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.

Kamada (KMDA US) Executive Summary: 

• US and global pharma companies that are working on credible Covid-19 treatments are up massively YTD, often more than 100% and far surpassing performance of general pharma indices.  

• KMDA has not meaningfully outperformed pharma indices despite having in our view one of the most credible treatments in development and in our base case, one that will be approved by the FDA and in the market by 1Q21. KMDA is an obscure, under-followed dual listed Israeli/US micro-cap, and when we asked the main analyst covering the stock (Jefferies), we were told they received almost no calls on the company recently or in the past. 

• If the Covid treatment does not end up receiving FDA approval, the NPV of cash and existing assets, net of all corporate overhead and R&D expense, covers the entire market cap at current levels. Industry experts have advised us that the Covid trial will likely cost $10M or less which is less than 3% of KMDA’s market cap.

• Heads you win, tails you don’t lose meaningfully, and the coin is a rigged coin where we think it will turn up heads much more likely than turning up tails as we think KMDA’s Covid-19 treatment is highly likely to get approved and reach commercialization. 

• In addition to being a strong risk-reward on its own, an investment in KMDA can serve as a portfolio hedge against delays/inefficacy of a vaccine, because the longer and more severe the Covid outbreak is, the more valuable Kamada’s Covid treatment will be. Additionally, we believe the company will not be as affected by an economic recession as many other equities because demand for KMDA’s life-saving products is inelastic.

Kamada Business Overview

KMDA is an Israeli-based plasma-derived pharma company focused on orphan indications. It is effectively controlled by Israel’s leading private equity firm, FIMI, a firm with a 20+ year track record of 25%+ IRRs and with blue chip investors. Given the involvement of FIMI, an investor can have high confidence in capital allocation and corporate governance. The company has a late stage product pipeline as well as two cash flow producing assets which have been in the market for many years and are well positioned for continued growth. One of the drugs, Glassia, treats Alpha1 Antitrypsin Deficiency and the other drug, Kedrab is used for preventing rabies infection. The company produced $25M of FCF in 2019 as the two cash flow producing assets more than cover firm-wide overhead and R&D. KMDA also has a net cash position of $100M which provides a source of upside as FIMI may use this for complementary M&A and with FIMI’s long-term PE track record of 25%+ IRRs, we believe M&A is much more likely to be value creative than value destructive.

There is a Large Upside Opportunity from KMDA’s Covid-19 Hyperimmune Product

Kamada is in the advanced stages of developing a plasma-derived hyperimmune therapy for Covid-19.
Hyperimmune therapies are manufactured by collecting and processing plasma from donors who have developed antibodies to fight a virus (either through exposure or vaccination); therapy is then administered to patients infected with that virus. The antibodies which helped to defeat the virus in hyperimmune plasma donors can then successfully fight the virus in patients receiving therapy. Hyperimmunes are the standard of care for many viruses: https://en.wikipedia.org/wiki/Hyperimmune_globulin.

Based on our research we believe that hyperimmune plasma therapy has a high likelihood of being an effective treatment for Covid-19. 

1. There is positive anecdotal early feedback on the efficacy of Kamada’s drug from convalescent use in Israel 

2. Hyperimmune therapies have proven safe and effective treatments for patients suffering from many other complicated viruses where many other treatments have failed (e.g., Rabies, Hepatitis B, Tetanus, etc)

3. We have had multiple conversations with top executives and scientists at the leading global plasma companies as well as former executives/scientists of these companies to remove any potential biases. All are highly confident in the efficacy and safety of hyperimmune treatment for Covid-19 and have indicated a probability of success for hyperimmune treatment above 75%

4. According to industry experts, hyperimmune therapies showed promise as potential treatments during SARS and MERS outbreaks in the past; these viruses are closely related to COVID-19 

5. The mechanism of action for hyperimmunes is straightforward and intuitive 

Kamada is well positioned to bring a hyperimmune product to market ahead of competitors 

Kamada a leading player in the hyperimmune space. Hyperimmunes are a niche industry which historically have not attracted the attention of the largest global plasma players. Kamada has capabilities to manufacture three of the four main commercialized hyperimmune drugs in the market today. Kamada  has also been an innovator in the space, developing an innovative purification technique for its rabies hyperimmune and making early progress on a Zika hyperimmune treatment (https://www.kamada.com/news/kamada-provides-update-on-progress-related-to-its-proprietary-hyper-immunoglobulin-iggs-platform-technology-including-its-commercial-anti-rabies-igg-and-its-pipeline-products-anti-corona-covid-19/). 

While there are other plasma companies working on developing a Covid-19 hyperimmune treatment, we believe that Kamada is currently the most advanced. Based on our analysis of public disclosures from KMDA’s competitors, Kamada appears to be well positioned to be the first company to commercialize a Covid-19 hyperimmune treatment. Kamada noted this in a recent market update: ‘We are extremely pleased with the rapid and important progress achieved to date in advancing our plasma-derived IgG product for COVID-19,’ said Amir London, Kamada’s Chief Executive Officer.  ‘To the best of our knowledge, Kamada is the first company globally to complete manufacturing of a plasma-derived IgG product for the treatment of COVID-19.’”

There are numerous other US and global companies working on Covid-19 vaccines and treatments, and these companies have outperformed the NASDAQ Biotechnology index (IBB) by a median of ~140% since announcing that they would pursue Covid-19 therapies

This ~140% outperformance corresponds to a median market share appreciation of ~$330M. An addition of $330M market cap would equate to an ~90% appreciation in Kamada’s stock price. 

Kamada, however, has only outperformed the index by ~5% since providing details on its Covid-19 treatment

Kamada should at least be performing in line with peers in our view. Many companies that are working on Covid-19 treatments are testing unproven technologies which have low probabilities of success and may take a long time to bring to market. Kamada on the other hand is in advanced stages of developing what is from our research a high probability of success therapy which could be commercially available in early 2021. While we expect KMDA to share the hyperimmune Covid 19 market with other players, we think this lower market share is more than offset by the higher odds of success and the speed at which KMDA could enter the market. As such we believe performance in line with the peers above would be justified, but it is also reasonable to believe that Kamada should outperform competitors. 

We believe that the market is justified in rewarding companies that are working on Covid-19 treatments. While some contend that the Covid-19 vaccine will be a panacea and make treatments and therapies unnecessary, we are less convinced. Consensus scientific opinion is that there is a material probability of a “tail” of Covid-19 cases over the medium term. This tail is driven by inability to completely vaccinate the global population, vaccines that are only effective on certain members of the population, and immunity that may be fleeting. A recent Harvard study published in Science explored various tail scenarios: https://science.sciencemag.org/content/sci/368/6493/860.full.pdf. In addition to the tail, it is possible that a vaccine is delayed and treatments are needed en masse for a 1-2 year period or even longer. 

While we have tried to estimate an NPV for KMDA’s Covid 19 treatment and spoken with numerous industry experts, the consensus is that it is impossible to do so with any precision given a huge number of variables (timing of vaccine, efficacy of vaccine, will the virus mutate, global infection rates, success of other treatments, pricing, potential for prophylactic use for healthcare workers, etc.). We can get to as little value as 50% of KMDA’s market cap to as much as multiples on KMDA’s current valuation, and we can go into more detail in the Q&A if and as helpful. We do think the median appreciation of $330M by pharma peers who are developing a Covid treatment is a highly relevant data point as it represents the market’s best sense for value taking into account all of the many variables and probabilities, and the crux of our thesis is we are getting this upside for free due to KMDA’s obscurity. 

One final upside from Covid-19 for KMDA is that many experts believe there will be additional novel virus outbreaks in the coming years/decades as population centers and worldwide travel continue to grow rapidly. If KMDA can show it can bring a Covid-19 treatment to market ahead of many much larger peers, the market may give the company significant enterprise value (as we show below, currently the company is trading in-line with its NPV value excluding any benefit from Covid 19 let alone positive enterprise value). 

In the event that Kamada’s Covid-19 hyperimmune is not successful or of value, the company’s other assets provide considerable downside protection

Kamada has no financial debt and a cash balance of ~$100M or $2.22 / share

The company’s main marketed product today is Glassia, a protein replacement therapy for AATD. https://www.kamada.com/product/glassia/.  AATD is a highly underdiagnosed condition. The AATD protein replacement therapy market is a high single digit growth market with growth driven by discovery of new patients. Glassia’s formulation is more convenient than many competitors and therefore Glassia has been a consistent share gainer in this market. While Kamada manufactures Glassia today, the product will transition to a royalty paid by Takeda to Kamada in 2021. Using an 8% discount rate we value this royalty at $4.33 / share and we can share our assumptions in more detail in the Q&A section if helpful.

Kamada’s second largest product today is KamRAB, a hyperimmune treatment for Rabies post-exposure prophylaxis. https://www.kamada.com/product/kamrab/. In short, Kamada’s hyperimmune is used to treat patients who have been exposed to rabies through animal bites and is the standard of care in the United States. Kamada launched its product with its partner Kedrion in the US in 2018 and has since captured ~20% market share. While we believe the rabies market is not a growth market, Kamada’s product should continue to gain share from the incumbent Grifols which historically had a monopoly position. Using an 8% discount we value KamRAB at $4.31 / share and can go into more detail in the Q&A. 

Kamada recently announced a partnership for contract manufacturing of an unnamed hyperimmune product. Based on the company’s guidance on economics we value this product at ~$0.55 cents / share. https://www.kamada.com/news/kamada-enters-into-a-binding-term-sheet-for-contract-manufacturing-of-an-fda-approved-commercialized-hyper-immune-globulin-product/

Kamada owns a local Israeli distribution business which has been growing nicely in recent years on the back of the company’s increased focused on partnerships. We value the distributor with a DCF and via using a revenue multiple based on comps. Both methodologies add ~$1 / share for this business. 

Kamada produces a variety of smaller proprietary plasma-derived products which it sells in Israel and globally. We value these products at ~$1 / share. 

Kamada also holds tax assets based on historical losses which we value at ~30 cents / share. 

Our $9.06 NPV calculation above assumes that the company maintains their $25M opex cost structure. A key source of upside to this NPV is that under its new controlling shareholder (FIMI, the leading private equity fund in Israel), we think meaningful cost cuts are likely which could add from $1.75 to 2.25 in additional value per share. We believe this is possible because we have gotten feedback from former executives who knows KMDA well that the company has a bloated cost structure. FIMI, which recently took over control of the business, has a strong reputation for cost management. Even if FIMI does not make cost cuts, the above $25M is conservative as we are assuming that the $10M of R&D spent each year into perpetuity doesn’t yield anything in terms of future products/pipeline. 

For conservatism we have not included other assets like the land that Kamada owns which we believe is worth ~$30M USD and we have not given the company credit for its pipeline, despite KMDA having a number of seasoned pipeline drugs. https://www.kamada.com/pipeline/

The company has initiated a phase 3 trial for its main pipeline candidate, inhaled AAT. While inhaled AAT has taken much longer to come to market than investors would have liked, we would highlight that Kamada’s stock traded at nearly $18 / share in 2014 on the back of excitement about the company’s inhaled program. 

Kamada is controlled by Israel’s leading private equity fund. We believe this offers additional downside protection and creates the opportunity for positive externalities

FIMI is the undisputed leader of Israel’s alternative asset management industry and has a stellar track record of +25% annualized returns across decades. FIMI has effective control of KMDA. FIMI invested  in November 2019, nearly doubled its stake in the company in January 2020, and bought stock in the open market as recently as May 2020. 

With FIMI controlling strategic decisions at Kamada, investors can feel confident that the company will be run to maximize value for shareholders. FIMI’s expertise in extraordinary transactions offers unanticipated upside opportunities, and the fund’s capital allocation discipline means shareholders can not only be comfortable on the use of cash flow but be excited by the prospects for share buybacks, special dividends, and value-accretive M&A. 

For more on FIMI see:

•  https://en.globes.co.il/en/article-fimi-to-raise-nis-12b-seventh-fund-1001317848 

• https://www.haaretz.com/israel-news/business/.premium-fimi-secures-largest-amount-ever-raised-by-israeli-private-equity-firms-1.5399736

Why the Opportunity Exists 

We think Kamada has been ignored by most funds given its small market cap (~$200-250M for most of recent history) and lower float and liquidity levels. We also believe that the predominately Israeli operations, management, and investor base makes the company more obscure and off the beaten path. When we asked the main analyst covering the stock (Jefferies), we were told they received almost no calls on the company recently or in the past. Finally, Kamada is ignored by healthcare specialist because of a negative history; the company burnt investors badly in 2014 and again in 2017 when it was unable to deliver on expectations for commercializing its inhaled AAT product. 

Upcoming Catalysts:

• Enrollment for Israel clinical trial – July 2020 

• Initiation and enrollment of US clinical trial – Q3/Q4 2020 

• Israel P1/2 trial results & BLA approval – Q3/Q4 2020

• Israel commercialization Q4 2020 / Q1 2021

• US/EU BLA approval – Q4 2020 / Q1 2021

• US commercialization Q1/Q2 2021

Investment Risks:

• Uncertainty regarding commercialization of Covid drug

• Regulatory risk 

• Disruption risk from innovative competitor products

• Illiquidity 

Catalyst

Upcoming Catalysts:

• Enrollment for Israel clinical trial – July 2020 

• Initiation and enrollment of US clinical trial – Q3/Q4 2020 

• Israel P1/2 trial results & BLA approval – Q3/Q4 2020

• Israel commercialization Q4 2020 / Q1 2021

• US/EU BLA approval – Q4 2020 / Q1 2021

• US commercialization Q1/Q2 2021