2023-11-21 10:11:25 ET
Summary
- Kamada is a profitable specialty plasma company with a strong balance sheet and significant capital available for investment.
- The company is expected to grow EBITDA significantly in the coming years through its existing business and potential acquisitions or licensing of new products.
- Limited downside outside Israel country risk.
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Kamada (KMDA) is a small Israeli company manufacturing and selling specialty plasma treatments. After a recent $60 million injection by its main shareholder, Kamada is debt free and has $52 million in cash. I believe the company has room to significantly grow EBITDA over the coming year and be rewarded by the market with a higher multiple. Positive results from a phase 3 clinical trial could add additional upside.
Kamada is one of the smallest public companies in the plasma industry, which is dominated by an oligopoly of much larger companies such as CSL Behring (CSLLY), Takeda (TAK), Kedrion and Grifols (GRFS) (the latter being the largest listed pure-play plasma company and in itself a very interesting story, albeit one that is currently hidden under a very large debt pile).
Kamada has a much smaller and more specialised product portfolio (described further below) than those larger peers and for some of its products even outsources sales to them. Kamada does have a sales force of its own in the US, which is primarily focused on the transplantation space.
One of the major growth catalysts for Kamada is using their strong balance sheet to buy or license new products space that can leverage this sales infrastructure.
Balance Sheet
A key part of the Kamada story is the Israeli private equity firm FIMI. They've been involved since 2019, but bumped up their ownership to 38% in August by putting in $60 million at $4.75. As a glance at the board will make clear, Kamada is now very much a FIMI production.
Exactly what FIMI saw to make them invest $60 million has for now been left vague beyond statements of "compelling business development opportunities", but from management commentary on recent earnings calls the plan is to acquire or license new products in the transplantation and/or specialty plasma space.
More certain is what Kamada has already done with the proceeds as told by its Q3 filings . The company paid of a $20 million bank loan, cleared out some contingent payments from a 2021 acquisition (see below) and also decreased accounts payable to $13 million from a historic level of $30+ million. The result is a pristine balance sheet with $52 million in cash and no debt. Kamada does have some long-term liabilities on the balance sheet, but they are mainly royalties on sales of certain products and will only be paid if/when revenue actually comes in.
I expect Kamama will start investing a large part of its cash in the next 6-12 months, especially as its current operations are solidly profitable and so there's no need to reserve cash just for keeping the lights on.
EBITDA And Cash Flow
For the first 9 months of 2023 , Kamada has generated adjusted EBITDA of $17.7 million and is guiding to $22-26 million for the full year with growth accelerating in Q3. At the midpoint that represents 35% growth year-over-year. The company is yet to provide guidance for 2024 but management has indicated on the Q3 earnings call that they expect the strong growth to continue.
This EBITDA converts quite well to cash generation. Thanks to the debt paydown, from Q4 onwards Kamada no longer has to worry about paying interest (about $1.5 million annually) and based on recent years capex runs at a very manageable $4-6 million annually.
For the first 9 months of 2023, if one backs out changes in working capital, interest costs (which will not exist going forward) and the paydown of debt and contingent consideration mentioned above, Kamada would have generated $12.8 million in cash (or $17 million if one crudely extrapolates to the full year, which may be conservative, given management has indicated they expect a strong Q4).
This is only an illustrative calculation, especially as the recent balance sheet changes makes the cash flow statements for 2023 noisy, but it is nevertheless significant for a company with a market cap of $270 million, $52 million in cash, no debt and good growth prospects. Continued growth may mean Kamada will continue investing in working capital, but I would regard that as a positive problem if so.
Kamada In Detail
With this being the thesis, it is time to do a deep dive into the individual components of Kamada and explain how they fit in.
Glassia & Kedrab/Kamrab
The historic foundation for Kamada's business comes from two drugs it developed, but which they now (mostly) rely on other companies to sell.
Kedrab/Kamrab is an anti-rabies immunoglobulin plasma drug developed by Kamada which they license to Kedrion in the US (Kedrion is perhaps the smallest of the "large" plasma players and was recently taken private and merged with UK-based BPL by private equity). Kamada still manufactures Kedrab for selling to Kedrion and also market it themselves in other parts of the world where it goes by Kamrab.
Kedrab is the current main driver of Kamada's growth. It generated sales for Kamada of $16 million in 2022 (at 50+% gross margin) and is on course to do significantly more than that in 2023. Management doesn't break out sales by product on a quarterly basis, but based on commentary in earnings calls, Kedrab is the largest growth driver currently.
The drivers for that growth are multiple based on commentary in earning calls: a post-covid US rebound in usage, a competing product from Sanofi having been withdrawn from the US market and Kedrab having a commercial advantage in being the only product explicitly indicated for use in children
How long the sales growth can continue is unclear, but Kedrion has already taken up their option to extend their US distribution rights until 2026 and discussions are ongoing for an even longer agreement, giving some indication that further growth is likely. The current arrangement seems like a win-win agreement - Kedrion can sell Kedrab through their already paid for US sales force and Kamada can supply it at very attractive margins - so this revenue stream should be safe well beyond 2026. Sourcing a replacement anti-rabies product would likely take years for Kedrion, so they would seem to have little incentive to stop the collaboration with Kamada.
Glassia
Glassia is a treatment for AAT deficiency developed by Kamada (see further down for more on this condition, as Kamada is also in clinical trials for another product for it). The sales rights for Glassia in the US has been sold to the Japanese giant Takeda. Until 2040, Kamada gets paid a royalty based on sales, which importantly comes with zero cost attached. In 2022 this came to $12 million.
Kamada also retains sales rights for Glassia for other parts of the world and currently generates about $6 million in annual revenue from that. This naturally comes with a lower gross margin (one can assume maybe 40%) than the Takeda royalty. There is room for growth by expanding sales into new geographical areas. Kamada has started sales in Switzerland , as the first European country, but the timeline for adding more countries is unclear and the specialised nature of the drug means it will likely take significant time for sales to ramp up once launched in a new geography.
Predicting sales growth for Glassia is not easy, but at a minimum it should provide a stable source of very high-margin revenue for years to come.
Other Specialty Plasma Products
While sales of Kedrab and Glassia are outsourced, Kamada also has a portfolio of specialty plasma products it sells directly in the US market. The portfolio consists of four different treatments, all acquired in 2021 from Saol Therapeutics .
Out of these four, Cytogam is the largest in terms of revenue at about $23 million in 2022 and is used to improve outcomes for organ transplantations. The remaining three likely generate about that amount combined.
Kamada has insourced manufacturing of Cytogam and has indicated gross margins of about 50%. This has also improved the utilization of Kamada's manufacturing facility in Israel which had been left underutilized after Takeda took over manufacturing of Glassia.
Kamada has built its own sales team in the US to market this portfolio and is increasingly investing in sales activities . The specialised nature of the portfolio means it is feasible for a small company like Kamada to afford the necessary sales infrastructure, since there are fewer potential hospitals to cover for a drug specific to organ transplantations than for a product with broader reach like Kedrab.
Management is optimistic they will be able to drive significant growth in especially Cytogam revenue. Until Kamada acquired the portfolio, there had been no dedicated sales team for Cytogam in the US for a number of years, so Kamada management believes there is an opportunity for significant growth. This is yet to be truly demonstrated with hard numbers and is one of the key proof points Kamada has to deliver in the coming year.
As mentioned previously, the company will likely also look to buy or license other treatments to sell through their US sales team. If successfully executed, this should bring significant cost leverage and help diversify Kamada's revenue streams.
Development Of New Drugs
A potentially valuable wildcard in the Kamada story is their ongoing InnovAATe clinical trial . The trial is for a new inhaled treatment for AAT deficiency, a rare generic condition that can cause lung and liver damage. Current treatments are available, but they are based on intravenous injection and so requires patients to get treatment in a clinical setting on a regular basis.
The inhalable treatment Kamada is trialling would give patients a higher quality of life by letting them get treatment within their own home instead. Due to inhalation in theory being a more effective mechanism for getting the treatment into the lungs, it should also be more cost efficient than the current IV treatments. Treatment for AAT deficiency is a $1 billion market, so the commercial opportunity is huge. Kamada is not alone in pursuing this opportunity, with fellow plasma player Grifols also exploring non-IV treatments , albeit they are earlier in the process.
However, while the current phase 3 clinical trial started years ago, its completion is still not imminent. The study requires 220 participants and so far Kamada has only gotten about 30% of that enrolled. The pandemic caused huge delays, but the rare nature of the disease also makes for challenges. Kamada is now working to add more trial sites to speed things up. The study period for each participant is two years, so final results are clearly not imminent.
Kamada is providing ongoing positive updates on progress and if that continues along with accelerated enrolment, the market may start to give more value to it. On the downside, this acceleration will likely come at additional cost, but I don't expect it to be of a magnitude that would alter the investment thesis.
It is worth stressing that while the clinical trial is being done in the EU, it is coordinated with the FDA and will also be valid for the US. Should the trial be successful, I expect Kamada will license the product to a larger company similar to the Glassia arrangement with Takeda.
Kamada also have a few other treatments in their R&D pipeline, including a plasma-derived tuberculosis treatment, but they are very early-stage. Management has indicated they will look for partners to help fund this pipeline once proof-of-concept is reached, likely in 2025, so there does not seem to be a risk R&D expenses will increase significantly. For now, I give zero value to this pipeline.
US Plasma Collection Centers
As a manufacturer of plasma products, Kamada requires raw human plasma as an input. They currently acquire this from other companies, such as Kedrion, but have a stated intent to become a vertically integrated manufacturer by having their own plasma collection centers. This matches the strategy of most plasma companies, e.g. another small plasma player like ADMA Biologics (ADMA) is pursuing a similar strategy.
Kamada has already acquired one plasma center in Houston - the vicinity to the border makes Texas a hotspot in the plasma collection business - and is working on opening another in 2024. Details are sparse on the economics of this, but the investment is easily absorbed by Kamada's balance sheet, assuming the second center has the same modest price as the first . Once fully operational, the two plasma centers should help improve Kamada's margins, but absent Kamada providing more detail, it is hard to quantify the impact.
For now, I do not see this as a significant value driver, but that could change if Kamada is able to demonstrate the margin impact of this vertical integration.
Israel Distribution Business
Finally, Kamada is also in the business of distributing pharmaceutical products in Israel, mainly specialty plasma products from European manufacturers (primarily Biotest, which in 2021 was acquired by Grifols).
In its current form the distribution business is not an exciting part of the story. For the past three years, it has generated annual sales of $22 to $26 million and gross profits of $2-3 million based on annual filings. Kamada doesn't allocate overhead to the individual parts of their business, but even being generous, it's hard to imagine the distribution business does much more than break even on a net basis.
Kamada has signed deals to distribute eleven biosimilar drugs in Israel - eight of them from the Icelandic specialist Alvotech - with scheduled launches from 2023 to 2028. Details are thin on the ground except that Kamada expects these drugs to generate around $40 million in peak annual sales . While that should bring some cost leverage to the distribution business, the gross profit generated will still be on the small side if one assumes similar margins to the current portfolio. Sales would likely also take years to ramp up to the $40 million number.
For now it's probably best to see the distribution business as a way for Kamada to help pay some overheads and maybe give them useful contacts in the pharma industry. It seems unlikely to become a significant profit generator.
Risks
The largest fly in the ointment is the fact Kamada is an Israeli company. The share price had been making slow but steady progress in recent months, but recent events pulled it back down to sub-$5 levels. From a financial perspective, I view the risks as manageable. Kamada's manufacturing facility in Israel is not in imminent danger, and the majority of its sales and profits come from the US. Sales in Israel are mostly from the distribution business and does not contribute meaningfully to profits. Nevertheless, a risk discount may remain attached to the company for a long time.
For company specific factors, it is worth noting that Kamada's current management has been in place for a long time. The CEO has been in the job since 2015 and other members of management have also been around for years. The share price has done little in that time, so you have to believe this time is different to invest.
I do believe that is the case, but I'll be watching results carefully to verify that assumption is correct. If sales growth does not materialise over the next 12 months, or it is achieved at the cost of materially lower margins, I would look to exit. Kamada should be able to leverage its cost structure through increased sales, so a drop in margins would be concerning.
I'd likely also move to the sidelines if Kamada starts to ramp up their early-stage R&D spend materially. I'm happy to see the company continue the current InnovAATe clinical trial, but I think the company otherwise is best served by focusing on things that can drive sales in the near-term. I would like to see Kamada spend its capital on acquiring or licensing treatments that can generate sales in the near-term.
Conclusion
For valuing Kamada, the company currently has an enterprise value of around $220 million (the current market cap of ~$270 million minus the $52 million in cash with no debt to account for). If the company meets the midpoint of its 2023 guidance and ends the year with $24 million in EBITDA, that will give it an EV/EBITDA ratio of around 9, below the 13 to 15 market average ratio for pharmaceutical drug companies.
My expectation is the company, from its current business only, will be able to deliver around $30 million EBITDA in 2024. If Kamada hits the midpoint of its 2023 guidance, which seems like a virtual certainty based on Q3 results, EBITDA growth for the year will be 35%. While that growth rate is unlikely to be sustained for 2024, given the dynamics for Kamada's individual parts described above, a growth rate of around 15% seems realistic. That would result in ~$30 million of EBITDA for 2024.
Such EBITDA growth should in itself drive the share price higher, but I also think the market will reward Kamada with a slightly higher EV/EBITDA ratio if it can establish a longer track record of growth and profits. My price target is $7, to be reached before end of 2024, which would give the company an EV/EBITDA ratio of around 11 to 12, still below the market average. The ratio may change if Kamada puts some of its cash to use, but if so it should hopefully be accompanied by a corresponding increase in EBITDA.
I believe any change in the market's view of Kamada will gradual, so I will be looking to follow progress throughout 2024 and then likely revisit the price target as 2025 draws nearer. Kamada delivering positive results may justify a higher EV/EBITDA ratio, as it establishes a longer track record, and the company is also likely to do one or more transactions in 2024 that could significantly alter the EBITDA outlook.
Personally, I've acquired only a small position in Kamada for the time being and will look to add to it over time based on continued positive results. Downside should be limited. The company has multiple revenue streams and it is unlikely demand for specialized pharma products such as these will disappear overnight. The lack of debt also provides protection.
For further details see:
Kamada: Solid Specialty Plasma Play