Good morning, everyone. Welcome to DRI Healthcare Trust's 2024 Second 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 securities 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. Reconciliations of these measures to measures recognized under IFRS are included in our earnings press release, available on our website and on SEDAR+. Unless otherwise specified, all dollar amounts discussed today are in US dollars. I want to remind everyone that this conference call is being recorded today, Wednesday, August 7, 2024. The Trust's quarterly results press release and the slides of today's call will be available on the investor page of the Trust's website at drihealthcare.com. I would now like to introduce Mr. Gary Collins, Chairman and Chief Executive Officer of DRI Healthcare Trust. Please go ahead, Mr. Collins.
Thank you, operator, and good morning, everyone. Thank you for taking the time to join us today. With me today are Ali Hedayat, board trustee and acting Chief Executive Officer of our manager, DRI Capital, which we refer to as DRI Healthcare. Navin Jacob, our manager's Chief Investment Officer, and Sandy Kwan, acting Chief Financial Officer of both the Trust and our manager. Last month, the Trust announced it was alerted to irregularities relating to certain alleged consulting and other expenses charged to the Trust and immediately launched an investigation conducted by a team of independent legal counsel and forensic accountants. As a result, a new leadership team has been appointed. Along with my role as Chairman of the Board of Trustees, I have also now taken on the position of CEO of the Trust.
Ali Hedayat has assumed the role of Acting CEO of DRI Healthcare, in addition to his responsibilities as a trustee of the Trust and a member of DRI Healthcare's investment committee. Ali is focused on the day-to-day operations of our manager, including overseeing deal sourcing and execution, risk management, corporate finance, and human resources. Sandy Kwan, former Vice President of Finance of DRI Healthcare, has been appointed as Acting CFO for both the Trust and our manager. Both Ali and Sandy have been instrumental in the Trust's performance over the past few years, and we have the utmost confidence in their ability to steward the Trust through this transitional time. We also announced yesterday that Amit Kapoor has been appointed as CFO of the Trust, effective September 16, 2024. We're confident this new management team, now entirely independent from the manager, will serve the interests of our unitholders.
We're currently reviewing all aspects of our internal controls and governance processes, including with respect to remediation of the related material weaknesses identified, as well as our relationship with the manager. We've also restated our 2023 financial statements and related disclosure documents, which were filed concurrently with our Q2 results. With our new leadership structure and our team of committed and talented professionals, we're well positioned to continue on our pace of execution, and we are enthusiastic about the opportunities available for the Trust. The Trust was active in the second quarter, with our business performing well and our team continuing to execute on all aspects of our strategy. In June, we were pleased to close a transaction for a second royalty entitlement on Xenpozyme.
We invested $13.25 million on closing, and with potential milestone payments, the total deal value is up to $45.75 million. The transaction increased our total deployment capital to $894 million across 13 royalty transactions since going public. Navin will discuss the transaction in detail later in the call. We also made significant unit purchases throughout the quarter under our normal course issuer bid. We take a dynamic approach to our capital deployment and will allocate such capital in a way we believe will provide the most accretive value for our unitholders. In the quarter, we purchased over 207,000 units for a cost of $2.2 million. These were the first purchases under the NCIB since the second quarter of 2023.
Subsequent to quarter end, under the automated unit repurchase plan, we continued making purchases that totaled 198,746 units, for a total cost of $1.7 million. Year to date, we have purchased 406,346 units for a total cost of $3.9 million. In aggregate, the Trust has acquired and canceled 3.2 million units, totaling $18.4 million under all current and previous NCIB plans. Finally, we declared a quarterly dividend of $0.085, which is payable on October 18 to unitholders of record on September 13 . I will now turn the call over to Navin Jacob, our Chief Investment Officer of the manager, DRI Healthcare.
Thank you, Gary. Our portfolio performed well in the quarter. This table shows the individual royalty receipts for the second quarter of 2024, compared to the same quarter in the previous year, as well as the previous quarter. When we remove the impacts of the large one-time milestone payments from Orserdu and Vonjo, which we received in the first quarter, total cash royalty receipts increased by 14% quarter-over-quarter. Excluding milestones, this quarter represents the highest total cash royalty receipts we have seen in a single quarter ever, and is a 59% increase from the same period in the prior year. This increase in year-over-year total cash royalty receipts was primarily driven by royalties on the sales of Orserdu, Vonjo, and Empaveli, as well as the expansion of the Omidria royalty. Zemplar royalties are only received in the second and fourth quarters.
We received our first royalty in the second half of 2023, and as such, there is no comparison for either prior period. We're happy with the early ramp of the drug, which has been largely in line with our expectations. Sales were generally flat between third and fourth quarter of 2023, which was reflected in the royalties received in this quarter. However, we saw a return to growth in 2024, with year-to-date sales increasing 89% year over year. Omidria royalty receipts increased 32% from the prior quarter, and 246% from the prior year before our second transaction on the asset, which expanded our entitlement and removed the previous annual caps. Overall, the asset is performing in line with our expectations, and we anticipate that it will be a significant contributor to our portfolio through the end of the decade.
Orserdu continues to benefit from its strong launch and is performing better than our initial expectations. Vonjo royalties grew 51% from the prior year period, in part from the addition of the second Vonjo royalty. Vonjo sales in the second quarter grew 15% versus the prior year, which is a little slower than expected. The slowdown is driven primarily by the combined effects of the momelotinib launch during a disruption in Sobi's marketing and sales efforts as they continued their integration of CTI. With the CTI integration now complete, we anticipate Sobi to refocus on Vonjo growth, and we look forward to a stronger second half of 2024. Importantly, there are several potential upside opportunities to Vonjo, which are minimally priced into our deal price. Sobi has life cycle management plans for Vonjo, including potential international expansion and new indications.
These opportunities would represent upside versus our expectations. Zejula royalty receipts grew by 26% year-over-year, sustained by increased patient demand and higher volumes, further enhanced by positive price impacts in the U.S., including impacts from the launch of the tablet formulation in the U.S. in Q3-2023. Several top-line data readouts are expected later this year, potentially leading to additional indications. Empaveli, Syfovre showed significant growth, with a 917% increase in royalty receipts year-over-year. Recall, we only received a nominal amount of royalties in the previous quarter due to a timing difference on the payment of royalties. Empaveli is marketed in the European Union by Sobi under the brand name Aspaveli, where it received approval in the first-line treatment of paroxysmal nocturnal hemoglobinuria, or PNH, during the second quarter.
Sobi anticipates trial readouts for additional indications in the second half of the year. Oracea royalty receipts grew by 50% year-over-year due to the success of new marketing strategies put in place by Galderma. Quarter-over-quarter receipts decreased 23%, mainly due to buying patterns, where the fourth quarter tends to see the largest volume. We are currently co-plaintiffs with Galderma, the marketer of Oracea, and litigation relating to the generic entry. After a lower court decision in favor of the defendants, the defendants launched a generic version of Oracea at risk in the United States in April 2024. The plaintiffs have appealed the decision. While the Court of Appeals denied the plaintiff's request for an injunction pending appeal, it did grant a motion to expedite the appeal. Meanwhile, at least one other generic manufacturer of Oracea has launched its product at risk.
The reduction in cash flows from Oracea are not anticipated to have any adverse impact on the 2024 guidance that we have provided. The Spinraza receipts declined 17% year over year and 15% from the previous quarter, which is in line with our expectations. Biogen noted that while there is bumpiness in certain markets, they remain encouraged by Spinraza's market share resilience. Xolair cash flows increased 8% year over year and decreased 32% quarter over quarter, which is in line with seasonal trends. Second quarter has historically been the lowest quarter for the receipts of this asset. Xolair was approved in the United States for multiple food allergies in the first quarter, and we expect to start seeing sales from that indication positively impact royalty receipts in the third quarter, as we receive them on a two-quarter lag.
On their second quarter call, Roche noted that there's been strong pickup of Xolair for the treatment of food allergies. There are already 15,000 patients being treated only four months after approval. Management further commented that it expects Xolair growth in the second half of the year to further accelerate to reach around 20%, and for that momentum to be carried forward into 2025, with year-over-year growth in the teens. Lumizyme royalty that expired as of Q4-2023, combined with the expected contractual step downs and expiries in our royalties on Eylea, Rydapt, Zytiga, Stelara, Simponi, and Ilaris, partially offset the increases we have seen in our portfolio.
As these assets near their expiries, we expect to see minor volatility, generic entry, and subsequent market share erosion, as we have seen, recently seen with Eylea and Rydapt, which occurs on the normal course as a drug reaches the end of its patent life. We completed our second acquisition for royalty on Xenpozyme in June. Xenpozyme is the first and only drug that treats non-central nervous system manifestations of acid sphingomyelinase deficiency, or ASMD, also known as Niemann-Pick disease, in pediatric and adult patients. ASMD is a rare, progressive, and potentially life-threatening lysosomal storage disease. The estimated prevalence of ASMD is widely variable and is approximately 1,000- 2,000 patients worldwide. The disease often leads to chronic fatigue, limited physical or social activity, and difficulties in performing daily activities or work.
Many patients die before or in early adulthood, often from pneumonia, respiratory failure, or liver failure. Xenpozyme is a product that provides ASMD patients and their families with disease-modifying therapy where none previously existed. It is an intravenously infused recombinant human acid sphingomyelinase enzyme intended to directly replace ASM expression in patients with ASMD, thereby improving clinical manifestations of the disease. Investing in additional royalty streams on an existing asset in our portfolio is an efficient, natural way of growing our business. Over the past 20+ years, nearly one-third of our deals have been follow-on deals, either multiple deals with the same counterparty or multiple deals on the same drug with different counterparties. For the first royalty on Xenpozyme that we acquired in October 2022, referred to as Xenpozyme One, we paid $30 million upfront, plus up to $26.5 million in potential performance-based milestones.
That transaction entitled us to an approximately 1% royalty on worldwide net sales. For the second transaction, Xenpozyme Two, we paid $13.25 million upfront, plus $32.5 million in sales-based milestones. This transaction also entitles us to an approximately 1% royalty on worldwide net sales of Xenpozyme. After receiving $6.3 million in receipts in any calendar year, the royalty rate steps down by 50% for the remainder of that calendar year. This decrease relates only to the Xenpozyme Two acquisition, as there is no sharing of economics on the Xenpozyme One transaction. Similar to the Xenpozyme One royalties, the Xenpozyme Two royalties are collected semi-annually.
Royalties from sales of the drug in Q1 and Q2 of a given calendar year are received in Q4 of that same year, and royalties from sales in Q3 and Q4 of a given calendar year are received in Q2 of the following year. We expect both Xenpozyme One and Xenpozyme Two to expire in the second quarter of 2036. Xenpozyme is a drug that has performed well since we acquired the initial royalty in October 2022. Sanofi is a global leader in enzyme replacement therapies, and the sales ramp has been faster than we initially anticipated at the time of Xenpozyme One. With this acquisition, we have now surpassed the $1 billion mark in committed capital since the IPO, with $894 million deployed, plus up to $138 million in potential milestone payments.
We continue to pursue our strategy with a robust pipeline comprised of $3.2 billion in potential opportunities. This represents the aggregate value of potential opportunities under active evaluation by our investment team that meet or exceed our qualitative and quantitative investment criteria. While we have seen signs of early recovery for the biotech market through the first half of the year, both in number of IPOs and M&A transactions, we are noticing a distinct bifurcation occurring. Cash flow positive companies with end market or strong late-stage assets and limited pipelines are able to attract capital, while cash-burning companies that require investments into R&D or manufacturing simply cannot attract the same attention in today's risk-off environment. For DRI Healthcare, we believe this represents a tremendous opportunity to continue funding biopharma companies to advance their scientific research and strategic aspirations.
Our deal pipeline remains robust, featuring counterparties and deals with return profiles similar to those we have seen over the past 18 months. This allows us to be selective, executing only on what we believe to be the highest quality transactions. Our focus remains on acquiring royalties on products that have the potential to change and improve health outcomes and quality of life for patients. We intend to acquire therapies that benefit from strong marketers, as well as solid and long-lasting intellectual property and/or regulatory protection. This aligns with our target of weighted average portfolio duration of over 10 years. I will now turn the call over to Sandy Kwan, Acting CFO of the Trust and the Manager at DRI Healthcare.
Thank you, Navin. We posted strong financial results for the quarter. We recorded $43 million in normalized total cash receipts, a 50% increase over the same quarter in 2023. We recorded $41.6 million in total income, a 48% increase over the same quarter in 2023, and we recorded $32.9 million in adjusted EBITDA, a 31% increase over the same quarter in 2023. This translates to an adjusted EBITDA margin of 77%. Finally, we delivered $0.49 in basic adjusted cash earnings per unit and declared a cash distribution of $0.085 per unit. We continue to generate strong cash flow from our assets, as Navin outlined earlier.
For the last 12 months, ended June 30, 2024, our normalized total cash receipts were $184 million, including total cash royalty receipts of $182.1 million and cash interest and other income of $1.9 million. Our operating expenses and management fees totaled $18.2 million net of performance fees payable, resulting in an adjusted EBITDA of $155.8 million and an adjusted EBITDA margin of 85%. We also generated adjusted cash earnings per unit of $2.47. As at June 30, we had $53.9 million of cash and cash equivalents and $43.5 million of royalties receivable. Under our credit facility, we had $260.8 million in available credit.
We believe we are well capitalized to act on the attractive opportunities we are seeing in the market. I will now turn the call over to Ali Hedayat, Acting CEO of our manager, DRI Healthcare.
Thank you, Sandy. As Acting CEO of DRI Healthcare and a member of the Board of Trustees of the Trust, I want to reiterate my commitment to doing the right thing for the trust and its stakeholders. The recent events have been challenging, but our strong portfolio of assets, skilled employee base, and robust pipeline provide a clear line of sight to continue to execute on our growth trajectory. Our experienced team, combined with investment systems and relationships built over decades, has led to strong execution in our short life as a public company and has propelled us far past the objectives that we set at the time of our IPO. We revised guidance based on strong performance since the IPO in February 2021.
In February 2024, we increased our deployment target for the second time in 1 year to over $1.25 billion for the five years ending 2025. Today, we reiterate that target. Our cash flow profile has changed dramatically since the time of the IPO, and we now anticipate high teens royalty income CAGR through 2025. In the long term, we expect mid to high single-digit royalty income CAGR through 2030. This guidance excludes the impact of any new transactions that we may complete. Built into these growth numbers is our 2024 royalty income guidance. Excluding milestone income and income from any new transactions, we anticipate royalty income of between $153 million and $155 million. This compares to 2023 royalty income of $117.5 million on a comparable basis after removing the impact of milestones.
We have also extended the portfolio's duration to over 10 years, in line with our target for 2025. With a combination of cash on hand, organic cash flow, and our expanded credit facilities, coupled with the increased flexibility from the preferred security refinancing, we believe we have ample deployment capacity to reach our new targets without the need to raise any additional equity from public markets. We have deployed $894 million to date since the IPO and have $355 million to deploy to reach our deployment target. We believe this goal is well within sight and that we have a clear roadmap to get there. Looking into the next quarter and beyond, we are focused on four key priorities.
First, we are laser-focused on restoring and rebuilding the confidence of our unitholders by continuing to implement and address governance practices and internal controls in a thorough and deliberate manner. To continue to grow the organization, we are committed to investing in our people and retaining them over the long term, as well as to attracting new talent. Our team's skill at sourcing and executing accretive transactions for our unitholders is vital to that success. Together with Navin, I believe that we will be able to continue to increase the breadth and depth of the talent on our investment team to propel our growth. We are also investing in technology to improve our throughput in sourcing and execution of deals. Next, we aim to continue to execute our proven strategy against the backdrop of one of the largest pipelines we have seen in the company's history.
We are enthusiastic about the progress we have made since the IPO and will continue to successfully execute on the opportunities that are available to us. With the current market constraints on biotech financing and the high demand for new and innovative treatments, combined with our skills in sourcing and closing deals, we continue to see multiple opportunities to deploy capital and remain capitalized to do so. Finally, we remain committed to being a critical partner in advancing innovation in the life science sector by providing funding to parties across the value chain, creating win-win solutions for all. With that, we will now take your questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press star followed by the number one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star followed by the number two. If you are using a speakerphone, please lift your handset before pressing any key. Again, should you have a question, please press star followed by the number one. One moment, please, for your first question.... Our first question comes from the line of Doug Miehm from RBC Capital Markets. Go ahead, please.
Yeah. Good morning, Gary, Ali, and everyone else. First question just has to do with recent conversations that you've been having with your potential counterparties as you think about equity, or sorry, royalty monetization. I just want to know if the tone of those conversations has changed in any way such that you may need to pay more for assets, or is it business as usual?
Hey, Doug, it's Ali. How are you? Look, you know, when we spoke immediately after these events, I think one of the things that I was worried about was certainly counterparty skepticism on our ability to consummate transactions, especially ones that potentially had, you know, back-end payments and the like. I really do not feel that. I think people have had a look at our balance sheet, understand where we are at, see the strong cash flows. And, you know, I think that relative to our maybe initial worries, the day of the event, things in our discussions have been much more normal than certainly I anticipated at the outset.
So what I will say, and you know, Naveen can feel free to chime in here as well, is that our discussions are progressing pretty much exactly in the way that they were prior to these events. We're seeing a very robust stream of late-stage transactions that we're working on, and we're not getting any pushback in any form from the counterparties that we're in discussion with. So deal engine is working really well, and I think that's really a credit to Naveen and his team there.
Okay, perfect.
Hi, Doug. Yeah, Doug, just I could add a couple, couple of sentences of color, which is that, look, we, the first thing we did, after the news broke is, you know, as you know, speaking to investors and analysts. The second thing we did immediately after that was calling all our past, partners and existing partners, and calling, folks that we are potentially gonna be doing deals with, and explaining the news and being very open about it and, explaining the remediation processes that are going on, to fix the situation. We were actually quite surprised to the upside and the positive reaction, from our potential partners, future partners, as well as our existing and past partners, all who were very supportive of the organization.
And I think that's in part driven by the transparency that has been created by the board and by Ali and the processes that are happening in place. And lastly, I think there's also a lot of comfort in the cash flows that exist at the trust, which, as you know, are very strong, as well as the support of the banks, which we have discussed before, and their support of the cash flows that we have and our ability to continue to do deals.
Perfect. As a follow-up, a more personal question for Ali and Gary. I expect you're both busy with other items in your lives and taking on these two roles, is it too much? Are you gonna be able to allocate the time that's necessary to completely right this ship? And given the potential for how much work this is going to be, would the company be open to informal approaches? And I'll leave it there. Thank you.
Yeah. So it's Gary Collins. Nice to meet you, Doug. I've committed myself to this. I have two other boards that I participate in, but they are not things that demand a huge amount of my time. I've committed myself to do this, for the next two years, and I'll be here whenever I need to be here, and I'll be devoting, you know, sort of 100% of my time to it. There are clearly some technical things that need to happen around internal controls, but there's also cultural change that has to happen as well. And that's not something that happens overnight, but it's something we've committed to do, and I'll commit whatever time I need to do to make that happen.
Doug, on my side, as you know, I've been pretty deeply involved with the business from a financial side for a number of years now. It's certainly a step up in the scope and time commitment of my responsibilities, but not sort of a black-and-white one, really more a significant incremental one. I'm highly focused on, you know, fixing the processes and, you know, the plumbing that has sort of led us to this point. I think the, you know, the one thing that is important in all of this to contextualize is that, you know, over the past couple of years, we've built a very robust organization, you know, certainly the deal team under Naveen and our operations team over here in Toronto.
I think, you know, those continue to function in a really superb way, and that certainly makes the path that we have to tread in terms of normalizing the business a lot easier and a lot more manageable for Gary and I. So, you know, we're both committed to getting this back to where it needs to be, but also both, I think, very thankful for the contributions from the team and the fact that they have continued to operate as normal and execute in a superb way. I'll just add that I've been really, I mean, I've served on a number of boards over the years. I've been really pleased with the engagement of the trustees right from day one. They've all committed vast amounts of time to get this right.
They work very well together and work very quickly. This isn't something we're gonna wait around to change. We've been on it from the first day we heard about this. So, you know, it's more than just me or Ali, there's a whole team working on it.
Thank you. Our next question comes from the line of Ash Verma from UBS. Go ahead, please.
Thanks, thanks for taking my questions and for the updates here. So just if you can please describe the deals that you have in the pipeline, and to what extent are your discussions on potential royalty deals on pause right now due to the management transition? Like, when can we start to expect more deal consummation? And then secondly, just new management team here, Gary and Amit, like, if you can kind of highlight your investment preferences, if they are, like, strategically or financially in any way different versus what the trust has done historically. I would love to hear your thoughts on where you want to take the business. Thanks.
I think we'll let Navin take the pipeline question, and Gary can answer your second one.
Hi, Ash. On the pipeline, we have not slowed at all with regards to our sourcing efforts and our diligence efforts. If anything, you know, this has energized the team to ensure that we go and get the highest quality assets and execute on them. I would say that as and this is just a fact, I mean, our pipeline is as big and as robust as it's ever been in the history of DRI. Quite frankly, it could be bigger if we wanted it to be. We have trimmed it a little bit just in order to focus on deals that we believe have the highest probability of closing from our perspective.
And so, we're fully confident in our ability to continue to execute on deals. There's good engagement with partners. We are in mid stages with several parties, and, let's just, you know, we hope to announce something over the coming months.
And it's Gary. Sorry. Your audio was a bit garbled when you were speaking. Can you repeat the question that you asked me, please?
Yeah, sorry. What I was trying to get at is that, are your investment preferences in any way different versus what the trust has done historically?
No, I think the trust has got a great track record. I said to somebody the other day that if I had a crisis to manage, this is the one I would choose, just because the underlying business is so solid. The team has been great, and they continue to execute. So while we're managing the governance issues and the cultural change here, I'm very comfortable that the team will continue to execute as they have in the past, very successfully.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Les Sulewski from Truist Securities. Go ahead, please.
Good morning. Thank you for taking my questions, guys. Just on the product portfolio now, what is driving Orserdu strength there? And then on the Oracea generic coming on board, any contractual agreements in case there's a potential monetary damages owed? And then, just take a backseat here on the transition. Is there any certain know-how or a Rolodex of partners that now goes away with the departure of the previous CEO? And, I believe, Gary, you did mention, you know, the potential cultural change or any sort of internal expectations that we can expect. I believe you do run a pretty slim team, but maybe just kind of give us an overview of what you would expect moving forward. Thank you.
So I'll spend a second on Oracea, and then I'll let Navin answer the questions on pipeline, and Gary on some of the other points you raised. I think on Oracea, look, as we stated, we're co-defendants in the litigation there. I think when you look at the way that we're addressing the situation right now, there's a mechanical impact from the shortened duration of the asset and the actions that we took this quarter. But sort of the bigger picture question is the revision in our forecast, and I think we don't have enough data right now to do a proper revision of the forecast yet in terms of the impact of the generic entry.
I think over the next quarter or two, we'll have sufficient data to do that, and we'll give you an update at that point when we have a bit more visibility. I think addressing your question on, you know, the institutional knowledge, for lack of a better word, look, I don't want to underplay that in the sense that obviously Behzad had a pretty extensive range of knowledge and 25 years of experience in this business. That's very important from, I think, an oversight perspective. But at the same time, I think the work that was done, as I mentioned before, to build a really robust and independent set of teams and processes in the organization over the past couple of years has been really significant.
So, you know, the investment team has been operating and sourcing those transactions independently of Behzad for, pretty much, you know, the entire history of the company after the IPO. I think they've done a great job in doing that, and certainly I'll have to work a bit harder in some of the areas that I have a little bit less depth in. But I've also been involved with oversight of the investment team on the investment committee and working through structuring and financial aspects of the transaction. So, I think there's a lot of continuity there, and we will certainly have to fill in some gaps, but I think we have, you know, the right team in place to make sure that's a smooth transition.
And Gary, sorry, go ahead, Naveen, go ahead.
Yeah, no, I was just gonna answer the question on Orserdu. I think you had asked what's driving the strength on the Orserdu. Part of it is continued growth in the U.S., as penetration in the ESR1 mutation market continues to happen. It's a very safe drug, so the physicians feel very good about it. It's the only drug approved, obviously, for ESR1 mutations. But a significant part of the growth in the last quarter or two has been launched in Europe, which occurred faster than we anticipated. The particular reimbursement over there has come in at a speed that was much faster than we anticipated.
And then as for the governance issues, you know, I think if you look at the way, the trustees have reacted to this, right from the very first phone call that we got, we have tried to be open, collaborative, involving the whole team. We've tried to be as transparent as we can with the market, with you people, with our, our unit holders, with the banks. Behzad was a very powerful personality, no question, and, and, you know, I, I want this team to continue to be collaborative, to work together, to be open, to be transparent. We have a lot of work left to do with, you know, beefing up internal controls, whistleblower, making sure people are comfortable to raise issues that are difficult.
You know, that's something that takes a little while, but that's been my leadership style. I'm a firm believer in show me, don't tell me. So we will be working very hard on, on those issues, and, and I think you'll see the results in the next few quarters.
Great. Thank you for all that, caller.
Thank you. Our next question comes from the line of Rahul Sarugaser from Raymond James. Go ahead, please.
Good morning, Gary, Ali, and Navin. Welcome, Amit and Sandy. Thanks so much for taking our questions. So, now that the accounting effectively has been cleaned up, and as we look forward to the pipeline, and I know a lot of the questions have been around pipeline. In the last quarter, you talked about it, you know, essentially 11 deals being in the near to midterm, with sort of another 23 following for that. So I was wondering if there was sort of maybe an update on those numbers, just to give us a little more visibility. And also, Navin, you've talked at length about the importance of synthetic royalties. Perhaps you can also give us a sense for the appetite for synthetic royalties as you're seeing them.
I can start on the synthetic royalties, and apologies, I didn't hear the first part of the question. If that was regarding the pipeline, please, if you don't mind repeating that at all.
I'll just repeat. Yeah. So, the question was, at last quarter, you folks had mentioned that there were 11 deals in the near term with a further 23 in the longer term. So I was wondering if there was an update to those numbers?
Yeah, I mean, well, with regards to the actual number of deals in the pipeline, those fluctuate from literally month to month, if not week to week. I mean, what I can tell you is that the overall deal size is as large as it's ever been. And very frankly, it could be bigger. We have cut out deals or turned away deals just because we just didn't have the capacity to vet all of them. Well, I mean, we vetted them at a high level, and they didn't necessarily meet our criteria relative to what we had.
We were very excited about the pipeline we had, and so we've pushed some of those to later time points so we get past these set of pipeline assets. With regards to near-term deals, we have several that are mid-stage, that can very quickly, over the next couple of weeks, hopefully move to late stage, and with potential to consummate over the next couple of months. Our midterm pipeline is as strong as it's ever been, and our early-stage pipeline is extremely strong. What I can say is that the last couple of weeks, there's been a mass acceleration in inbound interest coming into us. That's a function of the equity capital markets for biotech not recovering as people had hoped.
You saw a little bit of recovery in the first quarter, and as we have talked about in the past, you know, I wasn't sure if that was a true recovery or a bit of a dead cat bounce and relief rally. I did not anticipate that to be a sustained rally, and that's playing out now, live, in real time. As I said, in the last two weeks, there has been a significant increase in inbound interest, especially on the synthetic front. And so we are continuing to have those kind of discussions, Rahul. We're, as I said, mid stages with several companies. A couple of them are
... for synthetic transactions, which we continue to be very interested in.
Terrific. That's really helpful. And then, so, so my follow-on question is, you know, clearly there's no, there's no issue with, with quantity, so the question then is gonna remain as you put up, you know, the next handful of transactions, that you maintain the quality and high RR- high intrinsic IRR to those transactions. And you talked a little bit about, you know, sort of, Behzad's know-how. Maybe you can give us a little bit more color in terms of how you're shoring up, the internal capabilities, such that you can really ensure, that the quality of the transactions that you put up next are going to be, you know, of the same caliber as before.
Yeah, I think-
If anything. Sorry, go ahead, Ali.
No, sorry. I'll comment on that from my vantage point, and obviously, Navin, feel free to chime in. But I think from my vantage point, the couple of areas to really think about in terms of diligence, one is, you know, the structuring and financial returns and forecasting aspects of the transaction. And, you know, there we've continued to add to our team under Naveen, and I think, you know, we have a very robust process there, and I think one that's proven itself out, both, you know, prior to the IPO and certainly in a much stronger way after the IPO. And that remains intact and unchanged.
I think in terms of my personal involvement with that prior to recent events, it's pretty much a continuation there. I think the other area in diligence is really, you know, issues related to IP law and contract law and things of that nature. And there we've continued to also add to the team and build a very robust, you know, legal team with lawyers that have that expertise, operating out of our U.S. office and with some oversight from Toronto as well.
Look, I think that's the area where I'm gonna have to frankly spend a, you know, a lot of my time digging in, and one area where, you know, the expertise of Behzad is, from an oversight perspective, maybe leaving a bit more of a gap relative to my capabilities. But I think it's something that, you know, is built off a foundation of the function itself being excellent and continuity and the function still being there. So, you know, from my perspective, I'm really confident that the diligence of our transactions and the quality of our transactions coming out of that diligence process, you know, won't be meaningfully impacted.
I know the areas that I have to work on personally to get my, my knowledge base improved, but it's being done in collaboration with, you know, a great team that's generating that knowledge.
That's terrific. Well, thank you so much for taking our questions, and wishing you the best of luck as you build from here.
Thank you. Our next question comes from the line of Scott Fletcher from CIBC. Go ahead, please.
Hi, good morning. Some helpful color earlier in the call on the impact on counterparties. I'm wondering, in a similar vein, your conversations that you've had with investors and other stakeholders in the wake of this, what are some of the items they've that have been brought up that they need to see to help sort of rebuild that trust you talked about earlier in the call? If there's anything we haven't discussed already on the call.
I think, I think from my vantage point, there's a couple of things. So one, I think that it's a big step to separate fully the governance of the trust from the manager. So having Gary and Amit there, as sort of guardians of the interest of the unitholders at the trust level, is one big step. The second step, which is downstream from there, is what is the process of thinking about the interaction of the manager with the trust? That's everything from issues like expense allocation to capital management and various other areas that I think need an overhaul in terms of process. So if you will, what's the kind of lines of communication and the process around that between the manager and the trust to make some of those decisions?
And then the third layer is critical, and that's really the internal processes at the manager. So, we really have to do a big overhaul of a lot of our operational processes and frankly, also our culture, to come in line with, I think, a standard that is much higher than the one that we had historically.
Yeah, I would just concur with that. I think having Amit and myself there, representing only the interests of the unitholders, is critical. And, you know, that relationship is not gonna be confrontational, but it is going to be. There's gonna be an accountability structure there in the relationship. And Ali and I need to continue to improve that, and we will. The internal controls are something that we'll be grinding down very hard on in the next little while, so we have a better comfort level. And then going forward, obviously, the cultural changes in the organization, that will be key to managing all of that.
Okay, thanks. And then a second question in a different vein. You were more active on the buyback this quarter, both before this news and after. Given where the unit price is now, should we expect sort of more continued allocation towards the buyback? And is there sort of a change in thinking between buyback and royalty acquisitions?
I think, you know, look, that's, that's a capital allocation decision for the trust, so I'll let Gary comment on it at a high level. I think in terms of, you know, getting into the weeds, it's always been a sliding issue for us between what we see as the embedded value of the portfolio and what we see as the value in our pipeline. I will say, at this unit price, obviously, the embedded value of the portfolio is pretty attractive. I think one or two things to put through the lens there, one is, as Naveen mentioned, the pipeline is incredibly robust, and the quality of the deals is very, very good.
So, you know, I think my prior comment is more a function of the unit price than, let's say, anything we're seeing in terms of the quality or returns on the deals that we're looking at. Two, you know, it's a reasonably obvious statement, but buying a diversified portfolio of assets that we already know well and not having a lot of costs associated with that, which is sort of embedded in a buyback, is, from one side, pretty attractive. But the offset to that is that, you know, we need to continue to think about the portfolio as a whole and diversification and extension of duration and various other things. So I think it's, you know, there's a bucket of issues related to comparing the IRRs.
There's a bucket of issues related to, you know, qualitative factors around those IRRs, and then there's a bucket of issues related to the shape of the portfolio and, you know, the long-term health of our cash flows, and we're weighing all of those in a balanced fashion.
Yeah, and I would concur with that and just add, you know, our prime focus is, you know, the risk and return for the unitholders, both in the short term and the longer term, and we evaluate that on an ongoing basis. And if it makes more sense to deploy capital in an NCIB, given where we are, versus some of the deals that Navin has on his pipeline, then we'll make those decisions in real time.
Okay. Thank you for the color. I appreciate it.
Thank you. Our next question comes from the line of George Farmer from Scotiabank. Go ahead, please.
Hi, good morning. Thanks for taking my questions. One, on guidance, notice that you have not revised your top-line guidance, $153 million-$155 million. That would imply some a negative growth quarter-over-quarter, going into the back half of the year. And also, kind of, you know, along those lines, just looking at some specific line items like Omidria, for example, can we expect kind of that consistent run rate? And if so, like, where, where might some royalties be slipping off? Maybe, maybe that would be in a ratio or in something else. Thanks.
I'll let Navin respond on the Omidria issue. Like I said, at a high level, look, I wouldn't read the guidance revision as anything negative. It's obviously been an extremely busy time for us, and I think, you know, we've taken a relatively conservative stance to our cut on that. And, you know, frankly, it's not been the highest focus item for us this quarter, so I wouldn't read anything negative into us not revising guidance.
On Omidria,
Yeah, sure.
Sorry, go ahead.
No, go ahead, Naveen. Yeah.
On Omidria, the product is strong. I mean, look, on any of our products, it's difficult to look one quarter versus another, and because as you know very well, in biopharma, there is either seasonal buying patterns or seasonal demand trends that vary from product to product. And so quarter-to-quarter growth trends should be, you know, viewed with a little bit of skepticism. I tend to look at year-over-year growth and how that is progressing over several quarters. And from that perspective, all of our products are looking in line and in a couple of cases slightly better than we anticipated.
Omidria looks in line with how we've been forecasting it, and we feel good about the product.
Great. Then also, you know, just as you think about deal flow going forward and with the management changes in place, I know, Naveen, you bring a lot of expertise with handicapping clinical trial success of unapproved drugs. I mean, is that something that you guys may consider about, you know, potentially purchasing royalties of unapproved drugs and taking on some more risk?
I don't think you'll see us, you know, be as aggressive as some of our competitors. I think we are open to doing that in a very thoughtful and risk-managed way. I think that's a comment that we have, you know, made pretty consistently. One thing that, you know, we're very focused on is really not letting these issues derail what I think the long-term strategic growth plans of the business are. I think, you know, to the extent that our intention was to, you know, broaden the type of structures that we look at, be more innovative and the types of financings that we do and, you know, the types of instruments that we use and things of that nature, it's not our intent to step back from any of that.
We're, you know, we're full speed ahead in terms of growing and expanding the business. But we're gonna do it in a very thoughtful and risk-managed way. I don't know, Naveen, if you have anything to add there, but-
No, I mean, look, as far as handicapping trials and taking, you know, risk on trials, we were doing that before all this happened. As you know, with Empaveli, we took risk on that asset with regards to Syfovre's approval, because PNH wasn't gonna get us to the cap. And so we had built in, you know, some valuation for Syfovre, which we had fully vetted with Tzield. We had a lot of that value that we had ascribed to the, to the upfront was with regards to the unapproved indication in the newly diagnosed population.
The trial read out exactly as we anticipated, with the top line, with the primary endpoint being positive, the secondary endpoint being a little bit wishy-washy, and that's exactly how we had thought. Numerically, the outcomes of those endpoints were almost bang on with our analysis. And so, this is not something that's new to us. If we do something, as Ali said, it would be in a very specific, thoughtful way that is risk mitigated, that is not - that does not add significant risk to the trust, but also, at the same time, provides a significant upside opportunity for unitholders.
And look, as Navin mentioned, we have a good record in that, right? You know, when you look at the CTI deal, which is another one that was, you know, pre-approval with the loan upfront and then, you know, the royalty on the back end, that's another example where we effectively structured a transaction that allowed us to protect our downside, but, you know, capture the benefit of the upside. So we're focused on continuing to innovate there.
Great. Thanks very much.
Thank you. Our next question comes from the line of Zachary Evershed from National Bank. Go ahead, please.
Thank you. Good morning, everyone. Thanks for taking my questions. Can you tell us more about the terminated binding bid process with the counterparty who opted for other financing and capital markets? I know you mentioned some bifurcation, but maybe we can dive a little deeper on that.
Sorry, Zach, which terminated bid are you referring to?
There's one highlighted in the MD&A for higher deal costs.
Got it. Okay. Look, in general, we're sort of not gonna comment on confidential processes that we didn't, you know, we didn't consummate, for obvious reasons. I think that was a transaction that, you know, we got very close to the finish line on. The counterparty did a broader company level, so not specific to that drug. You know, a broader sort of capital markets transaction at the company or corporate level. It was a big, you know, diversified, business. So, what I would highlight there is that it wasn't a small or mid-cap biotech, but a business that sort of had the capacity to access the capital markets in a broader way and opted to do that instead of doing something at the drug level.
That's a good color. Thanks. Then, is there any concern that the former CEO could form a competing enterprise?
No, that's really not going to happen. As you know, you know, the business remains owned by the Khosrowshahi family at the manager level, and, you know, it's really profoundly unlikely that something like that could occur, given both the restrictions on him, obviously, the market credibility issues and the ownership structure of the manager.
Fair enough. Thanks. Appreciate it. I'll turn it over.
Thank you. Our next question comes from the line of David Martin from Bloom Burton. Go ahead, please.
Good morning. You mentioned that Vonjo, you expect the second half to be better for it. You mentioned Sobi completing the integration of CTI. Is there anything else happening that gives you confidence for the second half? Is Sobi's marketing message change, changing, or have there been changes in guidelines for myelofibrosis treatment?
Yeah. No, look, there have been guideline changes at the end of last year that were positive for Vonjo. We, you know, I think the messaging around the benefits that pacritinib provide in the not just the severe thrombocytopenic-
... population, but also the anemia, anemic population is still fully under and is not fully appreciated by physicians, especially in the community setting. So we anticipate Sobi to start increasing the messaging around the outcomes, the severe outcomes associated with severe thrombocytopenia to patients. And the fact that Vonjo is the only asset that works in that setting, I think, will start resonating with physicians because the data is pretty clear that those patients have a much worse outcome than patients with anemia. And in fact, Vonjo does actually work in patients with anemia. So there is a pretty strong message there, but obviously you had a strong competitor in GSK pushing momelotinib at the same time as the CTI integration was happening.
So that combined effect is what would cause a slowdown. But now that that integration is over, I think the story is pretty pretty clear. And CTI or Sobi rather has acknowledged that and has a very clear message from our perspective.
Got it. You mentioned the change in internal processes and culture at the manager. Will it change? Will it affect the way opportunities are sourced and assessed?
No, I think what we're really talking about here is, from one side, a cultural change in terms of, you know, people feeling like they have the ability to question, decisions and dig into, you know, various things that they may view as being incorrectly done, but I think, a much broader set of process changes as well. So, as you saw in the MD&A, there were a number of issues with the way that we were handling invoicing, allocation of expenses, controls around vendors, controls around check processing and things like that. And I think a lot of the manager-level investigation that we're going to do is going to be process driven and focused on those issues and rectifying them.
And then I think on top of that, there's another set of issues which have to do with, all right, how do you push those costs to the trust? How does the trust approve or not approve those things? What are the basis around those? What's the documentation around those? So it's a lot of process-driven changes. I don't think those in any way will impact, you know, our sourcing or execution of deals. They will be very focused on the allocation of, you know, the various expenses that we run up and the diligence of the deals and how those get allocated.
Okay, thanks for clarifying that. Then one final one, if I may. You mentioned you're not going to be necessarily leaning more towards pre-commercial assets, but with this bifurcation of the financing window, cash flow positive companies getting money, but cash burning companies not, doesn't that naturally push you towards more pre-commercial assets?
Look, I think we will... Sorry, go ahead, Navin.
Yeah, no, I... Look, there is pre-commercial, you know, there's post-phase three pre-commercial and pre-phase three pre-commercial, right? Those are very different risk profiles associated with them. As you know, as you know well, if you have two phase three trials that are successful, that are very strong and have low, clear safety and clear efficacy benefits and a strong p-value and a good and limited competition, that's a highly de-risked asset, even if it is pre-approval, right?
Yeah.
It's a very different proposition than an Alzheimer's asset that's in phase two. So, you know, this notion of pre-approval is too broad of a distinction, right? An Alzheimer's asset in phase two obviously has a very different profile than an immunology asset post-phase three, right? The risk reward for unitholders on that post-phase three immunology asset could be highly attractive for unitholders, right? So, really we have to be we can't be so broad-brushed in our description of pre-approval, I think. So there are instances where if we see something attractive, where we think there is limited risk, and a great opportunity for returns for unitholders, that's something we have to assess seriously.
But as always, it's something we can structure around to ensure that the trust's risk profile is managed. And then, with regards to your question on the cash flow positive versus cash flow negative, you know, there are plenty. There are several companies, many companies out there that have approved assets but have deep pipelines and therefore, are not actually cash flow positive, or barely cash flow positive, and will remain like that for several years. And they're having significant issues raising the amount of capital required to fund their deep pipelines through the equity markets. And so they're turning to royalty players to help fund those activities.
So, it's not just for pre-approval assets that we could have an opportunity to participate with these companies. There are also approved assets as well.
Okay, thanks. Thanks for explaining that.
Thank you. Our next question comes from the line of Tania Armstrong Whitworth from Canaccord Genuity. Go ahead, please.
... Thanks, gentlemen. Just a couple for me. First, have you received any expressions of interest from parties potentially looking to acquire the DRI platform, just given the unit price decline and considering that the Khosrowshahi family might not have as vested of an interest in the business?
No, we've not received any expressions of interest. I will say we've been reached out to by a number of bankers who, you know, would like to be hired. But our focus really is on building the company. And I think the best value for unitholders is us to continue to execute and continue to expand on the growth of the company. And if somebody chooses to make an offer, you know, we increase the value of that offer by having a great company. So that's our focus, and, you know, we'll see where it goes. The trustees obviously have a fiduciary responsibility to evaluate any approaches, but we've not had any.
And Tania, as you can see, the Khosrowshahi family has, you know, obviously been shocked by this and I think has done the right thing by stepping up and fully reimbursing all the misappropriated expenses and other items that were misallocated. So, you know, they're showing a great deal of commitment to stabilizing the business and, you know, putting capital out of pocket to do so.
Okay. Excellent. Secondly, do you foresee there being any change to the management fee now that the executive leadership team has been internalized?
Well, you know, let me turn that over to Gary, but I'll just give you a bit of context on the management fee part of this question, which is... Look, I think one way to look at the management fee, if you want to sort of normalize it for an asset manager, is to take, you know, the run rate of what that 6.5%, let's say, take our midpoint of guidance would be, and put it over the book value of the assets. And when you do that, you know, you will see that it's not a particularly aggressive fee in a private equity context. It's, you know, 1% and change. And I think that's, you know, pretty standard for the type of business that we operate.
I mean, obviously, when you have factors like milestones and, and the like, which are accretive to unitholder returns, they also cause, you know, some outsized volatility in the management fee. But just on a run rate basis, taking the fee and putting it over our book value of assets, we'll give you a pretty clear sense that it's not, it's not something that's sort of out of market standard.
Sorry, were you asking about the management team or the management fee? I didn't hear.
The management fee. Just wondering if there will be any change, just because now the trust is bearing that added cost of having an internalized management team?
Yeah. Well, I mean, we're going to have lots of discussions with the manager over the next little while as we sort through the governance issues. You know, we're not out there hunting for something, but we'll obviously be having robust conversations about this relationship going forward. And, you know, that may end up being part of it, but it's not something we're out there hunting for.
Okay, perfect. And one last one, if I may, for Navin. Given your focus on longer duration assets, are you able to comment on what % of that near-term pipeline is kind of over 10-year duration opportunities?
Tanya, I haven't. That's a good question. I haven't cut our pipeline in that way to. But I can tell you that many of the medium-term assets we're looking at, most of them, are over 10 years.
Okay. Excellent. I'll leave it there. Thank you, gentlemen.
Thank you.
There are no further questions at this time. I'd now like to turn the call back over to Mr. Gary Collins for any final closing comments.
Just want to thank you all for taking time to be with us this morning, and I look forward to discussing Q3 with, in November, and I'm sure we'll be speaking to a number of you one-on-one over the next little while as well. So thank you for your continued interest in, in DRI Healthcare Trust.
Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.