Omeros Corporation (DHTUN) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to DRI Healthcare Trust Transaction Announcement Conference. Listeners are reminded that certain statements made in this 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 DRI website. DRI Healthcare Trust does not undertake to update any forward-looking statements. Such statements speak only as of the date made. 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, Monday, October 3, 2022. I would now like to introduce Mr. Behzad Khosrowshahi, Chief Executive Officer of DRI Healthcare Trust. Please go ahead, sir.

Thank you very much, and good morning, everyone. Thank you very much for taking the time to speak with our team today. With me this morning are Navin Jacob, our Executive Vice President and Head of Investments and Research; and Stewart Busbridge, our Chief Operating Officer. This has been a busy quarter where we closed on multiple deals, including $125 million transaction for a royalty on OMIDRIA as announced this morning. We want to take this opportunity to reflect on the progress made on our strategy as outlined at the time of our IPO and provide more details on our more recent transactions to date as well as our portfolio. DRI is the pharmaceutical royalty industry pioneer with a strong track record of deal execution across a variety of counterparties in therapeutic areas. Since DRI's first fund was raised in 2006 through our [Audio Gap] due to our announcement this morning, we have completed 67 transactions on over 40 different [ drugs ]. Our deep institutional knowledge and market intelligence tools based on thousands of evaluated transactions have been key to our success. In addition, we have built a formidable proprietary database of over 6,500 royalties on over 2,000 different drugs. We have compiled this database over 17 years, and it will be tough, if not impossible, to replicate. Combined with the deep industry relationships we have formed over the years, it gives us a competitive advantage in a sector with high barriers to entry. Our people are also critical to our success. For a business like ours to succeed, you need a team that is experienced in analyzing and executing transactions involving specialized products and has a varied set of experiences across the life sciences and pharmaceutical industries. We benefit from a highly experienced, skilled team of investment professionals with science backgrounds and advanced academic degrees. Importantly, since we went public, we have made some key additions to our team. Stewart Busbridge with whom many of you have spoken is our Chief Operating Officer, and he's responsible for our capital markets activities. He joined us after a lengthy investment banking career with Canaccord Genuity and CIBC. Navin Jacob, who will be speaking with you later on this call, is responsible for our investing activities. He joined us after a lengthy career, both on the sell side where he was a senior research analyst with UBS, Deutsche Bank and ISI and on the buy side, where he held senior investment roles at HealthCor and Citadel. And Emmanuel Coeytaux, who heads our strategy function. He joined us after a career that spans 10 years with BCG, Sanofi and a number of successful startups. I'm very pleased to be working with them as well as the rest of our dedicated team members. [Audio Gap] will allow us to successfully identify, source, underwrite and maintain royalty streams for our unitholders' benefits -- benefit, I should say, sorry. We have focused our growth strategy in an attractive market niche, which capitalizes on small to midsize transactions. We believe this is an underserved and difficult-to-penetrate segment. Still, it is one in which we have seen a lot of success over the decades and are particularly well positioned to continue to exploit. We look for medically necessary market-leading products with strong growth potential that benefit from strong and long-lasting intellectual property protection. These products are developed or marketed by industry-leading, high-quality life sciences companies. Since our IPO in February 2021, we have delivered on this growth strategy. During our IPO, we stated our 5-year deployment target of $650 million to $750 million. This quarter alone, we have completed 3 transactions deploying $184.5 million. In just 19 months, we have -- we are almost halfway to the high end of the target with $345 million deployed. All 5 transactions we have completed since our IPO fit our investment criteria, matching the right kinds of products with attractive financial return profiles. The duration of the portfolio currently stands at about 9 years. The royalty acquisitions that we will be discussing on the balance of our presentation, build on DRI's track record of successful deployment, which most recently began with our first private equity fund raised in 2006 that acquired $645 million in royalties over a 3-year period. That was followed by our second fund raised in 2009, that acquired $730 million in royalties over a 4-year period and was followed by our third fund that acquired $586 million royalties during its life. Throughout this time as well as since we have gone public, we have continually been focused on making smart acquisitions that will deliver outstanding results for our unitholders. Most recently, we completed 2 deals in 2021, first was the transaction with CTI BioPharma in August where we issued a secured loan with a royalty component triggered upon the approval of Vonjo, which ultimately came in February 2022. Then in September, we completed the royalty transaction for Oracea. In the last 2 months, as you will hear, we have completed 3 more deals for Empaveli, Zejula and OMIDRIA. At the IPO, we said we were going to deploy $650 million to $750 million per year over a 5-year period with $345 million already deployed with the potential for these transactions to ultimately be as large as $401 million with the achievement of certain milestones, we are well ahead of our target pace. Notably, we have significantly advanced the primary objective of the trust, replacing over 1/3 of the cash flows that are expected to -- that are expected to expire over the next 8 years or so. I will now turn over the call to Navin to discuss our most recent transactions in further detail.

Thank you, Behzad, and good morning. Over the 3 -- over the past year, the 3 transactions we've completed now resulted in a deployment of $184.5 million with potential to go up to $215.5 million with options and milestone payments. Each transaction is unique in terms of the deal structure, counterparty and therapeutic area. The transaction for Empaveli is structured to include the option at our discretion to increase our exposure. The Zejula deal includes a milestone payment for achieving further regulatory approval. The OMIDRIA deal is a structured transaction that provides good visibility into cash flows that we can expect to receive through 2030. These transactions significantly advanced our goal of replacing the cash flows from those assets that are expected to expire over the next 8 years. With regards to Empaveli, this is a hematology product approved for paroxysmal nocturnal hemoglobinuria, otherwise known as PNH. PNH is a serious chronic rare genetic disorder characterized by the complement pathway mediated destruction of red blood cells. Symptoms include severe anemia, blood clots, abdominal pain, difficulty swallowing, erectile dysfunction and red or black urine known as hemoglobinuria. We leveraged our strong balance sheet and funded this purchase with cash on hand. We acquired a royalty of just under 1% of worldwide net sales of Empaveli for an amount of $24.5 million. The royalty entitlement is on sales of up to $500 million per year. DRI holds the option to increase the sales cap to $1.1 billion for a onetime payment of $21 million. Royalties are collected on 2-quarter lag and will expire in Q4 of 2031 in the U.S. and Q2 of 2032 in the EU. Empaveli as a pipeline and a product. It is also in development for other indications, most notably geographic atrophy, an ophthalmologic condition with a PDUFA date of November 28. Some of you may be familiar that -- or may be aware of the AAO meeting that is ongoing this past weekend and through to Tuesday during which Empaveli is a focus of discussion for geographic atrophy. Empaveli is also being studied for cold agglutinin disease, also known as CAD, an autoimmune disease; and C3 global -- glomerulopathy, a renal disease. Empaveli is marketed by Apellis Pharmaceuticals and outside the U.S. by Sobi and is sold in the EU under the brand name Aspaveli. Our second transaction this summer was Zejula. It's an oncology drug currently approved for ovarian cancer with multiple other oncology pipeline indications in development. We purchased this royalty from AnaptysBio for $35 million. The transaction was funded from our credit facility and includes a $10 million milestone payment if Zejula is approved by the FDA for endometrial cancer by the end of 2025. The royalty rate is 0.5% on worldwide net sales. Royalties are collected on a 1-quarter lag, and we expect the entitlements to continue for at least 10 years. Zejula is marketed by GSK worldwide, excluding certain Asian territories, for all indications, except for prostate cancer, which pending regulatory approvals will be marketed by J&J. Takeda markets Zejula in Japan for all indications as well as Taiwan and South Korea for all ex prostate cancer indication. Zai Labs markets Zejula in China. GSK collects royalty from all these sublicensees. We collect a royalty on all of the Zejula sales from GSK, including sublicense royalties that are collected by GSK. [ Of ] sublicense sales, we collect a royalty on their royalties. The announcement that we made just made this morning was for OMIDRIA, which is an ophthalmologic product approved for intracameral use during cataract surgery or intraocular lens replacement. This transaction is a basic traditional royalty deal and is subject to certain annual caps. For a purchase price of $125 million we made to Omeros Corporation, we are entitled to royalties on OMIDRIA that are capped at $1.67 million for the last 4 months of 2022, $13 million for full year 2023, $20 million in 2024 and $25 million every year after between 2025 to 2028. For 2029, we have an annual capital of $26.25 million and for 2030, an annual sales capital of $27.5 million or royalty cap, rather with no entitlements after 2030. These caps are significantly below what Omeros has received from this royalty entitlements historically. The royalties will be paid monthly with the annual cap divided equally over the 12 months. OMIDRIA is marketed by Rayner Surgical, a private specialized marketer of cataract lenses in Europe and the U.S. I will now ask Stewart to review the overall portfolio. Stewart?

Thank you, Navin. Including the transactions that Navin just described in Q3, our portfolio now consists of 21 royalty assets on 17 products spanning 9 therapeutic areas. The new products that we have recently added are all marketed by companies that we have not previously been exposed to. Our portfolio duration currently sits at just over 9 years which has increased with our various transactions despite the maturing of some royalties and the passage of time. Finally, a number of our products continue to be among the most successful in the world, with 5 of our drugs currently having over $1 billion in annual sales. In addition to highlighting the acquisitions that we have made recently, it is also worth reflecting on the performance of some of the other assets in our portfolio. As we disclosed this morning, we have concluded that the issues that resulted in the voluntary withdrawal of Natpara in 2019 in the United States are likely to persist for the foreseeable future. This will mean that while sales and royalties should continue in Europe and the rest of the world markets, in the near term, we are not sure if or when the product will return to the U.S. market. For background, DRI owns a royalty on Natpara, an endocrinology product that entitles DRI to a mid-single-digit percentage of worldwide sales. The royalty is subject to an aggregate cap of $125 million in royalties. To date, including DRI's legacy funds prior to our IPO, we have collected $85.9 million out of that $125 million. We are currently evaluating the financial implications of our revised assumptions and alternatives -- and alternatives that we may have to maximize the value of this asset over time. In contrast, some of the other assets that we own either have or are due to benefit for some important catalysts. Early in September, Regeneron disclosed top line data related to the safety and efficacy of long-acting EYLEA, a formulation that is delivered every 4 months rather than every 2 months. These data were quite compelling and may result in a positive impact on sales if and when the FDA approves an adjustment to EYLEA's current label. In addition, we continue to see VONJO performing well in its launch, something that's been driven largely by the better-than-expected adoption of the drug in the community oncology setting. Until this morning's announcement, I'll remind you that VONJO was the largest transaction that we have completed as a public company. We will provide you with a full update on our portfolio on our third quarter results call in early November. Looking forward, we remain focused on 3 key priorities: one, growing our asset base by adding high-quality assets to our portfolio in line with our investment criteria. We are successfully executing the strategy as evidenced by our deployment to date. Two, generating sustainable growing cash flows through accretive transactions with appropriate capital structures. And third, continuing to return cash to unitholders. As a result of the strong performance of our portfolio, we've been able to maintain a quarterly distribution that currently implies a current yield of over 4.5% and we are committed to balancing our use of cash between unitholder returns and future growth. We are poised for that growth with a dynamic pipeline in various stages of execution in order to add high-quality assets to our portfolio. Our access to capital and rigorous due diligence processes keep us well positioned to capitalize on the right opportunities in the most attractive therapeutic areas. Thank you. And with that, we will now take your questions.

[Operator Instructions] The first question comes from Doug Miehm of RBC Capital Markets.

I have 3 questions. The first one has to do with the intellectual property on this product and whether or not there's any Paragraph IV filed or any potential litigation that's going to be ongoing with it? The second one has to do with the first half of 2018 according to IQVIA, it looked like sales dropped off significantly. And based on how the contract is written, if that were to occur, again, you couldn't recoup those. And then finally, perhaps you could talk a little bit about the implied IRR of this, which appears to be sub-10% again. And I recognize that this looks like a very good drug from the perspective of offsetting some of the declines you're expecting to see, but I just want to see that within the context of the U.S. 10-year, which is almost at 4% right now.

Doug, thanks very much for the questions. I appreciate it. We can certainly tackle the 3 questions that you raised. The intellectual property on this product is very strong. There's no -- there's no challenges or Paragraph IV challenges or anything like that ongoing or, to my knowledge, have occurred. And we don't foresee anything at least before our royalty expires. So we're happy with the strength of the intellectual property. The sales dropped off in 2018 because of a reimbursement issue that we don't anticipate repeating going forward. There was just a change in legislation and regulations and the reimbursement fell away and then came back. So that was hopefully a onetime thing, and we don't anticipate that reoccurring. And I hear you on the IRR. I mean Navin and his team have constructed this deal, as you said, in a way that sort of improves our cash flows and adds to our cash flows pretty significantly over the near term and then through 2030, of course. The IRR based on our calculations is about 9.7%, so just approaching the 10% level. And we measure these deals on a multiple -- on a variety of metrics, IRR, multiple cash flow accretion, and we were attracted to this on that basis. And I think that ultimately, at the end of the day, we hope to have a pool of assets that we've acquired over a few years' time that generate returns that are comparable with what we generated in the past. And we're constructing this pool of assets in much the same way that we have done in the past and requiring attractive things that will ultimately be accretive for investors and deliver attractive returns. I'll let Navin jump in here just to add anything that he has on his mind.

Thanks. Thanks for that. Thanks, Doug. Good question. Just on the IP. So the patents have been tested by generic and the [ filer ] in the past. Competitors have been granted a launch date of April 2032, which is after our royalty entitlement ends. And even though the patents are potentially open to future validity challenges, based on the past settlements that have occurred, which are with very large generic manufacturers, including Sandoz, the potential for invalidity attacks in our opinion, do not appear to significantly favor any potential challenges. So we feel very strong about the IP protection here over the next 10 years.

The next question comes from Greg Fraser of Truist Securities.

A quick one on just the royalty structure. I was wondering if you could kind of help with the way it works. It looks like you're acquiring part of the royalty that Omeros is entitled to? I'm just looking for some more color on the structure.

Thanks for the question, Greg. I will turn it over to Navin to respond.

Sure. Yes. So Greg, thanks for the question. So we've -- you're exactly right. It's effectively -- we're buying a portion of their royalties. As you can see from their historical royalties. And if you speak to Omeros based on the projections of where the product is going to go, OMIDRIA is going to go or where their royalty -- their historical knowledge of that product will also give you some insight into where they think the product will go as do we that we are only buying a portion of their sales of the royalties, and it's capped by the annual amounts that are discussed in the press release, roughly $13 million for the year of 2023. And that annual cap grows over the course of 2023 through to the end of 2030. So effectively giving us a growing royalty stream.

So is this...

Does that help? Yes, sorry, go ahead.

So as long as Omeros gets royalties at or above the caps that you're entitled to, you'll get to that full amount each year?

Exactly. And as you can see from historical sales as well as the growth -- the continued growth of the product, those caps are well below what their historical amounts have been for sales that are required in order for us to hit the caps.

Got it. Okay. Very good. They're entitled to a milestone payment that's related to Part B coverage. Can you talk about the importance of that Part D -- Part B decision to the growth outlook for the product? And would you be entitled any part of that milestone payment?

No, we're -- the easy part of that is we're not entitled to any of that milestone payment. It's a roughly $200 million milestone payment. It is incrementally important to the product's growth but in our opinion, that was not part of what we were underwriting to. I mean it's nice, it's an extra additional layer of coverage and protection to the coverage, but by itself is not required for us to achieve our annual royalty caps.

Got it. Okay. And just bigger picture, given the size of this deal, any amount deployed so far here should investors expect you to maybe take a breather before signing additional transactions? Thanks so much.

We don't believe in breathers, Greg. I think as you know, Greg, that we're in a pretty unique and attractive market right now, particularly as biotechs struggle for financing, and we're seeing a ton of high-quality opportunities that are just sort of collateral damage, so to speak, as a result of the market conditions that we're sitting in. And so our focus is to run as quickly as we can to provide the financing that these companies need as well as these individuals and institutions need. We're going to be smart about it. We're not going to just deploy the capital willy-nilly, but we'd like to continue to deploy on a good pace.

The next question comes from Rahul Sarugaser.

Thank you so much for including us in the lineup this morning. So just a quick point of clarification, and I think it was a little bit answered in the previous question this morning, I just wanted to clarify a little bit further. So -- looking at the Omeros PR, where they indicated that no more than 1/3 of the payments -- essentially, they pay out no more than 1/3. That sort of implies that their revenue would need to be an order of $75 million in 2025. So could you give us a sense of your confidence that the revenue on the product should more than reach that and enable that?

Rahul, to answer the question, you're asking about significance of the Omeros press release that the third number?

Sure. Yes. They said that no more than 1/3 would be paid out.

Yes. I mean I think as Navin said, as he answered the previous question, we're confident that total revenues that Omeros records will be greater than the amounts that they would owe us under the caps. I can't really comment about whether it's going to equate to 1/3 or some other fraction. That's really Omeros' commentary.

Sure, sure. Okay. That's helpful. And then maybe more of a general question and a little bit coming back to Doug's question at the beginning. Given that we are now in the sort of unique environment of rising rates, but of course, also in an environment, I believe, then you alluded to the fact that you are in an attractive market where there are lots of smaller biotechs that are seeking financing. Could you maybe speak to your strategy and the interplay between these 2 sort of opposing forces?

Between the opposing forces of rising rates and a ton of demand for financing?

Correct.

Look, I think we take a bit of a 10-year view and we're building portfolios that will deliver returns over the long term. And so while we understand that short-term rates are going up and long-term rates are going up as well, we also understand that they would likely -- before these royalties expire come back down to. And so we're taking a bit of a long-term view. I think our business is to acquire royalties on attractive assets and build portfolios that ultimately generate returns that are consistent with what we've done historically. And that's what we're focused on. And sometimes you'll see us do deals at 10% returns and sometimes you'll see us do deals that perform at much better levels such as the Vonjo deal, for example. So I think we're building a portfolio, and I wouldn't take away too much with just rates of return on one particular deal.

The next -- the next question comes from Paul Stewardson, iA Capital Markets.

Just calling in for Chelsea. I guess a 2-part for us. Can you give a little bit of color on the CMS payments for non-opioid pain management in terms of that exclusion? And then the second -- in terms of how that affects -- if that affects net sales and how that affects the product? And then, I guess, just more generally, can you talk a little bit about the competitive landscape of what else is out there versus OMIDRIA and what they're going to be up against over the next 10 years?

Absolutely. I will turn it over to Navin to tackle those.

Sure. So with regards to the CMS payments, I think what's most important is at the end of last year, there was a final ruling provided by CMS with regards to coverage of OMIDRIA. And that's what gave us a lot of confidence in the continued coverage. As you may have seen, there was also re-upping of that coverage for 2023. What is different now versus what you would have historically seen was that final ruling, which changed the way in which CMS views the reimbursement of the product, wherein now, what's required is basically just an annual check to determine whether it should maintain its reimbursement or not. And based on the criteria that was set 2, 3 years ago via different legislation, CMS has now broadly has to align with those legislation requirements that suggest in our mind that OMIDRIA will continue having reimbursement for the next 10 years, hence, this deal. With regards to competition, there's -- most of the competition really is generic and is found via compounded products. As you may be well aware, compounding products in the ophthalmology space leads to significant issues. There was a center in Texas that had significant issues, a compounding pharmacy center in Texas that led to significant inflammatory and issues with patients with cataract surgery. A product like OMIDRIA, which provides significant convenience for the surgeons administering the product, prevents such situations. And obviously, they're reimbursed for it, which is a positive for them and for the product. As such, we don't see much competition that's going to affect demand over the next 10 years.