Andrey Omelchak - LionGuard Capital Management GUD LetterKnight Therapeutics (GUD) stands out as a true hidden gem, not only for its excellent free cash flow generation, huge net cash position, and solid growth rate but also for the strategic acumen of its leadership poised to grow per share intrinsic value of the company for years to come.
Jonathan Ross Goodman, the Chairman, renowned for building and selling Paladin Labs (PLB CN) at 16x EBITDA and 5.2x sales, is at the helm of Knight, steering the company with a vision reminiscent of his success at Paladin. To put it in perspective, Paladin launched an IPO at $1.50/share in 1995 and was sold to Endo Pharmaceuticals at $151/share in 2011. Complemented by top management team including President & CEO, Samira Sakhia, savviness, and experience of senior leadership is superb for the company of this size.
Knight’s growth strategy, focusing on licensing new drug therapies, showcases a methodical approach that has significantly enhanced its revenues and adjusted operating income. Despite these achievements that tremendously increased its intrinsic value, the company's stock price has not participated over the years, showcasing just how irrational market dynamics can be.
To-date, Knight has become a leading player in licensing therapeutics across Latin America, demonstrating strategic foresight and adept management, especially highlighted by its strategic acquisition of Biotoscana in Brazil. Despite challenges, including an activist battle and the impacts of COVID-19 which initially slowed the integration process, Knight has shown resilience and is delivering on expectations.
As of the end of last quarter, Knight had $162M of cash and marketable securities and $62M of debt on its balance sheet. With net cash position of $100M (18% of its market capitalization), coupled with high FCF generation, Knight has been very active on enhancing shareholder value through substantial stock repurchases in the open market. To put in perspective, in 2023 they bought back $53M worth of stock and since inception of NCIB program the amount is close to $240M.
An additional layer of downside protection for investors are Knight’s “hidden” assets in the form of limited partnership (LP) investments, which we believe are worth anywhere between $120M and $160M. As those investment monetize over the next few years, an additional approximately $140M (26% of current market capitalization) of liquidity will become available. Combined with today’s net cash, a case can be made that 44% of today’s market capitalization is in liquid cash or soon-to-be liquid cash position.
On that basis, Knight’s today’s enterprise value (EV) is around $300M and its normalized free cash flow (N-FCF) yield on EV for fiscal 2024 and 2025 are 15%+ and 20%+.
Furthermore, going forward we see a lot of room for margin expansion, which coupled with high FCF conversion rate and solid growth rate, set the stage for much higher FCF per share, not even accounting for buy-backs or any Substantial Issuer Bids (SIBs).
It is key to highlight that insiders own more than 23% of outstanding shares, creating a clear alignment of interests with minority shareholders of the company. Insiders, coupled with longterm minded large shareholders provide a good protection against predatory bids for high-quality yet greatly mispriced business. In this case, especially given the company’s long-term prospects, we see it as a major positive. If history is an indication of the future, any forthcoming monetization should only take place at fair valuation levels.
With a proven track record of strategic acquisitions, robust and fast-growing FCF generation, high levels of net cash on balance sheet, and aggressive buyback program, Knight Therapeutics is wellpositioned for sustained growth and an increase in per-share intrinsic value, mirroring Jonathan Goodman’s remarkable tenure at Paladin Labs.