Knight Therapeutics Inc

TSX:GUD

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen. My name is Angeline and I will be your operator for today. Welcome to Knight Therapeutics Second Quarter 2024 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 they were prepared, but cautions that these assumptions regarding the future events, many of which 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 via e-mail to [e-mail] or via phone at (514) 4844483.

I would like to remind everyone that this call is being recorded today, August 8, 2024, 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, Angeline.

Good morning, everyone, and welcome to Knight Therapeutics Second Quarter 2024 Conference Call. I'm joined on today's call with Amal Khouri, our Chief Business Officer; and Arvind Utchanah, our Chief Financial Officer.

I'm excited to report for the first 6 months of the year, we delivered record revenues of $180 million, excluding hyperinflation and adjusted EBITDA of over $29 million. Our innovative product promoted portfolio delivered growth of 12% versus last year, primarily driven by the growth in Lenvima, Trelstar, AKYNZEO, Cresemba as well as the contribution from the recent launches of IMVEXXY and BIJUVA in Canada and Minjuvi in Brazil.

Furthermore, we have expanded and strengthened our pipeline with the in-licensing of Jornay PM, a novel formulation of methylphenidate for ADHD. Jornay PM complements our growing neurology portfolio along with IPX203 and Celgene, which we in-licensed in the last 9 months. I would like to add that earlier this week, Amneal announced the FDA approval of IPX203 and expected launch in September of this year. This allows Knight to continue on our plans for regulatory submission of this product next year.

Now moving on to our NCIB. Knight completed the NCIB launched in July 2023 and purchased a total of 6 million shares at an average price of $4.87 per share. Subsequent to the quarter, Knight launched a new NCIB, under which we can purchase for cancellation up to approximately 5.3 million common shares over the next 12 months.

I will now turn the call over to Arvind to provide an update on our financial results.

[Arvind Utchanah, executive]

Thank you, Samira.

When speaking of our financial results, I will refer to EBITDA and adjusted EBITDA, which are non-IFRS measures as well as adjusted EBITDA per share, which is a non-IFRS ratio. Knight defines EBITDA as operating income or loss, excluding amortization and impairment of noncurrent assets, depreciation, purchase price, accounting adjustments and the impact of accounting under hyperinflation but to include costs related to leases. Adjusted EBITDA excludes acquisition costs and nonrecurring expenses. Knight defines adjusted EBITDA per share as adjusted EBITDA over the number of common shares outstanding at the end of the respective period. Furthermore, my discussion on the operating results will refer to figures that exclude hyperinflation.

For the second quarter, we delivered record revenues of over $94 million, an increase of $3.7 million or 4% versus prior year. Our oncology and hematology disease portfolio delivered approximately $36 million of revenues, a growth of $7.7 million or 28% compared to the same period last year. This was driven by the continued growth of our key promoted products, including Lenvima, AKYNZEO, Trelstar as well as the launch of Minjuvi in Brazil.

Turning to our other specialty portfolio. During the quarter, the portfolio generated $20.6 million in revenues, an increase of $3.8 million or 22% compared to the same period last year. This increase is a result of the transition of commercial activities of Exelon from Novartis to Knight in 2023. As a reminder, the revenues of Exelon were lower in the second quarter of 2023 due to advanced purchases by certain customers in the first quarter of that year.

Now moving to our infectious disease portfolio. We generated $37.8 million of revenues in the second quarter, a decrease of $7.7 million or 17% compared to the same period last year. This decrease was primarily due to the timing of orders for AmBisome under the contract with the Ministry of Health in Brazil or MoH as well as a decrease in the demand of Impavido. The decrease was partly offset by the growth of our key promoted products, including Cresemba as well as timing of orders for certain products.

During the quarter, we sold a total of $8.9 million of AmBisome under our MoH contracts compared to $18 million in the same period last year. As a reminder, during the first 6 months of 2024, we delivered a total of $18.1 million of AmBisome to MoH compared to $20.4 million in the same period last year.

Now looking at our gross margin. We reported $45.3 million or a gross margin of 48% of revenues in the second quarter of 2024 compared to $40.2 million or 45% of revenues in the same period last year. The increase in the 2024 gross margin as a percentage of revenues was due to product mix, including a lower proportion of AmBisome sale to MoH.

I will now turn to our operating expenses. Our operating expenses, excluding amortization of noncurrent assets for the second quarter were approximately $30.1 million, an increase of $3.3 million or 12% compared to the same period last year. The increase in operating expenses was driven by an increase in our generic costs due to our structure and higher compensation expenses as well as development costs for our pipeline products.

Moving to adjusted EBITDA. For the second quarter of 2024, we reported $15.7 million of adjusted EBITDA, an increase of $1.5 million or 10% compared to the same period last year, driven by higher gross margin, which was partly offset by higher G&A costs and R&D investments for our pipeline. While our adjusted EBITDA increased by 10%, our adjusted EBITDA per share increased by 23%. This additional increase in the adjusted EBITDA per share was driven by the decrease in common shares outstanding due to repurchases under our NCIB.

Finally, on to our cash flows. During Q2 '24, Knight had cash outflows from operations of $1.1 million, driven by our operating results, offset by an increase in working capital of $11.9 million. As we had communicated at the end of Q1, the majority of this working capital increase is due to payments related to inventory that was purchased in Q1. As a reminder, on a year-to-date basis, Knight generated $29.3 million of adjusted EBITDA and $29.8 million of cash inflows from operations.

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

[Samira Sakhia, executive]

Thank you, Arvind.

I would like to provide an update on our financial outlook for fiscal 2024. I would remind everyone that this guidance is provided on a non-GAAP basis excluding hyperinflation due to the difficulty in predicting Argentinian inflation rates. We are increasing our financial guidance on revenues and expect to generate between $355 million to $365 million in revenues, up from $335 million to $350 million. In addition, we are updating our guidance for adjusted EBITDA, which is now expected to be approximately 16% of revenues, which in dollars remains within the previous guidance range.

The change in our financial outlook is primarily due to an improvement in forecasted LatAm currencies against the Canadian dollar as well as an acceleration of investments in our pipeline products. In addition, this guidance is based on a number of assumptions, which are described more in our press release. Should any of the other assumptions differ the financial outlook then the actual results may vary materially.

Over the last several months, we have announced 3 product submissions in multiple territories, two product approvals, 3 product launches, and we have added 3 pipeline assets from 3 new partners. We have a pipeline of 18 products that are expected to generate over $150 million in revenues should they achieve our estimated peak sales. This demonstrates not only our commitment, but also our ability to execute on our strategy.

We have a profitable and cash flow-generating business with a growing portfolio of assets, and with over $150 million in cash, cash equivalents and marketable securities at the end of the quarter, we remain well positioned to continue to execute on our strategy to in-license and acquire innovative and branded generic pharmaceuticals as well as to develop our own branded generic portfolio.

Thank you for your support and confidence in the Knight team. This concludes our formal remarks. I'd like to open up the call for questions. Over to you, Angeline.

[Operator]

Thank you. And before we begin, may I please 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] or via phone at 514-484-4483. [Operator Instructions]

Your first question comes from Michael Freeman from Raymond James.

[Michael Freeman, analyst]

Congrats on some solid results. I'm glad you mentioned the approval of IPX203 by Amneal yesterday. I wonder if there -- I wonder if this approval came -- got in line at timing-wise with your expectations and Amneal's expectations. And if there are any implications for perhaps an acceleration of timelines for approvals in jurisdictions in which you operate and LATAM?

[Samira Sakhia, executive]

That's a great question. Actually, we knew when Amneal had submitted earlier this year, which is, I believe, sometime in February, and the FDA has a pretty standard time of review. So this is really around the time that they were expecting their approval. And it doesn't really change our timelines since we had structured our agreement to even start working on some portions of the submission while they were pending their approval.

[Michael Freeman, analyst]

Helpful. Now on the escalated guidance, you mentioned there is much to do with currency here. But I also mentioned that there -- that you've been accelerating investments into your pipeline products. I wonder if you could describe what this acceleration of investment looks like?

[Samira Sakhia, executive]

So as you know, we have 18 products in our pipeline. What we are really trying to do is see what we can accelerate whether it's some development work in advance of submission as well as launch, prelaunch activities. So we would be Jornay PM, which we may actually -- which we're trying to see if we can launch by the end of next year as opposed to the following year. We have Minjuvi, which we are expecting approvals in other territories. We have also fostamatinib or TAVALISSE also expected for approvals in certain countries next year as well.

[Michael Freeman, analyst]

Okay. Excellent. Very helpful. Just one very last comment. I -- on Bausch Health's earnings call, they did mention for their international business that they are seeking to do some business development activity, specifically in LATAM. I wonder if you could comment on how Bausch Health specifically figures into your competitive set across the jurisdictions in which you operate?

[Samira Sakhia, executive]

Sure. I'll ask Amal to answer that.

[Amal Khouri, executive]

So in terms of -- I think if you were asking whether we have seen them competing against us for deals, we haven't released on across [Technical Difficulty] the deal. On the flip side of it, in terms of -- depending on what they're looking for -- them or any other companies looking to their best assets in our regions. As you know, that's one of the areas that we focus on, which is to look at acquiring assets from companies who are looking to divest or focus our portfolio.

[Operator]

Your next question comes from David Martin from Bloom Burton.

[David Martin, analyst]

Congratulations on the quarter and the progress. I'm wondering when you put this acceleration of the pipeline, previously, you had been expecting a dip in revenues with the increased generic pressure on some of your legacy branded generics. Do you see the situation being that different anymore?

[Samira Sakhia, executive]

Not really. As you can imagine, when we're launching new products, it does take time for them to get to their peak sales, which is usually in the 3- to 5-year range. So even if we advance some launches by 3, 6 months, it's not really going to have a bigger impact on what's going on in the DGX portfolio. It really accelerates the payment.

[David Martin, analyst]

Sorry, there's a bit of feedback. What about M&A of some mature products with sales to like backfill that gap? Is that still on your radar?

[Samira Sakhia, executive]

Absolutely. This is one where we are always looking for assets to be able to add. As you know, we acquired Exelon a lot for that reason. We added AKYNZEO which actually not only added EBITDA immediately, but really was a great fit into our portfolio and is a growing asset. We are always mindful here between the quality of the asset and the valuation expected. It is a very competitive market, and we are very disciplined.

[David Martin, analyst]

Got it. Also, I'm wondering what's driving the Brazilian Ministry of Health to establish these contracts for AmBisome? Is there an outbreak in fungal infections that might be transient? Or is this something that you expect to be long term and renewed year after year? And what is the patent protection on AmBisome in Brazil?

[Samira Sakhia, executive]

So AmBisome has not had patent protection for decades. And we know, for example, in the U.S., there is already 2 generics.

As for the first part of your question, fungal infection is an issue in Brazil. It's not a transient issue. Prior to the government acquiring AmBisome, they were acquiring a competitor's product, kind of a similar molecule, but not the same formulation. That competitor has been having supply issues for the last few years. And that is really why they have switched to AmBisome. And the -- what this has been really great about for us is it's actually allowed us to establish a very good relationship with the Ministry of Health. We are working with them on AmBisome. We're also starting at a very small level, but still meaningful even on Cresemba, and really expect to be able to continue with that great relationship, even if the -- even if our competitor comes back and we no longer have AmBisome shipments to them, this -- the link is great.

[Operator]

And the next question comes from Scott McAuley from Paradigm Capital.

[Scott McAuley, analyst]

First on Jornay and saw that the other Ironshore got acquired, which I guess is a positive for the potential for that product. But in terms of your agreement with Ironshore and kind of changing of control issues or questions, that doesn't affect your license agreement for that product across Canada and Latin America.

[Amal Khouri, executive]

Is Amal. Yes, no, it doesn't affect it. I mean, as you -- I'm sure you know this is a very common -- this is something that we have to consider the common possibility in our deals, and it's something that we do consider. So the acquisition has not affect our right.

[Scott McAuley, analyst]

That's great. And on the AmBisome, the administrative health contract, just maybe you said before, I don't recall, but how much is left on that contract for 2024? Because obviously, there was some good -- I think it was over $8 million this quarter. Do you have a sense of how much we can expect left on that contract for 2024?

[Samira Sakhia, executive]

So right now, from what we have confirmed, there is only a small amount left. That being said, they do have an option to be able to acquire more than that, but we won't be knowing that until later into the second half.

[Scott McAuley, analyst]

That's great. And I guess, lastly on the -- obviously, the working capital, some big inventory and big swing this quarter. Do you expect that to kind of level out for the rest of the year?

[Samira Sakhia, executive]

I'm going to ask Arvind to take that question.

[Arvind Utchanah, executive]

So the working capital was really an expectation that we had from Q1 related to paying invoices or inventory repurchased in Q1. I would say our working capital is lumpy in a quarter in any given quarter depending on purchases of inventory. So you really have to look at it on a year-to-date basis. And if you look at our cash flows on a year-to-date basis, we do have a solid cash flow to EBITDA conversion ratio and it's really because of the solid business that we've built, and that does very well.

[Scott McAuley, analyst]

Great. So yes, continue to kind of expect some potential lumpy quarters and swings quarter-to-quarter, but longer term trending in the right direction?

[Arvind Utchanah, executive]

Absolutely.

[Samira Sakhia, executive]

That's exactly right.

[Operator]

There are no further questions at this time. I am now handing the conference over to Samira Sakhia.

[Samira Sakhia, executive]

Once again, thank you for your confidence in the Knight team and for joining our Q2 2024 conference call. Have a great morning.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.