Wolf Hill Capital recently published its Q4 investor letter, discussing its investment thesis on Knight Therapeutics Inc (TSE:GUD) and other companies. We’ve already covered Archrock Partners, Constellium, and Sanderson Farms. In this article, we’re going to take a look at Wolf Hill’s analysis on Knight Therapeutics, a $1-billion market cap specialty pharmaceutical company based in Montreal, Canada. The company focuses on acquiring, in-licensing, selling and marketing pharmaceutical products for the Canadian and select international markets.
Knight Therapeutics is led by Jonathan Goodman, who is the founder, CEO, and largest shareholder of the company with a 15% stake.
“Between Paladin Labs 1996 IPO and its 2014 sale to Endo Pharmaceutical, Paladin Labs compounded at 30% annually, for a 100X return. Knight Therapeutics was spun out from Paladin Labs to shareholders of Paladin in early 2014 as part of the sale to Endo Pharmaceutical,” Wolf Hill said in the letter.
Endo Pharmaceuticals acquired Paladin Labs for $3 billion, or $151 a share, a 100 times increase from its IPO price of $1.50 per share.
Wolf Hill believes that Goodman has the ability to turn Knight Therapeutics into Paladin. Here are the fund’s comments:
We believe Jonathan Goodman is turning Knight Therapeutics into Paladin 2.0. Knight’s business model is to develop, acquire, license, market and distribute pharmaceutical products in Canada, Israel, and select international markets. Central to this business model is Goodman’s expertise in capital allocation. Knight, and Paladin before it, has a proven play book for value creation in acquiring and in-licensing late stage or newly approved pharmaceutical products in Canada. Specifically, Knight acquires specialty drug marketing rights in countries that multinational drug manufacturers consider too small to move the needle. This includes drugs for Diabetic macular edema, tropical diseases, neurological disorders, HPV associated cancers, anti-aging skincare, and joint stiffness associated with osteoarthritis Typically, rights are for countries outside of the US, Western Europe, Japan, and China. Knight also provides secured lending to small pharmaceutical companies generating mid-teen IRR’s, and invests in select early stage pharmaceutical ventures to gain access to a pipeline of potentially interesting compounds.
Knight’s business model centers on the rational allocation of capital by a highly experienced and incentivized management team. Acquisition targets are not chosen on the basis of Knight’s ability to hike the price of acquired drugs, nor does Knight believe in financing acquisitions with debt. In 2014 and 2015 when serial acquirers were bidding up pharmaceutical assets, Goodman and Paladin were happy to take advantage of the sellers’ market as the lone rational player. This allowed Knight to later buy assets at distressed prices. As an example, recently Goodman has been vocal about his desire to repurchase Paladin Labs from Endo Pharmaceutical, at a much more rational price.
Since its inception in 2014 with 2 employees, CAD $1mm in cash, and a single therapeutic pending FDA approval, Knight has raised CAD $685mm at increasing valuations and through various initiatives and strategic transactions generated CAD $178mm of net income. In recent months the stock has drifted lower – perhaps attributable to investor fatigue due to the methodical pace at which Mr. Goodman has been deploying capital. This has provided a wonderful entry point to acquire shares in Knight below it’s current book value of C$8.50/share. Since Knight’s book value consists primarily of cash and secured loans, it should provide a floor to the stock with upside asymmetry if Mr. Goodman is even remotely successful in replicating his play book at Paladin Labs.
Like Paladin Labs, Knight Therapeutics Inc (TSE:GUD) is a specialty pharmaceutical company focused on developing, acquiring, in-licensing, out-licensing, marketing, and distributing drugs, pharmaceutical products, consumer health products, and medical devices from international drug makers in the Canadian market and internationally.
Shares of the company are down 8% since the beginning of this year. Meanwhile, the stock has dropped nearly 28% during the past 12 months.
So, GUD could be a good investment, given a highly-experienced management team with proven track record in the specialty pharmaceutical business and the company’s strong financial position.