Stock Stories: 3Q16

Kindred Biosciences, Inc.: A Deep Value Play
KIN

Kindred Biosciences, Inc. develops therapeutics for pet-specific treatments.

  • We initiated our position in the 4th quarter of 2014, when Kindred announced plans to discontinue its AtoKin study, which caused a major decline in the stock price.

  • Kindred announced positive results for its horse fever drug, Zimeta, in conjunction with unfavorable results for its Sentikind product in the 4th quarter of 2015. Stock declined due to the failed SentiKind drug, allowing us to add to our position over several months following the news.

  • In the first quarter of 2016, Kindred announced positive results in for Mirataz, which helps the management of weight in cats. Believing the upside from Mirataz and Zimeta were not represented in the stock, we added to our position.

  • Anticipation for FDA approval for Zimeta and Mirataz, coupled with improved long-term outlook, has contributed to recent appreciation in stock price.

Headquartered just outside of San Francisco and founded in 2012, Kindred Biosciences (KIN) is a biopharmaceutical company focused on developing drug candidates for pets. The company’s unique business model leverages compounds and targets that have been previously identified as effective on humans in order to develop therapeutics for pet-specific treatments. By utilizing previously identified compounds, Kindred Biosciences is able to shorten its development timeline, while controlling costs. Currently, the company is working on developing drugs for over 20 potential indications.


Deep Value Checklist

In our deep value portfolios, we believe asset protection and balance sheet strength are two key components of an attractive investment opportunity. With over 60% of its market capitalization in net cash and no debt on its balance sheet, Kindred Biosciences meets these characteristics. A strong management team with sizable inside ownership adds to our conviction, as co-founder Dr. Richard Chin currently serves as Chief Executive Officer (CEO) and owns over 13% of outstanding shares. Dr. Chin has previous experience in various roles at Genentech, and as CEO of OneWorld Health and Oxigene.


Recent Developments

Over the past few years, two failed product candidates have weighed heavily on the stock, providing an opportunity to initiate, and subsequently add to, our position. However, recent developments indicate the potential for two marketready drug candidates. Kindred Biosciences completed pivotal trials for Zimeta and Mirataz, reporting positive and statistically significant topline results for both trials. Zimeta treats fever in horses, while Mirataz helps manage weight loss in cats. Management expects to launch both product candidates in 2017.


Attractive Risk/Reward Profile

In our view, the company is at a critical inflection point. The potential launch of Zimeta and Mirataz remain underappreciated by investors, despite a recent rally in the stock price (+55.6% YTD as of 9/30/16). In fact, we believe the current market opportunity for these two product candidates more than justifies the company’s current market capitalization. The remaining extensive product pipeline provides further upside opportunity. With a strong balance sheet, our investment thesis ultimately rests on our perceived downside protection, coupled with upside opportunities. Overall, Kindred Biosciences is well positioned within the pet pharmaceutical industry to take advantage of an underserved market.







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