Patience is a virtue, especially when it comes to specialty pharma name Knight Therapeutics (Knight Therapeutics Stock Quote, Chart TSX:GUD), which has been testing investors with is go-slow approach to building up the company. But there’s nothing wrong with having a lot of cash on the balance sheet, says analyst Ryan Modesto of 5i Research, who says that GUD is sowing the seeds for future growth.
“This company gets a lot of flack. They have a lot of cash they’re sitting on, somewhere around 60 per cent of their market cap, and it’s been that way for a while now. So, investors are getting antsy,” said Modesto, to BNN Bloomberg on Wednesday. “They want the company to go out and spend some money and make some acquisitions and the management team is saying, ‘We’re only going to do that when the right opportunities come.’”
Born out of the sale of Paladin Labs to Endo Pharmaceuticals in 2014, Knight doubled in value over its first two years but has been on a downward trend since early 2017. Earlier this year, Knight had to contend with a board battle which saw activist shareholder Medison Biotech push for Knight CEO Johnathan Goodman to step down in the interest of the shareholders. That was put to a vote last month, with Goodman being re-elected to the board along with six other names which he had put forward, while Medison’s Meir Jakobsohn withdrew his nomination before the vote. The stock has climbed four per cent since then.
Modesto says that in times of uncertainty, there are worse options for companies than holding a lot of cash like Knight.
“In terms of catalysts, the catalyst is going to be when they go out and buy a company with their cash balance. But they’re sowing the seeds right now. They’re going through venture capital-type of funds to get rights to different companies and therapies and they’re some small acquisitions here and there. And when you look at the investments they’ve been making, their returns have been small but they’re been good returns. So, we don’t think that the company has lost their touch,” he says.
“With so much cash on their balance sheet, first off, we don’t think you need to worry about it. There’s an opportunity cost because it might stay flat but in a down market or the next recession a company like Knight Therapeutics is going to look pretty good because 60 per cent of their balance sheet is in cash,” he says.
Knight last reported its quarterly earnings on May 9, coming in with revenue of $3.0 million, a six per cent decrease year-over-year, and net income of $5.2 million a 25 per cent year-over-year decrease. The company finished the quarter with cash and cash equivalents of $748 million.