Baupost Group Buys Large Stake In Kindred Biosciences

Kindred Biosciences Inc (NASDAQ:KIN) is up 2.3% in after-hours trade after Seth Klarman’s Baupost Group reports a 17.9% stake in the company, according to a 13G filed with the SEC. The stock, which recently IPOed, has a market cap of just 170 million, which makes it a tiny position for the value oriented hedge fund with $25 billion in assets under management. However, Baupost is the second largest shareholder. In a separate filing, Baupost Group showed a 9.8% stake in Enzon Pharmaceuticals Inc (NASDAQ:ENZN), which is down from 17% of O/S owned according to the hedge fund’s Q3 13F. Seth Klarman’s hedge fund is still the third largest shareholder in ENZN and famous activist investor Carl Icahn is the largest owner.

Kindred is a development stage biopharmaceutical company focused on the large and growing companion animal health market. The company’s strategy is to repurpose human drugs for pets. Kindred has three lead products in late stage development for dogs: CereKin for osteoarthritis (OA), AtoKin for atopic dermatitis (AD), and SentiKin for post-operative pain. These products have fairly established clinical profiles in humans and there is varying degrees of evidence suggesting they will likely be active in dogs and perhaps other pets.

In a recent initiation report by Alex Arfaei of BMO, the analyst states:

We estimate a 70% probability of success for the lead products and forecast peak sales of $95MM for CereKin by 2019, $30MM for AtoKin by 2020, and $64MM for SentiKin by 2021. Valuation: $15/share using DCF as well as P/E and price/sales multiple. Kindred will probably not be profitable until 2017. Thus, our DCF is based on our long-term forecasts for the three leading products, a terminal value that accounts for the rest of the pipeline, and the company’s net cash position. Our DCF is supported by relative valuations: Applying an average P/E multiple of 15-19x to our 2017-2021 EPS forecasts, and discounting back, we arrive at a valuation of $16/share. Similarly, an average price/sales multiple of 3-5x our 2017-2021 revenues/share forecasts, discounted back yields $14/share. These multiples could be conservative given Kindred’s growth potential based on our forecasts: 2017-2020 revenue/share CAGR: 23%, EPS CAGR: 34%.

Alex Arfaei on his recommendation

Kindred has a promising pipeline. We believe if some of the leading products are successful, Kindred will likely partner with or be acquired by one of the larger animal health companies (e.g. Zoetis, Eli Lilly’s Elanco). As such, we rate KIN stock a speculative Outperform.