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Knight Therapeutics: The Good

A specialty pharmaceuticals company based in Montréal, Québec, Knight Therapeutics comes across as a carbon copy of Jonathan Goodman’s first venture, Paladin Labs, listed at $1.50 a share in 1995 and sold to Endo nineteen years later for $151 a share.

As part of the deal, Knight was spun-off from Paladin with a royalty stream from sales of Impavido — a drug for treating a rare parasitic infection — outside of the United States, in addition of a FDA priority review voucher later sold to Gilead for $140 million.

It then went on to raise $685 million — the latest round at a richer valuation than today’s stock price — and pocket $179 million in profits through several astute transactions.

The son of pharmacist turned successful entrepreneur Morris Goodman, Jonathan grew up reading prescriptions and trade press from breakfast to bedtime. And it shows, as the man lives and breathes the pharma business.

When the time came to strike out on his own, he devised a colorless but highly opportunistic business model in licensing niche, late-stage or underexploited products in markets overlooked — because deemed too small — by big pharma.

This now field-tested playbook consists in identifying unaddressed needs in the attractive specialty pharmacy segment, searching for targets to licence on the right terms NPV-wise, before sifting through the arcane approval and marketing process.

In short: being rational, sweating the small stuff and grinding it out — the kind of endeavors that should appeal to old-fashioned value investors. Though simple in theory, in practice it seems that within the pharma business — and money management likewise — the basic concept of working hard yields an appreciable competitive advantage by itself. So why go without?

Knight also runs a portfolio of debt and equity securities in selected funds and companies. Beyond being — most likely — sound investments, these deals satisfy a strategic purpose, for they offer a perfect leeway to secure profitable licensing rights out of the group of investees.

A straight shooter armed with little patience to suffer fools and speculators, Goodman keeps demonstrating phenomenal skills in capital allocation. His various sermons about patience, prudence, shunning leverage and waiting for the right valuations — ideally when an urgent seller unloads good assets in distress — read like value porn and flow through the way business is conducted at Knight.

As Warren Buffett famously quipped:

You don’t have to swing at everything — you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, “Swing, you bum!”.

Yet investors have manifested fatigue over waiting for large acquisitions, so many bailed out. Goodman — the chief shareholder — said a myriad of times that he was running the company “for his grandchildren” and that he wasn’t keen on laying down cash in a sellers’ market, but his plea fell on deaf ears in a world feverishly oriented towards excitement and fast money. Bitcoin, after all, provides more excitement than opioid-induced constipation relief.

As a consequence, the recent sell-off offered placid investors the opportunity to hop in alongside a proven entrepreneur in a burgeoning business at roughly book value — or even slightly less once adjusted.

Should the Paladin-like call option fail to happen, the fortress balance sheet — $979 million in cash and securities, against only $13 million in liabilities — warrants a compelling margin of safety.

(Long GUD at an average price of CAD $7.7 a share.)

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