Knight Therapeutics Inc

TSX:GUD

Earnings Call Transcript 2022-Q4

[Operator]

Good morning ladies and gentlemen. My name is Taren and I will be your operator today.

Welcome to Knight Therapeutics fourth quarter and year end 2022 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 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 during today’s call will be taken from analysts only. Should there be any further questions, please contact Knight’s Investor Relations department via email to [e-mail], or via phone at 514-484-4483.

I would like to remind everyone that this call is being recorded today, March 23, 2023, 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, President, Chief Executive Officer]

Thank you Taren. Good morning everyone and welcome to Knight Therapeutics fourth quarter and year end 2022 conference call. I am joined on today’s call by Amal Khouri, our Chief Business Officer, Arvind Utchanah, our Chief Financial Officer, and Jeff Martens, Global VP Commercial.

I’m excited to announce that we delivered another great year in 2022 and reported record revenues of over $290 million, a growth of 21% over last year, as well as record adjusted EBITDA of over $54 million, an increase of 42% over last year. This growth was generated by the full year effect of Exelon, the impact of our recent launches in Colombia, as well as continued growth from our key promoter products.

We have also executed on all aspects of our portfolio strategy. We in-licensed Akynzeo, a product with existing sales in our key markets, and further expanded our innovative pipeline with the in-licensing of fostamatinib from Rigel. We also added three products to our branded generic pipeline, which include the rights to the two largest markets in LatAm, Brazil and Mexico.

On the regulatory front, we continued to advance the pipeline and submitted tafasitamab, or Mojuvi, in Brazil, Colombia and Argentina, as well as two branded generic products in each of Chile and Colombia, and obtained the regulatory approval of Palbocil in Argentina.

In addition to delivering record results and advancing our pipeline, 2022 was very productive as we completed the integration of GBT and fully on-boarded Exelon and Akynzeo.

Turning now to the NCIB, during the year we purchased approximately 5.6 million common shares for aggregate cash consideration of over $30 million. Subsequent to the quarter, Knight has purchased an additional 1.3 million common shares for aggregate cash consideration of $6.5 million. The average purchase price of the shares purchased through the NCIB launched in July ’22 was $5.31 per share.

I’m now going to turn the call over to Jeff to provide more details on our product results.

[Jeff Martens, Global Vice President, Commercial]

Thank you Samira. In 2022, as Samira mentioned, we have delivered record revenues of over $290 million, an increase of over $48 million on a constant currency basis or 20% over prior year. We grew across all of our therapeutic areas due to the increasing market penetration of our new launches, as well as the full year acquisition effect of Exelon.

Now moving to our oncology hematology portfolio, during the year revenues excluding hyper inflation were $105.5 million, a growth of $16.4 million or 18% versus the same period last year. This includes a contribution from our key promoted brands, including new launches of Lenvima, Halaven, and Rembre in Colombia in the first quarter of 2022, the growth of our promoted products in all territories, and the addition of Akynzeo in Brazil and Canada. This increase was partially offset by a decline in sales of certain branded generic products due to their life cycle and entrance of new generic competitors.

As for our infectious disease portfolio, we delivered revenues of $116.5 million excluding hyper inflation. Our portfolio grew by $29 million due to an increase in patient treatments as our markets reduced COVID-19 restrictions, growth of our key promoted products, and a one-time sales contract with the Ministry of Health in Brazil for AmBisome. We recorded $7.5 million in the quarter, which represents 40% of the full value of the contract and we expect to deliver the balance in the first half of 2023. This growth is offset by an estimated $14.2 million due to lower COVID-related demand for certain of our infectious disease products that were used to treat invasive fungal infections associated with COVID-19 and the planned transition and termination of the Gilead agreement effective July 1, 2022.

Now moving to our other specialty portfolio, during the year revenues excluding hyper inflation were $69.8 million, an increase of $21.3 million compared to prior year. This increase is mainly due to the full year effect of Exelon and the change in accounting treatment from net profit transfer to recognition of net revenues and related cost of sales.

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

[Arvind Utchanah, Chief Financial Officer]

Thank you Jeff. In the course of this conference call, I will refer to EBITDA and adjusted EBITDA, which are non-IFRS measures. Knight defines EBITDA as operating income or loss excluding amortization and impairment of intangible assets, depreciation, purchase price accounting adjustments, and the impact of accounting under hyper inflation, but to include costs related to leases. Adjusted EBITDA excludes acquisition costs and non-recurring expenses.

I will go directly to gross margin since Jeff has already discussed our revenues. For the fourth quarter of 2022 excluding the impact of hyper inflation, we reported gross margin of $41.9 million or 50% of revenue compared to $28.6 million or 51% of revenue in the same period last year. For the year ended December 31, 2022, gross margin excluding hyper inflation was $150.3 million or 52% of revenue compared to $118.8 million or 50% of revenue in the same period last year. The increase in gross margin as a percentage of revenue is due to the change in product mix as well as the full year effect of the acquisition of Exelon.

Moving onto our operating expenses excluding hyper inflation, amortization and impairment of intangible assets, for fourth quarter our operating expenses were $29.2 million, an increase of $4.6 million compared to the same prior year period. For the year ended December 31, 2022, our operating expenses were $99.3 million, an increase of $15.2 million versus last year. As we return to normal commercial activities, we see an increase in our sales, marketing and medical costs for our key promoted brands, including promotion spending behind the re-launch of Exelon and Akynzeo. In addition, we saw an increase in compensation expenses as we strengthened our structure, including the management team, and certain variable costs such as logistic expenses, which rose as a function of higher sales.

Moving onto adjusted EBITDA, for the fourth quarter of 2022, we reported $13.8 million, an increase of $8.1 million or 143% compared to the same prior period. For the year ended December 31, 2022, our adjusted EBITDA was a record $54 million, an increase of $16 million or 42% over the same prior year period.

Moving onto impairment of non-current assets, which is not reflected in our adjusted EBITDA, for the year ended December 31, 2022, under IFRS we recorded an impairment of $24 million, of which $21.6 million related to PPE and intangible assets in Argentina. The main reason for the write-down in Argentina is the increase in the value of non-monetary assets due to the hyper inflation adjustment under IFRS. Under hyper inflation accounting, the net carrying value of non-monetary assets, including PPE and intangible assets, is adjusted by the inflation index and converted back to Canadian dollars at the closing rate of the reporting period. During a period where the inflation index is higher that the devaluation of the Argentine peso related to the Canadian dollar, the net carrying value of the non-monetary assets will increase in Canadian dollars which can lead to an impairment.

Now moving onto gains or losses on our financial assets, which are not reflected in our adjusted EBITDA, in 2022 we reported $20.7 million of net unrealized losses on financial assets measured at fair value to profit or loss. The loss is driven by the mark-to-market adjustment of underlying assets as a result of a decrease in the share prices of [indiscernible] traded equities held by our strategic funds.

Moving onto our cash flows, in 2022 Knight generated cash in-flows from operations of $40.5 million, including a net working capital investment of just under $10 million mainly due to the on-boarding of Exelon and Akynzeo. Finally, in December we closed a loan with the International Finance Corporation for $52 million denominated in Brazilian real [indiscernible] Mexican and Chilean pesos. The five-year loan has customary financial and non-financial covenants and is secured against certain assets of Knight, as well as restricted cash collateral of 35% of the loan balance. Depending on the currency, the interest rates on the loan range between 7.9% to 15.8% annually. As a result, Knight expects its interest expense to increase in 2023. The IFC loan further strengthens our balance sheet while providing an actual hedge against future currency depreciation in the key markets in which we operate.

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

[Samira Sakhia, President, Chief Executive Officer]

Thank you Arvind.

Now turning to our financial outlook for 2023, excluding the impact of IAS 29, or hyper inflation, Knight expects to generate revenues of $280 million to $300 million and adjusted EBITDA between 13% to 15% of revenues. I’d like to remind everyone that this guidance is provided on a non-GAAP basis due to the difficulty of predicting Argentinean inflation rates.

The guidance is also based on a number of assumptions which are described in our press release. Should any of the assumptions differ, the financial outlook and the actual results may vary materially.

Our team has been extremely successful executing on our pan-American ex-U.S. strategy and has built a profitable business with a unique platform and a strong foundation from which to continue growing over the long term. We ended 2022 by delivering record revenues and record adjusted EBITDA as a result of growing our current portfolio, as well as adding new products that leverage our existing platform.

Looking ahead, while we face headwinds with the entrance of new competitors on certain of our branded generics products, as well as incur investments related to launched products, Knight is expected to continue to generate strong cash flows from operations, and with over $150 million of cash and $175 million of financial assets, we remain well positioned to execute on our mission to acquire, in-license, develop and commercialize pharmaceutical products in Latin America and Canada.

Thank you for your support and confidence in the Knight team. This concludes our formal remarks. I’d like to now open up the call to questions. Back to you, Taren.

[Operator]

Thank you. Before I 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 email to [e-mail], or via phone at 514-484-4483.

[Operator instructions]

We’ll take our first question from David Martin with Bloom Burton. Your line is now open, please go ahead.

[David Martin, Bloom Burton]

Good morning. A few questions. Great quarter.

You mentioned facing generics in the upcoming year. I’m wondering, A, is this year expected to be more [indiscernible] the status quo as far as generic threats, and is Exelon one of the products where you anticipate generic threat?

[Samira Sakhia, President, Chief Executive Officer]

Thank you David. There’s a couple of different dynamics, whether it’s on our innovative or our branded generics portfolio. When I look at our branded generics portfolio, it’s kind of a life cycle issue. Some of the generics [indiscernible] the large contributors are facing more competition, more new entrants in that same molecule in the next year. When it comes to our innovative portfolio, including Exelon, we’ve known about generics on Exelon. We face already some generics. We do expect, depending on the market, either a new entrant or a couple more new entrants. For the year, we’re still expecting it to be generally flattish as a brand.

[David Martin, Bloom Burton]

Okay, okay. You mentioned the AmBisome one-time contract - I think you said $7.5 million received to date, which is 40% of it. Was that all in Q4, and then when do you expect to receive the remaining 60%?

[Samira Sakhia, President, Chief Executive Officer]

It was all in Q4, the $7.5 million related to AmBisome, and the second portion of that order is supposed to deliver in the first half.

[David Martin, Bloom Burton]

First half? Okay. Then lastly, can you give any commentary on your business development pipeline right now? Does it look as strong as ever, have there been any changes that you’ve seen?

[Amal Khouri, Chief Business Officer]

Good morning, this is Amal. Yes, the pipeline is very--the deal flow is very healthy, the team is very active, and we continue to look at opportunities along all three work streams, so acquisition of products and portfolios, in-licensing of innovative products, as well as growing our branded generics portfolio, so whether it’s internal development or in-licensing, so the team remains quite active along all three.

[David Martin, Bloom Burton]

Okay, thanks. That’s it for me.

[Samira Sakhia, President, Chief Executive Officer]

Thank you David.

[Operator]

We’ll take our next question from Endri Leno with National Bank. Please go ahead.

[Endri Leno, National Bank]

Yes, good morning. Thanks for taking my questions.

The first one, it’s a bit more related to guidance, but what I wanted to ask is the products that are facing generic competition in ’23, is there any kind of new product that you can launch to counter some of that, be it branded generics or new ones, or do we expect that generic impact to continue throughout the year and into 2024? Basically, can you offset that with any new things?

[Samira Sakhia, President, Chief Executive Officer]

We are offsetting, so when it comes to our branded generics portfolio, it’s kind of as they mature, new entrants come in, so you see more of a price erosion and a margin erosion, and that’s really what we’re seeing going into ’23. The way we’re countering that is obviously through the promotional efforts on our innovative products that are growing. We’re also launching some branded generic products ourselves, new products, so you see that in the new launches in our press release. The issue that we have is kind of a timing of when are the new launches happening versus the erosion, and this is why our BD team has been extremely busy on all three fronts - acquisition, in-licensing, as well as the generics portfolio, and we will continue to really strengthen the portfolio to be able to manage these waves that are normal.

[Endri Leno, National Bank]

Great, thanks for the answer.

In terms of the costs, do you expect any increases in the costs, for example versus what you did in 2022, in ’23, or are they generally kind of more stable?

[Samira Sakhia, President, Chief Executive Officer]

When I look at kind of the dollars that we have in our opex this year, we expect ’23 to be flattish.

[Endri Leno, National Bank]

Great, thank you. Also, there was a comment on the press release about investing more in 2023, doing some investments. Can you specify what those investments could be? Are they more in personnel or are you adding manufacturing capacity, or in new launches or anything like that?

[Samira Sakhia, President, Chief Executive Officer]

Well as you know, a lot of our products, when I look at the innovative portfolio, there is a re-launch of Exelon, there is a re-launch of Akynzeo. We are doing planning and prep for Mojuvi, we have Lenvima and Halaven in Colombia. Those are investments that are going to continue to be ongoing. As I said before, the total value of those dollars is not going to change between ’22 and ’23.

[Endri Leno, National Bank]

Great, and last one from me and I’ll jump in the queue, but the contract that you got from the Ministry of Health in Brazil, is there any reason--if you can characterize and describe it a little bit, what is it for, any reason why it would be only one-time? Have they found another product or is there a generic that’s coming along, or any kind of color there, and what’s the probability that [indiscernible] repeats again?

[Samira Sakhia, President, Chief Executive Officer]

I think in this case, the government had some experience with AmBisome during--kind of the public side of the business would have had some experience due to COVID. We suspect that they had shortages maybe on some of the competitor products that are cheaper, so we received this contract. We don’t put a high likelihood of a renewal of this contract, so we will ship the second half and we don’t expect it again.

[Endri Leno, National Bank]

Thanks, I’ll jump in the queue. Thank you.

[Operator]

As a reminder, if you find that your question has been answered, you may remove yourself from the queue by pressing star, two. If you’d like to join the queue, you may press star, one at this time.

We’ll take our next question from Scott McAuley with Paradigm Capital. Please go ahead.

[Scott McAuley, Paradigm Capital]

Morning Samira, congrats to you and the team on the strong quarter and finishing the year.

Just one from me, the others, I think have been answered. But on the outlook for 2023, just looking at the adjusted EBITDA margins that you’re expecting, my back of the envelope shows that that would--you know, the number would come down year-over-year relative to 2022 despite the growth in the top line, so just wondering what you could share in terms of what’s contributing to that kind of margin pressure on the bottom line, despite the growth on the top line.

[Samira Sakhia, President, Chief Executive Officer]

Sure, so as we’ve said, where we’re seeing the headwinds is really coming from our branded generics portfolio. As we manufacture those products for ourselves, we are able to--those are high margin products, so when you see the impact of a decline in sales, it actually has been more a heavier hit to the bottom line, and the loss of margin on that product drops straight to the bottom line.

[Scott McAuley, Paradigm Capital]

Got it, so it’s more on the gross--I think you said you expect costs and other things on personnel to be flattish, it’s more on that gross margin impact from the branded generics?

[Samira Sakhia, President, Chief Executive Officer]

Exactly.

[Scott McAuley, Paradigm Capital]

Got it. That’s great, thank you very much, and again congrats on a great year.

[Samira Sakhia, President, Chief Executive Officer]

Thank you.

[Operator]

We’ll take our next question from Sahil Dhingra with RBC Capital Markets. Please go ahead.

[Unknown Analyst, RBC Capital Markets]

Hi, good morning, thanks. This is [indiscernible].

My first question is just wanted to confirm on Exelon, are all the commercial rights being transferred to Knight, and is Q4 fully burdened with Exelon costs in terms of SG&A? That would be my first question, please.

[Samira Sakhia, President, Chief Executive Officer]

Sure, so in the case of Exelon, it has--all of the MA transfers have been done. There is some smaller markets in Central America and Caribbean that remain and will really have a major impact on our numbers when they do switch over to us. When it comes to SG&A, we don’t really do it by brand, but as I said earlier, when it comes to the total opex, we really don’t expect that to change going into 2023.

[Unknown Analyst, RBC Capital Markets]

Okay, and my second question would be the difference between--the delta for the guidance, it does imply on the lower end you will be probably--the revenue would decline, and that is mainly due to the branded generics, competition in the branded generics, or is there something else?

[Samira Sakhia, President, Chief Executive Officer]

No, the real issue that we’re dealing with is we face new entrants, the head-to-head competition our branded generics portfolio. As that happens, what we see is that we have to lower our price - that’s a straight margin hit that drops straight to the bottom line. It’s really an issue of the portfolio. As we launch newer products, both on our innovative portfolio as well as in our Gx portfolio, we’ll ride this wave out going into the future.

[Unknown Analyst, RBC Capital Markets]

Okay, and my final question is do you have certainty regarding the timing of these competitive products launching, so will there be an impact in a particular quarter as we think about quarterly revenues, or it is uncertain at the moment?

[Samira Sakhia, President, Chief Executive Officer]

It will really depend on the country and the product. It’s hard to predict right now, but we do expect them coming in.

[Unknown Analyst, RBC Capital Markets]

Okay, thank you. Those are all my questions.

[Samira Sakhia, President, Chief Executive Officer]

Thank you.

[Operator]

Our next question will return to Endri Leno with National Bank. Please go ahead.

[Endri Leno, National Bank]

Thank you. Two more questions for me. The first one, it’s more for the BD team, but when you’re looking at new products, especially for 2023, are you looking at more replacing some of the lost sales that you get from the branded generics, or is that strategy still continuing to try and build the footprint in Canada and Mexico?

[Amal Khouri, Chief Business Officer]

Hi Endri, this is Amal. It’s really all of the above, right, so we look to bring in opportunities that would be immediately accretive, so that would be products or portfolios or M&A with existing sales and existing profitability. We’re also looking at the same time to bring in pipeline, and that’s both innovative as well as branded generics, so really it’s full steam ahead on all of the above.

Again, as Samira said earlier, the phasing issue that we’re facing this year with our branded generics portfolio maturing and the pipeline not yet coming in already this year to compensate for that, the work that the team is doing is to make sure that going forward, we don’t really have that temporary dip but we’re kind of building both with existing and pipeline.

[Samira Sakhia, President, Chief Executive Officer]

I’m just going to add to her. If you look at what we did in ’21, we added Exelon, we added the Incyte products, as well as continued on the development side of our branded generics portfolio, and you see that with some of the submissions that we have and the approval that we have this year.

When you look at 2022, you have kind of a similar idea - in-licensing of BGX, in-licensing of innovative with Rigel’s product as well as the addition of a product with existing sales with Akynzeo, so there is really nothing that’s changed in our BD strategy. We’re going to continue to execute on the same strategy.

[Endri Leno, National Bank]

Great, and as a follow-up there, have multiples changed at all when you look across geographies, or have they remained as they were?

[Samira Sakhia, President, Chief Executive Officer]

The deal landscape remains competitive. Of course, the level of competitiveness depends on the type of deal and type of product, but we haven’t seen anything kind of dramatically different in terms of valuations or multiples, but the landscape really is competitive and we have to remain--

[Endri Leno, National Bank]

Great, thank you, and--

[Samira Sakhia, President, Chief Executive Officer]

Go ahead?

[Endri Leno, National Bank]

Got it, thank you. The last one from me is just more on the political side of things. Would you expect any impact, especially when it comes to Brazil and Colombia? Have there been any regulatory or access changes for 2023 that you anticipate?

[Samira Sakhia, President, Chief Executive Officer]

That’s a really great question. One of the things that we know, similar to the rest of the market, and that’s not really a political issue, it’s more an economic issue. Post-COVID, whether it’s private payors or public payors or generally even individuals on cash pay products, due to economic issues and inflation, everybody is trying to control budgets and spend, so we do face that and that’s not just a Knight issue, I think it’s a global pharma issue.

When it comes to the political environment, there has been a lot of talk about pharma reform in each of Colombia and Brazil. Colombia, for example, has issued a reform package that they submitted. It is being highly debated and may go into place, but probably not in the form that it’s in today just because of the level of debate that we’re seeing. In the case of Brazil, they’ve talked about it but we really haven’t seen anything.

The one thing to remember is when it comes to the pharmaceutical industry, this is one where we know that our products are always going to be necessary. It’s really a question of the pricing, the reimbursement, and one of the reasons why we want to maintain a diversified portfolio of innovative products as well as branded generics, because this way we are able to adjust and bring value to those payors.

[Endri Leno, National Bank]

Great, thank you very much. That’s it for me.

[Operator]

One more, if you would like to ask a question, you may press star, one on your telephone keypad now. Again, that’s star, one if you’d like to ask a question.

It appears there are no further questions at this time. Ms. Sakhia, I’d like to turn the conference back to you for any additional remarks.

[Samira Sakhia, President, Chief Executive Officer]

Thank you Taren. Thank you for your confidence in the Knight team and for joining our Q4 2022 conference call. Have a great morning.

[Operator]

This concludes today’s call. Thank you for your participation. You may now disconnect, and have a great day.