Paladin Labs PLB
May 25, 2012 - 2:09pm EST by
SpocksBrainX
2012 2013
Price: 42.17 EPS $2.55 $0.00
Shares Out. (in M): 20,920 P/E 16.5x 0.0x
Market Cap (in $M): 882 P/FCF 12.9x 0.0x
Net Debt (in $M): -253 EBIT 72 0
TEV ($): 621 TEV/EBIT 8.6x 0.0x

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  • Pharmaceuticals
  • Canada
  • Strong Balance Sheet
  • No Debt
  • Acquisition
  • Insider Ownership
  • winner
  • Multi-bagger

Description

There are a number of things about Paladin Labs that I don't understand.  I say that freely upfront in case somebody asks me something and I look like the dummy you suspected I am.   However, there are enough positives associated with this stock to make it my largest position at present despite my overriding ignorance.

 

PLB, simply put, finds and develops drugs for the Canadian market and also invests its cash flow in anywhere they can make a buck (a CAD in this case) in a low risk, high return manner.  The company has an overcapitalized balance sheet, a simply tremendous long-term record of wealth creation, high ROE business model, intelligent management team, and trades for a FCF yield of 11.6%.  Risks include 1) worries about two drugs which have/will have (eventually) generic competition, 2) the unfortunate accident which sidelined the company's dynamic founder, 3) some oddball accounting (to me at least - I'm used to retailers and asset managers and easier stuff than this but I figure that a dummy like me can at least monitor cash levels to make sure everything is a-ok), and 4) all the risks involved with a company that makes acquisitions/other movements with cash a strategic priority.  While they haven't done anything stupid in the past, anything is possible.

 

all figures CAD

 

Positives

 

1 - Strong Balance Sheet.  The easiest thing for me not to screw up.  PLB has 252m on the BS and no debt.  The cap is 882m right now, 621 sans this amount.

 

2 - Q1 EBITDA, defined by the company, as 18m.  I have tried to understand where they get their EBITDA numbers but it is hard to get a consistent answer but all the analysts basically swallow what the company feeds and any differences between these numbers and others are minor.  However, from the magic of Canadian tax law, another thing that makes me shudder, this company somehow manages to not pay taxes (thanks tax pools) and thus, for at least the next few 3 years, EBITDA is a good proxy for FCF as CapEx is almost non-existent.  I am just taking 18 x 4 as my trailing EBITDA number though again you can get more precise if you want.  TDN shows an estimated 69m for 2012, Paradigm 80m so the number is likely somewhere in between.  

 

3 - high FCF yield - again, using 72m as FCF by 621 and you get 11.6%.  On a one year forward basis, subtracting EBITDA from the EV gets you to 13%.  In three years, even if EBITDA stays flat, PLB generates 216m or 216/621 or 35% of the current EV.

 

4 - high ROE business model.  CapEx and PPE is minimal.  This is a business that generates high margins on sales with limited Capital Requirements.

 

5 - Tremendous record of wealth creation.  Dealing in Canadian drugs where there is no unified authority is a painful process for large pharma companies but a very good business for PLB.   Here is the chart from their website which says many things

 

Investment Highlights

Strong revenue growth
• 5 year Compounded Annual Growth Rate of 24%
Healthy, robust business
• Generated 67.6 million of EBITDA in 2011 or $3.27 per fully diluted share
Rich, near-term pipeline for growth
• 1 product awaiting regulatory approval
• 3 products pending regulatory submission
• 17 products in phase I, II and III

Financial Data for 10 Years

For the years ended December 31
(in thousands of Canadian dollars except for share and per share amounts).

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

Revenues

141,466

127,989

109,693

82,744

62,941

48,357

33,689

27,871

23,788

23,277

17,497

Net Income (Loss)

50,151

29,856

37,738

13,798

9,033

5,806

3,254

3,239

(4,172)

5,162

1,485

Earnings (Loss) Per Share (Basic)

2.51

1.60

2.23

0.93

0.60

0.39

0.22

0.22

(0.28)

0.37

0.12

EBITDA

67,558

56,441

39,183

29,021

19,913

15,420

9,230

7,571

4,457

8,301

4,982

Cash & Marketable Securities

239,009

139,389

105,369

21,342

36,216

36,074

42,085

42,124

42,319

45,612

22,448

Shareholders' Equity

322,726

228,845

194,802

95,348

82,000

73,741

66,250

63,192

59,332

63,178

37,836

Shares Issued and Outstanding

20,270,836

18,803,384

18,563,250

14,921,446

14,902,784

14,980,131

14,732,368

14,858,469

14,799,588

14,780,205

12,539,247



6 - Intelligent Management Team.  See what they do, not what they say has always been my motto, but PLB talks to talk and walks the walk.  Besides the above array as testament to their skills, there are numerous other examples of what this company does that you can read in the annual circular in SEDAR but my favorite one was here:

 

On January 11, 2011, the Corporation invested $77,232,000 (£50,000,000) in ProStrakan Group plc ("Prostrakan") through the acquisition by way of assignment of ProStrakan’s existing secured debt facility with the addition of certain conversion rights. On February 21, 2011, in connection with the proposed acquisition of ProStrakan by Kyowa Hakko Kirin Co., Ltd. ("KHK"), the Corporation consented to the repayment of its debt facility subject to closing of the acquisition. On March 31, 2011, at the general meeting of Prostrakan’s shareholders the acquisition of ProStrakan by KHK was approved. On May 17, 2011, the Corporation received gross proceeds of $86,432,000 representing the aggregate of: the principal of the ProStrakan debt facility of $77,232,000, the interest accrued as at May 17, 2011 of $778,000, a break free of $3,089,000, and the outstanding balance of interest payable for the first year of $5,333,000, resulting in an aggregate gain on early redemption of $8,422,000. Moreover, the Corporation has retained the rights to the products it had previously been licensed in connection with the agreement.

 

Course, there are risks:

 

1 - the dynamic CEO previous was seriously hurt in a car accident.  His family controls a majority position here, but the bigger concern is how much of PLB's dedication of low risk, high reward capital allocation and business building was directly attributable to Mr Goodman.  I refuse to believe everything was due to one man but it is hard to underestimate how un-nerving this is but his partner and acting CEO Mark Beaudet has so far given investors the same sorts of assurances (thru his public statements and from interviews with others) that he knows the business and will continue with the same culture.

 

2 - this is a pharma company and there are usual issues with evaluating new drug possibilities and existing drug challenges.  The circular makes this even hard by not breaking out sales by product (IMS data is provided instead) though candidly I'm not going to have the skill set to evaluate if one drug is a threat to another or what not.  There are two significant drugs that face generic competition - PlanB which already has some generic competition but is mostly holding share, and Pennsaid which many thought would have generic competition by now but is expected by Q3.  This will put a damper on growth in EBITDA depending on impact.  There are similar issues/concerns with other drugs.  I am just making the assumption that the business team that built the record above has a handle on these issues.

 

3 - some oddball accounting.  Again, I'm sure these wouldn't be oddball to smart folks in Canada, but taxes are nil here - always have been - and according to one analyst the company "...aggressively amortizes its product and company acquisitions over a relatively short period of time so depreciation and amortization can be higher than seen in comparable companies."

 

4 - all the risks you see with a company that makes investments.  PLB is in the midst of a large one - a cash transfer and share issuance and then share acceptance for Litha upon which PLB will have a 45% interest in that company and vastly increase PLB's own look-thru/existing revenue and EBITDA as the company expects to consolidate this portion of Litha's operations inside its financial statements.  This will result in cash going down to  abt 200m (based on Q1 cash) but with, based on 12-11 data provided by PLB, revenue increasing to 255m and 96m in EBITDA (and note this does not give effect to the interest in Litha not owned by Paladin).   Investments in emerging market drug companies are norm here, and it is entirely possible to loans to other companies won't work out and bids for undervalued stocks might not work and a lot of things might not work out. 

 

It just looks cheap to me.  This is yet another favorite of Jason Doneville of Doneville Kent Asset management, the most Peter Lyncian Canadian investor I've ever seen (though I haven't seen much, but he is a remarkable money manager).  Analysts are currently afraid of the CEO's statement in Q4 that revenue for 2012 would merely be flat with the previous year (which, by the way, PLB did the previous year too and beat it) and refusal to upgrade this forecast despite a jump in Q1 sales.  I just don't think this means anything long-term, and when they close on the Litha deal and if they make more good deals these statements become  a distant memory, though PLB has experienced a good run lately. 

 

 

 -

 

Catalyst

closing of Litha acquisition

 - a good deal increasing EBITD even more

 - Goodman ever returning

 - time (I think this is a good business and time will just make it better so to me it is a multi-year holding)

 - from the little I understand, it looks a lot like that pharma company that Sequoia loves so much (Valeant)

    sort by    

    Description

    There are a number of things about Paladin Labs that I don't understand.  I say that freely upfront in case somebody asks me something and I look like the dummy you suspected I am.   However, there are enough positives associated with this stock to make it my largest position at present despite my overriding ignorance.

     

    PLB, simply put, finds and develops drugs for the Canadian market and also invests its cash flow in anywhere they can make a buck (a CAD in this case) in a low risk, high return manner.  The company has an overcapitalized balance sheet, a simply tremendous long-term record of wealth creation, high ROE business model, intelligent management team, and trades for a FCF yield of 11.6%.  Risks include 1) worries about two drugs which have/will have (eventually) generic competition, 2) the unfortunate accident which sidelined the company's dynamic founder, 3) some oddball accounting (to me at least - I'm used to retailers and asset managers and easier stuff than this but I figure that a dummy like me can at least monitor cash levels to make sure everything is a-ok), and 4) all the risks involved with a company that makes acquisitions/other movements with cash a strategic priority.  While they haven't done anything stupid in the past, anything is possible.

     

    all figures CAD

     

    Positives

     

    1 - Strong Balance Sheet.  The easiest thing for me not to screw up.  PLB has 252m on the BS and no debt.  The cap is 882m right now, 621 sans this amount.

     

    2 - Q1 EBITDA, defined by the company, as 18m.  I have tried to understand where they get their EBITDA numbers but it is hard to get a consistent answer but all the analysts basically swallow what the company feeds and any differences between these numbers and others are minor.  However, from the magic of Canadian tax law, another thing that makes me shudder, this company somehow manages to not pay taxes (thanks tax pools) and thus, for at least the next few 3 years, EBITDA is a good proxy for FCF as CapEx is almost non-existent.  I am just taking 18 x 4 as my trailing EBITDA number though again you can get more precise if you want.  TDN shows an estimated 69m for 2012, Paradigm 80m so the number is likely somewhere in between.  

     

    3 - high FCF yield - again, using 72m as FCF by 621 and you get 11.6%.  On a one year forward basis, subtracting EBITDA from the EV gets you to 13%.  In three years, even if EBITDA stays flat, PLB generates 216m or 216/621 or 35% of the current EV.

     

    4 - high ROE business model.  CapEx and PPE is minimal.  This is a business that generates high margins on sales with limited Capital Requirements.

     

    5 - Tremendous record of wealth creation.  Dealing in Canadian drugs where there is no unified authority is a painful process for large pharma companies but a very good business for PLB.   Here is the chart from their website which says many things

     

    Investment Highlights

    Strong revenue growth
    • 5 year Compounded Annual Growth Rate of 24%
    Healthy, robust business
    • Generated 67.6 million of EBITDA in 2011 or $3.27 per fully diluted share
    Rich, near-term pipeline for growth
    • 1 product awaiting regulatory approval
    • 3 products pending regulatory submission
    • 17 products in phase I, II and III

    Financial Data for 10 Years

    For the years ended December 31
    (in thousands of Canadian dollars except for share and per share amounts).

    2011

    2010

    2009

    2008

    2007

    2006

    2005

    2004

    2003

    2002

    2001

    Revenues

    141,466

    127,989

    109,693

    82,744

    62,941

    48,357

    33,689

    27,871

    23,788

    23,277

    17,497

    Net Income (Loss)

    50,151

    29,856

    37,738

    13,798

    9,033

    5,806

    3,254

    3,239

    (4,172)

    5,162

    1,485

    Earnings (Loss) Per Share (Basic)

    2.51

    1.60

    2.23

    0.93

    0.60

    0.39

    0.22

    0.22

    (0.28)

    0.37

    0.12

    EBITDA

    67,558

    56,441

    39,183

    29,021

    19,913

    15,420

    9,230

    7,571

    4,457

    8,301

    4,982

    Cash & Marketable Securities

    239,009

    139,389

    105,369

    21,342

    36,216

    36,074

    42,085

    42,124

    42,319

    45,612

    22,448

    Shareholders' Equity

    322,726

    228,845

    194,802

    95,348

    82,000

    73,741

    66,250

    63,192

    59,332

    63,178

    37,836

    Shares Issued and Outstanding

    20,270,836

    18,803,384

    18,563,250

    14,921,446

    14,902,784

    14,980,131

    14,732,368

    14,858,469

    14,799,588

    14,780,205

    12,539,247



    6 - Intelligent Management Team.  See what they do, not what they say has always been my motto, but PLB talks to talk and walks the walk.  Besides the above array as testament to their skills, there are numerous other examples of what this company does that you can read in the annual circular in SEDAR but my favorite one was here:

     

    On January 11, 2011, the Corporation invested $77,232,000 (£50,000,000) in ProStrakan Group plc ("Prostrakan") through the acquisition by way of assignment of ProStrakan’s existing secured debt facility with the addition of certain conversion rights. On February 21, 2011, in connection with the proposed acquisition of ProStrakan by Kyowa Hakko Kirin Co., Ltd. ("KHK"), the Corporation consented to the repayment of its debt facility subject to closing of the acquisition. On March 31, 2011, at the general meeting of Prostrakan’s shareholders the acquisition of ProStrakan by KHK was approved. On May 17, 2011, the Corporation received gross proceeds of $86,432,000 representing the aggregate of: the principal of the ProStrakan debt facility of $77,232,000, the interest accrued as at May 17, 2011 of $778,000, a break free of $3,089,000, and the outstanding balance of interest payable for the first year of $5,333,000, resulting in an aggregate gain on early redemption of $8,422,000. Moreover, the Corporation has retained the rights to the products it had previously been licensed in connection with the agreement.

     

    Course, there are risks:

     

    1 - the dynamic CEO previous was seriously hurt in a car accident.  His family controls a majority position here, but the bigger concern is how much of PLB's dedication of low risk, high reward capital allocation and business building was directly attributable to Mr Goodman.  I refuse to believe everything was due to one man but it is hard to underestimate how un-nerving this is but his partner and acting CEO Mark Beaudet has so far given investors the same sorts of assurances (thru his public statements and from interviews with others) that he knows the business and will continue with the same culture.

     

    2 - this is a pharma company and there are usual issues with evaluating new drug possibilities and existing drug challenges.  The circular makes this even hard by not breaking out sales by product (IMS data is provided instead) though candidly I'm not going to have the skill set to evaluate if one drug is a threat to another or what not.  There are two significant drugs that face generic competition - PlanB which already has some generic competition but is mostly holding share, and Pennsaid which many thought would have generic competition by now but is expected by Q3.  This will put a damper on growth in EBITDA depending on impact.  There are similar issues/concerns with other drugs.  I am just making the assumption that the business team that built the record above has a handle on these issues.

     

    3 - some oddball accounting.  Again, I'm sure these wouldn't be oddball to smart folks in Canada, but taxes are nil here - always have been - and according to one analyst the company "...aggressively amortizes its product and company acquisitions over a relatively short period of time so depreciation and amortization can be higher than seen in comparable companies."

     

    4 - all the risks you see with a company that makes investments.  PLB is in the midst of a large one - a cash transfer and share issuance and then share acceptance for Litha upon which PLB will have a 45% interest in that company and vastly increase PLB's own look-thru/existing revenue and EBITDA as the company expects to consolidate this portion of Litha's operations inside its financial statements.  This will result in cash going down to  abt 200m (based on Q1 cash) but with, based on 12-11 data provided by PLB, revenue increasing to 255m and 96m in EBITDA (and note this does not give effect to the interest in Litha not owned by Paladin).   Investments in emerging market drug companies are norm here, and it is entirely possible to loans to other companies won't work out and bids for undervalued stocks might not work and a lot of things might not work out. 

     

    It just looks cheap to me.  This is yet another favorite of Jason Doneville of Doneville Kent Asset management, the most Peter Lyncian Canadian investor I've ever seen (though I haven't seen much, but he is a remarkable money manager).  Analysts are currently afraid of the CEO's statement in Q4 that revenue for 2012 would merely be flat with the previous year (which, by the way, PLB did the previous year too and beat it) and refusal to upgrade this forecast despite a jump in Q1 sales.  I just don't think this means anything long-term, and when they close on the Litha deal and if they make more good deals these statements become  a distant memory, though PLB has experienced a good run lately. 

     

     

     -

     

    Catalyst

    closing of Litha acquisition

     - a good deal increasing EBITD even more

     - Goodman ever returning

     - time (I think this is a good business and time will just make it better so to me it is a multi-year holding)

     - from the little I understand, it looks a lot like that pharma company that Sequoia loves so much (Valeant)

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