Knight Therapeutics Inc

TSX:GUD

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen. My name is Chester, and I will be your operator for today. Welcome to Knight Therapeutics Third 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 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] or via phone at [phone].

I would like to remind everyone that this call is being recorded today, November 7, 2024, and I 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, Chester. Good morning, everyone, and welcome to Knight Therapeutics Third 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 that for the 9 months ended September 30, 2024, we delivered record revenues of over $271 million and adjusted EBITDA of over $42 million. During the same period, our innovative promoted portfolio delivered growth of 17% on a constant currency basis versus last year, primarily driven by the growth of Lenvima, Trelstar, AKYNZEO, Cresemba as well as contribution from the recent launches of Imvexxy and Bijuva in Canada and Minjuvi in Brazil. Furthermore, we have advanced our pipeline with regulatory approval of Minjuvi in Mexico, and we expect to launch Minjuvi in the first half of 2025.

I'll now move over to our NCIB. At the beginning of Q3, Knight launched an NCIB under which we can purchase for cancellation up to 5.3 million common shares over a 1-year period. During the quarter, we have purchased 437,500 common shares under the NCIB at an average price of $5.65. 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 and financial results at constant currency, 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 number of common shares outstanding at the end of the respective period. In addition, revenues and financial results at constant currency are also non-GAAP measures. 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 hyperinflation.

Furthermore, my discussion on the operating results will refer to figures that exclude hyperinflation unless otherwise indicated. Prior to discussing the results of our third quarter, I will provide a quick update on the foreign exchange rates for the LatAm currencies versus the Canadian dollar. We saw relatively flat exchange rates from Q3 2023 to Q1 2024. In Q1 2024, we started seeing a depreciation that further accelerated in Q3 2024. Overall, we saw a foreign exchange depreciation in Q3 2024 versus Q3 2023 between 7% and 13% with Brazil at 12%. When we compare Q3 '24 to Q2 '24, we saw a depreciation between 5% and 9% with Brazil at 7%. For more details on currency fluctuations, please refer to Section 7 of our management discussion and analysis.

For the third quarter of 2024, we delivered revenues of over $91 million, an increase of $9.8 million or 12% versus prior year. On a constant currency basis, revenues increased by $13.8 million or 18%. Our oncology and hematology portfolio delivered approximately $37 million of revenues, a growth of $5.5 million or 18% or $6.7 million or 22% on a constant currency basis compared to the same period last year. This increase was driven by the continued growth in our key promoted products, including Lenvima, AKYNZEO, Trelstar as well as the launch of Minjuvi in Brazil.

Now moving to our infectious disease portfolio. We generated approximately $34 million of revenues in the quarter, an increase of $4.6 million or 16% or $6.6 million or 24% on a constant currency basis compared to the same period last year. The increase was mainly driven by the timing of orders for AmBisome from the Ministry of Health or MOH in Brazil and the continued growth of Cresemba, another one of our key promoted product. The increase in sales from AmBisome and Cresemba was partly offset by a decrease in the demand of Impavido. As a reminder, during the 9 months in 2024, we delivered a total of $24.8 million of AmBisome to MOH compared to $20.4 million in the same period last year.

Turning to our other specialty portfolio, which includes Exelon, our women's health portfolio as well as our GI portfolio and certain other products. During the quarter, the portfolio generated $21 million in revenues, remaining relatively unchanged compared to the same period last year.

Now looking at our gross margin. We reported $43 million or a gross margin of 47% of revenues in the third quarter of 2024 compared to $42 million or 52% of revenues in the same period last year. The decrease in gross margin as a percentage of revenues was due to product mix, including a higher proportion of AmBisome sales to MOH.

I will now turn to our operating expenses. Our operating expenses, excluding amortization of noncurrent assets for the third quarter were $30.5 million, an increase of $2.9 million or 11% compared to the same period last year. The increase in operating expenses were driven by an increase in marketing spend for launches of Minjuvi, Imvexxy and Bijuva, prelaunch activities for Jornay PM in Canada, an increase in R&D costs, mainly driven by medical activities related to key promoted products and an increase in our G&A costs due to our structure and higher compensation expenses.

Moving on to adjusted EBITDA. For the third quarter of 2024, we reported $13.5 million of adjusted EBITDA, a decrease of 13% compared to the same period last year, driven by higher operating expenses behind new product launches, partly offset by higher revenues and corresponding gross margin. Our adjusted EBITDA per share was $0.13, a decrease of 10% over the same period last year, driven by a lower adjusted EBITDA, partly offset by a decrease in common shares outstanding due to share repurchases under our NCIB.

I will now cover our financial assets, which are valued at $126 million at the end of Q3. During the quarter, we recorded a total net unrealized gain of $11.7 million on our financial assets, which resulted from an unrealized gain of $14.5 million recorded in other comprehensive income and an unrealized loss of $2.8 million recorded in our statement of income. The unrealized gain of $14.5 million was due to the revaluation of our synergy shares, which were at a carrying value of 0 prior to Q3 2024.

In October 2024, Synergy completed an IPO on NASDAQ. And as a result, Knight revalued the Synergy common shares, resulting in an unrealized gain of $14.5 million in Q3 2024. As a reminder, Knight owns 17% of Synergy, which is subject to a 6-month post-IPO lockup period.

Finally, on to our cash flows. During Q3 2024, Knight generated cash inflows from operations of $5 million, driven by our operating results, offset by an increase in working capital. Our working capital increased by $11 million, mainly due to an increase in inventory driven by the timing of purchases as well as investments in our new product launches. On a year-to-date basis, Knight generated $42.8 million of adjusted EBITDA and $34.8 million of cash inflows from operations.

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

[Samira Sakhia, executive]

Thank you, Arvind. Now looking at our financial outlook for 2024. I would like to remind everyone that this guidance is provided on a non-GAAP basis due to the difficulty in predicting Argentinian inflation rates. In addition, our guidance is based on a number of assumptions, which are described in our press release. Should any of the other assumptions differ, the financial outlook and the actual results may vary materially. Despite the currency headwinds and the launch of our branded generic of Lenvima in Brazil, we are maintaining our financial guidance and expect to generate revenues of between $355 million to $365 million, and an adjusted EBITDA of approximately 16% of revenues.

We continue to strengthen our business by advancing our portfolio and expanding our pipeline of assets. In 2024, we have announced 1 product submission, 2 product approvals, 3 product launches, and we have added 2 pipeline assets with commercial rights across all of our territories. We remain committed to advancing our pipeline products and securing regulatory submissions and approvals to grow our business in Canada and Latin America. We have a pipeline of 18 products that are expected to generate over $150 million in revenue should they achieve our estimated peak sales.

This demonstrates not only our commitment, but our ability to execute on our strategy. We also have a profitable and cash flow generating business with a growing portfolio of assets 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 develop our own branded generic product portfolio.

Thank you for your support and confidence in the Knight team. This concludes our formal remarks. I would like to open up the call for questions. Chester?

[Operator]

Thank you. 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 comes from Scott McAuley from Paradigm Capital.

[Scott McAuley, analyst]

Samira and team, congrats on the quarter. Definitely a busy day out there in earnings. So maybe just in terms of new products and investments in kind of sales and marketing, you highlighted all the activities that you guys are working on, the new products that are either in the pipeline or have been launched. And you do highlight in the financials kind of some increases in investments in sales and marketing. So maybe could you give any more color on kind of some of those prelaunch activities, those investments that you're making and any kind of expected investments down the road?

[Samira Sakhia, executive]

Great. Thank you for the question. So we are right now in launch mode behind Minjuvi in Brazil. So a lot of activity, physician education, conferences, working with nurses. This is a complex product, working with HMOs on reimbursement behind this product, which will be a slow uptake. In the case of Minjuvi and Bijuva, we have our sales force. And again, the same standard activities, physician education, sales reps, going to conferences, all of that is happening.

It will continue going into next year behind these products. We are already starting with preparing for Jornay PM, meeting with physicians to understand their needs. Same thing with Minjuvi in Mexico, and we will be continuing all of that effort going into next year. And in both Mexico and Canada, we will be expanding our sales force. So we are not in ADHD today in Canada. We are not in hematology in Mexico, and we will be adding staff for both of those products.

[Scott McAuley, analyst]

That's great. And then in terms of the -- in Brazil, the Ministry of Health contract, is that finished now for the one over the past 12 months? Is there still more to deliver? And is there any expectation that will be renewed for next year? Obviously, it's been chunky on the revenue side, but I think, as you mentioned, kind of a bit dragging on the margins. So any color looking forward on that?

[Samira Sakhia, executive]

So we do expect there is a potential for a small shipment in Q4, possibly between like the $2 million to $4 million range. As for next year, because we're not seeing any trade -- any news in the trade about our competitor coming back, we are hearing from the MOH that they would like to start discussions for 2025. That's very early, and we don't know how much or when that will conclude.

[Scott McAuley, analyst]

That's great. And then also, I guess, touching on the new product launches. You highlighted the working capital, investing in inventory for those new product launches. And I know some of that working capital can be -- can swing fairly substantially quarter-to-quarter. So looking forward the next 2 to 4 quarters, should we expect kind of ongoing expansion of inventory as you're preparing for these -- preparing and in that early stages of new product launches?

[Samira Sakhia, executive]

That's a great question. So yes, we will have purchases of inventory behind the launches. But when you're launching, it's not really big purchases. Where we see the -- what we have been seeing as lumpiness in the quarter is actually kind of purchasing patterns behind our existing products. So you take a product like AmBisome, you take products like Lenvima, we have to make big purchases all in 1Q, we wind that down. You will see an uptick, but it won't be that dramatic, and it will start -- it will kind of normalize very quickly.

[Scott McAuley, analyst]

That's great. And lastly for me, on the financial assets, great to hear the Synergy IPO going well and starting to include some of the value for those shares in your financial assets. And you highlighted that those shares are locked up for 6 months. But just overall, maybe touching on your thoughts on monetizing those assets in general, kind of expecting to extract that value and then being able to take that capital and reallocate it to help grow other parts of the business.

[Arvind Utchanah, executive]

I can take the first question, Scott. So as I mentioned earlier on the call, like we have a 6-month lockup with the IPO, so there's the whole period. Beyond the lockup, obviously, we're looking at maximizing shareholder value. So we'll be looking at how to maximize the value of our Synergy shares at that point.

[Scott McAuley, analyst]

That's great. And I guess just over the financial assets overall in terms of liquidating those over the next -- the coming years, is that something you expect to accelerate? Or is that something that we'll kind of see small changes quarter-to-quarter, and it will continue to provide some value, but there won't necessarily be an acceleration of liquidating those assets in the coming year or 2?

[Arvind Utchanah, executive]

Yes. So as a reminder, if you look at our cash flows on the funds, Scott, like they've been generating cash flows over the last 5 years. So it's been cash flow positive. We don't have a lot of commitments left in terms of what remains to be contributed to the funds. The funds have an exit date, and those are maturing over the next 3 to 7 years, I would say. And as they mature, we'll be collecting the cash from those funds.

[Operator]

Your second question comes from David Martin from Bloom Burton.

[David Martin, analyst]

Sounds like your pipeline is very robust. I'm wondering if you can put some numbers around how many sales, marketing and support personnel you're going to be adding in Canada and in LatAm. How many you've added recently and how many more are yet to come?

[Samira Sakhia, executive]

I'm going to give you kind of ranges, not really details because again, that's really confidential type of information. When I look at a product like Minjuvi in Brazil, great fit with our oncology portfolio as well as our -- actually our infectious disease because it's a really great fit with Cresemba. So we're not actually going to be -- we did not end up adding anyone.

In the case of Minjuvi in Mexico, think, between 4 to 7 people. And you have to remember, the cost of teams in Canada is much more expensive than the cost of teams in LatAm. In the case of -- we have added a women's health sales force, and you're already seeing the impact behind that in our P&L today. When it comes to ADHD, we're not there today. And over the next year, we're probably adding between 8 to 12 people.

In the following year, we may add a few more as Qelbree comes on because that's a great fit with Jornay PM. And as we expand ADHD into LatAm territories, which will be follow-on a couple of years later, we will be adding sales force. But at that point, the reason I'm a little reticent is because the portfolio will be shifting, and we'll see how to maximize potential with the teams that we have.

[David Martin, analyst]

Okay. Another quick question. Hyperinflation, I know that affects the top line. Does it affect your margins, too? Or because it's affecting the revenues and the expenses, it kind of cancels out.

[Samira Sakhia, executive]

I'm going to let Arvind answer that question.

[Arvind Utchanah, executive]

David, yes. So hyperinflation, like it affects all the line items in your P&L, especially your margin because you basically have to restate your cost of sales depending on when that inventory was purchased using the inflation index. So there's a big impact on COGS and gross margin. That being said, if you look at our results, like in our adjustment to EBITDA, we do exclude the impact of hyperinflation from those numbers.

[Operator]

The next question comes from Michael Freeman from Raymond James.

[Michael Freeman, analyst]

Congrats on a strong quarter. Apologize if I missed this during the prepared remarks, as I was on another call. But I'm curious if you could share as much color as you can on the generic entry scenario with Lenvima, touching on Brazil and also what's going on in Chile. Wondering if you could expand on whether there is risk for generic entry in other geographies for this drug specifically.

[Samira Sakhia, executive]

Sure. So let me first start with that -- like a branded generic or even a generic entrant in the LatAm market is not the cliff that we see in Canada. So in Canada, you would go from a product losing share, 90% share within 12 months, if not sooner. In LatAm, the decline is much more measured, and it goes over time because the purchasers, the physicians recognize kind of the value of the brand. They also see the other kind of activities that you have behind with education, patient support, all of that. And the decline takes 3 to 5 years where you sit in kind of the 25-ish percent market share kind of as it kind of comes down. So over the next couple of -- if I look at Lenvima in Q4, we expect immaterial impact in Q4. As it goes into next year, we do expect it to start declining. We're going to continue to battle it out to retain and to have prescriptions and prescriptions filled with our product.

And you have to remember, we're in -- especially in a market like Brazil with Lenvima, the majority of our business is private business. It's not public business. And the little that we have of public will wind down quickly, but the private business, we can continue to duke it out for a while.

Do we expect generics in other markets? Let me just -- actually -- sorry, with Chile, we haven't -- we've seen the approval. We haven't seen the launch. We are already in discussions with customers about our products, why it's better and why they should continue to acquire Lenvima. Again, same idea as what I described about Brazil, we will be seeing a downward curve, but it will take a few years.

In a market like Colombia, we don't -- the product is not patented. It does have regulatory exclusivity for a couple more years. That being said, the issue in Colombia that we're probably going to be dealing with likely in the back half of next year is potential pricing regulation where the government will reassess us -- could reassess us on our price and they would bring the list price down. This is something that we had planned for and knew was coming. And what we have done is really in the last since launch have been maximizing the profitability before pricing regulation.

[Michael Freeman, analyst]

Okay. I'm curious if you would be able to quantify the -- I guess, like the overall revenue impact or like the proportional revenue impact of a scenario where generic entry unfolds as it appears it will now, and there is no successful litigation from your end. I guess the potential revenue impact from Lenvima going generic in the geographies that it appears to be doing now in respect to overall revenue?

[Samira Sakhia, executive]

So we don't provide information by our -- by product. And as I said, like in this year, it's immaterial, and we don't really expect a significant impact even next year.

[Operator]

[Operator Instructions] There are no further questions at this time. I will now give back the call over to Ms. Samira Sakhia. Please go ahead.

[Samira Sakhia, executive]

Thank you, Chester. Once again, thank you for your confidence in the Knight team and joining our Q3 2024 conference call. Have a great morning.