Knight Therapeutics Inc

TSX:GUD

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentleman. My name is Chessa, and I will be your operator today. Welcome to Knight Therapeutics Inc. 2018 Fourth Quarter and Year-End Financial Results Conference Call.Before turning the call over to Jonathan Ross Goodman, 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 or future events, except as required by law. We would also like to remind you questions for 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 conference call is being recorded today, March 14, 2019. I would now like to turn the meeting over to your host for today's call, Jonathan Ross Goodman. Please go ahead, Mr. Goodman.

[Jonathan Ross Goodman, CEO & Director]

Good morning, everyone, and welcome to Knight Therapeutics Fourth Quarter and Year-End 2018 Conference Call. I'm joined on today's call by Samira Sakhia, Knight's President and CFO; and Amal Khouri, our VP of Business Development. We are pleased to report that during the past year, we made significant progress in building a specialty pharmaceutical company in Canada and select international markets. We've expanded our product portfolio with the in-licensing of 5 innovative products offering novel treatment options in women's health, oncology and gastroenterology. Furthermore, during 2018, we have advanced our commercial presence with the Canadian regulatory approval of Probuphine and Iluvien, 2 innovative pharmaceuticals. Probuphine, which was launched in 2018 offers a new alternative in the fight against the public health crisis of opioid dependence. Iluvien was approved for the treatment of diabetic macular edema in November 2018 and is expected to be launched in 2019. In addition, Knight currently has Netildex for the treatment of inflammatory ocular conditions and NERLYNX for the treatment of breast cancer, pending Canadian regulatory approval. If approved, the launch of these 2 products will substantially increase our commercial presence and more importantly will make a difference in the lives of the patients. Finally, we issued a strategic loan to Moksha8, a specialty pharmaceutical company, operating in Brazil and Mexico. Knight has advanced its rest of the world strategy with this relationship and will increase our capacity to identify and evaluate opportunities in Latin America. On February 28 of this year, Knight celebrated our fifth anniversary. I'm excited by the fact that we are well on our way to building a specialty pharmaceutical company we can all be proud of building together. We are currently commercializing 2 products in Canada, in addition to Impavido to sell in several markets. We have secured for Canada 17 innovative products in various stages of development. More importantly, we have a great near-term pipeline with Iluvien in launch preparations, NERLYNX and Netildex under Health Canada review as well as Ibsrela indicated for IBS-C and the 2 TXMD women's health products being prepared for regulatory submission. It has taken us longer than we would have liked, but we are well underway to building a great, not good, GUD pharmaceutical company that touches the lives of patients. 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]

Thank you, Jonathan. Good morning, everyone. I'm pleased to report that for the quarter and the year-end December -- year ended December 31, 2018, we reported revenues of $3.9 million and $12.5 million, respectively. The annual growth of 45% is attributable to the timing and growth of sales of Impavido as well as growth in the sales of Movantik. According to IQVIA Canada, Movantik sales were $1.4 million for the year ended December 31, 2018, an increase of 45% compared to the same period last year. Our operating expenses for the year were $14 million, relatively flat compared to the last year. Operating expenses for the fourth quarter were $4 million, an increase of 23% compared to the same period last year due to higher professional service fees and the timing of certain expenses. We reported interest income, excluding accretion for the quarter and year-end of $5.9 million and $20.9 million, respectively. Interest income remained relatively flat compared to the same periods in the prior year. Furthermore, as a result of the company's adoption of IFRS 9, there was no significant interest accretion in the year compared to $5.4 million last year. Our share of income of associates relates to our strategic investment in Medison and is driven by our share of Medison's net income, net of fair value adjustments of intangibles. For 2018, our share of Medison's net income was $555,000, a decrease of $299,000 or 35% versus last year. Since our investment in Medison in 2015, revenues have grown year-over-year nicely. However, Medison's net income of $21.7 million was down 12% from 2017 or 23% from 2016. Despite this downward and troubling trend in net income, we continue to believe that Medison's position as the third-largest Israeli pharmaceutical company has value.In the fourth quarter, we recorded a net loss on financial assets measured at fair value through profit or loss of $6.7 million. The loss is explained by the unrealized loss and reevaluation of Knight's strategic fund and equity investments measured at fair value through profit or loss. For fiscal 2018, we reported a net gain of $7.6 million on financial assets measured at fair value through profit or loss. This net gain is explained by a realized gain of $6.4 million as well as unrealized gain of $1.2 million on certain financial assets. The realized gain is mainly attributable to the disposal of certain equity investments, the distributions from our strategic funds and the early repayments of our loans from Medimetriks, Profound and Pediapharm. For the fourth quarter of 2018, we reported net income of $221,000 compared to a net income of $7.1 million in 2017, while for the year ended December 31, 2018, we reported net income of $24.1 million, an increase of $6.8 million or 40% versus last year. Now turning to our product portfolio, which we both expanded -- which both expanded and matured over the past year. During 2018, Knight received the Canadian regulatory approval of Probuphine and Iluvien. We believe that Probuphine is an important product that allows patients and physicians to deal with the important issues of burden, compliance and the stigma of opioid dependence. In the current year, 2019, Knight's commercial efforts will be focused on physician training and the public reimbursement of Probuphine to ensure that all Canadians have access to this novel therapy.Furthermore, Iluvien was approved by Health Canada for the treatment of diabetic macular edema. Iluvien is a single implant that offers a proven and effective treatment for DME for patients due to its continuous microdosing for a period of 3 years without the burden of frequent injections. We expect to launch Iluvien later in 2019. At the beginning of 2018, Knight submitted Netildex for regulatory approval to Health Canada. Netildex is a fixed combination of netilmicin and dexamethasone for the treatment of inflammatory ocular conditions for the anterior segment of the eye, including postoperative cases where bacterial infection or a risk of bacterial infection exists. Unfortunately, Knight received a Notice of Non-Compliance and will be responding to Health Canada's concerns shortly. In addition, Knight expanded its product pipeline with the in-licensing of innovative -- 5 innovative products offering novel treatment options in the therapeutic areas of women's health, oncology and gastroenterology. In 2018, Knight entered into an exclusive license agreement with TherapeuticsMD for the commercial rights of TX-004HR and TX-001HR for Canada and Israel. TX-004HR is an FDA-approved product and marketed as Imvexxy in the U.S. for the treatment of moderate-to-severe dyspareunia, a symptom of vulvar and vaginal atrophy due to menopause. TX-001HR is also FDA approved and marketed as Bijuva for the treatment of moderate-to-severe vasomotor symptoms due to menopause. We expect to submit both of these products for regulatory approval in 2019. We also expanded our GI portfolio with the exclusive commercial rights for tenapanor in Canada, and Mytesi for Canada and Israel. Tenapanor will be marketed as Ibsrela for irritable bowel syndrome with constipation. Ardelyx submitted Ibsrela for regulatory approval in the U.S. in September of 2018. We expect to submit Ibsrela to Health Canada in this year. In addition to its IBS-C indication, tenapanor is also being evaluated in a Phase III study for hyperphosphatemia. Subsequent to 2018, we -- Knight advanced its oncology portfolio with the Canadian exclusive rights to commercialize neratinib, a novel treatment for breast cancer. Neratinib is marketed as NERLYNX for the extended adjuvant treatment of adult patients with early-stage HER2 over-expressed amplified breast cancer following adjuvant Herceptin therapy. NERLYNX has already been submitted to Health Canada for regulatory approval and we expect to get that during 2019. Now I'm going to turn over to Knight's strategic loan portfolio, which has been a key to expanding our access to early-stage products. In 2018, Knight received $4.5 million as partial repayment of the 60 Degrees Pharmaceutical loan and subsequently lent an additional USD 2.1 million at an interest rate of 15%. As consideration for the additional loan, Knight obtained commercial rights of ARAKODA for the prevention of malaria in patients aged 18 years and older for the territory of Latin America. Subsequent to year-end, on February 15, 2019, Knight announced a strategic financing with Moksha8 Inc., a specialty pharmaceutical company operating in Brazil and Mexico, the 2 largest markets in Latin America. Under the terms of the agreement, Knight may loan up to USD 25 million in working capital funding and USD 10 million was issued at closing. The loan bears an interest rate of 15% and matures 5 years from the date of issuance. Knight may also issue up to an additional USD 100 million for Corporate Development and the acquisition of product licenses in Latin America. In conjunction with the strategic financing agreement, Knight received warrants at a nominal price representing 5% of the fully diluted shares of Moksha8. Furthermore, on February 20, 2019, the company entered into a USD 5 million loan -- secured loan agreement with Triumvira Immunologics Inc. for the development of its novelty T cell technology. This loan also bears an annual interest rate of 15% and matures on February 20, 2020. In addition, as part of this strategic financing transaction, Knight received warrants to purchase 3.5% of Triumvira's fully diluted common shares and obtain the commercialize rights to Triumvira's oncology products in select countries. I will now turn the call over back to Jonathan for his concluding remarks.

[Jonathan Ross Goodman, CEO & Director]

Thank you, Samira. As we move ahead into 2019, the talented team at Knight and I remain fully dedicated and committed to both the patients we serve and the shareholders we work for. Over the past few weeks, we have spoken with many Knight shareholders and their message to me has been clear. We believe Knight is executing on the plan that is working under the leadership of the team of industry professionals with a proven track record of success. Shareholders, like all of us here at Knight, are excited for what the future holds. As at December 31, 2018, Knight had over $780 million in cash, cash equivalents and marketable securities. From the strong cash position, Knight will focus on the disciplined execution of our strategy to continue building a Canadian and rest of the world's specialty pharmaceutical company. This will be achieved through the in-licensing and acquisitions of pharmaceutical products for the Canadian and select international markets as well as through corporate acquisitions at a fair price. Knight is also focused on finding the right strategic partners in Latin America, the Middle East and Africa to further our rest of the world strategy.Furthermore, Knight will continue to pursue deals such as strategic loans and/or equity investments to secure rights to innovative pipeline assets, including early-stage products. I remain today as dedicated to building Knight into a best-in-class leading specialty pharmaceutical company as I did the day I started Knight 5 years ago.In these past 5 years, we have received FDA approval for Impavido, which was successfully launched and is income-producing, sold our Priority Review Voucher for USD 125 million to Gilead, in-licensed over 20 innovative therapeutic products from 19 different companies, lent over $170 million to 15 different loan partners generating a double-digit return, committed $126 million to 8 fund managers as part of the long-term licensing strategy and generated $220 million of net income to date. I intend on seeing my vision through as CEO of Knight. I have said many times that the shareholders should invest in Knight as a stock to leave to their grandchildren. And I firmly believe that our long-term strategy will generate healthy, long-term returns. Thank you for your support and confidence in the Knight team. This concludes formal remarks. So now I'd like to open the call up to questions from analysts.

[Operator]

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

[David Novak, MD & Healthcare Research Analyst]

I guess to kick it off today, I'm going to grab the bull by the horns here and ask a direct question about the Medison's situation, specifically to you Samira, as you're an integral member of the Knight team, who really touches on every aspect of the business operations, and you're free from some of the debatable accusations being made with respect to potential indirect conflict. So, in your history at Knight, have you ever come across an asset that you believed would be a good fit for Knight, but felt pressured to pass up on said opportunity to perhaps benefit a competitor.

[Samira Sakhia, President, CFO & Director]

David, thanks for the -- thanks for your question. I think that's a really irrelevant question. So as you know, I worked with Jonathan since actually 2001. And the conflict that is being thrown around is a conflict that has actually existed since the mid-90s because Paladin was actually a spin-off from Pharmascience and his family had holdings of -- he was involved in Paladin, and his brother was involved in Pharmascience. Not in those almost 20 years have we ever had a situation where Jonathan told us to step off an asset because he was concerned that Pharmascience was involved in it. What is actually my experience is the fact that after we win or we lose an asset, we realized that we were actually competing against Pharmascience. It happened at Paladin, and it has happened at Knight where after the deals concluded, we realized who the winner was, and we realized -- we kind of find out through the rumor mills who the losers were.

[David Novak, MD & Healthcare Research Analyst]

Great. So I guess, I mean, have you ever, just following on that, entered a competitive process where you have actually won an asset and subsequently identified that you were competing against Pharmascience or an affiliate?

[Samira Sakhia, President, CFO & Director]

Not at Knight; at Paladin, yes. At Paladin, we won an asset and a few weeks later kind of the seller let it slip that Jonathan won against his brother.

[David Novak, MD & Healthcare Research Analyst]

Okay. Great. And then with respect to the recent transactions that have been highlighted at Pendopharm, does management present all BD opportunities to the board, including those that management may have diligence and concluded that they're not worth pursuing?

[Samira Sakhia, President, CFO & Director]

So we don't present for the sake of showing how hard we work. What we want to do is, really show to our board the results that we have, and things that we can execute on. So our BD team is looking at multiple opportunities at all times, what they say is, here is the landscape at a point in time, this is kind of what we're looking at, we could be doing diligence, we have some early negotiations, it doesn't work out, we walk away, we move on. That sort of, "Oh, I worked really hard." The Board doesn't care. They want -- similar to our shareholders, the Board wants to talk about what we can execute on, and what are we doing that's getting us there.

[David Novak, MD & Healthcare Research Analyst]

Great. And then maybe finally could you talk a little bit about how Canada and Israel may differ in terms of markets from a licensee perspective?

[Samira Sakhia, President, CFO & Director]

So one other -- and I'm going to let Jonathan add if he wants. So Israel is the size of Quebec. Canada is a developed market. It sits right next to the U.S. Our pricing controls affect other countries. So for example, Canada has referenced price, like in -- under the Patented Medicines Pricing Review Board, PMPRB, looks at price caps, and they look at our price caps, and compare us to certain European countries and the U.S. These other countries that have similar basis for pricing. And Canada is in their country -- in their basket. So they care about how pricing works in Canada, because it could impact their pricing in other jurisdictions. We also sit right next to the U.S. and I'm sure everybody has been hearing for the last decade about drug pricing in the U.S. and the drug pricing in Canada. We have had multiple examples of this drug costs $1,000 in the U.S. and it's being sold for $20 in Canada. How does that happen? So again that kind of neighborhood information is out there and partners care. Jonathan, I'm not sure if you wanted to add something. Okay. Sure, go on.

[David Novak, MD & Healthcare Research Analyst]

And then maybe just a last question. I mean, could you talk a little bit about the motivating driver behind entering into your partnerships with Medison in the LatAm. I mean, you could have built out those footprints yourselves. Why did you enter into partnerships with existing infrastructure?

[Samira Sakhia, President, CFO & Director]

So I'm going to -- I'm going to answer that -- try and answer that as well. Look, one of the things that we want to be the partner of choice for rest of the world pharma. What I can tell you today is, we know that we're good at Canada. When it comes to Mexico, we can choose to partner with somebody who knows Mexico well or we can build it ourselves. We think it's faster to do it with a partner and depending -- and you've seen with the way Knight has transacted. We always remain completely flexible on how we will enter that partnership. So whether it's an equity ownership, whether it's a loan, whether it's buying the company completely outright, we're open to all of those solutions. And if depending on the market, if it means going greenfield, we may even consider that. But we're a young company and we're going to be opportunistic on how we enter those markets.

[Jonathan Ross Goodman, CEO & Director]

It is Jonathan, I am sorry, go ahead David.

[David Novak, MD & Healthcare Research Analyst]

So I was just going to ask, would it be fair to state that you guys are experts in Canada. You're not an expert in Israel, you're not an expert in LatAm. So you would rely on other expertise just like it would be perhaps not to investors advantage to have somebody, who is not an expert in Canada, come and try to build something in Canada. You're relying on other people's expertise because that's what they are best at, and is that a fair statement?

[Jonathan Ross Goodman, CEO & Director]

That is the fair statement, and that's why we didn't buy more than 28% of Medison because we wanted the management team to be fully engaged in building their business.

[David Novak, MD & Healthcare Research Analyst]

That's it from me guys. I apologize for the distracting questions, and I look forward in subsequent quarters getting back to questions on the actual operations of Knight.

[Jonathan Ross Goodman, CEO & Director]

I assure you David that you're not the only distraction in our life today.

[Operator]

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

[Andre Uddin, Managing Director of Healthcare Research]

Samira, I know it's a little bit difficult to determine this, but could you give us a rough range of what SG&A expenses would look like in 2019 due to some of the Medison legal expenses?

[Samira Sakhia, President, CFO & Director]

Well, you're seeing some of the increase in the SG&A and the G&A goes through in Q4, so that was related to that. Unfortunately, as you can see, this is not abetting anytime soon. So we will continue and it will continue to rise. We don't give -- well, what I can tell you is, generally these type of shareholder fights cost between $1 million to $2.5 million, and that's for each side.

[Operator]

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

[Endri Leno, Associate]

Actually, well -- I have a few, I mean, I guess, on the director situation as well, but I'll start with the products. Just some kind of initial thoughts on the launch of Probuphine in Q4. What's the reception been like? And how do you see it developing in 2019?

[Samira Sakhia, President, CFO & Director]

That's a great question. So Probuphine, there is a lot of interest in it. There is a lot of physicians -- we have had quite a few physicians that have already started to take the training, and we've got basic -- at this point, we've got several physicians across Canada trained. The product does have private reimbursements. We are starting to see injections happening one off. But today, the team's focus is really helping physicians. At this point, we're helping physicians identify the right patient that could benefit for this as well as working through public reimbursement so that its market access across Canada is available to all patients.

[Endri Leno, Associate]

Great. Next one on the Netildex, on the Notice of Non-Compliance. I mean, is it anything serious or like -- just if you can expand a little bit on it, please?

[Samira Sakhia, President, CFO & Director]

Again, it's really -- Health Canada, it's not really about the clinical issues of the product. It goes back to a little bit on the manufacturing. Our team is gathering all the information and they will be submitting shortly.

[Endri Leno, Associate]

Okay. Great. And Iluvien last one on the product side. You said it will be launched later in 2019. Are you able to narrow it down a little bit like maybe H1, H2 or even if a quarter.

[Samira Sakhia, President, CFO & Director]

Sure. It's going to be H2, really so that we have -- again, this is another product where it's an implant by way of injection. We -- really, we want to be further ahead when it comes to reimbursement. So really launching it in H1 or H2 will not make that significant a difference. So I'm giving the time -- the team enough time so that they are more effective as soon as they get out there.

[Endri Leno, Associate]

Okay. Great. And the last one, I mean, I'll go back, I guess as everybody else to the Director -- defending Director concerns, but so -- there was a presentation that was distributed this morning on what they presented to the Board last night or before. And they had a plan or presented a plan potentially for Knight. I was wondering if you can comment on that a little bit whether you can focus or whether you would like and what prevents you, what is good or bad from focusing on orphan drugs and this new kind of biotech type of medications?

[Jonathan Ross Goodman, CEO & Director]

It is Jonathon. Well, there is absolutely nothing new in the plan that we're not doing, most of the companies, if not all the companies, we've already approached.

[Samira Sakhia, President, CFO & Director]

I'm just going to add, I'm disappointed that this is how Mayor has decided to work with management and the Board. We are reviewing. It was only presented to us yesterday, and so we are reviewing and we will have further comments. But like Jonathan said, from our preliminary review, we're not averse to doing rare disease products. In fact, again, and I go back to the team at Paladin who was all like myself, Amal and Jonathan. We did have rare disease in -- at Paladin, we were Shire's distributor in Canada, and we look to continue to do that here as well. And we will -- like I said, we will review and we will respond once we've had a chance to more fully digest.

[Operator]

[Operator Instructions] Your next question comes from the line of Justin Keywood from GMP Securities.

[Justin Keywood, Director of Equity Research]

For the Moksha8 transaction, on the potential additional $100 million loan, first, would that bear the same interest rate as the working capital loan?

[Samira Sakhia, President, CFO & Director]

We didn't disclose, but it's under the same agreement. So it should not change.

[Justin Keywood, Director of Equity Research]

Okay. And then are you able to provide any additional color on what the parameters would be as far as deploying that additional capital like would it be on a certain therapeutic area that you're looking for in the region or would it depend on product rights?

[Samira Sakhia, President, CFO & Director]

So the extra $100 million is for them to be able to -- if they are acquiring assets, it's not further -- we've not disclosed or determined further than that.

[Justin Keywood, Director of Equity Research]

Okay. And then just finally on the Medison's situation. Is there an anticipated time line when a solution could be determined?

[Samira Sakhia, President, CFO & Director]

That's a great question. That's not just dependent on us. We'd like to arrive to a solution as soon as possible. Unfortunately, we're not sure that that's what the other side is aiming for. We're expecting that he will be putting a new slate of Directors at our AGM. And we will see -- who -- it's really our shareholders who will decide whether they support the current board and management team or if they are supporting Mayor and the new board.

[Jonathan Ross Goodman, CEO & Director]

In 23 years of being in the pharmaceutical business, I have never sued anyone or been sued. This is the first time that I have had to use a lawyer for something other than contract negotiation. We always do what is right, what is fair, what is pragmatic. And I'm still in shock that we're here -- that we're at the stage that we're at now.

[Operator]

There are no further questions at this time. Mr. Goodman, I'll turn the call back over to you for closing remarks.

[Jonathan Ross Goodman, CEO & Director]

Thank you for your support and confidence in the Knight team. This concludes formal remarks for now. I'd like to -- thank you very much.

[Operator]

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