While investors shun Therapeutique Knight, an asset manager from Saint-Bruno-de-Montarville maintains confidence and becomes the largest institutional shareholder of this Montreal pharmaceutical company.
Last month, the Medici firm increased its stake in Knight to now hold more than 10% of the shares. Medici began May with 11.5 million shares of Knight in its portfolio, a filing with regulatory authorities shows.
At the current price, this stake in Knight is valued at $55 million.
Medici is not seeking a board seat. “We appreciate what the leaders do. We do not want to take an activist position,” comments portfolio manager Pierre-Olivier Langevin.
If the founder and executive chairman of the board, Jonathan Goodman, remains Knight's largest shareholder with approximately 20% of the shares, Medici has just passed businessman George Armoyan into second place in the shareholding.
Knight's stock continues to trade near its floor price. The stock closed Wednesday's session at $4.74 on the Toronto Stock Exchange. It was worth over $10 six years ago.
The pressure on the stock increased at the end of March after the publication of the end of year results. Faced with the stock's weakness, Knight massively bought back shares for cancellation purposes throughout the month of April.
Medici does not hide the fact that Knight's stock market performance is putting his patience to a “severe test”. But the asset manager says he is staying the course because revenue and profit growth are there. “The valuation multiple of the stock does not reflect this,” says Pierre-Olivier Langevin.
He specifies that Knight has shown growth in excess of 10% for several quarters. Revenue grew 21% in 2022 while operating profit rose about 50%.
“The valuation is approximately 5x operating profits excluding cash and excess assets on the balance sheet. It's very weak. Private companies obtain more generous evaluations than that,” underlines Pierre-Olivier Langevin.
According to him, the recent decline in the stock seems linked to the market's disappointment with the financial projections released by management for 2023.
Great caution
Medici notes that Knight executives have historically been very cautious when giving forecasts at the start of the year.
For example, in 2022, Medici points out that Knight delivered revenue growth of 21%, whereas management had presented a growth forecast of just 8% 12 months earlier. Medici believes it is likely that the situation will repeat itself in 2023 and that the forecasts presented will prove to be too conservative.
Since 2019, revenues have increased from 48 million to almost 300 million. Adjusted operating profit increased from 7 million to 55 million during this period. Meanwhile, Medici notes that Knight repurchased about 18% of its own shares at a price below its intrinsic value.
Medici expects "robust" profit growth for the next few years as Knight adds a few new drug licenses each year.
Considering its financial situation and the profits it generates, Knight should also be able to acquire other mature products or rivals, according to Medici.
Poor results over a prolonged period or a loss of hope that the capital can be deployed over a reasonable horizon are the elements that would wear out Medici's patience.
On Bay Street, 4 out of 7 analysts say to buy. The 12-month average target is $6, which suggests a potential return of 25% from the current price.
Before founding Knight in 2014, Jonathan Goodman co-founded and led Paladin Laboratories, a pharmaceutical company acquired by Endo Health in 2013 for $3.2 billion.
The persistent disinterest of investors in Knight can be explained in several ways, according to Pierre-Olivier Langevin. Knight's significant presence in Latin America, where political and currency instability can scare off some investors. There's also still a lot of capital on the balance sheet that some investors might not like.
Pierre-Olivier Langevin also notes that Knight stands out compared to other pharmaceutical companies. Many companies in the sector have poor balance sheets and he believes Knight may be suffering as a result. We can in particular think of the debacles of Valeant, Concordia Healthcare and Endo.