Knight Therapeutics Inc

TSX:GUD

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen. My name is Simon and I will be your conference operator today and welcome to Knight Therapeutics Inc. Second Quarter 2018 Financial Results Conference Call. Before turning the call over to Jonathan Ross Goodman, Chief Executive Officer; Samira Sakhia, President and Chief Financial Officer; and Amal Khouri, Vice President of Business Development, 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 they are prepared but cautions 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 as a result of new information, future events, except as required by law.I would like to remind everyone that this call is being recorded today, August 9, 2018, and would now like to turn the meeting over to your host for today's call, Jonathan Ross Goodman, Chief Executive Officer. Please go ahead, Mr. Goodman.

[Jonathan Ross Goodman, CEO & Director]

Thank you, operator. Good morning and welcome to Knight Therapeutics Second Quarter 2018 Conference Call. I am joined on today's call by Samira Sakhia, Knight's President and CFO and Amal Khouri, Vice President of Business Development. We are pleased to report that in our second quarter, we continued on our mission towards building a leading specialty pharmaceutical company. This was highlighted by the Health Canada approval of Probuphine and the recent strategic investment and license agreement with TherapeuticsMD for two late-stage differentiated women's health products.Looking ahead, we remain focused on leveraging our balance sheet to find good opportunities for growth and building a specialty pharmaceutical company that improves the health and well-being of Canadians while creating shareholder value. On a historical note, 73 years ago, today an atomic bomb was detonated over Nagasaki, Japan and 51 years ago today, I was born.I will now turn the call over to Samira who will walk you through with less historical insights, the second quarter financial results and highlights.

[Samira Sakhia, President, CFO & Director]

Thank you, Jonathan and happy birthday and good morning everyone. I just want to note that the TherapeuticsMD presentation is currently not up on our website. It should be up shortly.Now, turning over to the financials. For the quarter ended June 30, 2018, we reported revenues of $2.2 million, a decrease of 10% versus the same period last year. The decrease is mainly attributable to the timing of sales of Impavido offset by the growth in Movantik. For the 6 months ended June 30, 2018, we reported revenues of $5.4 million, an increase of $1.2 million or 27% as compared to the same period last year, driven by the same factors. According to IQVIA Canada data, Movantik sales were $319,000 and $620,000 for the 3 and 6-month periods ended June 30, 2018.Our operating expenses for the quarter decreased by $800,000 or 20% versus Q2 2017 as a result of reductions in G&A expenses mainly related to lower stock-based compensation offset by commercial activities, including certain pre-launch activities for Probuphine.Our interest income is driven by the sum of interest income and interest accretion. For the quarter, interest income, excluding accretion, was $4.8 million, an increase of 3% versus Q2 2017. The increase is explained by higher interest income on cash, cash equivalents and marketable securities offset by lower average loan balances. As a result of the company's adoption of IFRS 9, there was no significant interest accretion in the quarter compared to $1.1 million for the same period last year.Our share of loss of income from associates, which relates to our strategic investment in medicine, is driven by our share of medicines net income, net of fair value adjustments of intangibles. For the quarter, our share of medicines net income was $1.2 million and fair value adjustments were $1.4 million whereas in the same period last year our share of net income was $1.6 million and fair value adjustments were $1.5 million.Furthermore, during Q2 2018, we reported a net gain of $2.8 million on revaluation of financial assets measured at fair value through profit and loss, driven mainly by revaluation of our strategic fund investments. For the quarter, we reported net income of $4 million, an increase of $3.6 million versus the prior period, while for the 6-month period ended June 30, 2018, we reported net income of $10.9 million, an increase of $4.4 million versus the prior year.Our product pipeline, the engine of Knight's future growth, both expanded and matured during this past quarter. On April 18, 2018, Probuphine was approved by Health Canada for the treatment of opioid dependence. Probuphine is a subdermal implant designed to deliver buprenorphine continuously for 6 months following a single treatment, promoting patient compliance and adherence while addressing the risk of diversion and illicit use.Knight expects to launch Probuphine by the end of 2018, and as we do, we will offer new hope in the fight against the opioid health crisis in Canada. Current patients who are stable on daily oral therapy of no more than 8 milligram of sublingual buprenorphine will have an additional innovative treatment option with a 6-month implant therapy.I'm now going to turn the call over to Amal Khouri to discuss our agreement with TherapeuticsMD.

[Amal Khouri, Vice President of Business Development]

Thank you, Samira and good morning everyone. Last week we announced the signature of an exclusive license agreement and strategic partnership with TherapeuticsMD for the rights of TX-004HR and TX-001HR for Canada and Israel. In addition and in conjunction with the license agreement, Knight invested [ USD 20 million ] in TherapeuticsMD concurrently with our public offering. TX-004HR is an estradiol vaginal soft gel which is FDA approved and marketed by TherapeuticsMD as a vaccine in the US.[ TX-004 ] is for the treatment of moderate-to-severe dyspareunia or vaginal pain associated with sexual activity, a symptom of vulvar and vaginal atrophy or VVA that is due to menopause. TX-001HR is a bio-identical hormone therapy combination of estradiol and progesterone and a single oral soft gel for the treatment of moderate-to-severe vasomotor symptoms due to menopause.Both products are designed to alleviate the symptoms of and reduce the health risks resulting from menopause-related hormone deficiencies including hot flashes, osteoporosis and vaginal discomfort. On average, women enter menopause at the age of 51 and in Canada there are approximately 7.2 million women aged 50 and over.In addition, 60% to 80% of women entering menopause will experience vasomotor symptoms such as hot flashes while up to 50% of post-menopausal women suffer from symptoms of VVA. Hormone replacement therapy or HRT is the standard treatment for both conditions and more specifically local treatments are preferred when a women is suffering from VVA only. According to IQVIA Canada, the total market for local HRT for VVA was $61 million in 2017 and grew at a full-year CAGR of 8%, prescriptions were just over 1 million in 2017 as well and grew at a full-year CAGR of 4%.Vagifem is the most significant product in this category with sales of $49 million in 2017. The total market for HRT was $116 million in 2017 and declined at a full-year CAGR of 1.3%. Prescriptions were approximately 4.1 million in 2017 and has been declining at a full-year CAGR of 3.7%.We expect to submit both products to Health Canada for regulatory approval during 2019.Lastly, for our [ USD 20 million ] investment, Knight received 3,921,568 shares at a price of [ USD 5.10 ]. Knight may sell up to 50% of the shares acquired immediately as well as up to 16.67% of these shares on each of the 30th day to 60th day and 90th day, following the filing of the final prospectus, which occurred on August 1, 2018. We are really excited to add these 2 innovative products to our growing portfolio and we look forward to continue to work with our new partner to bring these products to Canadian patients.I will now turn the call back to Samira.

[Samira Sakhia, President, CFO & Director]

Thank you. Amal. I want to thank the BD team, including Amal and Jody Engel, our Director of Business Development for the many hours of hard work to make this deal happen.Turning now to Knight's strategic loans. On April 24, 2018, we amended our loan agreement with 60P or 60 Degrees Pharmaceuticals and committed to lend an additional amount of up to USD 2.1 million, at an interest rate of 15% to support the regulatory approval and commercialization of tafenoquine. As consideration for the amendment, Knight received an additional USD 3 million, plus annual interest of 9% as a convertible debenture. Furthermore, Knight has obtained the rights to commercialize the anti-malarial drug tafenoquine in Latin America.Subsequent to the quarter, Knight received $3.1 million from Profound, representing a full repayment of the loan balance. After the repayment from Profound, we had a nominal value of $26 million receivable from 6 strategic loan partners and we continue to look for loan opportunities that both generate good income and more importantly, help us to secure commercial rights to innovative pharmaceutical products.Turning now to our fund strategy also designed to generate good income and help us secure innovative pharmaceuticals. We have committed a total of $126 million. During the quarter, Knight invested $9.9 million and received distributions of $5.8 million from our strategic fund investments. As of June 30, 2018, we have an outstanding commitment of approximately $73 million related to these funds. At the end of the quarter, Knight had over $806 million of cash, cash equivalents and marketable securities on hand and a net asset value of $1 billion or $7.09 per share. We remain well positioned to execute on our mission to improve the lives of patients while making a good return in the process in that order.This concludes our formal remarks. I'd like to now turn the call up to questions. Simon?

[Operator]

[Operator Instructions] And your first question comes from the line of David Novak with Raymond James.

[David Novak, MD & Healthcare Research Analyst]

Thanks for taking the questions and happy birthday, Jonathan. You also share the birthday with the date Julius Caesar beat Pompey the Great, which is an interesting date to share a birthday with. I guess to start, a few questions on the therapeutics and the assets. First, on the transaction structure, I found the equity purchase in lieu of an upfront to be really an interesting use of capital. Is this a structure Knight hopes to replicate in the future or was this really a unique one-time opportunity?

[Amal Khouri, Vice President of Business Development]

David, this is Amal. So -- yes, it's definitely a deal structure that works well for us considering our cash balance. And if you recall, this is the second time we actually do this. We had done the deal with Advaxis a few years ago where we participated in private placement and in parallel to that investment, we signed a license agreement. So it's definitely a deal structure that we'd be happy to do over again if it works for both us and the partner.

[Samira Sakhia, President, CFO & Director]

I just wanted to add, we would be -- again looking -- we've always been very open to doing different kinds of structures, so whether it's equity or debt we would be willing to do that. That's part of why some of these loans that we have is really to be able to add to our portfolio of products.

[David Novak, MD & Healthcare Research Analyst]

And maybe you guys could provide some commentary with respect to how you feel, specifically TX-004 will compete in the market that already has fairly substantial generic alternatives of competing therapeutics like Estrace and Vagifem, for example. So in management's view, is this product differentiated enough that this wouldn't really be a concern? How do you guys think about that?

[Amal Khouri, Vice President of Business Development]

Yes -- I mean the product is well differentiated. We have -- the product has onset of action at 2 weeks, which none of the other products actually has. There is also dosing flexibility and the way to administer the product is actually a real benefit to patients. So we believe the product is well differentiated.

[David Novak, MD & Healthcare Research Analyst]

Excellent. And just on the covenants with respect to regulatory applications, if hypothetically Health Canada doesn't respond within the average 300 days or if a Non-C is issued, would this in any way trigger TXMD's ability to terminate the agreement or is that solely based on submission timeline alone?

[Amal Khouri, Vice President of Business Development]

We didn't really -- so, just -- we don't really disclose the details of these terms, but it's really at the submission level rather than the approval level.

[David Novak, MD & Healthcare Research Analyst]

Okay. And I guess just 2 quick housekeeping questions. During the quarter, did you guys respond to the Iluvien notice?

[Amal Khouri, Vice President of Business Development]

Yes, we did.

[David Novak, MD & Healthcare Research Analyst]

Great. And finally on Medison. Could you guys provide a bit of commentary as to how Medison has been performing relative to your own internal expectations? I know last year they had some pressure due to some pricing pressures that they faced. How are they performing today benchmarked to your own estimates?

[Amal Khouri, Vice President of Business Development]

So they continue to perform well. One of the things that they are facing after the downward pricing pressure is really a hit to their margin. That being said, one of the other pieces that's actually adding to this is the fact that they are launching some new products and for that, they are having a lot of sales -- SG&A related to that and that's really what's hurting their performance to-date.

[David Novak, MD & Healthcare Research Analyst]

Okay. Great. So presumably though, once these assets hit market and they grow, you should sort of see a rebound in the margins and that's kind of the hypothesis here?

[Jonathan Ross Goodman, CEO & Director]

[ We've gotten in the ] profitability.

[Amal Khouri, Vice President of Business Development]

In the profitability. The gross margins, we believe, will stay where they are or continue to decline slightly.

[David Novak, MD & Healthcare Research Analyst]

Got you.

[Operator]

Your next question comes from the line of Ammar Shah with National Bank.

[Ammar Shah, Associate]

I was actually just wondering the Probuphine commercialization is coming up in the year. [ What are the ] next few months looking like for you guys leading up to this? Just hoping to get like a little bit of play by play on what we can expect what you guys are thinking.

[Amal Khouri, Vice President of Business Development]

So we have already started pre-launch activities related to Probuphine. As you know, we have a sales force of 12 reps outside -- outside sales reps across Canada. We are going to be continuing to use that team. We're not expanding that beyond there. But there will be more promotional activity and spend related to that as we prepare -- as the launch -- as we start having products in the fields.

[Ammar Shah, Associate]

Okay. Makes sense. And then switching gears a bit. Your transaction activity, it's picked up quite a bit to start the year. What's -- kind of what are you guys seeing in the market out there in terms of your deal pipeline and how are you kind of looking at valuations and whatnot?

[Amal Khouri, Vice President of Business Development]

So we continue to see the same level of activity and same level of deal flow that we've been seeing for the past couple of years. In terms of valuations, we also continue to monitor and wait still for expectations around valuations to come down a little bit. We remain financially disciplined and continue to look for good opportunities [ around valuations ].

[Operator]

[Operator Instructions] The next question comes from the line of Chris Potter with Northern Border Investments.

[Chris Potter]

My question was answered.

[Operator]

And I am showing no further questions at this time. [ I'd ] turn the call back over to our presenters.

[Samira Sakhia, President, CFO & Director]

Thank you for your confidence in the Knight team and for joining Knight's Q2 2018 Conference Call and have a good morning.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.