEMPO-2 studies showed that tavapadon monotherapy improved motor signs and symptoms versus placebo in early disease. TEMPO-3 showed that as adjunctive therapy, it improved both on and off time versus placebo in advanced disease. Across the Phase III program and the long-term extension studies, the safety profile is differentiated with low observed rates of somnolence, impulse control disorders and edema relative to current dopamine agonists. On approval, the product will be commercialized by AbbVie, a strong marketer with an established franchise that already includes two products indicated for Parkinson's disease. Turning to Slide 5. DRI is paying a single upfront payment of $316 million concurrent with and conditional on FDA approval. In exchange, we are acquiring three different cash flowing items. First, four equal annual fixed payments summing to $93.75 million, payable on or before each of the first four anniversaries of approval. Second, cumulative sales milestones. Measured from first commercial sale rather than in any single year. And the third cash flow item is tiered royalties on U.S. net sales. Estimated U.S. loss of exclusivity is June 2039. The chart on this slide shows Visible Alpha consensus for U.S. net sales, shown for reference only. Hopefully, it is evident from the structure of the acquisition assignment that DRI unitholders would be protected to the downside by several features, including the fixed payments, royalty rate, the size of the market opportunity and finally, the length of the patent term. All of these features in our estimation leads to a very high probability of achieving the multiple cap. Slide 6 summarizes why tavapadon is a great fit for the DRI portfolio. This deal provides a near- to medium-term high-quality cash flow stream from a credit-worthy marketer in a therapeutic area where we have conviction, and it complements the longer-dated pre-approval assets we intend to add. In a nutshell, the tavapadon deal funds the next generation of royalty acquisitions, which is exactly the compounding dynamic we are building toward. That concludes our prepared remarks. And with that, let's open the call up to questions.

[Operator Instructions] Your first question is from Louise Chen from Scotiabank.

So, I was just curious how you think about AbbVie's peak sales expectations of $5 billion. I know you're capped, but just curious maybe just how you're thinking about how likely you are to reach the high end of the cap that you've talked about here. And then also, can you say anything else about the pipeline opportunities that you're actively working on? Maybe just the timing or even therapeutic areas that you have interest in, in general?

Louise, I'll take most of that over to Navin. But I'll say that, in general, this transaction maps to our target returns for cash flowing assets. So, it's not -- there's some [Technical Difficulty] relative to, I think, consensus estimates [Technical Difficulty] and these estimates, but we don't think either are sort of crazy. And when you work that through how we look at the outcomes, I think in the [Technical Difficulty] transact [Technical Difficulty].

Louise, thanks for the question. By the way, operator, can you hear me? I think it was breaking up for Ali for a second -- for a few seconds there.

Yes, I can hear you loud and clear.

Okay. Great. Louise, so a few things. First on -- with regards to the $5 billion peak guidance that AbbVie has given, that's for their entire Parkinson's disease franchise, which is made up of three assets: Duopa, which is an old asset that's been around for quite a while; Vyalev, which is their more recently launched asset, I believe it launched about 18 months ago, roughly, and tavapadon, which will be launching imminently, assuming FDA approval. So, all three products combined make up the $5 billion, and that's a worldwide number. The other thing is AbbVie has said that Vyalev is the biggest component of those of the $5 billion. And then the last thing that they have said though, however, is that tavapadon is a large piece of the $5 billion. With regards to consensus, we don't -- as Ali says, we don't typically give peak sales estimates. On the other hand, it doesn't -- consensus estimates for tavapadon don't appear crazy.

Anything on...

Sorry, the second question -- yes, sorry, with regards to the pipeline, our next couple of deals that we're going to be focused on are pre-approval deals. Potentially Phase III financing, potentially something that's post Phase III, but pre-approval. With regards to therapeutic areas, as we've said always, we are therapeutic area agnostic. We've never done a deal in Parkinson's disease. And as you can see, we were happy to invest quite meaningfully in this space. What we look for are assets that are going to provide a differentiated data set to society and add value to society, have a strong pharmacoeconomic benefit as well as a solid risk/reward or risk-benefit ratio as deemed by the FDA and by KOLs.

Your next question is from Douglas Miehm from RBC Capital Markets.

Congratulations. First question I have is just related to how you've underwritten this deal. When we look at the potential estimates for the drug that are out there, they do trend towards $1 billion plus by 2020 -- 2034, excuse me. And I'm just wondering if you've underwritten the deal to that level or you're looking at a more conservative case. And that's really related to the higher discontinuation rates that were in that ICER report. So just curious on that. And then the other question I have with respect to this is, if in the event that AbbVie starts to pursue fixed doses combinations of their products, I'm just wondering how the structure of the deal works to ensure that you're [indiscernible] adequately. I'll leave it there.

Sorry, go ahead.

Yes. No. So, Doug, so the peak -- as we said, we don't talk about peak estimates. On the other hand, as I said, consensus does not appear crazy. We -- with regards to the ICER report and discontinuations, I mean, ICER you have to take a grain of salt of any ICER report. I mean, there -- we focus on the data that's available -- the publicly available data. And if you look at that -- if you look at TEMPO-1, TEMPO-2, TEMPO-3, it's very clear that there is a differentiated profile with tavapadon with regards to discontinuation as a function of the partial agonism that's specific to D2 and D3 or rather the lack of activity on D2 and D3. This is focused on D1 and D5, which very clearly provides a better safety profile relative to traditional dopamine agonist. This is not a traditional dopamine agonist. And all the feedback from KOLs and also surprisingly, payers has been quite positive. There are -- the KOL community is extremely excited. There's -- it's been a very long time since you've seen anything novel in this space, and we believe that this is truly novel. Most of the other drugs are basically 505(b)(2) versions of traditional dopamine agonist and/or levodopa/carbidopa. And as such, something that's truly novel in the space where you have a million patients annually or prevalence in the U.S. is pretty exciting.

Doug, I'd also reiterate the point that we made around structure here. When you look at the distribution of outcomes for the drug and you think about the combination of the fixed payments and the fact that the sales-based royalties are cumulative. They're not based on sales in a year. The variance of outcomes has sort of a reasonably muted effect on our cash flows.

And then just that last question with respect to if AbbVie were to pursue fixed-dose combinations, do you still receive your royalty?

We would. But very frankly, the size of the entitlement plus the sales potential of the drug, by the time something like that came to the market, we'd probably be out of our investment given the capped nature of the deal.

Your next question is from Erin Kyle from CIBC Capital Markets.

Congratulations on the royalty acquisition this morning. Just on the structure of the deal, just on the tiers, can you just help provide some guidance on those tiers between low double digits and mid-single digit? We are assuming the tiers begin at the higher end and step down fairly evenly over the next decade or so as sales progress. Is that a reasonable assumption?

Pretty limited on what we can say about that.

But I think the way you're thinking about it, Erin, is the right way as it goes the other way as opposed to stepping up.

Okay. And then just to clarify, the fixed payments and milestones. Those don't count towards the cash receipts cap, do they?

They do.

They do.

They do. They do. Okay. And then maybe just last question from me. Just on the transaction and timing. If you can provide any color on maybe why Bain and NovaQuest are selling now just before FDA approval here? And then are you buying the full entitlement of the royalty? Or do they still have an existing entitlement inside of this one?

We're not going to go into -- I don't want to conjecture as to why the counterparties are doing what they're doing. We were excited by the opportunity that tavapadon presented a strong differentiated asset in a therapeutic area that requires -- that has significant unmet need, marketed by one of the best marketers out there in the biopharmaceutical industry, plus we have some downside protection for our unitholders. That was an opportunity that we felt very strongly that it would not only as a stand-alone investment, provide significant value to investors, but also it further accelerates our strategic direction as an organization. And from that perspective, we're very excited about this deal.

And we've talked a lot about sort of shaping the portfolio and some of the work that we've been doing over the past 12 months put us in a position to really think tactically about what assets we layer on when and why and how that opens up room for us to really grow the business. And I think this is essentially probably the ne plus ultra example of that in the sense that we really were put into a position with the EKTERLY disposition that we were able to shape the portfolio very aggressively with this deal and on the back of this deal, meaningfully extend our duration and extend our returns with some pre-approval opportunities we're looking at. So really, that's the sort of holistic logic here.