Knight Therapeutics Inc

TSX:GUD

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen. My name is Jessa, and I will be your operator today. Welcome to Knight Therapeutics Inc. 2017 Fourth Quarter and Year End Financial Results Conference Call. Before turning the call over to Jonathan Ross Goodman, Chief Executive Officer; Samira Sakhia, President and Chief Financial Officer; and Amal Khouri, Vice President Business Development, 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 or future events, except as required by law. I would like to remind everyone that this call is being recorded today, Thursday, March 15, 2018. I would now like to turn the meeting over to your host for today's call, Jonathan Ross Goodman, Chief Executive Officer. Please go ahead, Mr. Goodman.

[Jonathan Ross Goodman, Chief Executive Officer and Director]

Thank you, Jessa. Good morning, and welcome to Knight Therapeutics Fourth Quarter and Year End 2017 Conference Call. As you may be able to hear, I have a cold, but I can assure you that our business is healthy. We are pleased to report that 2017 marked a pivotal year for Knight's simple yet meaningful mission to make people better through the products we sell. In 2017, we relaunched Movantik, our first commercial prescription pharmaceutical in Canada, and proudly submitted 3 products to Health Canada approval that each target patient in need. If approved, these products will be key to the continued expansion of our commercial presence in Canada. We just celebrated our fourth anniversary. During this time, we generated $195 million of net income. While we continued to advance our pipeline, building Canada's leading specialty pharmaceutical is a marathon, not a sprint and will take time. We continue to view our balance sheet as a significant competitive advantage and remain confident that our patience and focus on securing the rights to innovative products at fair prices will pay healthy dividends in the future. I will now turn the call over to Samira, who will walk through the fourth quarter and year end financial results and highlights.

[Samira Sakhia, President, CFO & Director]

Thanks, Jonathan. Good morning, everyone. I'm pleased to report that for the quarter and year ended December 31, 2017, we reported revenues of $2.5 million and $8.6 million, respectively. The growth of 45% on a year-over-year basis in revenues is primarily from Impavido, which includes both sales in the U.S. as well as rest of world and the addition of Movantik. According to IQVIA data, Movantik sales in Canada were $936,000 for the year ended December 31, 2017, an increase of 68% compared to $558,000 for the same period last year. Our operating expenses for the year increased by $2.5 million over last year, primarily explained by commercial activities, including promotion of Movantik and an increase in the number of employees as Knight expands commercialization and prepares to launch new products in Canada. Our interest income for the year was $26.3 million, an increase of $1.9 million over last year, driven by higher cash balances and marketable securities, increasing interest rates and higher interest accretion related to our strategic loans. Our share of income in associate, which relates to our strategic investment in Medison, was $854,000 for 2017, a decrease of $1.9 million versus last year. The decrease in share of income is mainly attributable to increases in Medison's marketing and selling expenses linked to new product launches as well as to an increase in the amortization of fair value adjustments recorded by Knight. Medison continues to expand its pipeline of specialty products and remains a partner of choice in the Israeli market. During the year, Knight received dividends totaling just under CAD 5 million from Medison. For Q4 2017, we reported net income of $7.1 million, a decrease of $794,000 or 10% versus Q4 2016, while for the year ended December 31, 2017 reported net income of $17.2 million, a decrease of $1.3 million or 7% versus last year. Now moving to our product pipeline. Over the last year, we submitted 3 products to Health Canada for approval; Probuphine, Iluvien and Netildex. Probuphine is a subdermal implant designed to deliver buprenorphine continuously for 6 months for the treatment of opioid drug dependence, promoting patient compliance and retention. Iluvien is a sustained release intravitreal implant for the treatment of diabetic macular edema. And Netildex is a fixed combination of netilmicin and dexamethasone for the treatment of inflammatory ocular conditions of the anterior segment of the eye, in presence or at risk of bacterial infection. Subsequent to the year-end, we received a notice of noncompliance from Health Canada regarding our submission of Iluvien. While we are disappointed with this, we see this as a delay and plan to respond to Health Canada's issues within the prescribed 90-day window. Turning to our strategic loans. We completed several transactions with our existing partners during the year. We issued additional loans to Synergy CHC Corp. and 60 Degrees Pharmaceuticals totaling an additional $16.3 million of loans. We also received loan repayments during the year totaling $19.3 million from Apicore Inc., and Pro Bono Bio plc as well as $2.5 million from Crescita Therapeutics Inc. Subsequent to year-end, we also received early repayment of $20 million on our $23 million of strategic loans to Medimetriks Pharmaceuticals Inc. At the end of the year, we had nominal value of $61 million receivable from 8 strategic loan partners. Now turning over to our fund strategy, which secures -- helps us secure product rights to innovative pharmaceuticals, where we have committed $125 million. During the year, Knight invested $21.3 million and received distributions of $8.1 million from our venture capital fund. We recorded a realized gain of $2.1 million related to our fund portfolio during the year. As at December 31, 2017, we continued to have an outstanding commitment of approximately $85 million, which we intend to keep liquid until called. At the end of 2017, we had over $765 million of cash and cash equivalents and marketable securities on hand and net asset value of $991 million or $6.94 per share. In conclusion, with the launch of Movantik and building our sales and marketing infrastructure, we are now well positioned to execute on our strategy of in-licensing and acquiring innovative pharmaceuticals for Canada and for some select international markets. Thank you for your confidence in the Knight team. This concludes my formal remarks. I'd now like to turn the call over to questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Rahul Sarugaser from Paradigm Capital.

[Rahul Sarugaser, Analyst of Healthcare and Biotechnology]

I guess, my first question is really around the pipeline as you continue to build and support your asset pipeline. There has been quite a bit of changes in the U.S. tax system that may be increasing the pressure on prices. And have you seen that affecting your search for assets?

[Samira Sakhia, President, CFO & Director]

I'm just going to turn it over to Amal to take that on.

[Amal Khouri, Vice President of Business Development]

Good morning. I mean, the specific pricing pressures in the U.S. are not necessarily impacting the deal flow that we're seeing. What's impacting -- the deal flow remains healthy in general. I think there are other changes in the U.S. that could impact the ability to get deals done at good valuations. And so it's not so much the pricing pressures in the U.S., it's more tax changes and money really flowing into the U.S. that keeps the [indiscernible] expectations quite high at this moment.

[Rahul Sarugaser, Analyst of Healthcare and Biotechnology]

Great. And just one last question and I will hand the line back. Last quarter call, you mentioned that there were certain number of assets in your pipeline. Has that number increased? And would you be able to share that? What the pipeline looks like?

[Amal Khouri, Vice President of Business Development]

The deal pipeline continues to be at around the same level. So we're always looking roughly at about maybe 100 opportunities in our pipeline, of course all at different stages. So the -- again, the deal flow remains similar to the previous years and healthy.

[Jonathan Ross Goodman, Chief Executive Officer and Director]

And business development remains the biggest part of our organization at the moment. I mean, Amal, you have 6 people.

[Amal Khouri, Vice President of Business Development]

Yes.

[Jonathan Ross Goodman, Chief Executive Officer and Director]

6 people, just scouring the earth for great products that touch peoples' lives and that we can launch to make money in the process.

[Operator]

Your next question comes from the line of Endri Leno from National Bank.

[Endri Leno, Associate]

Just a couple for me. I'll transition first into the pipeline discussion from the previous question. So I was wondering in terms of valuations, can you give us some bit of color on that one? What kind of valuations are you seeing? I mean, in terms of where would you like to execute? Are you seeing 50%, 25% higher? Or is it multiple highers from your comfort level?

[Amal Khouri, Vice President of Business Development]

It's really hard to give one number. I mean, what I can tell you is that if you look back at the last 4 years, the valuations have not really come down. So it continues to be at the same level as it was in the last 2 years, but it's difficult really to say there is one number where everything is at an x premium to what we would pay because, of course, that varies by opportunity.

[Endri Leno, Associate]

Okay. And where would you see -- at least in general, I mean nothing specific, but where would you see the most opportunities for deal flow? Is it more Canada? Or is it more Eastern Europe, South America? Or what geographical area?

[Amal Khouri, Vice President of Business Development]

So we're sourcing -- in terms of where we source products from, we're sourcing products from companies in the U.S. and Europe primarily, and that's because, as you know, we don't do any R&D. So we look for assets that have clinical development in jurisdictions that we can -- that are recognizable by Health Canada and that we can file in Canada. So in terms of sourcing, the primary geographies remain the U.S. and Europe.

[Endri Leno, Associate]

Great. And my last question is just if you can expand a little bit on the Notice of Non-Compliance for Iluvien. I mean, what does Health Canada expect? I mean, how major of a request that they have? How long do you think it's going to take you to respond to their request?

[Amal Khouri, Vice President of Business Development]

So we do see this only as a delay. The issue really was that as with Health Canada, if you have a lot of questions, they will issue a non if they don't think that you can get the answers done in time and there was quite a few questions. And we do think that we can respond within the 90 days. So it really is a delay towards our launch. We were expecting to launch at the end of this year. It will be pushed back by a few months.

[Jonathan Ross Goodman, Chief Executive Officer and Director]

Iluvien -- it's Jonathan. Iluvien is approved in the states and approved in Europe. So we think that we have the data to respond to their questions.

[Operator]

Your next question comes from the line of Andre Uddin from Mackie Research Capital.

[Andre Uddin, Managing Director of Healthcare Research]

My question was already answered.

[Operator]

[Operator Instructions] Your next question comes from the line of David Kideckel from Beacon Securities.

[David M. Kideckel]

One of my questions was already answered, but my second question has to do with your pipeline of drugs. And I'm just wondering from the strategy perspective, have you considered bringing in rare disease drugs from elsewhere into Canada?

[Amal Khouri, Vice President of Business Development]

We -- I mean, we look across all therapeutic areas. As you know, we're not really -- we're relatively agnostic to therapeutic areas. Of course, we have some preference to specialty and orphan, of course, falls right into that. So we look across the board, including orphan drugs as well.

[Operator]

Your next question comes from the line of Rahul Sarugaser from Paradigm Capital.

[Rahul Sarugaser, Analyst of Healthcare and Biotechnology]

Just one last question. So following up on David's question, given that a lot of sort of big pharma franchises in sort of cardiology and neurology tend to be declining over the next few years, and they see cancer as the primary growth area, would you be able to comment on whether cancer is a particular area of focus for you?

[Amal Khouri, Vice President of Business Development]

Yes, again, we're looking at all specialty areas. So cancer is another area that we're interested in. And as you know, we already have -- it's earlier in the pipeline, but we've already transacted in oncology. So yes, it's an area that we look at.

[Operator]

There are no further questions at this time. I'll turn the call back over to management.

[Samira Sakhia, President, CFO & Director]

Thank you, everyone, for joining Knight's Q4 and Year End 2017 Conference Call, and have a good, and of course, that is GUD, morning.

[Operator]

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