David Capital Partners' Adam Patinkin on how Lifecore's CDMO business $LFCR (podcast #301)

Mar 31, 2025

∙ Paid

Adam Patinkin, CFA, Managing Partner at David Capital Partners, LLC, joins the podcast to discuss his thesis on Lifecore Biomedical, Inc. (NASDAQ: LFCR), a fully integrated contract development and manufacturing organization (“CDMO”).

Today's sponsor: Fintool

Fintool is ChatGPT for SEC Filings and earnings calls. Are you still doing keyword searches and going to the individual filing and using control F? That’s the old way of doing things before AI. With Fintool, you can ask any question and it’s going to automatically generate the best answer. So they may pull from a portion of an earnings call, or a 10k, whatever it may be and then answer your question. The best part- every portion of the answer is cited with the source document.

Now- if you’ve tried to do any of this in ChatGPT you may know that the answers are often wrong or hallucinations. The way Fintool is able to outperform ChatGPT is their focus on the SEC filings. If you’re an analyst or a portfolio manager at a hedge fund, check them out at https://fintool.com/

Please follow the podcast on Spotify, iTunes, or most other podcast players, as well as on YouTube if you prefer video! And please be sure to rate / review the podcast if you enjoy it, or share it with someone else who would enjoy it (more listeners is a critical part of the flywheel that keeps this Substack and podcast going!).

Disclaimer: Nothing on this podcast or on this blog is investing or financial advice; please see our full disclaimer here. The transcript below is from a third party transcription service; it’s entirely possible there are some errors in the transcript

Transcript for paid subs begins below

Today's sponsor: Fintool

Transcript for paid subs begins below

Andrew Walker: All right. Hello and welcome to the Yet Another vVlue Podcast, I'm your host, Andrew Walker. If you like this podcast, it will mean a lot if you could rate, subscribe, review wherever you're watching or listening to it. With me today, I'm happy to have on for the second time, one of my favorite people in the business, Adam Patinkin from David Capital. Adam, how's it going?

Adam Patinkin: Great. How you doing Andrew, thanks for having me back.

Andrew: Thanks for coming back, man. You're one of the people's most popular guests, most requested guests. I'm just really happy to have you on again today. Look, we got a lot to talk about, so before we get into it, let's just start this podcast with a disclaimer. Nothing on this podcast is investing advice, that's always true, but I'll just add an extra disclaimer to everyone, it's going to come as no surprise to anyone that Adam, I believe, is long the stock not to put words into his mouth, but I am also long the stock, so people should just keep in mind that both of us are literally talking our own book, so please do your own research, consult financial advisor, all that jazz.

That disclaimer out the way, Adam, wanted to have you back on to talk about the stock we're going to talk about is Lifecore, the ticker there is LFCR. David Kaplan runs a concentrated value book, so maybe we can start by talking about how Lifecore fits into the David Capital view of the world, and then maybe we'll do a little industry and start talking more specifically in Lifecore. I'll just toss it over to you.

Adam: Great. Well, Andrew, again, thanks for having me on, I'm really excited to do this podcast and excited to talk about Lifecore today. Maybe to just take a quick step back, David Capital, we're a alternative investment manager based in Chicago. We also have offices in London, and we scour the markets across developed markets, so across North America, Europe, Australia, New Zealand and we look for opportunities on the long side that we call value plus a catalyst. Essentially what that means is that we are looking for securities that are both deeply undervalued but also have a clear event path that we can point to and say, this is why the stock may be mispriced today, but this is why the stock won't be mispriced tomorrow. In other words, we need that catalyst path, that event path by which an undervalued stock will become fairly valued over time. For us, the very best catalyst, I think that when people think about catalysts, maybe there's a certain sense for maybe how people talked about catalyst 20 years ago in the value community, which is some kind of a spin or financial engineering or some kind of catalyst outside of a fundamental change to the business. The best catalysts are where there is a fundamental change in a business and the business becomes a higher quality business worthy of a higher multiple and a more profitable business, and that's exactly what's happened with Lifecore.

Just at a very high level and I know we're going to get into the thesis in much more depth, but Lifecore operates what's called a CDMO business. CDMOs are extremely high quality, they trade for very high multiples, recurring revenues, high profit margins, long lived customers, very difficult to add capacity, so the barriers to entry are high, but this business has been under managed for a number of years. There's been a lot of distractions, a lot of noise, it was part of a larger conglomerate, they've exited all of those other businesses and now for the very first time it is a pure play CDMO business. I think that why it fits our value plus a catalyst philosophy so well, one is there's been this change where it's gone from a conglomerate to something that we think should be very highly valued, a pure play CDMO business, but also there is a clear strategy where we think with a good degree of conviction that the profit stability of this business is going to go up a lot in the next few years, and that's through a combination of running the business more efficiently, which should expand EBITDA margins and also the company happens to have had after a five year investment period, they just doubled their operating footprint into a market desperately short of capacity and so the opportunity to fill up that excess capacity can really drive above market revenue growth. You put those two things together, the opportunity to drive significant revenue growth plus the opportunity to double your EBITDA margins by managing the business better and you have created an opportunity where EBITDA can double or triple over the next few years. That's really rare to find in a public company, and so that's why it fits our value plus a catalyst philosophy, and that's why we're here today.

Andrew: Adam, I was laughing when you said this business was historically maybe mismanaged and part of a conglomerate, this is leading the witness because I know the answer, but do you want to mention the main business here when David Capital and a lot of other funds first kind of maybe this used to be land act when it kind of first came on their radar and just how kind of crazy the main business is and then that might lead us into the history with the restatement and everything, but I think it is an interesting story.

Adam: Yeah. Let's do that, let's start with the history, I think that I was a history major in college, so you're speaking my language there. When you look at the history of Lifecore, it previously was under the umbrella of a conglomerate called Land Deck Corporation L-A-N-D-E-C. Landec Corporation, their roots were in a technology that they developed, a packaging technology that allowed fruits and vegetables to have a longer shelf life. What I think Landec found over time was that it was very difficult to get food companies to buy this packaging because the food companies would tell them that their best customer wasn't the consumer who was going to eat the apples or bananas or whatever it was, their best customer was the garbage bin, and so they didn't have an incentive to have longer shelf lives. Landec really struggled to kind of monetize and commercialize this kind of game changing technology. They ultimately decided to do it themselves by buying a bunch of kind of agriculture related businesses that they felt like they could use that packaging technology and kind of force those companies to adopt, so they bought a guacamole business and an olive oil business and a veggies business and a salads business and a hydroponics business. All of these companies were based out in California and they were all ways for them to kind of use this packaging technology, but what they ended up doing is assembling kind of a hodgepodge business of really low or a hodgepodge conglomerate of really low quality businesses. Those were all volatile, seasonal, low margin commodity businesses that kind of deserve a low multiple.

I remember like the analysts, they would try to divine what the green bean harvest would be in the upcoming year to try to figure out how they would model how these businesses would do. At some point they realized, hey, wait a second, we need to have maybe a more stable business alongside all these super volatile businesses year to year and in 2010, they acquired Lifecore. Lifecore is this CDMO business located in a different part of the country in Minnesota, a very much steady eddy mid teens, top line growth, mid-20s EBITDA growth over essentially a decade long period from the time that they bought it in 2010. Over time, it kind of became clear that these volatile businesses with the packaging technology that never really got traction weren't worth as much as the CDMO business, which just kept growing bigger and bigger and bigger.

We first met with the company in 2018. We had the CFO by our offices, and the CFO was waxing on and on about how game changing this packaging technology was and we're looking at it being like, well, this CDMO is most of your value, why don't you just focus on your crown jewel business, why are you spending all this time on these mediocre or outright poor businesses, and he said, no, no, no, we got to focus on the technology business and, or the packaging business, and we said, okay, well, this isn't for us.

In 2019, a really well credentialed small cap activist called Legion Partners, they're based in Los Angeles, we think really highly of them, they're excellent, they noticed this and they got involved and they took an activist position. Their opinion was kind of exactly what ours was, which is, you've got this great business, the CDMO business, which is probably worth more than the entire enterprise value of the company, because the market had just awarded the company a low multiple like its agriculture businesses, sell all the agriculture businesses and just focus on the CDMO business. Immediately the shareholder base rallied to them and said, this is a very sensible approach and we agree and we think we should go with the Legion approach. The company kind of capitulated and they agreed to do it, and so they said, look, our strategy is going to be to sell these half a dozen disparate agriculture businesses and we're going to become a pure play CDMO business. They made that decision right at the beginning of 2020, and then Covid hit.

Once Covid hit, it threw a number of those businesses into a little bit of disarray, it caused buyer appetite to swing around a little bit in terms of buying those assets and it ended up taking a few years to sell them all. They did end up selling them all, but they ended up getting a little bit less in proceeds than maybe they would have gotten if Covid had not happened. Along the way, Landec stumbled where they had to issue a financial restatement and it related to the way that they were accounting for the businesses that had been divested, so it had nothing to do with the CDMO business. It only related to the businesses being divested and their accounting firm, their auditor then changed its mind after coming in and saying, you need to do a restatement, they changed its mind on the first restatement and had them do another restatement. I've never seen that in my entire investment career, thousands of companies looked at, I've never ever seen that before. It was a total mess. The company went dark for a year. They almost got kicked off of NASDAQ, and by the way, the restatement was immaterial. There was no fraud, there were no changes to cash, it ended up just being moving a few line items here and there that had a de minimis effect, but it caused a huge amount of disruption and distraction for Landec.

As we got into 2024, finally the storm clouds kind of started to disappear and you could finally see blue sky again. The company ran a strategic process, they decided to overhaul the board and to overhaul their executive team. They brought in a new CEO, they brought in a new CFO, they finished the divestments of all the agriculture businesses, they got current on their financial statements, they got fully compliant with their NASDAQ listing and essentially they got to a place where finally they were a pure play CDMO business and could deliver on the potential they always had.

Andrew: That was a great overview of the historics. Again the restatement was crazy because as you said, it was like a historically divested business, and it was like, hey, if I remember correctly, hey, how do you treat these avocados of the business that you disposed of that you sold three years ago, and you'd be like, dude, I have no idea. Like somebody ate them, pooped them out, they're sitting as fertilizer somewhere. The results were quite immaterial and it cost them a lot of money to get through those restatements if I remember correctly, but I do just want to focus on one thing, you've mentioned a few times a CDMO is a high quality business and my background, before running the Yet Another Value Empire, I was a credit analyst at a High Yield Fund and I've all them and I remember I had in my notes and I saw this company for the first time. I had in my notes, CDMOs equal good business, so I just want to turn over to you. Do you want to explain what a CDMO is and why 27 year old Andrew, who had a lot of wrong thoughts on the world, but he actually was probably right, why it had just been ingrained in me and so many people that CDMO equals good business, not great, maybe great, but at minimum good stable business.

Adam: Yeah. I would go so far as to say that they are great businesses, which is kind of how the market has treated them over time. What a CDMO is, it is a contract development and manufacturing organization, a CDMO, essentially they make drugs. If you're a biotech company or you're a pharmaceutical company, a biotech company would focus more on biological processes or organisms, a pharmaceutical company historically is focused more on chemical based drugs and chemistry. The lines have kind of blurred between them, a lot of pharmaceutical companies own biologic drugs, a lot of biotechs have chemistry based drugs, but if you're a drug company, if you are developing through scientific research and then commercializing a drug, you generally don't also manufacture the drug. The reason is because manufacturing is this totally different skill set, you need specialized facilities, you need to have technical expertise, you need to have operating scale, you have to get exhaustive government approvals and oversight, there's a lot of capex, just start up one of these and so it just ends up being a non core item. Essentially any small or medium sized biotech or pharmaceutical company will fully outsource all of its drug manufacturing, and even the very large pharmaceutical companies will outsource a significant portion or oftentimes now most of their manufacturing to specialized CDMOs, and they prefer to partner with quality CDMOs. They don't want their clients to die when they take the drug and so they will pay up to partner with a CDMO that has a great track record, has a long operating history, has a history of compliance with the FDA and with other global regulatory bodies that oversees this really tightly and so this is very much a business where they look to outsource it.

The other point to it is that it's a small percentage of the total cost to bring a drug to market. When you think about how much it costs to bring a drug to market, most of the cost is from the R and D, the clinical trials, the regulatory approvals, marketing, distribution. The cost to actually make the drug is a low single digit percentage of the total cost to bring the drug to market and so it doesn't matter that much. It's not a big impact on the P and L if you're going to pay up a little bit for the manufacturing with a great CDMO. Now what does that mean for the CDMO business, why does it end up being a great business?

Andrew: Can I just, yes, Andrew, on one thing, just if I was to, yes, Andrew, the one other thing I learned is, hey, if you're a CDMO, when you get a drug in there, you are literally in the FDA's orange book as, hey, this is getting made at Adams facility in Chicago, and if you're Johnson and Johnson and you want to switch to Andrew's facility in New York City, you have to go to the FDA, the FDA has to come run new tests in Andrew's facility. It's like a year plus long process and unless Adam's facility is really bad, like the headache, the switching cost, the time, it is just not worth it. It's a great business, it's a good business for all those reasons you listed, but it's also just an incredibly sticky business given what a small piece of the overall structure it is and how ingrained into the regulatory approval regime it is.

Adam: Yeah. That's absolutely right. The recurring revenues, the predictable revenues to your point, Lifecore has customers that have been with them for 40 years, 40 years, and it's just the churn rates are incredibly low because if you, not always the case, most of the time the case is, especially for more complex modern drugs, if you want to switch who your manufacturer is, you need to get new FDA approval and that is costly, a big headache and companies drug companies just don't want to do that, and so the churn rates are incredibly low at CDMOs. Yeah, so if you look at why a CDMO business is so attractive, very little churn, high barriers to entry, this requires a lot of specialized technical expertise, highly regulated industry, customers aren't going to hire you unless you've got that regulatory track record and that manufacturing track record, so it's hard for new entrants to come in. The profit margins are attractive, a leading CDMO or a decent CDMO should earn 30% plus EBITDA margins. It's a growing industry with all the innovation and medical research that's been happening, CDMO businesses or the CMO industry is growing roughly triple the rate of GDP, so call it 8 to 9% a year every year.

Maybe the last thing that's worth calling out is just it's a diversified customer base. This is not betting on a biotech where you've got one drug and the FDA test, you either sink or swim on that, this is like if you think about like the gold rushes in the 1800s, it wasn't the miners who got rich betting on whether they would find gold or not, it was the merchants who sold them the picks and the shovels. CDMOs you can think of as the picks and shovels of the global pharmaceutical industry. Rather than making a bet on a single drug or a single technology, CDMO's represent a diversified portfolio of different medicines. Both prospective medicines that are working its way through the approval process and also already commercialized medicines that they just produce year in and year out on an ongoing basis. You put all this together, the recurring revenues, high barriers to entry, lots of growth, strong profit margins, diversified customer basis, no surprise these businesses get big multiples. Historically, CDMOs have traded for 20 times EBITDA or more, recently a number of them have transacted closer to 30 times EBITDA, in fact, the last three transactions of good comps for Lifecore transacted at 31 times EBITDA, 27 times EBITDA and then 45 times EBITDA. The reason why they transact for these multiples is because, especially for private equity firms, they're seen as really attractive, strong free cash flows, high margins and really long term revenue visibility because you've got these customers that you've locked up for a really long period of time.

Andrew: Two of the transactions you're referring to, I think one of the thesis here is this is the last pure play publicly traded CDMO that I'm aware of. CDMO, Avid biosciences just got taken out, as you mentioned by a, by a private equity firm, you can go look at the proxy, you can go look, and as I said, I think on an email to you, and I'm not the only one who said this, if you look at the multiple that they got taken out from, it would make a Lifecore shareholder blush, and Catalent got taken out by Novartis, which Catalent is multiples bigger than these things, but the price there was pretty big. Look, I think that's a great overview. Let me ask one more question and then I will...

Adam: Yeah. Just to... It was acquired by Novo Nordisk.

Andrew: Novo Nordisk, that's right.

Adam: Acquired Catalent.

Andrew: Let me ask one more question on the bull side and then I'll try to provide some pushbacks on the bear thesis, we just laid out a lot of different great things, but the company isn't exactly quiet about publicizing these great things, you can go look as recently as their investor deck that they publish in November 2024, when they do an investor day, there's lots of write ups. You can go online and find them from you and from a ton of other people, if you go look at seeking Alpha. My question to you is this, the market is a competitive place, a lot of this information is out there, what do you think you're seeing that the market is not seen in Lifecore stock that makes this kind of a risk adjusted opportunity?

Adam: Yeah. I think it's a little hard to see how good the opportunity is when you just look at the surface and even though maybe you and I are familiar with the company, I think most of the market is simply not. This company was dark until the middle of 2024 and during the period it was dark, they were not issuing financial statements, they were not coming out and doing earnings calls and really explaining their business and answering questions from the sell side. It's only very recently that Lifecore has become a little bit more outspoken and laid out the thesis.

In November of 2024, the company did an investor day. I think for anyone who's trying to get up the curve and learn about Lifecore, that's a great first stopping point. It's a little less than an hour and the company really laid out its strategy and its prospects, but I know, I really do, I think that this is an off the radar company that a small group of different investors have come across over time, but I think most of the investment community is not familiar with it. Even with a glance at the financials in the current fiscal year, which ends in about six weeks at the end of May, I'm sorry, it ends in nine weeks at the end of May, the company is not expected to grow either revenues or EBITDA, but also the company should start growing really quickly thereafter. If you look at it on a backwards looking basis, it looks like a no growth business on both the top line and bottom line. I think my differentiated view would be the business is on the cusp of inflecting in a big way and those EBITDA margins are going to go up a lot and the revenue growth is going to accelerate a lot and when you put those two things together, the past and the future don't look the same. Those inflection points are very difficult for the market to get its arms around, but once it does, once it becomes clear to the market that this business is accelerating and doing what they have now promised they would do starting in November, I think it can really quickly rerate. This is something that can happen fast.

Andrew: Let me build on that thesis with one of the pushbacks because my main concern that's grown over the past nine months with Lifecore is, you can go read their 2022 decks, and they have always said a thesis very similar to what you've laid out. They've said, look, we messed up with the avocado business, but we've got a crown jewel in the CDMO business. From 2015 to 2021, it grows CAGR at 16% from 40 million in revenue to almost 100 million in revenue, EBITDA margins are getting stable around 25%, and we are bringing a lot of capacity online, there's demand for it, this is a growing industry, this is going to be great. Then you kind of look at the 2024, the recent results and the business like flat lines, and alcon, there's a lot of other stuff going on, some of which we've discussed, some of which we haven't, but the business basically flatlines. Revenue is up a little bit, but even goes backwards, even our margins go backward and I guess when I look at this, I'm getting hit with two things. I'll mention the second one and the next question, but one of the things I'm getting hit with is, hey you, Adam, everyone has this thesis, CDMO businesses are good business, there's growing demand here, particularly post Catalent getting bought by a big industry player. People want independent people who they know the supply is going to be there, they know they're not going to call up and say, hey, we're working with competitor, you're gone, we're taking over your capacity. Like it seems like there should be this demand and then for three years I see just like complete stall out on the financial side, so I'm trying to marry like that stall out for three years with the thesis you and I have where great business, great assets, growing demand, all this sort of stuff.

Adam: Yeah. Lt's focus in a little bit on Lifecore itself, so let's talk about the business and then let's talk about why this trailing financials don't paint the same picture that I think it will paint going forward. First, let's dive into Lifecore itself.

What does Lifecore do? Lifecore specializes in what's called the fill finish of complex injectables, so let me break that down. What they're working with are complex injectable drugs, which means instead of it being more of a liquidy drug, it would be a highly viscous drug, it would be more like maple syrup or molasses even rather than water and so that's a difficult drug to manufacture and it's a difficult drug to put into a vial or cartridge or prefilled syringe that will then be injected into the patient. Remember, injectable drugs is the fastest growing number one vertical within the pharmaceutical industry. In fact, over half of all drugs approved by the FDA in the last couple of years have been injectable drugs and that's what Lifecore specializes in. They specialize in these complex, highly viscous drugs and then turning them into injectable, creating the injectable delivery mechanism by doing what's called a fill finish. They fill it and then finish the drugs so that they can send them out and the doctors and patients can use them.

The doing this is very difficult. You have to be totally contamination free. You can't have any impurities, so if you think about it, Lifecore has created a controlled contamination free setting where they then can manufacture and fill finish these very complex injectable drugs in a totally sterile environment across millions of doses a year. That's a very difficult thing to do and it's no surprise that Lifecore is a sole source provider to many of its customers. Its customers have nowhere else to go, no one else on earth has the same technical expertise that Lifecore does, which is a huge competitive advantage for the company.

Lifecore plays in the right space, again injectables, is the fastest growing vertical within the pharmaceutical industry. Kind of spurred on by GLP1 drugs like Wegovy or Ozempic. GLP1 drugs are expected to 10x in sales by 2032 and that means that there is a chronic shortage of manufacturing facilities for GLP1s, essentially for all fill finish injectable drugs and it takes five years to add new capacity. Sometimes if you run a sprint, maybe you could get it done in three or four years, but it's very difficult to add new capacity and CDMOs tend not to add new capacity unless they have the orders in hand. The odds of there being kind of a mismatch the wrong way between supply and demand is unlikely to happen not just for the foreseeable future, but I think for the long term future as well.

Lifecore itself has a great track record. They've never received an FDA 483 warning letter, which is what would be bad where there's a real issue in manufacturing. They've got a 40 plus year track record with global regulatory bodies. They've got a diverse customer base of dozens of different of companies, including some brand names, their biggest customer is a company called Alcon, which is the leading eye care provider in the world, a$40 billion company.

Last, Lifecore is based in Minnesota just outside of Minneapolis in an area called Medical Alley, which runs from the Mayo Clinic in Rochester through the Twin Cities and up to Duluth and it has over a thousand health care companies, over half a million healthcare workers. It is a wonderful place to have their operations with a deep labor market there, as well as lots of nearby customers. In every way, when you kind of think about it, the vertical they play in, the specialized expertise, where they're located, what their customer base looks like and their track record, Lifecore is a great CDMO business. In every way, it is worth the same amount as any of these other CDMO businesses have transacted for. To your point, at the beginning of 2024, there were four publicly traded CDMO businesses listed in the U.S, three of the four have since been acquired. The very last one is Lifecore and so I would argue that it's a scarce asset, it's a valuable asset, but I think that also prompts the question, why is this one still publicly traded, why has it been [inaudible], right?

Andrew: That was my second question I want to lead to, because you think it's a strategic asset, I think it's a strategic asset, everything else gets taken off the board and then these guys run a sales process, it fails, they have to do really deep in the whole financing. My question would just be, hey, isn't the market beating us over the head, hey, there's something wrong, there's some reason these aren't strategically transacting in a hot market, there's something wrong with the thesis here?

Adam: Yes. My suggestion would be no, I think that that's the wrong kind of conclusion from it. The company ran a strategic review process while it was dark, so it was on the edge of being kicked off of NASDAQ, it didn't have current financial statements. In a situation like that, the odds of a transaction happening are low. That's a tough setup to get a business sold. The company decided, look, we think we can create a lot of value and eventually transact by doing it ourselves and so they overhauled the board, they overhauled the C-suite, and they brought in a management team that can kind of take the company to the next level. Now, maybe let's go into that. Let's go to the front view mirror as opposed to the rear view mirror for a second.

Why do I think that this management team is going to be able to kind of change the trajectory here and make it so that again, go forward, financial statements don't look like the rear view financial statements. First when you looked at Lifecore and its management team, it was run as kind of a small business, like a mom and pop business that happened to get to scale and happened to become a very important business, but it never was run in a really professional way. There's kind of a heuristic that I use in evaluating companies, there's some social psychology that has shown that in any group of people, you know pretty much everyone in the group or are familiar with them, up to 160 people, but once you go beyond 160 people, you stop knowing everyone and so there's a point that a company reaches around 160 people where all of a sudden it has to switch from being a mom and pop to a more professional organization. I don't think that Lifecore made that switch. I think that once you hit kind of 2022 and they got to 200, 250, 300 people, it became too much for them to operate because it was kind of a divisional head who was running the company, not a more kind of global thinking professional CDMO operator.

Even though the revenues kept growing, the EBITDA margins kind of continued on a standalone basis just for the segment, it was in the mid-20s, but if it was fully costed, including all central cost, it was continuously operating in kind of the mid teens EBITDA margins, whereas peers operate at 30% plus, literally half of the EBITDA margin of peers. As part of the strategic review, they brought in a new CEO named Paul Josephs. Paul previously was running a CDMO business in Illinois, where we are called Woodstock and it was private equity backed actually larger than Lifecore. He had a track record of not once, not twice, but three times taking an under managed CDMO business and kind of whipping it into fighting shape and he'd done that with Woodstock. Woodstock was in a really good place and he was kind of looking for his next challenge and Lifecore was able to poach him and bring him on as the new CEO, so he's now doing what he's done over and over and over again in the past, which is to say, hey, look, Lifecore had a very convoluted org structure. Over time they'd hired people for different roles and if they didn't work out, they just hired another person to operate alongside them. If there were gaps, they employed consultants at triple the cost to fill those gaps, they weren't tracking KPIs the way a company like this should, they didn't have the sophistication and the operating systems in place to do this and so now Paul and the new CFO, Ryan Lake, who is a public company CDMO CFO who previously helped sell one of those publicly traded CDMOs for over 100% premium, they have come in, they did a reorganization of their org structure, they brought in some talented executives, they've ended the consulting contracts, they have essentially put in place all of these different KPIs around manufacturing cycles, procurement, product yields, business development, all kinds of things. They're running this business as a professional organization and as they have done each of these things, I think that there's going to be a pretty meaningful uplift in EBITDA.

The company is now guided that they're going to go from 15% to at least 25% EBITDA margins over the next three years and I think that that's probably conservative. I think that they're going to be able to get there both because they are doing all of these operational things, but then also because of operating leverage which kind of gets us to the second part of the thesis. They've had revenue growth over the last few years. It's just in the current fiscal year where it flatlines, so why did that happen?

One, the company's largest customer, which is Alcon, did a inventory de-stocking which happens every now and then with really big companies and they essentially had a blanket mandate across the organization. You got to pull some working capital out of the business, so hold off on we'll keep selling out of inventory but hold off on ordering for a little bit, and so all of a sudden they said hey, we're going to pause our ordering for a bit with Lifecore and that impacted the company maybe by as much as $10 million or more. If you exclude that, the company would have grown pretty nicely year over year, but that temporary kind of one off inventory de-stocking happened at Alcon, we think based on all the Alcons of public company, you can see that their growth is accelerating, their inventories are in a much better place, we think all of that ordering is going to come back to trend levels here pretty soon.

The second bit of our thesis is that Lifecore new management team has been implementing guaranteed minimum step ups in their contracts with customers and if you roll that forward over the next few years, we think that that's going to be at least 5 to 7% revenue growth just from those minimum guaranteed step ups.

Then there's a third thing, right? Look, those two alone can take this company from zero growth to double digit growth. Alcon coming back, plus the minimum guaranteed volume step ups, which I think give you a lot of visibility that this is going to happen, but then there's the third bit which is new capacity. Lifecore prior management team did something pretty unusual. They ordered new capacity on spec back in 2019 and that almost never happens in this industry. You don't order on spec, you order when you've got customer contracts in hand, but they saw that the industry was growing at such a high pace that they decided to order on spec. It took five years to get it installed and fully approved. That happened in Q4. Now Lifecore, which is doing about 130 million of revenues, they have revenue capacity of $300 million plus per year. In other words, they're operating at around a 40% capacity utilization. As Lifecore wins new customers and they are aggressively going out into a market that's desperately short capacity, I'm confident that they're going to win a bunch of new customers here and they've already started some of those announce, they've started hitting the tape, including one last week. The incremental margins here are going to be extremely high and so as you start filling up that operating capacity, I think that that plus the efficiency of just running the company as a professional organization, I think that those two paired together, you're going to see this company not just at 25% EBITDA margins, but in the next few years at 30% plus.

Andrew: The capacity hits on the next question and the thing that weighs on my mind the most. As you mentioned, they brought a ton of capacity online, and for analysts who are looking at this, I'm on their November 2024 investor deck, this is slide 18 if I'm looking at this, they say, hey, in FY25 we're going to do 40 million units. That's 20% capacity utilization. I actually think it's kind of incredible that they're even EBITDA positive with only 20% capacity utilization, like the these CDMO businesses, I've seen a few, they Won't even open a facility until they have 50% utilization committed, so they're saying, hey, we want to go build a facility five years from now, they're going to get 50% committed, then go build the facility, so I just want to ask you, there are plans called medium term, again, I'm looking at slide 18, we're going to do 40%, we're going to fill up 40% of our capacity, longer term, get to 100% capacity, I'm sure it'll be something more like 90%, but what's the timeline for filling that up? I will admit, if I'm just throwing in my two cents to being again, I realize I'm just a stock jockey looking at the numbers, but I will admit I've been a little bit disappointed b it feels like the industry's in a shortage, yes, they've had some small wins, but maybe I haven't given them enough time, maybe I'm too impatient, but it feels like they should have had a little bit more headway in kind of announcements and filling this capacity, so I just want to ask how you feel about the progress and when you think we start actually seeing the capacity get soaked up.

Adam: Yeah. I would say there's a few different angles to think about this. The first is they just got the capacity certified in Q4, we're in Q1. There's been almost no time for them to start getting all the customer wins and then having that flow through into revenues. Companies will say, hey, great, I'm very excited to hear that you've got capacity that's coming, why don't you come back to us once it's fully certified and you've got GMP approval, good manufacturing processes, once you've got GMP approval and it's everything is good. They just got that approval less than 100 days ago and so now once you get those certifications, then Lifecore can go out to companies and say, hey, we've got the certification, let's have a real conversation and so they start having the real conversation. Maybe six weeks later or eight weeks later, they fly out a team to do a site visit. Obviously that aligned with maybe the turn of the new year and so now you're scheduling in January for teams to start doing vetting of the facility or in February and then you start having those conversations and start figuring out are we going to do this, are we going to pull the trigger?

The company has disclosed that its pipeline is at a record level at a particularly important. A record level of global large pharmaceutical companies that could be game changers here. They've already announced a handful of new customer wins since the new management team has come in, I think they're up to five customer wins since the new management team came in, including one last week. It's coming, you can see it coming. I think a major catalyst here is when you start that cadence of those customer wins really starts to pick up, but you're just at the front end here. You're in the first or second inning here of those customer wins just based on timing, you're at the front end of that.

The other bit that I think is worth mentioning here is that I think that Lifecore's business development team had its hands tied behind its back a little bit because the company had a culture that said what they do is only the most complex, difficult drugs to manufacture and I think that the new management team has said, wait a second, that's great, we love doing the really complex drugs, but we don't have to do the most difficult ones, we can also do the medium difficult ones, we can also do the easy ones. We have expertise to do anything that's a fill finish injectable drug, including GLP1s. When you have a remit for the first time that you can go out and attack all of these new solutions, all of these different areas, you know GLP1s are called peptides, you can go attack peptides, the company's never attacked peptides before even though it's right in the middle of their circle of confidence or of competence, and so now the company is doing that. They've added a bunch of people to their business development team, they've given them the resources and the mandate to go out and make it happen. These deals don't happen overnight, but they're coming. They've got the capacity and, I believe, our conviction is when you've got an operator of this quality, you've got this significant amount of demand and now you've got a real biz dev effort to kind of bring the two together, it's just a matter of time. As that happens, as they start announcing those wins, I think that that's an important catalyst for the shares.

Andrew: Just one more, one of my other worries here is we mentioned one of the great things about CDMOS is it's really hard to switch drugs once they're up and running, however, if you're a CDMO without a lot of capacity, that's one of the bad things, you go over to pick your person who's making injectables and say, hey, we've got a lot of excess capacity, we'll sell it to you 10% cheaper than your current supplier, and they say, hey, that's grea, but that's all of our scientists going out there, us re-registering, running new trials, all this sort of stuff, we're going to pass, so one of my worries here is if not that competitive seals is off the table, but if those are really hard, the way you fill capacity is you bring a lot of phase one drugs and stuff in here, and then you bring 100 in and then 50 of those succeed, and then 25% of those succeed and blah, blah, blah, so eventually you do fill the capacity, but it takes a really long time because you have to bring tons of phase one trials in and kind of wait for them to mature and go to commercialization, so how concerned about you or just the speed to fill that capacity given the difficulty of stealing business?

Adam: Yeah. I think that you're totally right, you're absolutely right that you can't just snap your fingers and then fill up all the capacity overnight, that's not how this works, the barriers to entry there are very real for all companies, including for Lifecore, but there's so many different ways to attack this that I think it makes up for it.

First, I wouldn't dismiss the phase one and phase two and phase three candidates. You earn higher margins even though they're shorter runs, you earn higher margins on those than you would for a fully commercialized drug, where maybe you have bigger volumes, but you have slightly thinner margins and so it's really good for a sophisticated CDMO to have lots of phase one and phase two and phase three drugs as well as the commercialized drugs, but when you think about how do you fill up the capacity, well, there's a number of ways that you can do it. One is you can expand with your existing customers. They have a lot of customers who do lots of different drugs, have already qualified the facilities, they can add additional drugs to the facility. You can expand by going from phase one to phase two to phase three and then to commercialization with your existing drugs. You can win new drugs that are in phase one or phase two or phase three. You can do technology transfers of drugs that are already commercialized. There's so many different ways to win here that it's not, I would say you're not just waiting on one, you can do all of them. Now, the deal that they won last week was a tech transfer. It was taking it from another company and putting it in house at Lifecore and so that can happen., that did happen last week. By the way, there's always a need, anyone who is sole sourced as a drug company is always looking to get multiple sources for their product, and so now that they've got this excess capacity, there's a lot of peptide companies, a lot of GLP1 companies that are looking around saying, hey, all of our production is coming from this one facility, we'd love to have a second source. That is really attractive as well. You don't have to move or eliminate your production from somewhere else if you are looking at your growth plans and saying, hey, this place doesn't have extra capacity, we need to get more, and oh, by the way, we'd love to be second sourced or dual sourced, Lifecore is really attractive. You put it all together, there's lots of ways to win here. I almost view it as like inevitable, like it's just a matter of time where every day they're out there, they're selling it and they've got such great capacity, such a great footprint, such a great track record. I just think it's a matter of time before they fill it up.

Andrew: Inevitable, saying I view it as inevitable, it is one of the most dangerous things to think, but my friend Mario Savelli one time we were talking about an idea on this podcast and he said, look, I've seen this played out before and I just feel it like I know how this plays out, we are at the inflection point, this is the moment to pounce and whenever I hear that, I both recognize, hey, it is a dangerous thing to hear, but it's also often the thing you hear at the inflection point from someone who's done a lot of work on the industry, who knows it cold, who knows it's going to flood.

Let me talk regulatory here. I think a lot of times in history, investors have overstated the impact of regulatory on a lot of different companies and industries. I think of telecom with everybody being, oh, net neutrality, no net neutrality, guess what, in the end, it didn't super matter for everyone, but I do think here the switch from the Biden administration to the Trump administration, love or hate either of them is some of the biggest both headwinds and tailwinds across the sector we could still see. Let's start with the tailwinds, I think there are two big tailwinds here. One, and this is outside of the Trump administration, but the biosecure Act I think is very interesting to talk about here, and the second thing with just the Trump tailwind in general it was not lost on me, last week, Johnson and Johnson announced they were spending 50 plus billion dollars to bring manufacturing capacity back to the United States, I look at Lifecore a little 100 million plus market cap company with domestic manufacturing, I say, hey, that's really in the sweet spot if people are saying we need to bring drug manufacturing back to the U.S, so I'd love to talk those two tailwinds, and then I do have a regulatory headwind I'll follow up with.

Adam: Yeah. I think that what the company has said about the Biosecure Act, which is really targeting a number of Chinese manufacturers, look what, what Lifecore does is very specialized and probably they're not really competing with the Chinese companies, there's not a major overlap there., but for the industry as a whole, obviously there's a benefit if it makes it a lot harder to move some of this manufacturing overseas. What the company has said is in the near term, it's probably not that much of an impact, but over the long term, the market may be underestimating how big the impact is of the Biosecure Act and I think that's probably right. The Trump administration, I think, will be very in favor of the Biosecure Act based on the people they've appointed to positions of power on this, based on the commentary around it, I think it's likely to pass and be signed into law and if that happens, I think that'll be a major thing where every pharmaceutical company will have to be thinking about making sure that a significant portion of their manufacturing is in the U.S and if they're looking at new drugs and who they're going to partner with, I think it'll give a nice tailwind to a company like Lifecore that's based entirely in Minnesota.

Andrew: Let me go to headwinds, one regulatory headwind I see is just RFK. I just see a lot of no commentary on policy or anything whatsoever here, but I do see a lot of uncertainty into what he supports, what they're trying to crack down on, and all this sort of stuff, and they worry, hey, you've got Lifecore, which is trying to fill a big book of business, and then you've got all their potential customers who are saying, hey we don't know, we don't know what drug pricing is going to look like, we don't know what's going to be supported, we don't know what Medicare, Medicaid are going to look like. I worry about just like this overall regulatory uncertainty with customers that are committing, when you do a CDMO deal, you're not doing it for the next quarter, you're doing it for the next 15 years of this drug's life, basically until it goes off patent, and I worry about that uncertainty. I don't know if that's just me being too much of a nervous Nellie or if that's a real thing, but I definitely hear it a little bit when I talk to some different health care companies.

Adam: Yeah. Look, the health care system is really complex, and I'm not sure if this is how you would design the system if you were going to do it to Novo, but the reality is that when you look at drug development and medical innovation right now, it's at the highest level in the history of the country and certainly in our lives and I don't think that RFK or anyone, look at some of the people that he's appointed, whether it's Marty Makari or various other folks who are involved in the administration directly reporting to the secretary of HHS, they're not trying to reduce the amount of medical innovation, they're trying to accelerate it. I think that if anything, what they're saying is that they want even more things to be considered, more kinds of medicine, because look, there's definitely some big flaws in the way our healthcare system is devised and one of them is that what are the drugs that get researched, they tend to be the drugs that have a profit motive, that have a company backing them, that can pay for all the trials and for everything else. There's not really a support for drugs that have gone generic or drugs that are kind of off the shelf or different vitamins or hormone treatments or other things that would be much less costly and where there's not a big bucket of gold at the end of the rainbow. That might actually cause there to be more demand for CDMOs, not less because maybe it'll be the government's role to step in and make sure that some of those things are getting funded, so I don't know, I don't view it as a bad thing with respect to CDMOs and in fact, I think you could paint some positive viewpoints on that. Ultimately, Lifecore is a small company, 300 million in market cap, I think it's just a matter of time before they get taken over. By the way, when you look at these deals, Avid Bioservices was that deal just closed after the Trump administration was in power and RFK had been confirmed, so I don't think it's stopping PE companies and other places from wanting to own these assets. These are great assets, they've been great assets through Democrats and Republicans and I think they will be going forward.

Andrew: Perfect. Last question. We've addressed this question, I have one question, I have one softball and then I'll let you wrap up with final thoughts, we've addressed this question a little bit, but I just want to make it explicit. If I was an investor and I again, I've read every Lifecore presentation going back till for years, but if I just listen to this conversation, if I read their 2024 investor presentation, if I read their 2022 investor presentation, I'd say CDMO, really good business, they disposed of the Avocado bad co-business that we're talking about, I think it was back in 2021 they finally get the disposal done, whatever, yes, there are restatement stuff, but if I just pulled up the stock chart here, I would say, oh pick a random day, December 31, 2021, so after the disposal, the stock is 11, here we are, you and I are taking this late March 2025, the stock is 660. I'd say, oh, these guys are talking great business, yes, there's been restatements, there have been all these tailwinds, but not only do I not see it in the stock price, I don't see it in the financial, so I just want to one last time hit what has been the big overhang or the big headwind over the last four years that's kind of kept the greatness of this business from shining through.

Adam: Yeah. I think we already addressed it, like the stock price follows the business performance and so you had this period of immense distraction going dark on the financials, going through all the disposals of the businesses, which, no, they didn't complete until the end of 2022 and then you have the restatement after that and then you have the overhaul of the board and the management team, and then this past year, this current year, there's no growth, of course the share price is going to be lower in that set of circumstances. Like, that's not a surprise, that's actually exactly what one would expect. That to me, I think is a good thing because that means that if the company is able to deliver, like what we think, where the EBITDA margins are going to start stepping up in a notable way and the revenue is going to start coming back with the minimum contracts and Alcon returning and then eventually as they start filling up this capacity, that sets you up for the, like, the market is not misvaluing this company based on trailing financials, I think it's misvaluing the company on future financials. I think that you can get a lot of conviction that those future financials are going to look a heck of a lot better than the trailing ones based on all of the things that we've talked about. I think maybe this is a good point to talk about some of the risks in the thesis and at least from where I see them, because I guess I'm not worried about what the stock price has done in the past, that's irrelevant to me, what I care about is what it's going to do in the future, I own shares today, I want to look at it going forward.

Our thesis is right now the company has revenue of about $130 million and EBITDA of about 20 million, we think Alcon comes back, you get revenue growth up into the double digits, the company has guided to at least 12% a year revenue growth over the next three years. On average, they've guided to 25% plus EBITDA margins, you do the math on that, revenue would be pretty close to 200 million by 2028 and you'd have EBITDA, if it's 25% EBITDA margins, that's 50 million of EBITDA, if it's 30%, like what we think they're going to get to, that's 60 million, and then you say, hey, 20 times EBITDA multiple, which is what these businesses have transacted at in the past, that's 1.2 billion of enterprise value, if it's 30 times EBITDA multiple, obviously that's 1.8 billion of enterprise value, but clearly nowhere near the 300 million of market cap and another, call it 150 million of debt that they have, so call it 400 and change million of enterprise value today. 1.2 billion, 1.8 billion, those are very different numbers from 400 million, and so you can see just how much big there is, just how much upside there is if they're able to deliver, which again, it's a management team that's done it before, they've got a very clear strategy, they've got all the levers they can pull for the growth and the levers that they can pull for the EBITDA margins.

What are the risks here? The number one risk here is execution. Professionalizing a business requires change, not just change to operations, but also a change to culture, that's not an easy task. You are professionalizing the whole organization. Another risk here is obviously sales. I feel good about the sales, I feel good about the traction that they're getting and you can hear it on the calls this. The company is getting more and more confident, it seems, with every earnings call that goes by, but if they don't sign those contracts, if they don't execute, then we're going to be wrong. This is an execution story for a team that's done it before, but if they don't do it, then we're going to be wrong.

The second risk is the balance sheet. The proceeds from selling the agriculture businesses, they were less than expected due to Covid and due to some other things and so that left the company a little bit more indebted than it was anticipated. We participated in a pipe transaction last year in October, where we invested money into the company alongside some other investors, plus, the company sold some excess inventory, and between those two, it brought in over $40 million of liquidity, so now the company, I think, is in a really good shape when it comes to liquidity, where it's got the financial strength, it's got the balance sheet strength, where it finally can execute on its strategy. Over the last couple of years, it didn't have that financial strength and that definitely affects the business. You're not current on your financials, you don't have the right leadership team, you don't have the financial strength, all of those things can hold back a business, but now the distractions are gone, the management team is right and the balance sheet is in a good position. I think that's what sets it up for success, but the balance sheet should rapidly delever. As EBITDA goes up and now the company's generating cash and paying down debt, it should rapidly delever, but you should monitor it. It's a risk factor.

The third thing is the CEO, it's Paul Joseph. It's his first time as a public company CEO. He's run private businesses, including large CDMOs, both within multinationals and as standalone CDMO businesses, but he's never done it in a public setting, so he's got to build a reputation. He doesn't have a reputation yet, he's got to build one. He's got to communicate well. He's got to work to win over the market's confidence and as that happens, I think that that's going to be a driver here too. If he does what he says and he's very clearly articulated, here's the game plan, here's the path, if they deliver on it, I think that that kind of confidence that market participants give to strong companies, that'll come here, but he's got to do it. That's a risk factor, he may not do it.

Andrew: Go ahead.

Adam: No, so I mean, when I think about risk, those are the risks, execution, balance sheet and the fact he's a first time public CEO, but at the same time in every investment you look at risk versus reward and here look, it's not a theoretical. This is a business where the CEO has done it again and again and again. He's not just guessing at how to do it, he knows the playbook and he's implementing the playbook and I think that that more than anything gives me confidence that a business with great potential actually can achieve its potential.

Andrew: No, I'm glad you mentioned leverage because look, if you're new to the story, the leverage will jump out at you here and there's the preferred, there's leverage and everything and look, to me, a lot of it is just tied to all the execution risks that we've talked about, but the tough thing with leverage is this is a company that effectively has been bailed out by Alcon several times and then by a pipe last year, like once you get on the verge with the leverage, the execution, you don't get a second chance at it. Like if they, if they stumble for another 18 months, it's going to be really tough with that leverage profile, not impossible, but the leverage really starts making it cut a little bit closer than if this was a just insanely cash rich balance sheet. I don't know if you want to comment on anything there.

Adam: Yeah. Again, this is all old news, right?

Andrew: Yeah.

Adam: Like the balance sheet is in the best place it's been in for half a decade. The management team is a different management team, they're not stumbling. In fact, since they've come on both the CEO and the CFO, they've announced a series of good customer wins, they've repeatedly said or reaffirmed their guidance, they've come out with a clear strategy, they've successfully attracted talent, they've built their business development team, they've done a reorg of the personnel at the company. They've done all the things that you do to professionalize an organization. I think the track record here looks really good so far. Maybe look, I know you keep asking questions about the past, one of the challenges that investors are going to face here is the past doesn't matter anymore, it's not about the last management team, it's not about what the balance sheet used to look like, it's not about what the cadence of customer wins used to look like, look at what's happening now, look at the last three months, look at the last five months, look at since this management team came in place and look at what they're doing and the story is very different. This is a very different setup than what it was before.

Andrew: I'd be remiss, you might not have by you, I do if you don't, but just speaking of the management team, everybody loves incentives drive outcome, everybody loves an incentivized management team, do you want to quickly talk about the incentives of the management team here?

Adam: Sure. Obviously, there it matters. You want to have a hungry management team, you want to have them incentivized and what Legion kind of advocated for and I think that they've been able to implement it here in a way that I think a lot of investors dream of is they have aligned this management team as much as you possibly can with shareholders. Right now for the stock trades at six and a half bucks a share, starting at 750, for every two and a half dollar per share increase in the stock price, the CEO and CFO are going to receive a package of shares and for the CEO, just as one example, he'll receive a hundred thousand shares for every two and a half dollar increase in the share price all the way up to $40 a share, all the way to 40. Which is, by the way, totally a possible outcome. You need to have the 30 times EBITDA multiple, but that's where you get to, you get to 40 bucks a share if you're at 30 times EBITDA and they hit the growth and EBITDA margin guidance that they've given, and so if you do the math on it, this could be worth tens of millions of dollars to the CEO and to the CFO. You can create generational wealth for them. If you're talking about motivation, to say that these guys are highly motivated would be an understatement, they are absolutely all in on making this a success because they're aligned with shareholders and if shareholders do well, they're going to get rewarded, too.

Andrew: No, and for those who, that is exactly where he's going for it, and for those who are interested, if you're an analyst, it's the May 2024, May 22, 2024, 8K from LifeCore. If you look at Exhibit 10.2, it's got this really nice table that says, hey, CEO, if our stock is trading under 750, you get zero of these PSUs, if our stock is trading at $35 per share, you get 100% of these PSUs, which creates multi generational wealth for them. Let's see. Adam, I think we've been through most of my questions here, I just want to pause, turn the floor over to you. Anything else you think we didn't talk about that investors should be thinking about, or you think we kind of glanced over that we should have hit harder?

Adam: Yeah. Maybe just let me conclude with talking about the math here, because ultimately the math is what matters. If you look at the shares and you fully convert the preps that are outstanding, so you get the balance sheet to be totally clean, just equity and debt, you'd end up with about 45 million shares. 45 million shares, and the stock is at six and a half, that gets you to just shy of 300 million bucks of market cap. Again, the debt, let's call it 150 million, I think that'll be paid down in a meaningful way over time, but that's what you're looking at, 450 million of enterprise value, 300 million of market cap. When you look at 20 million of EBITDA, which I think is going to start stepping up in a pretty significant way year after year, and you put those multiples on it, it's not that hard to get to pretty significant valuations, so just to say if they did get to 60 million of EBITDA, you put a 20 multiple on it, 1.2 billion of enterprise value, subtract maybe 100 million of debt at the time, you'd have 1.1 billion of enterprise value on 45 million shares, that's like a $25 a share stock price. If you were to say, hey, it gets a 30 times multiple, obviously you're talking about something closer to 40 bucks a share and so you can see what the upside is from 650, but ultimately I don't think the stock is ever going to get to $40 a share and the reason is because I think it's going to get acquired. Just like all the other CDMOs that have been listed in the U.S this is just too good of a business, it's too valuable of a business for it to remain a public independent company. There's private equity firms that have a lot of cash, a lot of dry powder, and it's just a matter... and how they do it, a number of private equity firms have built platforms of CDMO businesses where they back the CDMO businesses and then the CDMO businesses do tuck in acquisitions, and I think ultimately that's what's going to happen here. I think eventually Lifecore will be acquired by one of those CDMO platforms backed by private equity and so I don't think the stock's going to get to 40. I think that anytime you could wake up and there's a transaction and this company has been taken out at a premium multiple for CDMO, for Avid Bio Services, which was acquired, they were acquired for 6.2 times revenue, right now Lifecore trades at three times revenue, three times EBITDA to sales. I would argue that it's a better business than Avid was, and so you can see the kind of multiples that they can get, even on current numbers, which would imply kind of a mid teens share price versus six and a half dollars right now. Now, talking about the company being acquired is not just a theoretical exercise.

Andrew: I was going to ask you about the fines, yeah.

Adam: As it popped up and you know, I'm happy to conclude on this, but in January of this year, the company issued its 10Q. They have a kind of weird filing calendar where their year end, their fiscal year end is the end of May, and so they filed their latest 10Q in January. Buried on page 11 under footnote 5, there was an interesting new disclosure, and the company was trying to value a security on this balance sheet, and included in the calculation, Lifecore was required to estimate the probability of a change in control event, literally a sale of the company by 2028. What was the number that Lifecore put in there, 80%, 8,0%, and so when you think about it, the company knows the end game, just as we do. A new leadership team is fixing up the business, they're doing a lot of really great things, they're going to boost margins, they're going to professionalize the organization, they're going to accelerate growth, all of these things are going to happen. There's a really compelling value plus a catalyst here where the profitability of this business is going to be a lot higher a year from now, two years from now, three years from now than it is today, but ultimately, it's a race against time. Lifecore is the last remaining CDMO listed on a public stock exchange in the U.S, and I just don't think that that's a sustainable situation, CDMO's are too valuable. One day, sooner or later, a suitor or multiple suitors are going to arrive and they're going to make an offer that Lifecore can't refuse and I think that that's, that's where it's going. I think it's clear in the filing that the company put out, I think it's clear strategically, and I think it's clear from an investment perspective. The company doesn't have to get to 60 million of EBITDA. In fact, I don't think it will get to 60 million of EBITDA, I think it's just a matter of time before they're acquired, and it won't be for 650 when that happens.

Andrew: Look, I don't think I'm stepping out of line, sy anyone can go look at the board of directors, the shareholder table here and everything, I don't think it's stepping online, say it doesn't take a lot of knowing anyone involved to think that nobody wants this to be a public company for long, everybody wants the best outcome for shareholders here, and that's probably selling to a strategic, along the lines of the change of control event. Anything else you should have hit on?

Adam: No, I think we've done a good job here. We kept this in a decent timeline, so I'm happy to wrap there, but I really appreciate it. Thanks for having me on again, and to talk about Lifecore. I think it's a really great one and I'm happy to be talking about a company with that's here in the U.S and that has the kind of risk reward profile that this one does.

Andrew: You just like set us up for a Netflix style cliffhanger because this has been great. I love having you on, but you know, I'm also looking forward to I believe we're going to be doing our old friend Ristri is reporting earnings on Wednesday, I believe and I believe later this week or possibly early next week, we're going to be taping and releasing an update on the Vista earnings, so if people want to hear more from Adam, they can go listen to the vistry call we did last year which I think holds up extremely, extremely well and they can look forward to probably a shorter update on everything that's happened there in the earnings there, but Adam Patinkin, David Capital, this is great. Thanks so much for coming on and looking forward to chatting with you again in the next week or so.

Adam: Sounds great. Thanks for having me, Andrew.

Andrew: Perfect.

[END]

Yet Another Value Blog

David Capital Partners' Adam Patinkin on how Lifecore's CDMO business $LFCR (podcast #301)