DRI Healthcare Trust offers investors relatively low-risk exposure to the trillion-dollar global pharma industry with a long track record of success, analysts at Stifel GMP said as they initiated coverage on the company with a ‘Buy’ rating and $20 price target.
The analysts noted that DRI is a portfolio of roughly 23 royalty assets tied to the global pharmaceutical market. It invests between US$25 million and US$200 million in drugs that have been approved by the US Food and Drug Administration (FDA) in return for a long stream of cash flow/royalties.
“The strategy has worked for 30+ years, yielding a solid track record of 18-20% IRR for 15+ years,” the analysts wrote in a note.
“We see a particularly compelling setup for DRI, as the current capital-constrained market is leading to more deal flow, including synthetic structures.”
The analysts noted that the pharma industry has defensive characteristics, including being recession resilient, but with good growth as well, spurred by innovation and the demand of an aging population.
“However, investing in the industry can be challenging due to a range of risks related to the stage of a company as well as a limited opportunity set in Canada,” the analysts said.
“DRI offers investors relatively lower-risk exposure by investing in a basket of royalties for FDA-approved drugs with high-quality marketers. Binary trial or regulatory risk is removed, along with lowering commercialization risk, as compared to investing in individual biotech or specialty pharma companies.”
Large royalty transactions such as those above $250 million have been dominated by Royalty Pharma and private company Healthcare Royalty Partners, with an estimated 60% to 80% market share over the past 10 years.
The high level of concentration highlights an opportunity for DRI to gradually move up the transaction size value chain, the analysts said.
Although access to capital is a barrier to entry for larger deals, they noted that DRI is already moving into larger deal size and a recent windfall from a 110%, one-month return from biologic drug Tzield, helps support growth estimates.
With DRI trading at a price to book ratio (P/BV) of just 0.8 times versus roughly 2.5 times for Royalty Pharma and expected cash flow growth of 15% over the next two years, the Stifel analysts said they see a valuation re-rating opportunity.
“As investor confidence in DRI builds and the business becomes larger, access to capital could also improve, highlighting a multi-year value creation opportunity,” the analysts added.
Contact the author at stephen.gunnion@proactiveinvestors.com