Knight Therapeutics Inc

TSX:GUD

Earnings Call Transcript 2019-Q3

[Operator]

Good afternoon, ladies and gentlemen. My name is Gabriel, and I will be your operator today. Welcome to Knight Therapeutics Inc. 2019 Third Quarter Financial Results Conference Call.Before turning the call over to Jonathan Ross Goodman, CEO of Knight, listeners are reminded that a portion -- 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 these 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 intentions 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]. That's G-U-D-K-N-I-G-H-T or via phone at [phone]. I would like to remind everyone that this call is being recorded today, November 12, 2019. And now I would like to turn the meeting over to your host for today's call, Jonathan Ross Goodman. Please go ahead, Mr. Goodman.

[Jonathan Ross Goodman, Founder, CEO & Director]

Thank you, Gabriel. Good afternoon, everyone, and welcome to Knight Therapeutics' Third Quarter 2019 Conference Call. I'm joined on today's call with Samira Sakhia, our President and CFO; Amal Khouri, our VP, Business Development; and Arvind Utchanah, our VP of Finance.We are pleased to report that we have executed on our strategy of building a Canadian and rest of the world specialty pharmaceutical company with the transformational acquisition of Biotoscana Investments SA or GBT. This transaction will establish Knight as the pan-American, ex-USA, in-licensing partner of choiceIn addition, during the past quarter, we had advanced our Canadian product pipeline with Health Canada's approval of NERLYNX, the submission of Joyesta for regulatory approval and the listing of Probuphine for reimbursement through certain public insurance plans. This will likely be our last quarterly conference call where we don't have to talk exchange rates, how to account for hyperinflation or the weather at Montevideo, the capital of Uruguay, and GBT's headquarters.I will now turn the call over to Samira, who will walk through our progress.

[Samira Sakhia, President, CFO & Director]

Thank you, Jonathan. Good afternoon, everyone. I'm going to go over the advancement of our Canadian portfolio and pipeline, which has continued to advance during the quarter.On July 16, 2019, Health Canada approved NERLYNX for the extended adjuvant treatment of adult patients with early stage HER2-overexpressed/amplified breast cancer following adjuvant Herceptin therapy. NERLYNX is a novel treatment for patients with early breast cancer and is expected to be launched in early 2020. Unfortunately, the pan-Canadian Oncology Drug Review Expert Review Committee, or pERC, published their initial report recommending that NERLYNX should not be reimbursed through public insurance plans. Knight has filed an opposition to this initial recommendation, and we are expecting a response from pERC by the end of 2019.Furthermore, in August, Knight reached an agreement with pan-Canadian Pharmaceutical Alliance, or pCPA, for Probuphine. And as of today, Probuphine is listed for reimbursement through the public insurance plans administered by Alberta, Saskatchewan, New Brunswick, Manitoba, Veterans Affairs Canada and the Non-insurance Health Benefit Program.Probuphine is indicated for the management of opioid dependence in patients clinically stabilized on no more than 8 milligrams of sublingual buprenorphine, in combination with counseling and psychological support. Our commercial team continues to work actively with other jurisdictions to finalize listings across the country to ensure patients have access to this novel treatment option.In November 2018, Health Canada approved Iluvien, a sustained release intravitreal implant for the treatment of diabetic macular edema. In September 2019, the Canadian Agency for Drugs and Technologies in Health published their final report recommending that Iluvien should not be reimbursed through the public insurance plans. Knight is working with Alimera Sciences, Inc. to assess the resubmission process for reimbursement.Subsequent to the quarter, in October, Health Canada approved Netildex for the treatment of inflammatory ocular conditions of the anterior segment of the eye following cataract surgery, where adjunct topical therapy to reduce the risk of bacterial infection is appropriate. Our commercial team is now -- will now focus on market access over the next few months related -- for Netildex.Furthermore, in October, we submitted Joyesta for regulatory approval by Health Canada for the treatment of postmenopausal symptoms of vulvar and vaginal atrophy due to estrogen deficiency. Joyesta, an applicator-free estradiol soft vaginal capsule, is marketed as Imvexxy by TherapeuticsMD in the U.S.In addition, we expect to file Bijuva, a bio-identical combination HRT for the treatment of vasomotor symptoms associated with menopause later this year.I'm now going to turn the call over to Arvind to go over the financial results for the quarter and 9 months.

[Arvind Utchanah, Director of Finance]

Thank you, Samira. I'm pleased to report that for the quarter ended September 30, 2019, we reported revenues of $4 million, an increase of $810,000 or 25% versus the same period last year. For the 9-month period ended September 30, 2019, we reported revenues of $10.2 million, an increase of $1.6 million or 18% as compared to the same period last year. The increase was mainly attributable to the timing of sale of Impavido and the growth in Movantik sales.According to IQVIA data, Movantik sales were $1.2 million for the 9-month period ended September 30, 2019 compared to $963,000 for the same period last year.Our operating expenses for the quarter increased by $3.4 million or 104% over the third quarter of 2018 and increased by $7.8 million or 77% for the 9-month period compared to the same period last year. The increase for the quarter was mainly driven by diligence and advisory fees of $2.5 million for the acquisition of GBT. For the 9-month period, the increase was mainly due to the GBT diligence and advisory fees as well as expenses of $3.8 million related to Meir Jakobsohn's shareholder activist campaign.Knight expects to incur additional expenses related to closing the GBT acquisition during the remainder of the year and into 2020. Without the unusual acquisition and dissident expenses, G&A expenses for the quarter and 9-month period remain fairly flat. The remainder of the increase in operating expenses is due to an increase in both selling and marketing as well as research and development expenses driven by the preparation for the new product launches and the submission of Ibsrela and Joyesta to Health Canada.We reported interest income for the quarter of $6.1 million, an increase of 22% or $1.1 million compared to the third quarter of 2018 due to a higher-average loan balance and an increase in interest rate, offset by a decrease in the average cash and marketable securities balances.For the 9-month period, interest income was $18.1 million, an increase of 21% or $3.1 million over the same period last year due to a higher-average loan balance and an increase in interest rates, offset by a decrease in the average cash and marketable securities balances.Our share of income of associates relates to our investment in Medison and is driven by our share of Medison's net income, net of fair value adjustments of intangibles. For the quarter, our share of Medison's net income was $1.5 million and fair value adjustments were $1.4 million, which is flat compared to the same period last year.We recorded a net loss on financial asset measured at fair value through profit or loss of $4.9 million for the quarter due to an unrealized loss of $7.9 million explained by the revaluation of -- to fair value of Knight's financial assets, partially offset by a realized gain of $3 million on our strategic fund investments.For the 9-month period, we recorded a net gain on financial asset of $19.6 million due to unrealized gains of $15.5 million, mainly driven by strategic fund and loan investment and a realized gain of $4.1 million on our financial assets.Finally, for the third quarter of 2019, we reported a net loss of $2.9 million compared to a net income of $4.9 million in the prior period. For the 9-month period ended September 30, 2019, we reported net income of $21.2 million, a decrease of $2.7 million or 11% versus the same period in the prior year.I will now turn over the call to Amal to go over business development activities and most specifically, the acquisition of GBT.

[Amal Khouri, Vice President of Business Development]

Thank you, Arvind. In October, Knight agreed to acquire a majority interest in Biotoscana Investments, an established and profitable Latin American pharmaceutical company headquartered in Montevideo, Uruguay. GBT is the LatAm partner of choice for multinational pharmaceutical companies and has a diversified portfolio of innovative products as well as a branded generics portfolio.Before addressing GBT's financials, I would like to remind participants that equivalent dollar amounts are approximate and are based on the Brazilian real to Canadian dollar closing rate -- exchange rate as of October 18, 2019, of 3.145.For the trailing 12-month period ending June 30, 2019, GBT generated revenue of BRL 754 million or $240 million, an adjusted EBITDA of BRL 154 million or $49 million, with Brazil, Argentina and Colombia representing about 86% of revenues. On October 18, 2019, Knight entered into a share purchase agreement to acquire 51.2% of GBT at BRL 10.96 per share or approximately BRL 596 million or $189 million. The transaction is expected to close on November 29, 2019, upon which, 80% of the purchase price will be paid in cash to the sellers and the remaining 20% will be deposited in an escrow account as a guarantee against the seller's indemnification obligations. The escrow will be released equally over a period of 3 years net of claims according to the terms and conditions of the share purchase agreement.Following the closing of the share purchase agreement, Knight will launch a mandatory tender offer to acquire the remaining 48.8% common shares of GBT, which trade as Brazilian depository receipts in Brazil. Assuming all public shareholders tender their shares, Knight expects to pay approximately BRL 568 million or $180 million. The tender process is expected to take 4 to 8 months from launch to close. Following the close of the share purchase agreement and the tender process, Knight expects to have paid a total of approximately BRL 1.164 billion or $369 million for the common shares and an additional BRL 154 million or $49 million to cover GBT's net financial debt.I will now turn the call back over to Samira.

[Samira Sakhia, President, CFO & Director]

Thanks, Amal. Now moving on to an update on Knight's normal course issuer bid, which commenced on July 11, 2019. As a reminder, under the NCIB, Knight may purchase for cancellation just over 12 million of its common shares. As at November 12, 2019, Knight has purchased approximately 7.2 million common shares for an aggregate cost of $54.8 million or $7.56 per common share, which represents about 60% of the maximum purchases allowed under the NCIB.I'll now turn the call over to Jonathan for his concluding remarks.

[Jonathan Ross Goodman, Founder, CEO & Director]

Thank you, Samira. I am proud of our significant progress in creating a Canadian and rest of the world specialty pharmaceutical company. Looking ahead, we are excited to welcome GBT's team of talented professionals and to position Knight as the pan-American commercial solution of choice for biotech companies with late-stage innovative products. Thank you for your support and confidence in the Knight team. This concludes our formal remarks. I'd now like to open up the call to questions. Operator?

[Operator]

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 [phone]. [Operator Instructions] Your first question will come from the line of David Novak of Raymond James.

[David Novak, MD & Healthcare Research Analyst]

I guess I'll leave my questions around hyperinflation and FX for a future call, which leaves me really just one question on the pERC recommendation around neratinib. I'm just wondering if you could provide a bit of color around why the pERC came to this conclusion, specifically, I'm trying to zero in on whether this is largely a recommendation based on the clinical efficacy of this therapeutic in the HER2-positive therapeutic regimen. Or is it really based on something else?

[Samira Sakhia, President, CFO & Director]

Hi. So one of the things is we're actually really disappointed with how they read the data because they really -- they only focused on a certain aspect of the submission. And one of the reasons why we are appealing this is because we wanted them to look at, more specifically, at the information that was provided. We have also worked with some KOLs as well as patient groups to relay that message, that this is a product that is medically necessary, and it meets -- and it really covers an unmet need in the market.

[David Novak, MD & Healthcare Research Analyst]

Okay. So maybe just a quick follow-up to that then. Are you getting any pushback from the pERC and perhaps specifically focused on sort of the increase in trastuzumab-based regimens, which, in theory, could maybe push back neratinib into the later adjuvant setting? Is that something they're focused on specifically or not really?

[Samira Sakhia, President, CFO & Director]

No. Not really.

[Operator]

Your next question will come from the line of Justin Keywood of GMP Securities.

[Justin Keywood, Director of Equity Research]

Just following that line of questions, has additional sales reps been onboarded to launch the products, NERLYNX and Iluvien?

[Samira Sakhia, President, CFO & Director]

So for -- at this point in time, well, we are being judicious. We are working more with our medical team. And we have added some additional medical science liaisons, but we have not added reps just yet.

[Justin Keywood, Director of Equity Research]

Okay. And then how does the recommendations affect commercialization plans? Is it wait and see and then reevaluate? Or are you going through with the ramp-up?

[Samira Sakhia, President, CFO & Director]

So in the case of NERLYNX, we will be ramping, not at the same pace as we thought we would. And for Iluvien, we are more in a wait and see for now until we get reimbursement.

[Justin Keywood, Director of Equity Research]

Okay. All right. Understood. And then I thought I heard additional expenses related to GBT for the remainder of this year still expected. Just wondering if we could get some clarity on what it could be.

[Samira Sakhia, President, CFO & Director]

So as you know, we actually closed GBT in the fourth quarter and not in the third quarter. So the third quarter was the first portion of diligence and support. Then Q4, there was obviously more work. And as you can imagine, there -- the -- acquiring in the second half is going to have more work related to it, so in each of these cases, there is legal, financial and banking fees.

[Justin Keywood, Director of Equity Research]

Okay. Is it fair to assume that Q4 will show higher expenses then?

[Samira Sakhia, President, CFO & Director]

It will be in the -- yes. And you will continue to see it in Q1 and 2 as well, maybe not at the same pace, but it's still fairly high.

[Operator]

[Operator Instructions] Your next question will come from the line of Endri Leno from National Bank.

[Endri Leno, Associate]

Just a couple for me. First, on the pERC recommendation, I mean, looking at that historically, if you have this kind of data, how often do they reconsider their opinions after they have launched an initial recommendation?

[Samira Sakhia, President, CFO & Director]

It depends. It is rare, but it really depends on the reasons of kind of what the appeal is in relation to. We have seen in a similar kind of assessment that they did reverse their assumption. At this point in time, like I said, we expect our -- we expect to get news from them by the end of the year. We are still planning for a launch next year.

[Endri Leno, Associate]

Okay. Great. And the last one, for Iluvien, like what kind of resubmission would you resubmit there? I mean is it going to be more data, scientific, or like what are you considering about it?

[Samira Sakhia, President, CFO & Director]

What we're looking to do is resubmit the real-world evidence because in their process, they actually don't look at real-world evidence in the first review. So we would be resummarizing and putting that back in. But we're working with Alimera to look at how and when and the costs related to it.

[Endri Leno, Associate]

Okay. And would you have an approximate time line?

[Samira Sakhia, President, CFO & Director]

Of when we would resubmit or when...

[Endri Leno, Associate]

Yes. When you would resubmit.

[Samira Sakhia, President, CFO & Director]

So we're currently still assessing, and it would be really in the first half of next year.

[Operator]

We have no further questions at this time. I will now turn the call over back to the presenters.

[Jonathan Ross Goodman, Founder, CEO & Director]

Thank you for your questions and the confidence. We look forward to reporting next as a pan-American, ex-U.S.A., specialty pharmaceutical company. Good afternoon.

[Operator]

This concludes today's conference call. You may now disconnect.