Description

Disclaimer: This report is the work of an investment adviser affiliated with the author. The report is the result of the adviser executing its investment strategy. The adviser holds a position in the security, however there is no assurance that the adviser will continue to hold the investment, or make additional investments, and will not update the information to reflect future changes in the adviser’s assessment of the investment.

Elevator Pitch

We think Kamada is a long that offers 3.6x MoM in 5 years with limited downside. We think that the opportunity exists because (1) it is an obscure Israeli plasma company with low volume; and (2) the company is undergoing a business model transition / lapping short-term disruptions that we believe obfuscate underlying performance and will cause headline results to inflect in the coming 3-5 years. We are also getting close to the end of FIMI's (the private equity owner of Kamada) hold period for Kamada (coming up on the 4-year mark since FIMI's original investment), which may suggest that a sale of the business may be imminent.

Company Overview

Kamada is in the plasma business and operates in two segments:

• 

• (1) Proprietary Products (79% of FY22 total revenues | 97% of FY22 adjusted gross profit): Kamada has a portfolio of 6 FDA approved plasma-derived products that comprise the majority of the segment revenues. Depending on the product and region, Kamada manufactures and distributes the various products in-house or outsources these functions to third parties. Kamada recently acquired its first plasma collection center and newly established a salesforce in the US. The general trend is for Kamada to insource more (collection, manufacturing, and distribution).

• (2) Distribution (21% of FY22 total revenues | 3% of FY22 adjusted gross profit): Kamada serves as the third-party distributor of >25 pharmaceutical products in Israel (with 11 biosimilar products in the pipeline for distribution pending regulatory approvals).

Below is a list of Kamada's proprietary products per their most recent 20-F:

The proprietary products (all plasma-derived products) that really matter are:

• Glassia (16% of total revenues | 30% of total gross profits):

  • Glassia is an intravenous treatment that is dosed weekly for patients with Alpha-1 Antitrypsin (AAT) deficiency. In the US, Glassia is manufactured and sold by Takeda; note that Kamada manufactured Glassia for the US market in-house until the transfer to Takeda was completed in early 2022.

  • US sales of Glassia are purely royalties on Takeda's sales and are thus booked at 100% gross margins. By contrast, ex-US sales of Glassia earn ~40% gross margins.

  • AAT is a growth market. Kamada estimates that only 10% of all potential cases for AAT are treated today. Ongoing identification of patients is expected to drive 6-8% market growth in the US and developed European markets moving forward.

  • Glassia was launched in 2010. Because of its product advantages vs. other AAT treatments, Glassia has grown market share nearly every year since launch and has continued to outgrow the market in recent years.

• Kedrab (13% of total revenues | 23% of total gross profits):

  • Kedrab is a prophylactic treatment administered for patients who have had exposure to the rabies virus.

  • In the US, Kedrion distributes Kedrab. Kamada manufactures Kedrab in-house, which comes at higher gross margins (we believe ~80%).

  • When Kedrab was launched, it entered a monopoly market. Kedrab has continued to gain market share because it is priced at a slight discount to Hyperrab (key competitor) and has labeling for pediatric use.

• Assets acquired from Saol (40% of total revenues | 47% of total gross profits):

  • In Nov 2021, Kamada bought a portfolio of 4 FDA-approved plasma-derived hyperimmune commercial products from Saol Therapeutics for $95mm upfront and $50mm additional in potential sales-based milestones.

  • Kamada is in the process of building a US salesforce to sell the Saol portfolio directly to major transplant centers. Kamada is also in the process of insourcing manufacturing of the Saol portfolio (starting with Cytogam) to their facilities in Israel.

Governance

FIMI, the top Israeli private-equity firm, owns 20% of Kamada's fully diluted shares and effectively controls the company; FIMI first invested in 2019 and has since the initial investment increased their stake through a private placement done in 2020. FIMI's average cost basis is $6.0/share vs. $4.7/share current market price.

The Investment Opportunity

Kamada is undergoing several business model transitions / lapping short-term disruptions that we believe will cause results to inflect in the next 3-5 years:

• Acquisition of Saol assets:

  • In Nov 2021, Kamada acquired a portfolio of 4 commercial plasma products from Saol for $95-145mm ($90mm upfront). We consider this a transformative acquisition. At the time, Kamada was transitioning the manufacturing of Glassia for the US market to Takeda, which we believe has temporarily depressed gross margins for the Proprietary Products segment given lower factory utilization (Kamada owns a single factory in Beit Kama for all of their production needs). 

  • Kamada is in the process of insourcing manufacturing for the plasma assets, which should improve factory utilization/margins and boost gross margins for the Saol assets by ~15pts.

  • This acquisition added scale, which is critical in the plasma business, and diversification to Kamada.

• Gaining share in the rabies market:

  • Kamada's sale of Kedrab in the US suffered near-term disruption from COVID and de-stocking issues with Kedrion. We believe that both headwinds are over now and that Kedrab is gaining share in the US market.

• Biosimilar distribution deals:

  • Kamada has a pipeline of 11 biosimilar products that they plan to start distributing in Israel over the next 5 years. These biosimilars will have 2-3x the gross margins of existing distribution products in the portfolio, thus driving both revenue growth and gross margin profitability.

• Glassia transfer to Takeda:

  • As a reminder, Kamada transferred the manufacturing of Glassia for the US to Takeda in early 2022.

  • Takeda owns a product that competes vs. Glassia called Aralast. We think that Aralast is a ~$80-100mm revenue business. Glassia is a superior product to Aralast. Now that Takeda owns more of the economics of Glassia, we believe that Takeda has a strong incentive to migrate Aralast patients to start using Glassia, which should increase the royalty payments that Kamada receives.

In addition, the company has called out the potential for more M&A, which we think generally would create value for shareholders given that a sophisticated private equity firm is the ultimate decision-maker. In fact, we have been pleasantly surprised by the developments in the Saol portfolio since the acquisition; pro forma revenues grew 24% y/y in FY22 vs. our initial expectations of L-MSD growth. Kamada has a clean balance sheet and has a global go to market (US sales force and global distributor relationships), so M&A has the potential to be highly accretive 

We underwrite M-HSD revenue growth over the next 5 years and for EBIT margins to go from ~10% to ~25-30%, driven by increased insourcing and operating leverage. Management guides to "double-digit growth [in EBITDA] in the foreseeable years ahead."

Without giving any credit for their Inhaled AATD product or for a sale exit [see below], we get to a 3.6x MoM in 5 years assuming a 13-14x NTM P/E multiple, which is informed by peer valuations.

Call Options

We do not ascribe any value to the following "call options":

• Inhaled AAT: Kamada is in the process of conducting studies for an inhaled version of their Glassia product. If approved, Inhaled AAT would be the first of its kind in the market and would be a game changer for the company. The company is in the process of conducting its pivotal Phase 3 trials, which seems to be going well. The company expects to complete enrollment by the end of 2024.

• Strategic sale: We believe that a sale to a strategic could be likely given that (1) scale is important in this industry, and in general, it is a consolidating market; and (2) Kamada is owned by FIMI. The easiest exit for them would be a trade sale. For reference, precedent transactions have occurred at ~2.5-3.5x NTM revenues vs. Kamada at ~1.4x today.

Good Downside Protection

We believe at the current share price, Kamada offers excellent downside protection:

• Kamada has a net cash position and generates free cash flow; we expect free cash flow to increase substantially during our hold period and anticipate cumulative cash flows from the next 5 years to cover the company's enterprise today.

• Kamada is cheap even based on near-term earnings, currently trading at 11.0x LTM EBITDA and 7.9x, 5.6x NTM EBITDA valuations using 2023 and 2024 projections, respectively.

• Kamada has a strong shareholder base, with FIMI owning 20% of Kamada.

• Kamada operates in an acyclical industry as Kamada's products are not a discretionary spend item.

Risks

• Kamada is illiquid and trades ~$270k/day between the listed tickers.

• Competitors are developing monoclonal antibody treatments for AATD and rabies, which is cheaper and (some may consider) safer than plasma-derived products. That said, we believe that we are still several years away from a monoclonal AATD or rabies product being approved by the FDA. Moreover, even if approved, adoption of new products is generally slow in the plasma industry, which should give Kamada a rather long runway with existing patients.

  • For rabies, because rabies has a ~100% fatality rate and HRIG (Kedrab) is ~100% effective, we think that the bar will be extremely high for the FDA to approve a new first-line treatment. We have heard from companies developing recombinant rabies drugs that the regulatory burden to enter this market is too high to justify trying. 

• As with other companies that operate in the healthcare sector, there is regulatory risk, particularly around pricing and reimbursement.

Catalyst

Earnings growth

Strategic exit

Free option on trial results