Knight Therapeutics Inc. (OTCPK:KHTRF) Q3 2022 Earnings Conference Call November 10, 2022 8:30 AM ET
Company Participants
Samira Sakhia – President and CEO
Jeff Martens – Global VP of Commercial
Arvind Utchanah – CFO
Amal Khouri – Chief Business Officer
Conference Call Participants
Andre Uddin – Research Capital
Doug Miehm – RBC Capital Markets
Endri Leno – National Bank
Operator
Good morning, ladies and gentlemen. My name is Elaine, and I will be your operator today. Welcome to Knight Therapeutics Inc Third Quarter 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 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 your 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 info@knighttx.com or via phone at (514) 4844-483. I would like to remind everyone that this call is being recorded today, November 10, 2022. I would now like to turn the meeting over to your host today, Samira Sakhia. Please go ahead, Ms. Sakhia
Samira Sakhia
Thank you, Elaine. Good morning, everyone, and welcome to Knight Therapeutics Third Quarter ’22 Conference Call. I’m joined on today’s call with Amal Khouri, our Chief Business Officer; Arvind Utchanah, our Chief Financial Officer; and Jeff Martens, our Global VP of Commercial. I’m excited to announce that for the first 9 months of 2022, we reported record revenues of over $210 million, which represents a growth of 14% as well as record adjusted EBITDA of over $40 million, which represents a growth of 24% over the same period last year.
This growth was generated by the full year effect of Exelon and the continued performance of our recent launches. During the past quarter, we made progress on the commercial transition of Exelon and AKYNZEO. To date, we have completed the onboarding of Exelon in Brazil, Colombia, Argentina, Chile, Peru, Mexico and Canada as well as AKYNZEO in Brazil and Argentina.
Furthermore, we continue to advance our pipeline with the submission of tafasitamab in combination with lenalidomide to ANVISA, the Brazilian health agency. We also expect to submit tafasitamab in other key LatAm countries over the next several months.
Turning now over to the NCIB. During the third quarter, we purchased approximately 800,000 common shares for aggregate cash consideration of $4.4 million. Subsequent to the quarter, Knight has purchased an additional 887,000 common shares for aggregate cash consideration of $4.8 million. The average purchase price of the shares purchased through the NCIB launched in July ’22 was $5.46 per share. I will now turn the call over to Jeff to provide more details on our product results.
Jeff Martens
Thank you, Samira. For the third quarter, we had revenues of $69 million, excluding hyperinflation, which represents a decrease of $2.5 million over the same period last year. This decrease is primarily driven by the planned termination and transition agreement with Gilead for the HIV HCV portfolio, which took effect July 1. Now moving to our oncology hematology portfolio.
During the quarter, revenues, excluding hyperinflation, were $26.3 million, a growth of $3.2 million or 14% versus the same period last year. This includes the contribution from our key promoted brands, including new launches of Lenvima, Halaven in Colombia, the growth of Trelstar in Canada and the addition of AKYNZEO in Brazil. This increase was partially offset by a decline in sales of certain branded generic products due to the entrance of new competitors.
As for our infectious disease portfolio, we delivered revenues of $27.2 million, excluding hyperinflation, a decrease of $3.7 million compared to the period last year. With the increase in patient treatments as our markets reduce COVID-19 restrictions as well as the growth of our key promoted products, the infectious disease portfolio grew by $7 million. This growth was offset by an estimated $10.5 million due to lower COVID-related demand as well as the planned termination of the Gilead agreement.
Now moving to our other specialty portfolio. During the quarter, revenues, excluding hyperinflation, was $15.6 million, a decrease of $2 million compared to the same period last year. The decrease is mainly due to advanced Exelon purchases by certain customers in Brazil in the second quarter in anticipation of the transfer of the commercial activities from Novartis to Knight.
On a year-to-date basis, as Samira mentioned, we have delivered record revenues of over $210 million, an increase of over $25 million or 14% compared to the same period last 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. I will now turn the call over to Arvind for an update on our financial results.
Arvind Utchanah
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 hyperinflation but to include costs related to leases.
Adjusted EBITDA exclude acquisition costs and nonrecurring expenses. I will go directly to gross margin since Jeff has already discussed our revenues. Excluding hyperinflation, the gross margin for the third quarter was $33.8 million or 49% of revenue compared to $38.4 million or 50% of revenues in the same period last year.
The decrease in gross margin both in dollars and as a percentage of revenue is due to the change in product mix as well as the change in the accounting of Exelon from net profit transfer to net revenues and related costs post the transfer of commercial activities from Novartis to Knight. We expect gross margin as a percentage of revenue to further decline over the next quarter as the commercial activities of Exelon are transferred to Knight in Mexico, Peru and Canada and Knight records revenues related cost of sales instead of a net profit transfer.
Finally, I would like to remind everyone that the change in the accounting presentation of Exelon has no impact on the absolute gross margin dollars or cash flows of the company. Under IFRS for the third quarter, we reported gross margin of $30.4 million or 42% of revenues compared to $37.8 million or 51% of revenue in the same period last year.
The gross margin as a percentage of revenue was negatively impacted by the change in the accounting of Exelon and product mix and was further negatively impacted by the higher levels of inflation in Argentina. In the first 9 months of this year, the inflation in Argentina was 66% as compared to 37% in the same prior year period.
While we expect the gross margin as a percentage of revenue under IFRS to further decline due to the inflation environment in Argentina, we do not expect the high inflation in Argentina to have a material impact on Knight’s cash flows over the next year. Our total operating expenses for the third quarter, excluding hyperinflation and amortization and impairment of intangible assets was $24.4 million, an increase of $4 million compared to the same prior year period.
As we return to normal commercial activities, we see an increase in our sales and marketing costs for our key promoted brands, including promotion spend behind the relaunch of Exelon and AKYNZEO. In addition, we saw an increase in compensation expenses as we expanded our structure, including the management team and certain variable costs such as logistics and consulting fees.
Moving on to adjusted EBITDA. The adjusted EBITDA was $9 million for the third quarter, a decrease of $8.3 million or 48% compared to the same period last year. We would like to remind everyone that our results on a quarterly basis remain lumpy. In the third quarter of 2021, we had significant COVID-related sales. And as previously mentioned, in the second quarter of this year, we had advanced purchases of Exelon in Brazil in anticipation of the transfer of the commercial activities from Novartis to Knight.
More importantly, on a year-to-date basis, we have delivered record numbers on both revenues and adjusted EBITDA in the first 9 months of this year, due to the full year effect of our Exelon acquisition as well as growth of our new launches. Now moving on to net gains on our financial assets, which are not reflected in our adjusted EBITDA.
In the third quarter, we recorded $5.4 million of net unrealized losses on financial assets measured at fair value to profit or loss. The loss is driven by the decline in the share prices of the publicly traded equities in our strategic fund investments due to general market conditions and the revaluation of certain private investments.
Moving to our cash flow from operations. Knight generated cash inflows of $11.3 million for the quarter and $35.8 million on a year-to-date basis. This quarter’s operating cash flow includes $6 million collected for settlement of certain claims with the former shareholders of GBT as well as an outflow of $4.1 million related to the working capital of Exelon and AKYNZEO.
Finally, as we continue to transfer the commercial activities of Exelon from Novartis to Knight, as I mentioned earlier, we will record net revenues with related cost of sales instead of net profit transfer, which will lead to a decrease in our gross margin as a percentage of revenue. We expect additional investments in working capital with an increase in the level of inventory in the next quarter that will negatively impact our operating cash flow. Our working capital are expected to normalize at the beginning of 2023. I will now turn the call over to Samira.
Samira Sakhia
Thank you, Arvind. As you can see from our Q3 results, and as we have said previously, our performance is best measured on an annual basis. The quarterly fluctuations are expected to continue due to factors such as timing of customer purchasing, historical COVID-related impact, onboarding of new acquisitions, divestments of certain products and volatility in exchange rates.
Based on our strong year-to-date financial performance, we are increasing our revenue guidance for full year ’22 to the range of $265 million to $275 million. The guidance — this guidance is a non-GAAP basis as it excludes the impact of IAS 29. This is due to the difficulty in predicting the Argentinian inflation rates. The guidance is also based on a number of assumptions, which are described in our press release. Should any of these assumptions differ, the financial outlook and the actual results may vary materially.
Looking ahead, we remain committed to building a leading pan-American ex U.S. specialty pharma company. We have over $145 million in cash, cash equivalents and marketable securities and we generate cash from operations, which positions us well to continue to execute on our strategy. Thank you for your support and confidence in the Knight team. This concludes our formal remarks. I’d like to now turn the call over to questions.
Question-and-Answer Session
Operator
[Operator Instructions]
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 info@knighttx.com, or via phone at 514-484-4483. [Operator Instructions] Our first question will come from Andre Uddin from Research Capital.
Andre Uddin
Just some of this was actually touched on by Arvind. Samira, maybe you could just add some color on this. If one looks at the hyperinflation that you’re seeing right now in Latin America, how is Knight dealing with it? And could you proof ahead maybe just a little bit more color on that? And is it possible to actually adjust drug pricing in those regions?
Samira Sakhia
Sure. So first of all, hyperinflation is only in Argentina. The rest of inflation is similar to kind of the situation that we’re seeing in global markets, whether including Canada and the U.S. and Europe. The other thing that I want to mention is that when it comes to markets like Brazil, Colombia and Mexico, they had started from a monetary policy to start increasing interest rates much earlier.
So they’ve been able to work through some of the inflationary issues a little bit better than we have, but inflation is in these markets. When it comes to pricing, it really — price adjustments, it really depends on a country-by-country basis as to what their regulations allow us to do. It also depends on some of our customers, on some of our products, especially due to competition where we want to be able to manage not outpricing ourselves versus our competitors.
So we take markets like Brazil, they allow us to — there’s only an annual increase that’s legislated. We may choose to take the MAX, we may not depending on the product, the customer and the competitive forces.
Andre Uddin
Okay. That’s great. And maybe either Samira or Amal, maybe you could just also give us a little bit more color in terms of what you’re seeing in business development? Are you seeing any changes in pricing for products? And what’s the competition environment like that would be great.
Amal Khouri
Sure, this is Amal. We’re not seeing — we’re not really seeing any significant changes. So deal flow continues to be healthy. But of course, there is also competition across the board on the deals that we look at. So I would say kind of bottom line really no significant changes.
Andre Uddin
And just one last question. In terms of your near-term product launches in the next year or so, what would be your most sort of important products we should be launching in terms of launches?
Samira Sakhia
I’ll take that on. Right now, the only products that we have that a launch for us is really AKYNZEO, which is being added to our portfolio. We have some smaller BGX that we’ll be launching as replacement of some of our current products, but they’re not going to have a — they’re basically a replacement rather than a new launch. But like Amal said, her team is very busy with the deal flow, and we continue to look for new opportunities.
Operator
[Operator Instructions] We will take our next question from Doug Miehm from RBC Capital Markets.
Douglas Miehm
I want to continue on the idea of potential acquisitions, et cetera, et cetera. And maybe you can speak to what type of countries where you’re looking right now, all South America, Canada, maybe a few others. But I’m particularly interested in Mexico. Is there anything that is going on in that market that may be an opportunity?
Amal Khouri
Doug, this is Amal. Yes, so we’re — in terms of product acquisitions, we’re looking for our entire territory. So all of the countries we’re in. In terms of M&A, as you know, we had highlighted both Canada and Mexico as priority countries because of the suboptimal size of our businesses in both markets. So we are — so we do have kind of a higher priority on those 2. In terms of specific opportunities we’re looking at, as you know, that’s not something that we disclose until there’s something to be announced, but we are prioritizing those 2 countries.
Douglas Miehm
Okay. And then just as a follow-up. I know that you said no significant changes. But I’m just curious, with the rates increasing as much as they have here, how does that figure into how you look at the returns on invested capital and products that you could be buying given that if in Canada, we’re seeing rates increase and you’re paying the same price for everything. Don’t — Wouldn’t you expect your returns to start to decline?
Samira Sakhia
We’re taking a more conservative and balanced approach. And you have to also remember is when we’re looking at our forecast, we’re looking at it on a decade plus. We’ve always remained kind of very careful in those ranges, and we aim to be generally in that mid-teens range on the portfolio and balancing out currencies, cash flow, the devaluation curves. And that — and we’re staying on that same path that we were doing last year 5 years ago, 15 years ago.
Operator
[Operator Instructions] We’ll take our next question from Endri Leno from National Bank.
Endri Leno
Apologies if I repeat something. I was a bit late getting on the call. But I’ll continue on that acquisition [indiscernible]. And particularly for Mexico, I think they’re pushing or there are in negotiations with the EU Commission to make an original hub to produce the vaccines and medications. Has that changed anything in terms of multiples, in terms of your interest for the market in terms of your competitors’ interest in that market?
Amal Khouri
This is Amal. So the kind of Mexico becoming a regional hub, whether it’s for vaccines or manufacturing is not really that relevant for us because we’re not in either business or in the vaccines business or manufacturing business. So for us, really, what we’re looking at when it comes to acquisitions is a portfolio of products. So companies with existing marketed products profitable sales, that’s really what’s the interest for us. And again, kind of the environment hasn’t really dramatically changed in terms of who these players are or who’s looking at these opportunities.
Endri Leno
Okay. Okay. The other question is in another country, but — and perhaps this has been answered, so I can read it after, let me know. But the election in Brazil that was concluded a week or 2 ago, any kind of color you can share on that one, if you haven’t already.
Samira Sakhia
Sure. Happy to comment. So Brazil is kind of in the same place as a lot of the other LatAm countries that we see going a little bit more towards the left. The one thing that — or a couple of things that I’ll point out is, one, all of these countries, similar to the rest of the world, is really dealing with what looks like recessionary environment.
So they’re going to have to be able to manage kind of their budgets. The second thing is we’re in the pharma business, and we sell drugs and people are always going to need our type of products. Putting those 2 things together, what we really are mindful of, and we have been really paying close attention to is the pharmaceutical budgets of payers, whether they be public or private.
And that’s where kind of having a branded generics portfolio and innovative portfolio, products that are cash pay versus public or private institutional pay. And that’s really what our team’s focus is on to continue to grow the business.
Endri Leno
And last one for me, it has to do with the FX, the U.S. dollar strength, I mean, does that impact any of your business? I mean do you purchase anything in U.S. dollars? Any color you can share there?
Samira Sakhia
Sure. We do have some U.S. dollar purchasing of our inventories and euro. The thing that I would comment on is really a lot of our agreements that come from a partnership way. Amal has done a lot of great work on negotiating profit share versus just a transfer price. That being said, as we see inflation kind of creeping up everywhere, we do expect to see that coming into our costs starting at some point next year.
Operator
It appears there are no further questions at this time, Samira. I’d like to turn the conference back over to you for any additional or closing remarks.
Samira Sakhia
Thank you. And thank you, everyone, for your confidence in the Knight team and for joining our Q3 ’22 call. Have a great morning.
Operator
This concludes today’s call. Thank you for your participation. You may now disconnect.
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