Quick Pitch: Lifecore Biomedical (LFCR)

Expected Company Sale – Multibagger Upside

 

This is a high-uncertainty/high-reward setup where the ongoing strategic review might result in the sale of the company at a multiple of today’s price. However, the company is in technical default due to a covenant breach, is non-current on its financials, and has not provided any additional disclosures over the last two months. Investors are left in the dark with no updates of the debt forbearance or the sale process. Hence, LFCR is a bit of a black box today, which is why the opportunity exists. The key known fact is that the company owns a fast-growing and high-quality pharma CDMO business that is apparently coveted by market participants. In a sale scenario, this business could fetch 15x-20x EBITDA multiple resulting in an equity value of $8-$20/share, a significant premium to today’s $5/share market price. 3 pending catalysts are likely to drive LFCR shares upwards – the announcement of a forbearance agreement with the lenders, getting current on the financials, or potentially full company sale.

The current situation has been well covered in a couple of recent hedge fund letters – Laughing Water Capital, Greenhaven Road Capital – as well as in this VIC pitch. I recommend reading through these write-ups as they provide a really good background on the setup. Below is my quick overview of the case together with a number of uncertainties and potential complications that I see here.

LFCR is a contract development and manufacturing services provider (CDMO) for pharma industry, which focuses mostly on the aseptic fill finish sector – filling sterile syringes and vials with clients’ products. This is a very specialized and high-quality business with very sticky clients. Fill finish is a critical step in drug production, where even a minute error can cause microbial contamination posing health risks to the patient. The process has strict FDA requirements and a lengthy reapproval process is needed when a client wants to change its fill/finish provider. Hence, the business is sticky where the switching process can take up to 3 years). It is also the fastest-growing sector of the injectables CDMO industry. The attractiveness of this business is clearly shown in the historical LFCR results – over the last 8 years delivered 15% revenue CAGR and 25% EBITDA CAGR.

lfcr

The company continues to grow. Back in Oct’22 management issued guidance for FY23 revenues of $124m (+14% YoY) and adjusted EBITDA of $32m (+10% YoY) for the Lifecore segment. This compares to the current EV of $265m. Management is clearly confident this growth is not going away anytime soon and is heavily investing into further expansion. The company aims to double its operational capacity from the current 10m unit fills per year (c. 80% utilized right now) to 22m by FY25 and then double again to 45m by FY28.

So if the business is doing so well, how did we get to a technical default?

Two months ago, the company was hit by a bad combination of delays in product shipments and customer onboarding, which shifted a large chunk of earnings forward and resulted in an earnings miss. The announcement of quarterly results (in mid-March for the quarter ending Nov’22) threw LFCR into a debt covenant breach and a going concern notice. This led to a market panic that for one day crashed the stock price from $5.11/share to $1.67/share. It was noted that the company “is currently in negotiations with the Lenders to seek a forbearance and amendment agreement to remedy the Company’s current and anticipated noncompliance with its covenants”. The same press release included the announcement of strategic alternatives as well as a significant expansion of a relationship with an existing client which agreed to finance $25m of LFCR’s capex. There have been no further updates since.

While the technical default and the going concern might sound scary, the downside appears to be very well protected at current levels even in a bankruptcy scenario. Laughing Water Capital put it well:

“Replacement cost of Lifecore’s assets would be around $400M, and would take 4-5 years, which is attractive vs. the Company’s current enterprise value of approximately $250M. <…> Even when giving no credit for existing cash and/or recent debt payments a rudimentary bankruptcy analysis suggests that equity owners today would survive intact, and with a nice profit. Of course, given that this business is accelerating, not declining, a valuation based on future cash flows would be more appropriate than replacement cost. The point is just to suggest that even in a bankruptcy scenario, equity owners have little to feat other than mark to market risk.”

The current LFCR share price is already at the levels where it was before the ‘going concern’ announcement. However, the market is likely underappreciating a number of recent positive developments.

  • Together with the going concern notice, LFCR has also announced a review of strategic review alternatives. The company has retained Morgan Stanley, which has recently advised on the sale of another CDMO (Alcami), to assist with LFCR’s strategic review. Recent precedents suggest that the takeout price could land substantially above today’s trading levels. Currently, the company trades at around 8.5x segment level adj. EBITDA and 2.1x revenues, which look very attractive relative to industry transactions. This article suggests the average EBITDA multiple for CDMO takeouts has been 17x. Several specific examples include Capsugel/Lonza (16x EBITDA) in 2016, Patheon/Thermo Fisher (17x EBITDA) in 2017, Avista/Cambrex (3.9x revenues) in 2018, Alcami/GHO Capital (rumors are the price was 20x EBITDA) and this year’s sale of Baxter’s CDMO business at 6.6x revenues. Although all these CDMO transactions have been much larger, LFCR operates largely in the fill finish sub-sector, which arguably deserves a higher takeout multiple.
  • The company has also announced a major commercial relationship expansion with an existing customer. The agreement entails the client making a $10m upfront cash payment for infrastructure preparation and a $15m reimbursement in further capital expenses. This agreement is not only a vote of confidence in LFCR but also suggests material uplift in revenues and EBITDA from this relationship. Laughing Water Capital guesses this expanded relationship would eventually result in 25% uplift in revenues and $10m in incremental EBITDA for LFCR (for a total forward segment EBITDA of $42m).
  • Another positive development that has taken place last month is that LFCR has finally transformed into a pure-play CDMO. Until recently, LFCR used to be a bad combination of struggling/low-margin food (pre-made salad and processed avocado) assets and a high-quality/fast-growing CDMO. This made LFCR screen very poorly and completely overshadowed the quality and margin/growth profile of the fill finish operations. In February and April the company finally completed divestments of its food assets, and it’s quite possible that the market is not fully appreciating this transformation yet.
  • LFCR has recently completed two common/preferred equity offerings at significantly higher prices. Major company shareholders have participated in both of these. In November’22, the company issued $5m common stock at $7.97/share. In January, it issued $39m of preferreds (7.5% coupon), convertible into common shares at $7/share. LFCR has a rather concentrated ownership with around 44% of shares held by 4 small-cap funds – Wynnefield Capital (16% stake), 22NW Fund (10%), Legion Partners Asset Management (10%), and Cove Street Capital (7.7%). Worth noting that, LFCR position is not particularly large for most of these funds, except maybe Wynnefield (4th largest position), and most of them have also been holding the stock for several years and are sitting on considerable losses.
  • Finally, LFCR’s liquidity position is solid. The company is not current on its financials (due to divestments-related accounting restatements) and just looking at the latest available earnings (ending Nov’22) it might seem like LFCR is having major liquidity problems – the available cash at the time was just $6m. However, since then the company has received substantial cash inflows from multiple sources. Since November LFCR raised $39m from preferred issuance, sold the Avocado business for $17.5m in February, and sold the Olive Oil business for $6.23m last month.

 

Thoughts on the uncertainties involved

The key uncertainty is how to interpret the two months of silence from LFCR and in what form will the company exit the technical default – dilution vs no dilution, liquidity problems or not, the business still on track with the previous guidance or not. I think that lack of disclosures either means the company’s sale discussions are in advanced stages making the forbearance agreement irrelevant, or the lenders are playing hardball and have no intentions of walking away with a minor settlement or a minor forbearance fee. The defaulted loan ($133m) is pretty large relative to the company’s market cap so lenders might be pushing for a material bite of LFCR equity. In the absence of a sale, this potential dilution could offset a large part of the recent positive developments (client expansion, transformation into pure play CDMO, etc.).

Then comes the question of the appropriateness of the 15x-20x EBITDA multiples that have been thrown around for the valuation of the company. It’s fairly difficult to understand how comparable is LFCR business to the previously mentioned industry transactions, most of which involved way larger (multi-billion) and much more diversified private companies. LRFC doesn’t separate its higher-quality fill finish revenues from more generic CDMO service revenues making the comparison even harder. It is not really clear if LFCR can fetch such a high multiple in a sale scenario. Smaller, but seemingly more commoditized/lower-margin peers are trading at far lower multiples. SCTL ($89m market cap) is now valued at 6x forward adj. EBITDA and 1x revenues, while CTLT trades at 10.9x forward adj. EBITDA and 2.2x revenues. Both of these companies appear to have only tiny fill finish businesses and are mostly operating in more commoditized sectors of CDMO. On the other hand, another peer, Avid Bioservices ($950m market cap), trades at a much higher 8.3x TTM revenues. This high multiple is driven by operations in a highly specialized cell and gene therapy space (mammalian cell culture manufacturing) and high growth. Overall, the trading and transaction multiples seem to be all over the place, and without a deeper understanding of the industry nuances and differences between the companies it is difficult to tell which of these peers/transactions are most closely comparable to LFCR.

Another uncertainty is the actual profitability of the business. The $32m forward EBITDA (+$10m from client relationship expansion) is based on management’s FY23 guidance issued in Oct’22. This guidance was withdrawn with the start of the strategic alternatives process. With the company being non-current on its fillings, it is hard to tell if this target is still valid. Also, this figure is for segment-level EBITDA only and excludes corporate overheads. It can be argued that part of these corporate overheads would be eliminated in a sale scenario, but if the company continues as a standalone, one needs to deduct $7m-$8m (as guided by management bac in Oct’22) to arrive at the EBITDA profitability of the whole company.

And finally, there is a question of LFCR management’s competency, which did not inspire confidence even before the current events. The divestments of the food assets have fallen short of investor expectations and have failed to resolve the company’s balance sheet issues. The way management has now thrown the company into technical default causing a 65% share price drop in a single day is mind-boggling. It’s hard to say what exactly happened with those shipment delays and client onboardings, but the fact management has operated with such a tight margin of error and was not able to foresee these issues and pre-negotiate the forbearance doesn’t inspire much confidence. At the very least, any issues and the going concern notice could have been communicated much better if there is no real business effect from it.

30 Comments

30 thoughts on “Quick Pitch: Lifecore Biomedical (LFCR)”

  1. LFCR case is working out even faster than I expected – the stock is up +20% today. The company reported that the technical default and going concern issues have been entirely resolved. LFCR has signed a $140m new financing +$10m sale leaseback commitment from one of its major customers, Alcon ($40bn pharma giant). The previous term loan ($99m) has been fully repaid. This now fully eliminates bankruptcy or any other possible large downside scenarios and puts LFCR into a clean position for the company sale. The recent CEO’s comment sounded very positive in that regard:

    “These agreements demonstrate our focus on finding an optimal path forward for the business, while not losing sight of our continuous efforts to advance our project portfolio. We believe these agreements also improve the potential outcome from our strategic review process and open the door to greater flexibility for the Company going forward.”

    A few more details on the new agreements:
    – The new financing is at more favorable rates – 10% vs c. 14% the company has been paying lately (LIBOR rate plus a spread of 8.50% for the previous term loan).
    – For the first 3 years the interest on the loan will be paid-in-kind, i.e. loan amount will increase. And after three years, only 3% of the interest will need to be paid in cash. So essentially, there will be no material loan repayments or cash interest charges till 2029.
    – This financing agreement also shows strong confidence and recognition of LFCR’s business value from Alcon.
    – Regarding the remaining credit facility ($48m) – it will remain outstanding but the company has entered into an amendment with the lenders, which includes a covenant waiver. This amendment incurred $1.2m fee.
    – The agreement also includes a $10m sale-leaseback arrangement for certain HA fermentation equipment.
    – Concurrently with the financing arrangements, LFCR has also announced a restated supply agreement, which increases the amount of hyaluronic acid product to be delivered by Lifecore to Alcon.

    https://ir.lifecore.com/news-releases/news-release-details/lifecore-biomedical-enters-1500-million-new-financing-repays-its

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  2. A few days ago, rumors emerged from Dealreporter, indicating that Lifecore Biomedical (LFCR) has officially initiated the sale process and has already distributed marketing materials to prospective bidders. The expectation is that bids will start pouring in by early July.

    One notable detail in this report is that LFCR is being pitched with a projected EBITDA of $70 million. This figure represents a significant increase from the previous 2023 guidance of $32m and even surpasses the $42m pro-forma adjusted EBITDA estimated in the Laughing Water Capital pitch.

    Although a $70m projection may seem overly optimistic, such rumors bolster confidence in the inherent business value of LFCR. At the very least, they suggest that recent operational setbacks were merely temporary.

    It will be intriguing to see where the bids ultimately stand. However, even by using the $42mn adjusted EBITDA and the 12x to 15x multiples observed in recent industry transactions, the sale scenario suggests an additional upside of 45% to 90%.

    https://seekingalpha.com/news/3976431-lifecore-biomedical-gains-on-report-as-sales-process-as-part-of-strategic-reviewlif

    Also, with the release of fiscal Q3 results (ending Feb 26, 2023), the company is now current on its financials. A couple of excerpts from the call:

    In the fiscal ’23 third quarter, we generated Lifecore segment revenue of $26.3 million and segment adjusted EBITDA of $3 million, both of which were consistent with our expectations and the cadence that we disclosed during our second quarter call. Both the second and third quarter results largely reflect the shift in timing of commercial launches by our customers, which impacted prelaunch production timing as well as planned commercial revenues. And when combined with the shifting mix of revenues within our development portfolio, temporarily slowed our growth. The good news here is that the launches of products are progressing well.

    In terms of outlook, while we aren’t providing formal guidance for fiscal 2023, we do expect a sequential improvement in fiscal fourth quarter, our largest quarter of the year, due to the shift in timing of projects that we spoke about. Along with an expectation of improved revenue, we also expect to see improved Lifecore segment adjusted EBITDA, which we expect to be approximately double our third quarter fiscal year ’23 results, aided by a more normalized revenue mix.

    The timing impacts we have been discussing, including the completion of some larger revenue, late-stage development projects in the prior year and this year’s impact from delays in commercialization, the timing of commencing new development projects and the commencement of earlier lower revenue stage projects are expected to be present through Q1 of fiscal ’24 before we expect to return to more normalized revenue and adjusted EBITDA levels that we realized in fiscal year ’22, which would reflect substantial revenue and adjusted EBITDA growth over fiscal year ’23 results.

    Now turning to our balance sheet. At the end of fiscal third quarter ended February 26, 2023, please note that the Curation Foods, all of assets and liabilities and the impact of the segment’s cash flows on our consolidated results are still reflected in our financial statements. Since we divested the remaining Curation and all of business subsequent to our third quarter period end, we will, for the first time, report a clean balance sheet with our fiscal fourth quarter results that reflect the go-forward Lifecore business in a stand-alone form. Additionally, with the recent refinancing also complete, our fiscal year-end balance sheet will also reflect our new capital structure.

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  3. LFCR is up 15% today, the move is seemingly driven by the SeekingAlpha article by Laughing Water Capital. Or is there anything else that is moving the stock today?

    A couple of extracts from the article:

    A buyer of LFCR has a not perfectly clear, but also not totally murky line of sight to approximately $120M in EBITDA. If we give it a Cook Pharmica exit multiple of 17.3x (which is likely conservative given the strategic value here), you are talking about the equivalent of $51 a share, assuming that the acquiror doesn’t do anything else smart over the next few years.
    <...>
    Yes, there is additional capex required to fill out existing capacity, and the capacity that will be coming online in the next few months. This was also true for LSNE and Alcami so maybe no adjustments need to be made. But maybe we need to knock the value down from (finger in the air) ~$23 to $21 or something like that.
    Yes, this year’s EBITDA is a disaster. As stated at the beginning of the writeup, I am not really interested in defending what happened this year, and you have to believe that a buyer will be buying “normalized” EBITDA.
    <...>
    You can even give them credit for completely filling their existing capacity – which I believe is what the recent Deal Reporter piece did – and say that the deal is being marketed on $70M in EBITDA. This still gives them no credit for the fillers that are about to arrive, but a 14x multiple – more befitting of a commoditized small molecule CDMO – gives you a $22 stock.
    <...>
    If I am wrong on what I believe is tremendous strategic value for these assets, and I am wrong that buyers will pay up for pending capacity as they have done in the past, and we “only” get 45% upside in 3 months, that won’t be a terrible outcome.

    https://seekingalpha.com/article/4613958-lifecore-stock-lfcr-highly-skewed-special-situation

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    • I’m pretty close to the situation and don’t see anything else today. Matt’s just that persuasive!

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  4. Any color on recent price action? Saw a delayed 10k filing (may be somewhat bullish given the sale process) and Cove Street’s sale (though the latest 13D shows ~1.5m shares still owned). Not sure if those are moving the price of it’s just volatility / markets. Any thoughts?

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    • I believe both of these factors could have affected the price. As you’ve mentioned, a delayed 10K could be viewed positively considering the strategic review, yet it could also be interpreted as a negative development. The same applies to the Cove Street sale. Their Q2’23 letter expressed strong optimism about LFCR’s strategic review, yet just two weeks later, Cove Street reduced their holdings by 25%. This could be perceived as a negative development, or it might be linked to strategic portfolio allocation unrelated to the LFCR sale process. One thing’s for sure, the market doesn’t like uncertainty.

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      • That makes sense.

        As someone who works in private markets, sale processes are taking longer on average this year. Compared to 2021, buyers want and are being given more time to assess what they are buying. So not surprising that this hasn’t been announced yet. The negative spin is that ~40% of private M&A is not getting across the goal line (per a banker that I spoke with last week). The appellis issue may be a drive of the delay. I think this is fully resolved, but if anyone has more detail that would be appreciated.

        Quality assets, like this one, are getting a lot of attention from private equity (this likely goes to one of the PE-owned strategics).

        On Cove Street, I was a bit confused by the filing. How many shares did they actually sell? (I think CapIQ’s output is misinterpreting it). My read is that they still own ~1.5m shares, but the second column of that share sale table in the 13d is confusing (is that shares or dollars?) Owning 1.5m vs. 900k shares is a significant difference.

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  5. Hey quick Question: Why have you closed this case? I mean the sale is probably not going to take place any time soon but otherr than that it seems still a good deal right? Especially at this price

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    • I’m still holding. Waiting for fiscal Q4 (call is scheduled for August 31) before making any decisions. Hopefully we will get some proper updates on the strategic review and earnings guidance.

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  6. Anyone have an understanding of yesterday’s news from Apellis? Apparently the issue is possibly related (thought not proven) to a certain gauge of steel in the filter needel (19 vs. 18 gauge). Manufacturing issues were previously ruled out (or at least there was not evidence of them following a review). Would this gauge issue implicate (or acquit) Lifecore? Any insight would be helpful.

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  7. Any reaction to the earnings call? I get ~$17m in FY 2024 EBITDA based on the quarterly breakdown and $17-19m of capex, so cash flow negative.

    This would mean that the current “theoretical” capacity isn’t being used (22m lines) in the next 12 months, but they are still rolling out another ~23m lines with this quarter’s delivery. My main question is around the challanges to filling this capacity. The space is capacity-constrained according to everything I read and demand is growing, but they won’t even fill up existing capacity and are expanding (understand that “capacity” is not interchangable). The development profile is growing, but when will this begin to use significant portions of the existing and new capacity?

    People are claiming that expansion doesn’t occur in this sector until most of the new capacity is spoken for by customers, but that doesn’t seem to be the case here (with the exception of the fermentation buildout for Alcon). Without demand to fill new capacity, is this comparison to other CDMO deals like for like? (not a rhetorial question, I honestly don’t know).

    I get the scarcity value point and think it’s possible that this still trades, but if it does’t sell, it will be a long ride to get to a level of profitability that supports a $10+ valuation (2 years at least for an LTM-based valuation).

    Shares sold off and bounced back, it seems like the market is still pricing in a ~$10-12/share buyout. Hard to handicap the probability at this point….

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  8. Any thougts on today’s filing? The required earnings restatement obviously does not impact the PF EBITDA figures that have been cited (at least not materially) but this likely delays a sale process or may even provide a reason to shelve it. Only optimistic take would be that they didn’t annouce a suspension of the process on this release.

    This plus the need to prove out the profitability of LFCR standalone seems to create a pretty serious discount for a serious buyer today vs. what they would pay for a clean asset that is at least on its way to generating $50-70m of EBITDA.

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    • It appears that most of the restatements related to LFCR’s current operations are immaterial. The company has emphasized that there is no impact on liquidity or operations. The market also seems to agree with this opinion, as it corrected right back to pre-announcement prices after the initial drop.
      https://www.bamsec.com/filing/100528623000118?cik=1005286

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  9. A couple of announcements from LFCR:

    – Strategic review still ongoing:
    “Lifecore remains actively engaged in its evaluation of potential strategic alternatives, which remains ongoing. As previously announced, the Company has not set a timetable for completion of this strategic review process, nor has it made any decisions related to its strategic alternatives at this time. There can be no assurance that this strategic review will result in the Company pursuing a transaction or that any transaction, if pursued, will be completed on attractive terms, or at all.”

    – The company expects to become current on its financials in the near term (the latest reported financials are as of February 2023):
    “Lifecore continues to advance its work on becoming current on its periodic reports, including completing the filing of its Annual Report on Form 10-K for the fiscal year ended May 28, 2023 (the “2023 Form 10-K”), which it anticipates being completed in the near-term.”

    – Extention of CDMO agreement with Alcon:
    “On December 31, 2023, Lifecore entered into a series of commercial agreements with Alcon, including (i) a long-term 8-year extension of its contract manufacturing agreement, which, among other things, contemplates increased capacity of aseptic manufacturing services; (ii) an amendment to its Hyaluronic Acid (“HA”) supply agreement to provide Alcon with an option to purchase additional HA equipment to accommodate expected future capacity needs; and (iii) new Storage Services Agreement for Lifecore to store certain of Alcon’s HA ingredients that are manufactured by Lifecore.”

    – Waivers from Alcon and BMO with regard to financial reporting covenants:
    “In connection with Lifecore’s delayed periodic reports, Alcon and BMO each provided a waiver related to the delivery of certain monthly financial reporting and the timing of the Company’s periodic reporting, and amended certain covenants related thereto.”

    https://ir.lifecore.com/news-releases/news-release-details/lifecore-biomedical-expands-relationship-existing-long-term

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  10. LFCR was mentioned in Cove Street Partners’ fund letter.

    Lifecore Biomedical (Ticker: LFCR), via our holding of the Convertible Preferred, remains our “on again, off again” performer. This was an “off” quarter, but it is important to understand the big picture here: the company is for sale as stated publicly by the company. It is correct to note that this is not a great time for the doing deals in general and healthcare services world in particular, but this is a process with an end, preferably within our lifetime. To reiterate, we utterly nailed the intrinsic value of the company’s strategic position and utterly missed the ineptitude of management, which to this writing plagues us. We materially reduced positions at higher levels than the current share price to recognize the likelihood that time hasn’t been our friend in a final value. We hate to ever be “hopeful” in our investment process, but we will attribute the word toward a guess at timing…soon.

    https://www.dropbox.com/scl/fi/0igqlu99b6s3w6tgym4o9/CSCAX_2023-12-31_Shareholder_Letter.pdf?rlkey=q8doiaijn5skosdx4mmcgcb69&dl=0

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  11. If anyone else is still following this: any insight on what’s driving price action? I’ve seen nothing in the news. 10%+ yesterday and going up today as well. Deal finally nearing?

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  12. CTLT announced a sale of 3 fill finish facilities to Novo for $11bn. Laughing Water Capital has a good overview on Twitter for those who are interested. This sale will restrict open fill finish capacity beyond 2026 and highlights the value of these assets. Nothing directly related to LFCR, but still a positive read through…

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  13. Last week, the whole sector went up (LFCR +26%, RNA +16%, SCTL +25%) on the back of Catalent’s (another peer, ticker CTLT) acquisition by the pharma giant Novo Nordisk, which is apparently aiming to bring fill-finish capabilities in-house for its blockbuster drug Ozempic. This acquisition might limit the availability of Catalent’s services for other pharma companies and naturally increases the demand and value of other CDMOs. Also, this transaction puts all the other CDMOs as potential acquisition targets to safeguard production capacity.

    CTLT’s fill-finish facilities were acquired at around 30x CY24 EBITDA. This is significantly above the previous CDMO industry transactions done at 16x-20x EBITDA, yet the mentioned price is purely for the fill-finish assets, which arguably deserve a higher multiple. LFCR currently trades at around 17x FY24 EBITDA guidance (ending May’24). At 20x FY24 EBITDA, the stock price would imply a 25% upside potential. But that’s not all.

    Assuming the company can fix its operational issues, and expand the capacity and utilization, EBITDA generation power could increase substantially. Rumors last June suggested LFCR was pitched to potential buyers with a projected $70m EBITDA (versus around $26.5m FY24 guidance). If the company gets sold at a valuation that reflects this level of earnings, the stock would be a multi-bagger.

    I think we will see a number of catalysts for LFCR over the coming months – finalization of financial restatements, the conclusion of the strategic review, takeouts of other CDMOs, or even a bid for LFCR itself.

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  14. Does anyone have a take on LFCR’s management?

    That they went into going concern beginning last year, is just one aspect (securing the financing from one of their clients seems like one of the better options out of that situation).

    Then there is the issue with having to re-file their financial statements and still not having filed the annual report – it’s been 4.5 months since the issues were announced.

    Also, they pitch the company for 70m EBITDA, but produce something around 10m.

    And from TXDeepValue Aug 31, 2023: Are they building capacity without having lined up clients beforehand, as seems standard in that industry?

    I had a quick look at the management team.
    What alarmed me a bit was the CFO – John Morberg.
    He was CFO for BL Restaurant Holdings, LLC (for 1.5 years only, though) and CEO/CFO at Garden Fresh Restaurant Corp.
    Both companies are, well, not really in the CDMO or life-sciences business.
    More concerning, both companies filed for Chapter 11.
    BL Restaurants filed in Jan 2020 (that is before Covid really struck).
    Morberg might have left in July 2019 according to LinkedIn
    https://dm.epiq11.com/case/barlouie/info

    And `In October 2016, Garden Fresh Restaurant Corp, the owner/operator of Souplantation and Sweet Tomatoes, filed for Chapter 11 bankruptcy. At the time Garden Fresh was nearly $175 million in debt.`
    Morberg was there until 2017.
    https://en.wikipedia.org/wiki/Souplantation_and_Sweet_Tomatoes#:~:text=In%20October%202016%2C%20Garden%20Fresh,nearly%20%24175%20million%20in%20debt.

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  15. LFCR was down 30% yesterday after the strategic review concluded with no deal:

    “After evaluating a full range of strategic alternatives with the support of its advisors, Lifecore’s Board of Directors unanimously concluded that the best way to maximize value for stockholders at this time is to continue executing on the Company’s standalone strategic plan. This conclusion was based on an expansive strategic review process, including outreach to and engagement with over 75 buyers, including both strategic buyers and financial sponsors.”

    Such an outcome is puzzling given the recent CTLT and SCTL buyouts and apparent rush by large pharma to secure fill & finish capacity. It remains unclear if:
    – the board was unwilling to sell anywhere close to current prices (i.e. demanded a significant premium from the 75 interested parties);
    – or if those 75 buyers did not like what they saw during the engagement.

    On a positive side, such a decision seems to be backed by the largest shareholder, Legion, whose support was even included in the press release.

    The key catalyst is now off the table and LFCR thesis has now shifted from ‘pending company sale’ to ‘CDMO which looks cheap on projected fill & finish capacity, but which has a significant customer concentration and which is not current on its financials’. That’s already in the too-difficult pile for me.

    A couple of other updates:
    – LFCR has finally filed 2023 annual report (ending May’23). However, these financials are already 10 months old.
    – Newly appointed CEO – he seems to have plenty of experience running CDMO businesses and probably is a good fit for re-focused LFCR.

    https://www.bamsec.com/filing/100528624000036?cik=1005286

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  16. Lifecore released a business update that includes preliminary financial performance up to the latest quarter (ending Feb’24) as well as guidance for the full year. There are quite a few positives:
    – That’s the first time the company shared figures for the recent financial performance – a sign that LFCR should be current with its financials shortly.
    – Revenues continued to accelerate during fiscal 2024 (growing +35% in the latest quarter, and expected to grow 20% in the current one). Management explained this was driven by “improvement in margins that were the result of product mix associated with new commercial shipments, improvements in legacy contracts, strong fermentation revenues, and pipeline development projects that came online during the second quarter.”
    – The company is progressing with the transition to 24/7 labor force and capacity expansion – a sign that there is no shortage of demand for its services.
    – Management reiterated that they have sufficient liquidity resources “to achieve its strategic plan over the next 12 months”.
    – Adjusted EBITDA for fiscal 2024 is expected to be $13.5m-$16.9m (or $23.8m-$27.2m before corporate overheads). I assume corporate overheads will be reduced going forward given the recent divestiture of non-core assets and finalization of strategic review. Coupled with further revenue growth and operating leverage, we should see material improvement in profitability.

    In my view, this update somewhat clears the skies and suggests that the strategic review might have concluded without a sale simply because the bidders were not bidding high enough, rather than due to any inherent problems with the business.

    Business update: https://www.bamsec.com/filing/100528624000041/2?cik=1005286

    On a side note, LFCR’s auditor E&Y resigned – I do not think this is a sign of any potential issues. E&Y had to deal with a year-long restatement process and both parties might simply be unwilling to continue doing business with each other after the restatement process dragged on for far longer than expected.

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  17. Laughing Water Capital just released an investor letter that includes a good overview of LFCR as well as CDMO industry and its prospects. Several excerpts:

    “Further, while at present both LFCR and CDMO are not generating much cash and thus “screen” poorly, both have available capacity at a time when capacity is scarce, and should benefit from tremendous operating leverage over the next few years as this new capacity is filled up. Importantly, industry dynamics as well as increasing amounts of detail on their respective pipelines suggest that for both companies filling their capacity is very much a “when” rather than an “if.” The thesis for both names is thus that we are just a few years away from large amounts of relatively sticky free cash flow, that should deserve a high multiple.”

    “I believe that a sale was not consummated because the bid x ask spread between buyers and sellers was simply too wide. Importantly, board members own 40+% of the equity, and they have an inside view of how customer demand is developing, and are thus better able to probability weight the likeliness of future earnings power developing than the market.”

    “My research suggests that several of the most likely private equity buyers have been in digestion mode following past acquisitions, and with an uncertain interest rate environment, it seems as if they took a “show me” approach to Lifecore’s earnings power, rather than giving credit for business which is still in the mixing bowl rather than fully baked. They were thus unwilling to pay the seller’s number”

    “Importantly, this new CEO is strongly incentivized to focus on share price. As part of his employment, he was granted 1,500,000 Performance Stock Units that vest in tranches based on share price. The highest tranche is $40, and if Mr. Josephs is able to steer the Company anywhere near those levels, he has the opportunity to make generational wealth.”

    “In sum, I was wrong in my belief that Lifecore would be sold and we would pull forward our returns; timing is always the hardest part of investing. But I do not think I am wrong about the value here, and at present the bar for LFCR stock to succeed appears very low, while at the same time industry developments, management developments, and capacity developments are all very favorable”

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