Stock pick: Sandon Capital

IDT Australia (ASX: IDT) is a pharmaceutical manufacturing company. The company’s services include early stage active pharmaceutical ingredient (API) development through to finished drug formulation.  IDT owns a manufacturing facility in Melbourne. Whilst the carrying value of this plant is only $7 million, IDT reported in 2016 that the insured (replacement) value of the facility was $90 million. The facility is approved by both Australia’s Therapeutic Goods Administration (TGA) and the US Federal Drug Administration (FDA).

IDT has performed poorly over the years and received an FDA Warning letter in 2018 (since resolved). The company has been loss making and consuming cash for the past decade. However, its recent foray into manufacturing medicinal cannabis has taken it to the cusp of profitability.

We believe the COVID-19 pandemic might provide IDT with new opportunities beyond the cannabis lifeline. 

Over the last 20 years, much of Australia’s API manufacturing has been shifted offshore to lower cost jurisdictions such as China and India. Today, Australia imports 90% of its medicines and is particularly vulnerable to any supply chain disruptions. The COVID-19 pandemic has brought these risks to light.

We believe the government should take steps to reduce risk in Australia’s pharmaceutical supply chain. One such step would be to mandate domestic manufacturing of APIs. If this were to occur, IDT’s underutilised facilities and TGA/FDA accreditation place it in a strategically important position to contribute to increase the resilience and capacity of our domestic pharmaceutical industry. Such moves would greatly increase IDT’s prospects for profit. 

IDT recently noted that its existing contracts remain unimpacted by the COVID-19 pandemic. It also disclosed that it has been asked by the Australian Government to assist with certain (unspecified) COVID-19 response activities.

Risks:

• Future issues with either TGA or FDA (which are not unique to IDT, but pharmaceutical manufacturing generally). 
• IDT has a poor operational and financial track record, which could persist.

This information has been prepared and provided by Sandon Capital. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 22 May 2020 and is subject to change.