Like all investors, I’m always looking for a chance to buy a dollar for eighty cents. Rarely though, have I found a company where the value is as easy to understand as is the case with Cadus Corporation(KDUS).
Cadus is a tiny company with a market cap of only $19.7 million at today(9/21/06)’s close of $1.50, yet it has cash and equivalents of over $24 million. In addition, the company owns several hundred thousand dollars of marketable securities, mostly in Sequenom(SQNM) While unusual, Cadus is certainly not the only company with cash exceeding market value. What is unusual is that the company has no debt or other liabilities, and is cash flow positive. The company has no employees(even the CEO is a consultant), leases nothing more than a storage space, and the interest on the cash hoard plus its one small revenue stream more than covers expenses, leaving a small profit.
Cadus was formerly a biotech company engaged in research and development until it sold all research assets to OSI Pharmaceuticals(OSIP) in July 1999. OSI continues to pay $100,000 per year in a contract that continues until 2010 to license Cadus’ patent portfolio. The portfolio is also licensed to another, undisclosed company which may extend the agreement for $250,000 per year once the current term expires this year. There are also potential milestones if drugs based on Cadus patents move towards approval. The company has done nothing substantial to monetize these assets, and it is probably reasonable to assign them a value of zero, and allow any upside to be a pleasant surprise.
One potential area of concern is ownership. Carl Icahn controls the company by virtue of a 38% stake. Icahn originally invested in Cadus in a private financing in 1993. He later purchased ImClone(IMCL)’s stake in 1995 which helped fund ImClone’s development of Erbitux. Icahn continues to be involved in ImClone, having just become a director and called on the Chairman to resign as a result of poor performance.
Oddly, though Icahn is well-known for taking stakes in companies and forcing changes to unlock value, nothing has been done to unlock value at Cadus despite years of Icahn control. The company claims in its 10-K that
The Company is presently seeking to use a portion of its available cash to acquire or invest in companies or income producing assets. To date the Company has not been able to identify an appropriate acquisition or investment and there can be no assurance that it will do so. There also can be no assurance that acquisitions or investments by the Company will be profitable.
Cadus has a large loss carryforward and could prove an attractive merger partner for a small, profitable company.
Cadus faces limited downside given its large cash position. Value could quickly be unlocked if the company decided to liquidate, found an appropriate merger or acquisition target, or unexpectedly monetized its dormant intellectual property. That is, if Carl Icahn finally decides to pay attention to the stock he already owns.
Disclosure: I own KDUS. I own no IMCL, SQNM or OSIP
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Cadus has always been interesting, this has been the same story for the past 5 years. Look at the chart. I have been watching this one as well, waiting……….as they rest of the few who have found this possibly undervalued company.
However, the key points I need to make here are just as clear as the case to own shares in this article. In the 10Q, the most important stats worth mentioning is the fact that the costs outweigh the revenues for Cadus. It will go broke in 2007 without any investments. Icahn has shown no interest in doing anything with this money. To me, and to others I know, seem to think that this company could easily go into liquidation, or bankrupcy if it waits too long. If they can use the cash effectively, this can be a winner. I happen to think that since Icahn wants his Dr. director buddy of KDUS involved in the ImClone shakeup, perhaps KDUS money just may have found a home for investment. Even so, remember what is pasted below from the 10Q.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2006 the Company held cash and cash equivalents of $24.2 million. The Company’s working capital at June 30, 2006 was $24.5 million.
The Company believes that its existing capital resources, together with interest income, will be sufficient to support its operations through the end of 2007. This forecast of the period of time through which the Company’s financial resources will be adequate to support its operations is a forward-looking statement that may not prove accurate and, as such, actual results may vary. The Company’s capital requirements may vary as a result of a number of factors, including the transactions, if any, arising from the Company’s efforts to acquire or invest in companies and income-producing assets and the expenses of pursuing such transactions.
Mike-
I’m confused by your claim that “costs outweigh the revenues for Cadus. It will go broke in 2007 without any investments. Icahn has shown no interest in doing anything with this money. To me, and to others I know, seem to think that this company could easily go into liquidation, or bankrupcy if it waits too long.”
Cadus’ costs are under $1MM per year, and while that outstrips revenue, revenue plus interest income has exceeded costs of late. Even if not, what number in the report makes you think that, it will run out of cash next year. I’ve read the same paragraph you cite, and see no reason to think that it suggests the company will burn through $24MM in cash in the next year. Look at cash levels over the last 3 years; there is no extreme downward trend. Please let me know where I am wrong. Where are the expenses changing so radically that the company will burn through all of its cash?
You are correct that this story is fundamentally unchanged for the past several years. I could very well be sitting here in 2010 still waiting for something to happen. But I’ve got to think that as time goes on, and the cash is just sitting there, the likelyhood of something happening increases. There is no reason for this company to continue to exist. It should and I believe, likely will, liquidate and return cash to shareholders.
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