What are the other Canadian companies that "were willing to put in the work to get drugs approved in Canada" and doing the same playbook? Thank you so much.
Great write-up. As a shareholder, I appreciate the less obscured view on knight. As you mentioned, knight's current iteration is really only since they acquired GBT in late 2019. So, it's effectively only been three years of operations under their management. I purchased my first tranche after the market sold off in covid and then built my position over 2021/22 in the low $5 range and recently added on at $4.60, so it may be easier for me to have a "long-term" view as it's only been a little over 2 years that I've held GUD.
Having said that, I think the valuation is very attractive (although that's been the case since day 1) and I think they are still going through growing pains of adding Exelon and integrating the 4 companies of GBT during the middle of covid. Now that is mostly behind GUD and we will see if they can fully execute without major restrictions. I was even thrown off recently with how much cash was going into working capital related to inventory purchases for Exelon, so they are still working through integrating the drug today.
Without being too long winded, I think there is a lot to be positive about today. The pipeline and sales are growing, the share count is shrinking, the float is also shrinking as major shareholders (Armoyan 12%, Goodman 22%, and another institution owns 10%) are buying large chunks of the company and there is a path to exit the funds and redirect that money to core operations. All while pessimism is at an all-time high. I'll give the team another 2 years.
Thanks for the other side of the argument. Yes, even as I wrote the doom and gloom, I understand and could have written a glowing report too. There are reasons to be optimistic.
Exelon hasn't fully been under the umbrella (giving the long process of transferring operations in each geography), GBT integration has taken time and there's probably still a bit of wood to chop, product deals have picked up and it's likely that some Paladin like deals are still available, the buyback is really humming and will provide a lot of value to remaining shareholders if management can get the business right, the float is pretty small and getting smaller, the pipeline is reasonably impressive and will contribute to organic growth (though against the time crunch of other deals winding down), etc.
It's possible the time periods I've used aren't fair indications of ROIC. It's possible that the next two years or so would be better. But if you're investing now, you're putting faith in the fact that the business operations will be better in the future than they are today. That's a fine bet to make, it could work out well. Indeed, if the business is better (either is actively improving or the quality is hidden in the numbers) Knight could be a very powerful stock. Buying what could be a long term compounder at 6x EBITDA when the valuation could double or more (12x would be air for a high returning compounder) and EBITDA will grow at a high rate is an attractive opportunity. Given other options in the market, and my hesitancy about Knight's business (the high ROIC deals not being available), I'm ok watching from the sidelines, at least for now. If in a year or two things look different, I'd be fine having missed out at these prices to wait for a clearer forecast.
Yes, all fair points! I'll just add that the depreciation expense is a tough one to calculate. I did a simple calculation a while back that their average depreciation rate is over 8 years. Without knowing the details of the deals they made it's hard to tell how conservative they're being. I think they are being conservative in order to keep profits lower in short term to decrease taxes, while re-investing the cash in buybacks and new deals for growth. Maybe it's wishful thinking but I think it makes sense on many levels. However, it's a good point how real that expense is at some point. It's just hard to tell how conservative their accounting is and when those deals will expire and how much profit they will show over their lifetimes.
That's a good point. It's almost certain that some of the products will continue to earn profits after they have fully amortized. If Knight has a perpetual license to a product (not sure how many of those it has), because of the products Knight goes after, some will have a trickle of earnings for a long time simply because they are too small for competition to go after. It's a benefit of the Knight/Paladin strategy. But as we saw with the Gilead/GBT deal, there are in fact ends to some of these deals. And because so much of Knight's earnings come from GBT right now, where the deals were agreed to before Knight was in charge, I think the amortization could be more "real". I have more confidence in Knight product deals outlasting their amortization than GBT deals.
As it stands, I think the safest thing to do is to take the amortization charge at face value. It could prove to be conservative, but we don't have evidence that Knight is conservative with its accounting in other instances, so to me it's too bold of an assumption to assume the amortization is overstated. But I agree it could be.
A great point of disclosure would be for Knight to present the weighted average length of its deals. DHI Trust does so, and it's a data point that really helps investors. It would be nice if Knight did so as well.
What are the other Canadian companies that "were willing to put in the work to get drugs approved in Canada" and doing the same playbook? Thank you so much.
Great write-up. As a shareholder, I appreciate the less obscured view on knight. As you mentioned, knight's current iteration is really only since they acquired GBT in late 2019. So, it's effectively only been three years of operations under their management. I purchased my first tranche after the market sold off in covid and then built my position over 2021/22 in the low $5 range and recently added on at $4.60, so it may be easier for me to have a "long-term" view as it's only been a little over 2 years that I've held GUD.
Having said that, I think the valuation is very attractive (although that's been the case since day 1) and I think they are still going through growing pains of adding Exelon and integrating the 4 companies of GBT during the middle of covid. Now that is mostly behind GUD and we will see if they can fully execute without major restrictions. I was even thrown off recently with how much cash was going into working capital related to inventory purchases for Exelon, so they are still working through integrating the drug today.
Without being too long winded, I think there is a lot to be positive about today. The pipeline and sales are growing, the share count is shrinking, the float is also shrinking as major shareholders (Armoyan 12%, Goodman 22%, and another institution owns 10%) are buying large chunks of the company and there is a path to exit the funds and redirect that money to core operations. All while pessimism is at an all-time high. I'll give the team another 2 years.
Thanks for the other side of the argument. Yes, even as I wrote the doom and gloom, I understand and could have written a glowing report too. There are reasons to be optimistic.
Exelon hasn't fully been under the umbrella (giving the long process of transferring operations in each geography), GBT integration has taken time and there's probably still a bit of wood to chop, product deals have picked up and it's likely that some Paladin like deals are still available, the buyback is really humming and will provide a lot of value to remaining shareholders if management can get the business right, the float is pretty small and getting smaller, the pipeline is reasonably impressive and will contribute to organic growth (though against the time crunch of other deals winding down), etc.
It's possible the time periods I've used aren't fair indications of ROIC. It's possible that the next two years or so would be better. But if you're investing now, you're putting faith in the fact that the business operations will be better in the future than they are today. That's a fine bet to make, it could work out well. Indeed, if the business is better (either is actively improving or the quality is hidden in the numbers) Knight could be a very powerful stock. Buying what could be a long term compounder at 6x EBITDA when the valuation could double or more (12x would be air for a high returning compounder) and EBITDA will grow at a high rate is an attractive opportunity. Given other options in the market, and my hesitancy about Knight's business (the high ROIC deals not being available), I'm ok watching from the sidelines, at least for now. If in a year or two things look different, I'd be fine having missed out at these prices to wait for a clearer forecast.
Yes, all fair points! I'll just add that the depreciation expense is a tough one to calculate. I did a simple calculation a while back that their average depreciation rate is over 8 years. Without knowing the details of the deals they made it's hard to tell how conservative they're being. I think they are being conservative in order to keep profits lower in short term to decrease taxes, while re-investing the cash in buybacks and new deals for growth. Maybe it's wishful thinking but I think it makes sense on many levels. However, it's a good point how real that expense is at some point. It's just hard to tell how conservative their accounting is and when those deals will expire and how much profit they will show over their lifetimes.
That's a good point. It's almost certain that some of the products will continue to earn profits after they have fully amortized. If Knight has a perpetual license to a product (not sure how many of those it has), because of the products Knight goes after, some will have a trickle of earnings for a long time simply because they are too small for competition to go after. It's a benefit of the Knight/Paladin strategy. But as we saw with the Gilead/GBT deal, there are in fact ends to some of these deals. And because so much of Knight's earnings come from GBT right now, where the deals were agreed to before Knight was in charge, I think the amortization could be more "real". I have more confidence in Knight product deals outlasting their amortization than GBT deals.
As it stands, I think the safest thing to do is to take the amortization charge at face value. It could prove to be conservative, but we don't have evidence that Knight is conservative with its accounting in other instances, so to me it's too bold of an assumption to assume the amortization is overstated. But I agree it could be.
A great point of disclosure would be for Knight to present the weighted average length of its deals. DHI Trust does so, and it's a data point that really helps investors. It would be nice if Knight did so as well.
I agree. Thanks again for your write-up and comments. It'll be fun to watch and hopefully profitable too.