ALC - Greenhaven Road Capital - Lifecore Biomedical: Gem Of A CDMO Business
2023-08-12 11:15:00 ET
Summary
- Lifecore Biomedical, a specialty contract development and manufacturing organization, benefits from secular tailwinds and has additional capacity coming online.
- The company's debt situation has been resolved by $150M in financing from their largest customer, Alcon, indicating a strong relationship and high switching costs.
- Historically, there has been a robust market for Lifecore's business, and the company may be sold for a healthy premium before the end of the year.
The following segment was excerpted from this fund letter.
Lifecore Biomedical ( LFCR )
The payoffs may be quicker at Lifecore, a specialty contract development and manufacturing organization ((CDMO)) with expertise in highly viscous liquids and packaging into pre-filled syringes. Their business benefits from secular tailwinds and has additional capacity coming online.
I wrote about Lifecore in the “elephant hunting” section of the last letter, mentioning that it had very interesting potential but that it was a small position because there was the possibility of substantial loss of capital. At the time, the company was in violation of its debt covenants, and it was unclear how much value would be available for the equity holders (us).
Fast-forward three months and the debt situation has been resolved by $150M in financing from their largest customer, Alcon ( ALC ), which also pledged significant new business that likely soaks up much of the oncoming capacity. When a customer provides financing to a supplier, it offers some indication of how much they value the relationship (or need it) and how high the switching costs are.
Activists have been involved with Lifecore for years, noticing the gem of a CDMO business inside a conglomerate that grew avocados and made packaged foods such as salsa and guacamole. Over time, the activists got board representation and, finally, everything but the CDMO business was sold. Now Morgan Stanley has been retained to sell the remaining CDMO business.
Historically, there has been a robust market for CDMOs at multiples higher than where Lifecore currently trades. In a normal business environment, I think we could see a purchase price more than double the current share price. Will potential buyers give credit for oncoming supply? Will they apply historical multiples in a higher interest rate environment?
It is impossible to say with certainty, but, with each passing day, we are likely one day closer to the sale of Lifecore. If the company does not sell, earnings should grow, Alcon’s new business will come online, and secular tailwinds persist. Are we going to care less about the safe manufacturing of drugs? Are we going to make the FDA process easier? Lifecore benefits from these trends.
Ultimately, I think it is a question of whether we get paid quickly or slowly on Lifecore. Gun to my head, I think the company gets sold for a healthy premium before the end of the year. In the meantime, as the business has been de-risked (debt situation resolved) and the new business from Alcon announced, shares have appreciated above $10 per share vs. our $5 cost basis. It’s not an elephant yet, but that represents a lot of progress with line of sight to a potential exit. So, we wait for the process to proceed.
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Greenhaven Road Capital - Lifecore Biomedical: Gem Of A CDMO Business