Knight Therapeutics Inc

TSX:GUD

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen. My name is Michelle, and I will be your operator today. Welcome to Knight Therapeutics Inc. 2020 Second Quarter Final Results Conference Call.Before turning the call over to Jonathan Ross Goodman, 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 they were 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.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 via e-mail to [e-mail] (sic) [e-mail] or via phone at [phone]. I would like to remind everyone that this call is being recorded today, August 13, 2020.I would now like to turn the meeting to your host for today's call, Jonathan Ross Goodman. Please go ahead, Mr. Goodman.

[Jonathan Ross Goodman, Founder, CEO & Director]

Good morning, everyone, and welcome to Knight Therapeutics Second Quarter 2020 Conference Call. I'm joined on today's call with Samira Sakhia, our Chief Operating Officer; Amal Khouri, our VP of Business Development; and Arvind Utchanah, our Chief Financial Officer.Despite the circumstances due to COVID, we continued to advance our acquisition of Grupo Biotoscana with the launch of our tender offer to buy the remaining 48.8% of GBT. Furthermore, we have advanced our commercial presence and product pipeline with the regulatory approval of Ibsrela in Canada, Lenvima in Ecuador and the Canadian in-licensing and onboarding of Trelstar.I will now turn the call over to Samira, who'll walk through the development of our portfolio and corporate updates. Samira?

[Samira Sakhia, President & Director]

Thank you, Jonathan, and good morning, everyone. I'll provide an update on our products, which have continued to advance in the quarter. As announced in January, Knight has partnered with Debiopharm in an exclusive agreement that grants Knight the Canadian rights to commercialize triptorelin and market as Trelstar, an LHRH agonist, for the treatment of prostate cancer. This quarter, with the transfer of the marketing authorization, Knight took over the commercial activities of Trelstar in Canada.In addition, as we discussed in our last call, in April 2020, Knight obtained Health Canada's approval for Ibsrela or tenapenor for the treatment of irritable bowel syndrome with constipation. We expect to be launching Ibsrela in early 2021.In addition, on June 30, 2020, our partner, Ardelyx, announced that it has submitted a new drug application to the U.S. Food and Drug Administration for the control serum phosphorus -- the control of serum phosphorus in adult patients with chronic kidney disease, on dialysis.Finally, in July 2020, Knight obtained regulatory approval for Lenvima or lenvatinib in Ecuador for the treatment of advanced liver cancer as well as advanced kidney cancer in combination with everolimus and differentiated thyroid cancer. Lenvima is sold by GBT under an exclusive license agreement with Eisai.Moving on to our corporate update. During the second quarter, we announced that we had completed the 2019 NCIB and had purchased a total of 12,053,692 common shares at an average price of $7.14 per share. Subsequent to the quarter, on July 10, we announced the acceptance by the Toronto Stock Exchange of the company's notice of intention to make a normal course issuer bid, which commenced on July 14, 2020. Under the 2020 NCIB, Knight made may purchase for cancellation up to 10.8 million shares over the next 12 months. As of today, Knight has not purchased any shares under the 2020 NCIB.I'm now going to turn the call over to Amal to update on BD activities.

[Amal Khouri, Vice President of Business Development]

Thank you, Samira, and good morning, everyone. As we've previously announced, the acquisition of 100% of Grupo Biotoscana was by way of a 2-step transaction. The first step was the acquisition of 51.2% majority stake through a private transaction that we closed on November 29, 2019, and that gave Knight a controlling interest rate. In December of last year, we started the process for the second step, which is the mandatory tender offer for the minority BDR holders. On July 15, 2020, following approval by the Brazilian Exchange and Securities Commission, we launched the tender offer to acquire the remaining 48.8% of GBT.In accordance with the offer, BDR holders are eligible to tender their BDRs at the auction, which will take place tomorrow, August 14. At the end of the auction, Knight through its wholly owned subsidiary will take up all BDR tenders at the auction and will settle within 2 business days. If at least 67% of the participating BDRs at the auction are tendered, all else further described in the offer notice, Knight will discontinue the BDR program and deal as GBT. If after the tender, the remaining BDRs represent less than 5% of the total shares outstanding, which include both BDRs and common shares, then Knight will proceed with a squeeze-out process, all as outlined in the offer notice.I will now turn the call over to Arvind to go over the financial results for the quarter.

[Arvind Utchanah, Chief Financial Officer]

Thank you, Amal. In the course of this conference call, I will refer to Knight's adjusted earnings, which is a non-IFRS measure. Knight defines adjusted earnings as operating loss or income adjusted to exclude amortization and impairment of intangible assets, depreciation, acquisition costs and nonrecurring expenses incurred but includes net interest income earned and costs related these. In addition, the adjusted earnings do not reflect the portion of GBT's earning attributable to the noncontrolling interest.I'm pleased to report that for the quarter ended June 30, 2020, we reported revenues of $53.3 million, an increase of $50 million or 1,562% compared to the same period last year. The growth in revenues is explained by the consolidation of GBT's financial results, which accounted for $48.9 million of incremental revenues. GBT generated $21.8 million in Brazil, $10.7 million in Argentina, $8.5 million in Colombia and just under $8 million in the rest of Latin America. The increase of 35% or $1.1 million in Knight's revenues for the quarter was mainly attributable to the timing of sales of Impavido, growth in Movantik sales and the in-licensing of Trelstar.We also reported a gross margin of $22.2 million or 42% of net sales compared to 20 -- $2.9 million or 92% of net sales in the same period last year. The change in gross margin in dollars and as a percentage of sales was mainly attributable to the consolidation of GBT's financial results.Furthermore, we recorded an inventory provision of $1.6 million due to the impact of COVID-19 on certain new product launches in Canada and Latin America. In addition, after excluding the impact of hyperinflation in accordance with IAS 29, the gross margin as a percentage of sales would have been 47% or 5% higher than reported.I would like to remind listeners that the presentation explaining the basics of accounting under hyperinflation is still available on Knight's website under the Investor Relations presentation section.Our selling and marketing, G&A and R&D for the quarter increased by $13.3 million or 214% over the -- compared to the same period last year. The variance is explained by the consolidation of GBT's financial results, which accounted for $15 million of incremental expenses. Knight's portion of selling, marketing, G&A and R&D decreased by $1.7 million compared to the same period last year, mainly due to nonrecurring expenses in the same third quarter of 2019 related to Meir Jakobsohn's shareholder's activist campaign.I would like to add that Knight expects to incur significant additional expenses in the second half of 2020 related to closing the GBT mandatory tender offer.Now moving on to amortization of intangible assets. For the quarter, our amortization of intangible assets is at $5.8 million, an increase of $5.4 million versus the prior period. The increase is related to the amortization of the definite-life intangible assets that we have acquired in the GBT transaction.Knight's interest earned on our cash, marketable securities and strategic loans was $3.7 million, a decrease of $2.5 million or 40% compared to the second quarter of 2019 due to a decrease in the average cash and marketable securities balance, partially offset by a higher average loan balance.In addition, we recorded interest expense for the quarter of $2.3 million due to the interest expense on GBT's bank loan of $1.1 million as well as interest accretion of $1.2 million on the liability related to the mandatory tender offer of GBT.For the quarter, adjusted earnings were just under $10 million, up 119% or $5.4 million compared to the same quarter last year. The consolidation of GBT's financial results accounted for $7.6 million of the increase, which is partially offset by a decrease in Knight's interest income. The nonrecurring adjustments made to the operating loss for the second quarter of 2020 is $304,000 and represent additional restructuring activities in connection with the integration of GBT.Now moving on to gains and losses that are not reflected in adjusted earnings. For the quarter, we recorded a net gain on financial asset measured at fair value through profit or loss of $16.5 million, mainly due to unrealized gains and revaluation of the strategic fund investments. In addition, we recorded a net gain on the mandatory tender offer, or MTO, liability of $3.2 million due to the unrealized gains on the foreign exchange revaluation of the Brazilian real denominated mandatory tender offer liability, offset by an annualized loss on forward and non-deliverable forward contracts. Furthermore, we recorded a realized gain of $1.3 million on our NCIB's automatic share purchase plan.Lastly, we recorded a foreign exchange loss of $4.1 million due to the consolidation of GBT's financial results as well as Knight's relative losses on certain U.S. dollar denominated financial assets.I will now turn to key balance sheet items as of June 30, 2020. At the end of the quarter, Knight had $567 million in cash, cash equivalents, restricted cash and marketable securities, an increase of $30.1 million compared to the end of the fourth quarter of 2019. The increase is mainly due to proceeds from the sale of shares in medicine, partially offset by the purchase of shares through the NCIB and the acquisition of intangibles. Furthermore cash, cash equivalents, restricted cash and marketable securities were $25.7 million lower than the first quarter of 2020. Due to a -- the $17 million -- $17.9 million of purchases related to the NCIB, $10.1 million invested in intangible assets, $6.8 million of bank loan repayment, offset by $8.1 million generated from operating activities.Trade and other receivables were $77.8 million, a decrease of $30.3 million compared to Q4 2019. Of the decrease, $22.8 million is related to the decrease in both short-term and long-term trade receivables due to the depreciation of LATAM currencies, the net collection of receivables and the credit loss provision recorded in 2020. The remaining difference is mainly due to the collection of a distribution receivable from a fund investment and a decrease in interest receivable due to the timing of the maturities of the marketable securities as well as a decline in interest rates.Our inventory balance at the end of the quarter was $71.8 million, an increase of just under $1 million compared to the end of last year. The increase is due to the timing of inventory purchases and the impact of hyperinflation adjustment, partially offset by inventory provision and the depreciation of LATAM currencies.The total accounts payable, accrued and other liabilities of $68.5 million, a decrease of $27.6 million or 29% compared to Q4 2019. The decrease is mainly due to payments of inventory purchases, payments of GBT transaction fees, the depreciation of LATAM currencies and a lower accrual balance as compared to December 31, 2019, due to timing.Lastly, Knight reported a total debt of $46 million, a decrease of $9.6 million or 17% compared to Q4 2019, mainly driven by the loan repayment of $7.5 million and a foreign exchange revaluation, partially offset by an additional loan issued to GBT.I will now turn the call back to Samira.

[Samira Sakhia, President & Director]

Thank you, Arvind. Since the outbreak of coronavirus or COVID-19, our focus has been on ensuring the continuity of product supply to patients in Canada and Latin America, while at the same time, ensuring the safety of our colleagues throughout the region and their families. While we continue to work from home, we are continuing to execute on the integration of Biotoscana, closing 100% acquisition and working on business development opportunities to grow the business.I'll now turn the call back over to Jonathan for his concluding remarks.

[Jonathan Ross Goodman, Founder, CEO & Director]

Thanks, Samira. We remain committed to improving the health of Canadians and now Latin Americans, while delivering sustained shareholder value.Thank you for your support and confidence in the Knight team. This concludes my formal remarks. And now I'd like to open up the call to questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from David from Martin (sic) [ David Martin from Bloom Burton & Co. ]

[David C. Martin, MD & Head of Equity Research]

Congratulations on the good quarter. First question, in Brazil, you had some shipments that were supposed to occur in Q1 that moved into Q2. I'm wondering how much of an impact, how big were those orders in Q2?

[Samira Sakhia, President & Director]

We didn't -- we don't usually provide the kind of the shift that happened, but it explains a bit of the growth that we have. This is Q-on-Q -- Q-over-Q.

[David C. Martin, MD & Head of Equity Research]

Okay. Also in Q1, you mentioned several things, the slowdown in new cancer diagnoses and slowdown in the use of other hospital drugs, also the impact of COVID on your Cresemba launches in various countries and your integration of GBT. I'm wondering have any of those issues normalized at all. Or are you still feeling a full impact?

[Samira Sakhia, President & Director]

So throughout the market, the -- there is a slowdown. We're seeing this in all of the markets. It's really depends very -- it's dependent on a market by market. The -- like certain treatments are continuing depending on the market. We have some products that are in the retail. We have some products that are institutional and specialty. And depending on the product or the territory and the level of shutdown, we're seeing a different response. There is slow pickup, but similar to -- and this is not just a Knight or GBT impact, you're seeing this throughout the industry where fewer patients are going in and fewer diagnoses are happening. We are seeing that in oncology. We are seeing that a little bit in -- we're seeing that also in tektology. But the -- our sales teams, our medical teams are continuing to deliver the message digitally in those -- in all markets. And there is interest in the product. It's just -- it is going to take time to normalize back.

[David C. Martin, MD & Head of Equity Research]

Okay. And what about your integration of GBT? Have you been able to accelerate that process?

[Samira Sakhia, President & Director]

We're continuing to work really hard, both here and in South America. Everybody is really focused on execution. The teams are looking at things like basic stuff like systems and processes, where things are slowly starting to advance and integration is on multiple fronts and multiple teams. And things are starting to come together, but this is going to be a long process over the next -- still over the next few months.

[David C. Martin, MD & Head of Equity Research]

And is adding products to the portfolio kind of in the background until the integration is finished? Or are you looking at that in parallel?

[Samira Sakhia, President & Director]

Absolutely not. I'm going to ask Amal to add, that her priority is really to add products.

[Amal Khouri, Vice President of Business Development]

Yes. No, absolutely. David, it's -- we've been -- we never took the backseat. It's always been front and center, and we haven't at all deprioritized or stopped working. We're actually -- we've been quite busy on the BD front from -- even from -- as soon as we closed the first -- the private transaction we've been active.

[David C. Martin, MD & Head of Equity Research]

Are you seeing opportunities where you'll be able to get products for both Canada and South Central America?

[Amal Khouri, Vice President of Business Development]

Yes.

[David C. Martin, MD & Head of Equity Research]

Okay. And then last question. Trelstar, a mature product that hadn't been promoted. Have you started to see a positive impact on sales of the product now that you started promoting it? Or is it too early?

[Amal Khouri, Vice President of Business Development]

Yes. It is a little bit too early because it was in the middle of Q2. We've had really good interactions with physicians, but it's a little too early to tell. And remember, at this point, any and all of those interactions are all virtual.

[Operator]

[Operator Instructions] Your next question comes from Justin Keywood from Stifel.

[Justin Keywood, Director of Equity Research]

I was just wondering if there was any type of pandemic relief program that contributed to the profit in the quarter. And if that's an opportunity in the near term?

[Samira Sakhia, President & Director]

Justin, no. We -- I assume you're talking about things like government grants.

[Justin Keywood, Director of Equity Research]

Correct.

[Samira Sakhia, President & Director]

That we would have taken advantage of. So the -- I think the -- and we did look at this early on. The only market that is providing -- of the ones that we're working in and that is providing pandemic relief is in Canada, and we wouldn't be eligible. And in the rest -- this is really continued work by the teams on executing.

[Justin Keywood, Director of Equity Research]

Okay. Understood. And then just a bit of a broader question. Just as far as business development opportunities, now obviously, the business is more focused in LATAM. Is Canada still a priority? Are you looking at new assets here? Or is the shift more to the LATAM region?

[Samira Sakhia, President & Director]

Yes, sure. We're looking across our territory. So we're looking at opportunities for Canada and LATAM. Ideally, we'd like opportunities for the entire territory, but we remain flexible for some opportunities that may either only be available for one versus the other or may have a better fit in one portfolio versus the other. But we continue to look for opportunities in Canada as well as LATAM.

[Justin Keywood, Director of Equity Research]

Okay. And I know Mexico was mentioned as possibly a good opportunity to increase that exposure of GBT. But obviously, they're having some challenges there with the COVID-19 outbreak. Has that changed your opinion at all as far as potential acquisitions in the area? Has that delayed it? Or the conversations, are they continuing?

[Samira Sakhia, President & Director]

Some -- so it hasn't really changed the interest and the importance of the Mexican market, but there have been some delays, not just for Mexico but across the board. Some conversations and some processes had -- have been delayed or temporarily put on hold because of the pandemic and some conversations continue.

[Justin Keywood, Director of Equity Research]

Okay. And then just one last question. Just on the EBITDA or gross margins, is this a good level to use as far as modeling in the near-term with possibly some expected improvement ahead? Or should we maybe anticipate some greater costs in the near term?

[Samira Sakhia, President & Director]

That's a great question. I'm going to turn it over to Arvind.

[Arvind Utchanah, Chief Financial Officer]

So on the EBITDA, just as a reminder, like on the gross margin, like what you see on our financial statement includes hyperinflation. So one thing to consider is the gross margin without hyperinflation. And we do provide a scheduling in the press release where we show the gross margin without hyperinflation. So that's one thing to consider.In terms of impact to gross margin in the long to medium term, it's really a multiple factor question, and it's quite -- it's not a straightforward answer. So there's really 3 things I would consider. So one is contract renewal. So as we have negotiation for renewal of contracts, we generally would expect an erosion on margin. The second one is FX. We do have high volatility in the LATAM currency, and that, too, would create volatility in the margin. And the third point to consider is your product mix. So as we launch product in the year and in the coming years, like we will have a change in product mix, and that too will impact the margin.So given all the multiple factors that I'd just mentioned, it's hard to predict the gross margin and really where we will land in the medium to fourth -- long term. But I believe we -- you could look at the historical situation of GBT's margin. And if you go back in -- to the last 2 years, it's usually fluctuating plus or minus 5% on average on a yearly basis.

[Operator]

[Operator Instructions] I have no further questions in queue. I turn the call back over to the presenters for closing remarks.

[Jonathan Ross Goodman, Founder, CEO & Director]

Thank you for your confidence in the Knight team and for joining our Q2 2020 conference call. Please stay healthy, stay safe and stay connected.

[Operator]

Thank you, everyone. This will conclude today's conference call. You may now disconnect.