More upside to come from DRI Healthcare, says Raymond James

DRI Healthcare Trust (DRI Healthcare Trust Stock Quote, Charts, News, Analysts, Financials TSX:DHT-UN) had a big day on Thursday, with the stock jumping almost 16 per cent on the sale of royalties. Raymond James analyst Rahul Sarugaser commented on the stock and company in a Thursday note to clients, saying he’s impressed by the quick turnaround and profit windfall.

DRI Healthcare, an open-ended biopharma royalty-holding trust with a 30+ year history in the pharma industry, announced on Thursday the sale of its royalty interest in TZIELD to Sanofi for $210 million. DRI had bought TZIELD only 50 days ago and with the flip profited $110 million. (All figures in US dollars except where noted otherwise.)

The company said it would distribute cash to shareholders and announced a $20 million special cash distribution to unitholders of record as of Jun 30, 2023, representing about $0.65 per share. The deal’s proceeds will also go towards paying down the majority of DRI’s revolving acquisition credit facility, which at $350 million in total credit has about $150 million drawn.

“DRI Healthcare is excited about the dramatic positive impact that TZIELD will have on patients who are at risk of developing Type 1 Diabetes,” said Behzad Khosrowshahi, DRI CEO, in a statement. “This is only the second time in 21 years that we have sold a royalty to a third party. Having only recently announced the TZIELD royalty acquisition, DRI Healthcare was not looking to sell the royalty.”

Sarugaser said as the biopharma royalty game is all about identifying underappreciated assets, DRI has in the past and again with this deal shown its strengths in this capacity. 

“Transactions like this yield DRI a low cost of capital to deploy toward future opportunities, potentially creating a powerful compounding effect for investors,” Sarugaser wrote.

At the same time, the analyst pointed out that acquiring TZIELD’s royalties was originally seen as the “final brick” needed to establish DRI’s base of assets for generating flat to slightly positive cash receipts through to 2030. So, that puts DRI back in need of a new asset.

But the company has plenty of dry powder to carry out its plan, Sarugaser said.

“If investors believe—as we do—that DRI’s team is capable of executing accretive deals for long-dated royalties at a regular cadence, this event should, in our view, be seen as extremely positive. With seven transactions and $607.5 million deployed since Oct. 2021, ultimately achieving a >ten-year portfolio duration, we believe management has proven this capability very well,” he said.

With the update, Sarugaser reiterated an “Outperform” rating and C$13.50 target on DRI Healthcare, representing at press time a projected one-year return of 64 per cent.