Knight Therapeutics Inc

TSX:GUD

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen. My name is Chad, and I will be your operator today. Welcome to Knight Therapeutics Inc. First Quarter 2022 Results Conference Call.

Before turning the call over to Samira Sakhia, President and CEO of Knight, listeners are reminded that portions of today's discussion may, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. The company considers the assumptions on which these forward-looking statements are based to be reasonable at the time that they were prepared, but cautious that these assumptions regarding the future events, many of which are beyond the control of the company and its subsidiaries, may ultimately prove to be incorrect.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether a result of new information, future events, except as required by law. We would also like to remind you questions during today's call will be taken from analysts only. Should there be any further questions, please contact Knight's Investor Relations department by e-mail at [e-mail] or via phone [phone]. I would like to remind everyone that this call is being recorded today, May 12, 2022.

And would now like to turn the meeting over to your host for today's call, Samira Sakhia. Please go ahead, Ms. Sakhia.

[Samira Sakhia, executive]

Thank you, Chad. Good morning, everyone, and welcome to Knight's 1 '22 Conference Call. I'm joined today on today's call with Amal Khouri, our Chief Business Officer; Arvind Utchanah, our Chief Financial Officer; and Jeff Martens, our Global VP of Commercial. .

I'm excited to report that in the first quarter of 2022, Knight's revenues were $63.8 million, which represents an increase of $17.7 million or 39% versus Q1 2021. In addition to the $7.1 million of contribution from Exelon, we had revenue growth across all our therapeutic areas driven by market penetration of our key promoted brands and an increase in patient treatments due to reduced COVID-19 restrictions. And on the business development front, we just announced that we entered into an exclusive license distribution and supply agreement with Helsinn for 2 products for Canada, Brazil and select LatAm countries.

Now that we have completed our organizational changes in the executive and senior management team, we are focused on continuing to leverage the platform and growing the business, while finalizing the implementation of the ERP and the quality management systems and optimizing our manufacturing structure. We expect to complete the ERP implementation in all entities, except the Argentinian affiliates, by the end of 2022.

Turning now to the NCIB. During the first quarter of '22, we purchased approximately 1.7 million common shares for an aggregate cash consideration of $9.1 million at an average price of $5.29 per share. Subsequent to the quarter, we purchased an additional 893,000 common shares for aggregate cash consideration of $4.8 million or $5.33 per share.

I will now turn the call over to Jeff to provide more details on our product results.

[Jeff Martens, executive]

Thank you, Samira. Building on our hard work of 2021, our efforts in 2022 remain focused on the executional excellence of our new product launches while delivering competitive growth for our mature promoted portfolio.

In the quarter, we delivered growth across all therapeutic areas. In addition to Exelon, we had growth of $5.3 million in our oncology hematology portfolio, which includes the contribution from launches of Lenvima, Halaven and Rembe. As for our antifungals portfolio, you may recall that these products used in patients who are immunocompromised, mostly post-treatment for oncology or hematology conditions. As these treatments resumed versus Q1 2021 lockdowns, there was a return to normal utilization of our antifungal products. Consequently, we saw an increase of $5.8 million in our infectious disease sales for Q1 2021.

I will now turn the call over to Arvind to go over the financial results.

[Arvind Utchanah, executive]

Thank you, Jeff. in the course of this conference call, I will refer to EBITDA and adjusted EBITDA, which are non-IFRS measures. Knight defines EBITDA as operating loss or income, excluding amortization and impairment of intangible assets, depreciation, purchase price accounting adjustments, the impact of accounting under hyperinflation, but to include costs related to leases. Adjusted EBITDA excludes acquisition costs and nonrecurring expenses.

Since Samira and Jeff have already covered revenues, I will go straight to gross margin. For the quarter ended March 31, 2022, we reported gross margin of $32.4 million or 51% of revenues compared to $20.1 million or 45% of revenues in the same period last year. Excluding the impact of hyperinflation, the gross margin as a percentage of revenues would have been 53% for the first quarter of 2022. The increased gross margin dollars and as a percentage of revenues is due to product mix, including the acquisition of Exelon and its related revenues recorded as a net profit transfer.

Our total operating expenses for the first quarter of 2022, excluding the amortization of intangible assets, increased by $4 million compared to Q1 2021. The increase is mainly driven by an increase in variable costs, such as logistic expenses as a result of higher sales, compensation, and consulting and professional fees as well as an increase in selling and marketing activities related to key promoted products, including Exelon.

Moving on to adjusted EBITDA. The adjusted EBITDA was $13.3 million for the first quarter of 2022, an increase of $7.7 million or 139% compared to the same period last year. The variance is due to an increase in gross margin, offset by an increase in operating expenses.

Now moving on to net losses on our financial assets, which are not reflected on adjusted EBITDA. In the first quarter of 2022, we recorded $16.4 million of net loss measured at fair value to profit or loss, of which $16.3 million was unrealized. The loss is driven by the significant decline in the share prices of the publicly traded equities in our strategic fund investment due to general market conditions.

Finally, Knight generated cash inflows from operations of $12.9 million for the quarter ended March 31, 2022. The cash flow from operation is driven by our operating results as adjusted for noncash items, such as depreciation and amortization, net loss on financial instruments, unrealized foreign exchange loss and change in working capital.

I will now turn the call over to Amal to provide an update on business activities.

[Amal Khouri, executive]

Thank you, Arvind. As Samira previously mentioned, this morning we announced we have entered with into an exclusive license, distribution and supply agreements for AKYNZEO for Canada, Brazil, Argentina, Uruguay and Paraguay; and ALOXI for Canada. AKYNZEO is the first and only fixed combination of a 5-HT3 and NK1 receptor antagonist that is approved for the prevention of chemotherapy-induced nausea and vomiting. A single dose of AKYNZEO given with dexamethasone has been shown to prevent chemotherapy-induced nausea and vomiting for up to 5 days. According to IQVIA, sales of AKYNZEO in Canada and Brazil were approximately $7 million in '21.

ALOXI is a second-generation 5-HT3 receptor antagonist with a duration of [ prevention ] up to 5 days after chemotherapy administration. Both products are highly synergistic with our oncology portfolio and commercial portfolios in Canada, Brazil and the remaining countries. We will begin commercial activities related to the product following a transition period from Helsinn's current licensees [indiscernible] by the end of this year. Upon transition, Knight will start recognizing revenue on a [ country-by-country basis ].

In addition to adding revenue in 2022, this transaction further validates our strategy of acquiring and licensing innovative products on the Pan-American ex U.S. basis. We will continue to focus on leveraging our Pan-American ex U.S. footprint to build our portfolio along our 3-pronged growth strategy, which includes acquiring products or companies with existing sales and licensing innovative pipeline assets and developing our branded generics portfolio.

I will now turn the call back to Samira for concluding remarks.

[Samira Sakhia, executive]

Thank you, Amal. Now turning to the financial outlook. For full year '22, we expect revenues to be in the range of $260 million to $207 million, an increase of $5 million on the upper end of the range as compared to previously disclosed revenue guidance. The guidance on revenues is on a non-GAAP basis as it excludes the impact of IAS 29. This is due to the difficulty in predicting Argentinian inflation rates. The guidance is also based on a number of assumptions, which are described in our press release. Should any of those assumptions differ, the financial outlook and the actual results may vary materially.

Looking ahead, we remain committed to building a leading Pan-American ex U.S. specialty pharmaceutical company, with over $155 million in cash, cash equivalents and marketable securities and the fact that we generate cash from operations, which positions us well to continue to execute on our strategy to in-license and acquire innovative pharmaceutical products as well as developing branded generic portfolio.

Thank you for your support and confidence in my team. This concludes my formal remarks. I'd like to now open up the call for questions. Chad?

[Operator]

[Operator Instructions] And the first question will come from Doug Miehm with RBC Capital Markets.

[Douglas Miehm, analyst]

Two questions. The first has to do with the new products that you just licensed in. And I'm curious about given how complementary they are to your portfolio, is this something that you sought out yourselves based on introduction in the marketplace? Or is this something where that company, Helsinn, approached you? And the second question, maybe more for Samira, just has to do with management changes in the company in South America. And maybe you could go into a little bit detail about some of the changes you've made and why you're excited about those. And I'll leave it there.

[Amal Khouri, executive]

This is Amal. I'll answer your first question and turn it over to Samira. So we -- as we've been saying, we're always on the hunt for opportunities within our therapeutic areas and for opportunities that fit within our portfolio. So we're always -- almost always proactively contacting different companies for opportunities, and this is not an exception.

[Samira Sakhia, executive]

The one thing that I would say and what I'd really congratulate the team on is the fact that they did chase this down. And what really gave us a bit of a competitive edge, because we know that we were dealing with competitors in some of the independent markets, like where you take Brazil or Canada. And where we stood out is our unique footprint, and it made it, for that partner, it was a great opportunity to have one partner for all of those reasons that they were looking to license out.

For the second question, the -- as you know, we've been changing our executive team. So as of today, we have a full team for what we need. You saw the addition of Susan, Monica, Daniela at near the end of last year, and the addition of Leopoldo earlier this year. As all of these teams get into place, what they have been doing -- and we've been doing a little bit of this ourselves, but also really looking at the next level down, whether it's country leadership, whether it's a director in a certain team, and we've really been making those changes going forward.

If I take kind of the organizations that we acquired 2.5 years ago, there is not an executive at Knight that is part of the former Biotoscana team. There is not a country leader, there is not a director, except for maybe one, that really is kind of from that former organization. And it's not because they weren't great or it's just the way we work, where we have the drive to execute as well as the focus on financial results and really continued execution.

And today, we have a great team. There's obviously, and always going to be, ongoing work to make sure we always have the right people, the right structure for where the business is going. And you see the execution over the last year where we had great results. You see the results of Q1, the fact that we just upped our guidance. And that's really execution on the strategy that we set out to do.

[Operator]

And the next question will be from Endri Leno with National Bank.

[Endri Leno, analyst]

Good quarter, by the way, congrats. Just had a few for me. I'll start a little bit with the guidance. I mean given Q1 results and the updated guidance that you gave, it's seems like revenues should be a bit -- I mean, flattish throughout '22, I mean, if we are to assume with Q1. Flattish meaning quarter-over-quarter. Is that a fair statement? Or do you expect certain cadence over the next 3 quarters?

[Samira Sakhia, executive]

So a couple of things. One of the reasons we upped the guidance is because we just announced a new product that we expect to start reporting some revenues related to that in the back end of the year. The second thing that I will say when it comes to quarter-over-quarter, I'm really not going to comment because there's a couple of things that are -- that I know. Our top line is going to be lumpy and it's for multitudes of reasons. This year, we don't know what the COVID impact is going to be. In Canada, we're going into summer, seeing lightening of rules. Everything is great. Brazil, Argentina, Chile are preparing to go into winter. So we don't know what's going to happen.

The second thing, and you probably saw that, is that we know that we will be transitioning Exelon in June in Brazil and transitioning Exelon in May in Colombia. That in itself is going to cause lumpiness as we make sure that we have the channel, have adequate inventory and no disruption in supply. So lumpiness is going to be there. I -- we are working hard to obviously grow our sales, and grow our sales not through just selling into the channel but creating demand. And Jeff's team has done a great job over the last year, and we can expect to continue to execute on that.

[Endri Leno, analyst]

Okay. No, that's great color. And related to that, but still a separate question as it were. You said you're working also hard to create demand and then to increase sales. Can you talk a little bit about marketing activities? Are they now in full force? And any costs associated with these? How should they trend over the course of '22?

[Samira Sakhia, executive]

So I'll start with the cost on the trend end. As we said, Q1 was a bit -- Q1, we saw treatments advance. But the front half of Q1, there was little to no activity because of Omicron in most of our territories. In the back half of Q1, we -- everybody went back into the field. Q2, Q3, we do expect travel and field activity to increase. The costs should increase. As far as how when things are happening, I'll turn that back over to Jeff. .

[Jeff Martens, executive]

Yes. So I guess the -- what I'll comment on is some of the -- just the product performance that we've seen over Q1 versus over Q2. So IQVIA is showing some strong growth in our launch products. So NERLYNX with growth over 13%. Trelstar, 53% over prior year. Also, with Lenvima in Brazil and Cresemba in Brazil, we've also seen some nice growth there as well, 74% growth with Lenvima and also Cresemba with 35% growth. So I think our launches are going quite well. So activities have resumed. The team, to Samira's point, are investing and we're seeing the return on some of those investments.

[Endri Leno, analyst]

Okay. That's great color. And the second part of my questions relates to the AKYNZEO, if I'm saying it correctly. I was wondering if you can talk a little bit about whether sales were impacted in 2021 at all, and whether you expect kind of a similar improvement to what you're seeing in your oncology portfolio for this year.

[Amal Khouri, executive]

Endri, this is Amal. Yes, I mean, the -- whatever COVID impact you would have seen, in general, an oncology treatment would have had the same effect on a product that is used for -- as a supportive therapy for oncology treatment. So when we saw during COVID oncology treatments,going down because patients weren't going in, weren't getting diagnosed, weren't getting treatment, whatever impact -- negative impact that had on the oncology therapies themselves have similar impact on supportive care therapies for oncology. And again, going forward, without lockdowns, patients going back in for treatment, there will be -- whatever -- again, whatever uptake you'll see in oncology treatments will translate into those products as well.

[Endri Leno, analyst]

Okay. No, that's great. And the last one for me, still related to AKYNZEO and the other drug. Do you anticipate any costs associated with the transfer, would be the first one? And then the second part, perhaps for Jeff, is that were they being promoted well or efficiently, in your view, before? And will you need to make any investment in that end to get better promotion and whatnot?

[Amal Khouri, executive]

Sure. So the -- I think your first question was...

[Samira Sakhia, executive]

Cost of transfer.

[Amal Khouri, executive]

Yes, cost of transition. Thank you, Samira. So what we -- again, this product fits right into our footprint and our portfolio. So we're not really expecting to add any significant infrastructure behind it because it fits right in. We may be adding some small number of headcount here and there just to optimize structure. But that will be it. So we're really not expecting any negative EBITDA impact from the product this year. Next year, we're expecting positive impact.

And in terms of how the product was being promoted or not, again, this is a product that was launched in Canada in 2017 and Brazil in 2018, so it had been -- there have been some level of promotion from Helsinn's current partner. We're transitioning that to us. And again, it's a great fit within our portfolio, so we're going to be promoting going forward.

[Operator]

And the next question will be from Justin Keywood from Stifel GMP.

[Justin Keywood, analyst]

Congrats on the improved quarter. I had a question on the infectious disease portfolio. It seems to be a pretty healthy increase. Was any of that related to the 2 products that helped manage COVID-19 symptoms? Or was that just regular use of those medicines?

[Samira Sakhia, executive]

So the increase is really due to the fact, and I think we said it in Q3 and in Q4, that Q4 was negatively impacted by inventory in the channel. So the -- what we're really seeing in Q1 is normal utilization. There is a bit of COVID, but it's not materially different from Q1 last year.

[Justin Keywood, analyst]

Are you able to quantify that amount?

[Samira Sakhia, executive]

Pardon me, we don't provide revenue by product. But it's not material.

[Justin Keywood, analyst]

Okay. And do you expect the medicine to be used going forward to manage COVID-19 symptoms still? Or should we not expect that?

[Samira Sakhia, executive]

We're not forecasting any utilization for COVID-19 in the guidance that we've provided.

[Justin Keywood, analyst]

Okay. Great. And then on the guidance, just to follow up on an earlier question. So the $260 million to $270 million, I believe that's $5 million higher. With Q1 at above $60 million, that leaves about $200 million to be achieved this year. How should we expect that to contribute in the subsequent quarters? Or any color around that?

[Samira Sakhia, executive]

So we don't really guide towards quarters. As we've seen over the last couple of years, seasonality, COVID, the whole -- during this time, it's extremely hard to predict. What our business is driving towards is achieving and hopefully exceeding that $270 million target that we've set out. The quarters will be lumpy for a whole slew of reasons. So we do -- basically, we know that we're going to hit the guidance that we've provided. We don't know how that will phase over the quarters.

[Operator]

And the next question will come from Scott McAuley with Paradigm Capital.

[Scott McAuley, analyst]

Congrats on the great quarter. This may kind of be related to what you've touched on before, but it seems like there's been quite a bump in the Brazilian revenues kind of quarter-over-quarter, with some declines in kind of other parts of LatAm. Is that again kind of more related to that lumpiness? Or is there anything else kind of fundamental going on there?

[Samira Sakhia, executive]

It's not really, but it was -- the issue really is about the lockdowns that we saw last year. Brazil is our biggest business. This year, coming out of kind of the uptake, where we saw it happening is in Brazil. We do see, obviously, growth in Colombia and Argentina as well. And rest of LatAm, it's too small, like made up a whole bunch of different things.

[Scott McAuley, analyst]

Got it. Got it. No, that's great. And then second -- lastly for me. Just on the margins, especially the EBITDA margins, kind of significant growth compared to last year overall and kind of the year before. Is this kind of a level that you're comfortable with kind of moving forward? Are you looking at opportunities? I think you say you're kind of completing that integration of the LatAm operations kind of by the end of this year. Are there opportunities to improve that? Or are you kind of happy where you are going forward?

[Samira Sakhia, executive]

No. So as kind of Jeff mentioned also earlier, we had, in Q1, kind of because of our -- because teams were locked down for, let's say, at least half of the quarter, we really didn't have commercial or medical spend in Q1 to the level that we would normally have. As we go into Q2 and Q3, where things like conferences and meetings are all happening, we expect that -- so EBITDA margin in Q1 is disproportionately higher than where we expected for the year. What we do expect is kind of in the mid-teens, which is where we ended up for the year last year.

[Operator]

And the next question will come from Rahul Sarugaser with Raymond James.

[Rahul Sarugaser, analyst]

Actually, just one question from me today. So congratulations on the in-license of AKYNZEO and ALOXI. So this -- CINV, the market has been a little bit about -- and recognizing that it's a pretty competitive space in North America and in Europe, but obviously, we don't -- we're not that familiar within LatAm. So could you give us a sense for what the competitive environment of these drugs will be in LatAm and as a result of the profile, and whether you'd be looking at expanding the geographic coverage for these drugs?

[Samira Sakhia, executive]

Rahul, is your question specifically for AKYNZEO or in general?

[Rahul Sarugaser, analyst]

Yes, CINV competitive environment and as a result -- yes.

[Samira Sakhia, executive]

I see. Okay. Sure. Sure. So I mean the -- within CINV, as you may know, there are really 2 main mechanisms of action that are used, 5-HT3 antagonist and NK1 antagonist. As I mentioned earlier, AKYNZEO is the only fixed-dose combination that contains both MoAs. So it's a unique product, both in Canada and LatAm and other parts of the world. The -- also the NK1 antagonist molecule that's in AKYNZEO is quite unique as well compared to other molecules with the same MoA. In terms of how the market looks, the bulk of the market -- again, same applies to Canada and LatAm, the bulk of the market is really made up of the 5-HT3 antagonist, which are also used for postoperative nausea and vomiting. So they're not really only for chemotherapy-induced nausea and vomiting.

And then in Canada, we do have an NK1 antagonist as a monotherapy. So that's one product we have here. Again, AKYNZEO is quite unique because it's a fixed-dose combination. It's an oral product. It's given as a 1 dose that continues acting for 5 days, versus if the patient takes one 5-HT3 versus and one NK1, it's multiple doses, even the NK1 on its own, it's multiple doses per cycle. So the product is quite well differentiated. In LatAm, in Brazil specifically, I'll mention Brazil specifically, there isn't even an oral NK1 antagonist that's available. So AKYNZEO's profile -- there is even, I would say, a bigger unmet need in Brazil. But again, in both markets and outside of our markets, the product is quite unique.

[Operator]

[Operator Instructions] The next question is from David Martin with Bloom Burton.

[David Martin, analyst]

Congratulations on the solid quarter. My first question, you had mentioned last -- on your last quarter's call, that there was going to be some pricing pressure as LatAm governments try to recover costs of COVID. And I'm wondering, have you seen any more than what you saw 3 months ago? Do you expect any more? Or is it all in the numbers now?

[Samira Sakhia, executive]

It really depends on the product. We will continue to see it throughout the year as certain agreements get negotiated. So we saw a bit of it now. We know that as the year progresses, we'll see more.

[David Martin, analyst]

Okay. Another thing in response to one of Justin's questions. I think you said with the infectious disease products, Q4 was impacted by inventory in the channel. Flipping into Q1, were they stocking back up their inventories? Or have they worked them down to where they wanted them and this is a steady state reflection now?

[Samira Sakhia, executive]

Sure. So what we had at the end of Q3 was inventory in the channel, and they bled through that inventory in Q4 and had normal levels at the end of Q4. So this is where we're seeing kind of that steady state. And one of the things, as kind of Jeff mentioned, our -- these products normally get used in people who are immunocompromised post oncology treatments. And because we saw treatments in oncology, we're getting utilization of our products in infectious diseases. And this is steady state, we don't have like excess inventory in the channel coming out of Q1.

[David Martin, analyst]

Okay. And I think going back to earlier in the pandemic, you've got a real bump in sales of your infectious disease products because of COVID. I know the oncology was working against that. But wasn't COVID rather a substantial amount of sales at one point? And I think what you're saying now, it sounds like it's diminished to almost nothing, is that fair?

[Samira Sakhia, executive]

Yes. So in Q2 and Q3, if you look at our revenue number, and we did disclose, I think for the year last year, we had between $13 million to $16 million in our infectious disease sales -- disease product, sales that were related only to treating COVID. That's not what -- that is not the only things that they are used for. And it's basically fungal infections, think about a patient who's immunocompromised, for whatever reason they're in the ICU. Normally, these patients are in the ICU post a treatment for a transplant for hematology, for oncology, and they will develop an invasive fungal infection. So if patients are coming in from the right reasons, our product will be used.

If unfortunately, they're coming in for COVID and also develop fungal infections, our products are there to treat them in those cases as well. What we saw in the middle of last year, especially in markets like Brazil, Mexico, Argentina, was that the hospitals were crowded with patients with COVID, and that's where our product was used.

[David Martin, analyst]

But in your Q1 numbers, used for treating COVID was de minimis?

[Samira Sakhia, executive]

Minimal. Yes, exactly.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Samira Sakhia for any closing remarks.

[Samira Sakhia, executive]

Thank you for your confidence in the Knight team and for joining our Q1 '22 conference call. Have a great morning.

[Operator]

And thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.