Kneat Solutions: Validating Our Thesis

Kneat’s solution is a must-have for customers. The validation process in life sciences is a regulated activity, firms have to validate everything they do to remain compliant with the FDA. This creates a very stable base of revenue for investors, the quality of this revenue is only enhanced by the fact that it is all contracted under a SaaS (software-as-a-service) model. Even in tough economic times, pharmaceutical companies will still need to validate everything they do, making Kneat's revenues very defensive.

The solution saves customers a lot of time versus the old paper-based system and importantly, ensures real-time record management in a secure, centralised location for the FDA to audit.

The company boasts 8 of the top 10 pharmaceutical companies as customers and is roughly 50% penetrated with existing customers. This high-calibre customer base is a massive testament to the product. KSI operate a ‘land and expand’ model, starting new customers on just a single program before expanding to cover the whole organisation over 3-4 years as the product proves its value.

Kneat is deeply integrated into a customer's daily workflow and houses all of their proprietary compliant data, meaning switching to another solution would be very cumbersome.

Kneat has multiple avenues for growth;

Increasing penetration of existing customers. Pharma is their core market and they only have ~50% penetration of customer budgets as of 2024, this will continue to grow as their customers roll the product out across all their programs. Merck, one of the world's largest pharmaceutical companies, uses Kneat across its entire organisation.

Expansion into the wide world of validation. Everything regulated by the FDA needs to be validated, meaning the market potential for Kneats solution is massive. This encompasses; Contract Drug Manufacturers, Medical Devices, Food & Beverages, Food Packaging, and more. The company sizes its existing market at $20B, compared to just $40m in revenues as of 2024.

Expansion Into New Verticals - Today, Kneat's core market is validation for pharmaceutical companies, the next step is toward contract manufacturers who produce drugs for the pharma industry, and then moving towards medical devices and industrial applications. They already have customers in each of these verticals today but as they deepen their relationships and showcase the versatility of the product investors can gain greater confidence in the growth potential.

Continued Outperformance - Kneat has compounded revenues at 67% since 2019 and the growth prospects remain healthy. They anticipate reporting EBITDA profitability next year, a key milestone for a company early in its development. Gross margins are currently high at 67.8%, indicative of the potential profitability.

Opening Up To A Larger Shareholder Base - Greater scale should attract more capital. Right now, management has noted that many shareholders simply can’t buy enough shares because the company is still small for a public company. As the company grows into its huge market, share price and liquidity should increase, allowing more institutional shareholders to buy the stock. Other investors, simply stay away from earlier-stage companies and wait a few years until they mature.