Knight Therapeutics Inc

TSX:GUD

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen. My name is Katie, and I will be your operator today. Welcome to Knight Therapeutics Inc. 2021 Second Quarter Financial Results Conference Call. Before turning the call over to Jonathan Ross Goodman, CEO of Knight, listeners are reminded that portion 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 forward-looking statements. The company considers the assumptions in 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 a result of new information, future events, except as required by law. We would also like to remind you that 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] or via phone at [phone]. I would like to remind everyone that this call is being recorded today, August 13, 2021. And now, we'd like to turn your meeting over to your host, Jonathan Ross Goodman. Please go ahead.

[Jonathan Ross Goodman, CEO & Director]

Good morning, everyone, and welcome to Knight Therapeutics Second Quarter 2021 Conference Call. I'm joined on today's call with Samira Sakhia, our President and Chief Operating Officer; Amal Khouri, our Chief Business Officer, Arvind Utchanah, our Chief Financial Officer; and Jeff Martens, our VP, Commercial. After 104 quarters of leading publicly traded specialty pharmaceutical companies since the tender age of 28, and with the majority of these quarters with Samira by my side, it is the right time for both Knight and for Canadian society for me to step aside and make room for a female superstar. I look forward to fulfilling my new role as Chairman to support Samira and our talented team to the best of my abilities. I do this not just because I'm the goodest and the largest Knight shareholder, but because teams support each other during both GUD, good times and bad times. Thank you to our shareholders and to Amal Khouri, Jody Engel, Corey Richardson, Arvind Utchanah, Georgette Lessard-Boyer, Gerry Mazzei and many others who followed me from the Paladin -- from Paladin Labs for their confidence over the last 27 years. A special thank you goes to James Gale, Managing Partner of Signet Healthcare Partners, for assuming the role of Lead Director. Imagine what we're going to do now that we're just warmed up. I will now turn the call over to Samira, who I will have to start being nice to in 17 more days, as Samira will become Knight's new talented orchestra conductor. Samira?

[Samira Sakhia, President, COO & Director]

Thank you, Jonathan, and good morning, everyone. It has been a privilege to have worked hand-in-hand with and learned from Jonathan over the last 20 years. And it was just a couple of weeks ago that we actually did celebrate our 20-year anniversary. I'm honored and humble today to take on the role of CEO of Knight and to lead an exceptionally talented and dedicated executive team and knights across Canada and Latin America. As for the quarter, I am excited to announce that for Q2, Knight achieved record quarterly results despite the ongoing challenges posed by the pandemic. During the last 6 months, we executed on multiple fronts with our business team -- business development team closing Exelon and already beginning to work on transition, the commercial team delivering on strong growth on our key brands, and all our teams executing on integration and systems implementation. Turning now to the NCIB. We completed the 2020 NCIB on July 13, 2021, and purchased a total of 6,193,169 common shares at an average price of $5.33 per share. Subsequent to the quarter, we announced the acceptance by the Toronto Stock Exchange of our notice of intention to make a normal course issuer bid, which commenced on July 14, 2021. Under the 2021 NCIB, Knight can purchase, for cancellation, up to 10.2 million shares over the next 12 months. As at August 11, 2021, Knight has purchased 2.3 million shares for an aggregate cash consideration of $11.9 million or $5.17 per share. I'll now turn the call over to Amal for an update on BD activities.

[Amal Khouri, Chief Business Officer]

Thank you, Samira. During the quarter, as you know, we completed the acquisition of the exclusive rights of Exelon for Canada and Latin America, which we paid a total consideration of CAD 217 million or USD 180 million. This acquisition leverages our Pan-American, ex U.S. platform, and further validates our rest of world strategy. Exelon is our first global brand that we are selling across our entire territory. In addition to the Exelon acquisition, our business development team remains focused 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 over to Jeff to provide a commercial update.

[Jeff Martens]

Thank you, Amal. Building on our hard work of 2020, our efforts in 2021 remain focused on executional excellence of our new product launches. Overall, our revenues on a current -- constant currency basis, pardon me, increased by $14.4 million or 28% during the quarter versus Q2 last year. The growth in revenues is driven by an incremental demand estimated to be between $5.5 million and $7 million, primarily due to our infectious disease products that treat invasive fungal infections associated with COVID-19; $4.8 million related to the growth of our recently launched products; and $4.2 million from the acquisition of Exelon. Furthermore, on July 6, 2021, Health Canada has approved NERLYNX to treat HER2-positive metastatic breast cancer patients in Canada. Over the remainder of the year, we remain focused on the execution and acceleration of our launches and continue our work on the return-to-field plan in all of our territories. I will now turn the call over to Arvind to go over our financial results.

[Arvind Utchanah, Chief Financial Officer]

Thank you, Jeff. In the course of this conference call, I will refer to EBITDA and adjusted EBITDA as well as constant currency, which are all non-IFRS measures. Knight defined EBITDA as operating loss or income, excluding amortization and impairment of intangible assets, depreciation, purchase price accounting adjustment and the impact of accounting under heavy inflation, but to include costs related to leases. Adjusted EBITDA exclude acquisition costs and nonrecurring expenses. In addition, constant currency is also a non-GAAP measure used to exclude foreign currency fluctuations. Financial results at constant currency obtained by translating the prior period results at the average foreign exchange rates, in effect during the current period, except for Argentina, where we only exclude the impact of hyperinflation. I'm excited to report that for the second quarter of 2021, we achieved record revenues of $65.8 million, an increase of $14.4 million or 28% on a constant currency basis. As for gross margin, we reported $28.8 million or 44% of revenues compared to $22.2 million or 42% of revenues in the same period last year. The increase is mainly due to higher revenues, lower inventory provision and a change in product mix, partially offset by the renegotiation of certain license agreements and the depreciation of the LatAm currencies. Excluding the impact of hyperinflation, the gross margin will be 46% of revenues for the quarter. Our total operating expenses for the second quarter increased by $1.7 million or by $1.3 million on -- in constant currency compared to the same period in 2020. The increase is mainly due to an incremental expense of $1.2 million related to the extension of stock options held by certain executive officers, directors and employees, partially offset by lower costs of restructuring versus the second quarter of 2020. Moving on to EBITDA. The EBITDA for the quarter was $9.3 million compared to an EBITDA of $6 million on a constant currency basis in the second quarter of last year. Adjusted EBITDA was $9.4 million for the quarter compared to an adjusted EBITDA of $6.4 million on a constant currency basis in the same period last year. The increase of $3 million or 47% was mainly driven by the previously mentioned increase in gross margin, partially offset by higher operating expenses. Now moving on to certain items that are not reflected in our adjusted EBITDA. During the quarter, we recorded $28.5 million of net gain on financial assets measured at fair value to profit or loss, which is mainly coming from our strategic fund investments. The unrealized gain was driven by several of our strategic fund investments, including an unrealized gain of $30.5 million on Singular Genomics System, an investment held by Domain, which had an initial public offering in the quarter. The unrealized gains in the quarter were partially offset by an unrealized loss of $13.5 million on the shares of Atea, a public company held by Sectoral's [indiscernible]. On a life-to-date basis, Knight has recorded an unrealized gain of $8.9 million on Atea. I would like to remind listeners that our financial assets are subject to equity price risk. For example, Singular Genomics System has seen a material decline in its share price subsequent to the second quarter. And at the current price level, Knight would record an unrealized loss or reverse part of the second quarter's unrealized gain by $14 million. Finally, Knight generated cash inflows from operations of $12.4 million in the second quarter of 2021, an increase of $4.3 million or 54% over the same period last year. The significant increases in cash from operations is driven by an improvement in our operating results and working capital as well as interest collected on the maturity of certain marketable securities during the quarter. I will now turn the call back to Samira.

[Samira Sakhia, President, COO & Director]

Thank you, Arvind. Looking ahead, we remain committed to continue building a leading Pan-American, ex-U.S. specialty pharmaceutical company. After closing Exelon, we have over $160 million in cash, cash equivalents and market securities to continue to execute on our strategy to in-license and acquire innovative pharmaceuticals as well as developing our branded generic portfolio. Thank you for your support and confidence in the Knight team. This concludes my formal remarks, and I would like to turn the call over for questions. Katie?

[Operator]

[Operator Instructions] We'll take our first question from Doug Miehm with RBC Capital Markets.

[Douglas Miehm, Analyst]

And I guess the first comment I'd like to make is -- and I'm sure I've done this before, but congratulations to you both. Jonathan, it's been great to work with you for such a long time as CEO; and good luck to you, Samira, as you move ahead in this new role. First question that I have just has to do with the sustainability of the antifungal strength that you saw in the quarter. Can you talk about what you expect to see or are seeing in Q3? And how we can expect that to move through the remainder of the year?

[Samira Sakhia, President, COO & Director]

First of all, thank you so much for your congratulations, and looking forward to continuing to work with you. But I'm going to turn it over to Jeff to answer the sales related to our products.

[Jeff Martens]

Yes, thanks so much for the question, Doug. So yes, as far as sustainability, we expect, due to COVID, that our sales will continue to remain lumpy, right? We're going to see probably movements in both directions. But what I can say is that there's really 2 factors, right? There's our infectious disease products, which are used, in some cases, in patients that are co-infected with COVID. And for those patients, obviously, as long as COVID is there, we will continue to see positive upside. But there's also the other element, which is after COVID's behind us, has the experience with these customers then positive. And we like to think that some of the positive experience that they've had with our medicines will continue. So I think there will be some sustainability, but it will be up and down.

[Samira Sakhia, President, COO & Director]

One other thing that we're seeing -- just I'll kind of wrap up a little on this. COVID is going up and down in our territories. So what we saw, for example, in Q2 was that Mexico cases were getting a bit better, but there was pickup in Brazil. It's starting to turn a little, where Mexico is getting worse in the Q3. Things are getting slightly better in Brazil. So it really depends on a market-by-market basis as well as hospitalizations.

[Douglas Miehm, Analyst]

Okay. That makes perfect sense. And then just a related question. You did start to get some traction in your product launches. And maybe what we're ultimately going to see is as COVID starts to wane, you're going to get more traction on those product launches. But perhaps you could expand a little bit on that, and I'll leave it there.

[Samira Sakhia, President, COO & Director]

Sure. So as Jeff mentioned, one of the things that we are counting on is the utilization so far on a product like Cresemba during COVID is going to carry forward in utilization post-COVID because they got familiarity on how to use it. Then there's products like Halaven and Lenvima, both of which continue to advance, maybe not as fast as we'd like, but we do -- as our reps start to go back in the field, patients start to go back to doctors and diagnoses start to happen. We expect that to rise. And the same thing in Canada behind Trelstar, Nerlynx and IBSRELA.

[Operator]

We'll take our next question from David Novak with Raymond James.

[David Novak, MD & Healthcare Research Analyst]

And I guess I'll just echo Doug here, and Jonathan, sending you the absolute best as you transition out of the CEO role. That said, I know nothing really changes here as you and Samira are and always have been completely on the same inhuman genius wavelength. Nonetheless, one hell of a good GUD, of course, quarter to bow out on. I guess just moving on to questions. So first for me, just building on Doug's former question, is it fair to assume that the largest revenue contributors from the infectious disease portfolio are Cresemba and AmBisome? And if so, could you give us a bit of perspective into what the historical run rate for these products were prepandemic, while noting that historical run rate may not be reflective of go-forward run rate, particularly if you can establish additional loyalty or physician comfort with these assets? Just having some historical context would be helpful.

[Samira Sakhia, President, COO & Director]

So it's a great question. So in the case of Cresemba, there is very little run rate because it was in early launch phase, especially in a market like Brazil, where we only launched it late March just as the world was shutting down. And every kind of -- every extra, extra dollar we're making is actually an extra dollar that we didn't have last year or even in the last Q because we are seeing a spike in the Q as well. As far as AmBisome is concerned, like one of the things is we are not disclosing product-by-product data. We did see a spike happen in the Q, and we don't -- we expect it to temper over the next few quarters for 2 reasons. One is really going back to infections and hospitalizations, but also, we're seeing vaccinations in these territories also start to go up, and that will kind of drive that down as well.

[David Novak, MD & Healthcare Research Analyst]

Got you. Great. And that actually leads well into my next question. So thinking about the LatAm market from a macro perspective here, emerging markets like LatAm are likely to take a bit longer coming out of a cyclical downturn from COVID relative to North America. Can you share any views around changes quarter-over-quarter you're seeing with respect to things like unemployment, vaccine uptake, et cetera, in these markets, which may help us zero in on a rebound to economic growth in these particular jurisdictions?

[Samira Sakhia, President, COO & Director]

Sure. So as you know, like I said, like you're saying, these are emerging markets. There's a whole amount of the economy is partially -- the informal economy. And so a lot of these countries stopped being in shutdown just because they couldn't afford it that much longer. What we are seeing when it comes to vaccinations is they are moving pretty rapidly. They are about 6 months, I'm going to say, 3 to 6 months behind us depending on the territory. So markets like Argentina and Brazil, latest data is showing that 50-ish -- mid-50s have gotten at least one dose. In the markets like Mexico and Colombia, it's late 30s, early 40s, and then the smaller markets are a bit behind that. So we do -- hopefully, as North American and European markets are not vaccinating as much, vaccines start to move south, and that continues to ramp up. We know for a fact that in our team in Brazil, over 70 people -- 70% of the people have received their first dose. And we expect that by kind of end of September, they'll be past their second dose. In Colombia, we were able to, through the Chamber of Commerce, acquire vaccines for our people. And I believe by the end of this month, they'll all have first dose. And hopefully, by the end of October, early November, is their second dose.

[David Novak, MD & Healthcare Research Analyst]

Excellent. That's very helpful. And I guess just lastly for me, and then I'll hop back in the queue is that, Samira, you've recently spoken about your thoughts around the potential to secure LatAm domicile debt facilities that hedge against volatility in the late market. Now this is a bit of a change from Knight and Paladin's historical anti-debt perspective. But could you just share your current thinking around the strategy as it stands today?

[Samira Sakhia, President, COO & Director]

So that's a great point. One of the things we will be doing, and this is less about adding debt and shoring up our cash flows. It's really more about hedging currency exposure. So we are looking to -- and Arvind is working very hard on this, is to add debt in reais, Colombian, Mexican, Chilean peso so that we can hedge the cash flows that are coming in, especially behind Exelon from those countries.

[Operator]

We'll take our next question from David Martin with Bloom Burton.

[Antonia Borovina, Associate of Equity Research]

This is Antonia on the line for Dave. So just 2 questions for me. Can you give us a bit of insight into the diagnosis and treatment of cancer patients? Are things going back to normal in the LatAm countries? And then also for Exelon, are sales still expected to be in that 45% to 50% range? Or has anything changed since the acquisition?

[Jeff Martens]

Thanks so much for the question. And maybe I'll start with answering the oncology diagnosis rate and treatment in LatAm and Canada, and then I'll pass it over to Amal for the other question. So on this, I guess, we're in a situation where the waves of COVID vary country to country. So for example, Mexico actually was showing a significant decline, where we're seeing diagnosis rates increasing. But there was a spike in Brazil and Argentina, et cetera, which hindered the ability for doctors to diagnosing patients, obviously, being apprehensive with cancer to go in or a condition to get diagnosed. So I would say the diverse footprint that we have probably leads to some countries showing an increase in diagnosis rates at times and others, less. So there is some variability. But one thing is absolutely certain. As the vaccination rates continue to progress, the diagnosis rates will continue to increase. And we've positioned our new product launches to successfully obtain some of those patients. So that is really, I think, the situation on the diagnosis rate. But -- and we've actually seen examples of this in the countries as well. So I guess it's a matter of us just holding it tight and waiting for the vaccines to eventually let these businesses to open up. I think that answers the question. I'll maybe pass it over to Amal.

[Amal Khouri, Chief Business Officer]

Sure. Thank you, Jeff. So for Exelon, I think your question was on performance and if anything changed since we closed the deal. So if we look at the first 5 weeks kind of from when we closed, which was May 26 till the end of the quarter, the performance that we saw was actually ahead of what we're expecting, but that's because there's some lumpiness in buying patterns. Overall, expectations are still the same as we have communicated previously. So we expect this brand to be a flattish, so to remain in the similar range to what we saw last year, so the mid-$50 million range.

[Samira Sakhia, President, COO & Director]

The other thing, Antonio, that I would add is especially on Jeff's comment on where -- what we're seeing as far as vaccine -- as far as kind of treatment and diagnosis, our territories are really not that different from Canada or the U.S., whereas as doors open, and we saw this at the end of 2020 a little bit, especially in a market like Brazil, where they were actually in their summer months, and there was a lightness. We saw diagnoses happen and then it shut down again as they went into winter. Over the next couple of Qs, they're going back into summer, and vaccinations are going out. So we do expect diagnosis to continue -- to start going back up.

[Operator]

[Operator Instructions] We'll take our next question from Endri Leno with National Bank.

[Endri Leno, Associate]

And I -- like all the congratulations on the transition from Jonathan to Samira, congrats to both of you. A question that I had -- well, a couple, but I wanted to start a bit with vaccinations. I mean, it has come up several times. I was wondering if you have any comments on, for example, the efficacy of some of the things that have been used. And even though people had been vaccinated, I mean there were still waves, and there were still shutdowns in Chile, for example. Is there something that has been observed in the other geographies or not to date yet?

[Samira Sakhia, President, COO & Director]

So one of the things is we get -- all of these countries are getting different types of vaccines. We did see early on that Chile went in and out of shutdown. What they are now seeing is that some of the other vaccines, while they're efficacious, they may not be efficacious enough in preventing infection. They are still quite good in preventing serious infection and hospitalization. And that's kind of the feedback that we're seeing. We saw that in Chile. We saw that in Uruguay as well where cases continued to spike, but then they started to really come off as well. These countries are continuing to monitor. So there's conversations that are happening in the U.S. and Canada about their doses. Those same conversations are happening in markets like Chile and Uruguay, where -- and other markets as well.

[Endri Leno, Associate]

Great. That's very helpful. The other question I wanted to ask is on the newly launched products. Have they been launching all the intended geographies and it's just a question of ramping them up? Or are any new countries that still have not been launched in?

[Jeff Martens]

Thanks so much for the question. It's Jeff. I'll take that question. So we do have a couple of launches pending. So maybe I'll start there. So we do expect to see Halaven, Lenvima approval in Colombia later this year. And we're also waiting for the final cadet review for IMVEXXY and BIJUVA, and we are bullish that we'll see a positive outcome there, and we look forward to launching those 2 products here in Canada. So those are the pending launches. All the rest of the medicines have been launched in all jurisdictions where we can get an indication. I would say and just to name them, right, so NERLYNX in Canada; Lenvima, Halaven in our LatAm countries, pending Colombia. [indiscernible] start here in Canada. It's obviously a bit of a turnaround product. We would like to almost refer to that as a launch because we've reassumed it and has been responding beautifully to promotion here in Canada. So there are those pending launches. But where we have launched, obviously, in a COVID environment, it has been a bit slow, some of the uptake in some of those areas, but we're really seeing traction now as COVID starts to get under control. And that's a long [indiscernible].

[Endri Leno, Associate]

That's great. Jeff, one more last question for me. On Exelon sales, are they -- are we to assume they directly go to EBITDA? Or is there a margin that need to apply to that sales number?

[Samira Sakhia, President, COO & Director]

Sure. There is a little bit of spend in the OpEx, but the number that we reported is net revenue. So that is going straight to gross margin.

[Operator]

We'll take our next question from Justin Keywood with Stifel GMP.

[Justin Keywood, Director of Equity Research]

I was just wondering if there's any seasonal strength in Q2 that perhaps didn't show up as pronounced last year in the early days of a pandemic?

[Samira Sakhia, President, COO & Director]

Actually, no. I think what we -- really what's happening even there wasn't really any seasonality in the Q2 of last year. A lot of what was happening in Q2 of last year was the total crisis that the whole planet was under with shutdown. What we're seeing in this quarter is really about the treatment. We're seeing growth in our products. We see the addition of Exelon. And what's really driving in our infectious disease products is utilization in association with COVID infections and very busy ICUs.

[Justin Keywood, Director of Equity Research]

Got it. And can you just remind us, is there any seasonality in the GBT business, just in general?

[Samira Sakhia, President, COO & Director]

In general, there is a little bit similar to Canada, right in -- a little bit in Q4. And that's really around the Christmas season that we see, where wholesalers and hospitals do start -- like to stock up because of Christmas vacations. It's hard to tell right now between Q4 of '19 and Q4 of '20. As we go in, we're going to continue to monitor and be careful. Just because of COVID, a lot of that seasonality has been hard to measure.

[Justin Keywood, Director of Equity Research]

Okay. And for Exelon, was it a full quarterly contribution?

[Amal Khouri, Chief Business Officer]

Justin, this is Amal. We closed May 26. So it was 5 weeks of contribution during the quarter.

[Justin Keywood, Director of Equity Research]

Okay. So we should see that to progress. Just in general, the adjusted EBITDA reported in the quarter, is that a good level to assume going throughout the remainder of the year?

[Samira Sakhia, President, COO & Director]

So Justin, it's really hard to guide because we are -- we're kind of still going through this crisis and the lumpiness that it drives to the top line as well as margin. If you look at our margin, it's also been swinging quite a bit, and that's really dependent on product mix. The one thing I can say is our teams are working really hard. We are focused on continuing to execute on our launches and manage through COVID. We do expect some of our expenses to rise over the next Qs as we start to go back to field and open things like travel. But we're driven to profitability as well. And the other thing that I'd like to remind you guys is that we are, like you said, going to be getting full quarter contribution behind Exelon.

[Justin Keywood, Director of Equity Research]

Understood. And my last question is just on the ERP project and how the implementation is going and any timeline to completion?

[Arvind Utchanah, Chief Financial Officer]

So we continue to progress. And as last discussed, like it's going out into multiple phases on a country-by-country basis. So the last guidance we gave was about 9 to 12 months and what -- we're still in the same time. So by mid of next year, we should be substantially completed.

[Operator]

With no additional questions in the queue, I would like to turn the call back over to Ms. Sakhia for any additional or closing remarks.

[Samira Sakhia, President, COO & Director]

Thank you for your confidence in the Knight team and for joining our Q2 '21 call. Please stay healthy and stay safe, and hope to see you soon.

[Operator]

That will conclude today's call. We appreciate your participation.