Knight Therapeutics Inc. (GUD) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is Kate, and I will be your operator today. Welcome to Knight Therapeutics Inc. Exelon acquisition. Before turning the call over to Jonathan Ross Goodman, CEO of Knight, listeners are reminded that portion 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 [email protected] or via phone at (514) 678-8930. I would like to remind everyone that this call is being recorded today, April 23, 2021. And I would now like to turn the meeting over to your host for today's call, Jonathan Ross Goodman. Please go ahead, Mr. Goodman.

Good morning, and welcome to Knight Therapeutics conference call. I'm joined on today's call by Samira Sakhia, our President and Chief Operating Officer; Amal Khouri, our Chief Business Development Officer; Arvind Utchanah, our Chief Financial Officer; and Jeff Martens, our VP, Commercial. We've agreed to acquire Canadian and Latin American rights to Exelon from Novartis to strengthen our existing footprint. While good things may come to those who wait, it wasn't the case this time. Waiting isn't in our DNA, but waiting for a good deal, for the right deal is most definitely. It was the sheer tenacity of Samira, Amal and Knight's entire business development team that made this happen. I will now turn the call over to Samira and Amal, who will walk through this transaction.

Thank you, Jonathan, and good morning, everyone. As we have mentioned many times, including on our last conference call, we have been focused on building our portfolio in order to leverage the great pan-American ex-U.S. platform, which we now have following the acquisition of Biotoscana. One of Knight's growth strategies is the acquisition of mature or under-promoted products on big pharma. The acquisition of Exelon for LatAm and Canada is a great example of execution of that strategy. Exelon is a well-established innovative brand that is prescribed for the symptomatic treatment of mild to moderate dementia associated with Alzheimer's. Exelon's indication falls into one of our priority therapeutics areas, more specifically CNS. In addition, this acquisition will be immediately accretive to both our top line and our bottom line. I will turn the call over to Amal, who will provide more details on the product and the transaction.

Thank you, Samira, and good morning, everyone. So as we announced earlier today, we have entered into a definitive agreement to acquire the exclusive rights to manufacture, market and sell Exelon in Canada and Latin America as well as an exclusive license to use the intellectual property and the trademarks associated with the products within Canada and Latin America. This acquisition leverages our pan-American ex-U.S. platform and further validates our rest of world strategy. Exelon will be the first product that Knight will be selling out across our entire territory. Exelon is a prescription rivastigmine product that was first approved in 1997 and is currently registered and commercialized in approximately 90 countries. As Samira mentioned, Exelon is indicated for the symptomatic treatment of mild to moderately severe dementia in people with Alzheimer's disease. In 2020, Exelon had annual revenues of approximately USD 47 million in Canada and Latin America. About 2/3 of those revenues were generated in Brazil and Colombia. At closing, Knight will pay USD 168 million in cash and an additional milestone payment of up to USD 12 million upon the achievement of certain conditions. The transaction will be funded with Knight's cash, and we expect to have remaining cash of at least $100 million to continue to execute on more business development opportunities. The closing of this transaction is subject to antitrust clearance in Brazil, which is expected to take between 45 to 90 days. At closing, Knight will enter into a transition service period, during which Novartis will continue to distribute and sell the product until the transfer of the marketing authorization on a country-by-country basis. During this transition period, Knight will receive a net profit transfer. And once the marketing authorizations are transferred, Knight will begin distributing the product through its own local affiliates on a country-by-country basis. Over the last 15 months, our business development team has been focused on leveraging our broader footprint to position ourselves as the partner of choice for Canada and LatAm. Our focus remains on executing on our strategy of in-licensing and acquiring branded pharmaceutical products as well as potential bolt-on M&A. I will now turn the call over back to Samira.

Thank you, Amal. In the last 18 months, we have transacted for over $600 million in key business development opportunities, including the acquisition of the Biotoscana as well as the acquisition of Exelon. Our team is focused on integrating and strengthening the operations with systems and processes while continuing to execute on our strategy of building a rest of world specialty pharmaceutical company through business development as well as through commercial and medical excellence. We are thrilled to add Exelon, an established medically important brand, to our portfolio of specialty CNS products and to continue supporting this important therapy in an area of such high unmet need. This concludes our formal remarks. I would now like to open up the call for questions. Turning over to you, Kate.

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 [email protected] or via phone at (514) 678-8930. [Operator Instructions] Our first question today is coming from Andre Uddin.

Mackie Research Capital. Just had a couple of questions in terms of the market share of Exelon. In terms of brand and generics, can you just talk a little bit about that in terms of the different regions?

Sure, Andre. And I am going to be turning the call over -- a whole bunch of times over to Amal as she is the closest to this. So Amal, can you take it over, please?

Sure. So I think when -- to comment on market share across the territory is a little bit difficult because the IQVIA data is not good as what we're used to having in Canada. But to give you a sense -- I think your question specifically was in relation to generics. So when we look at Exelon, the product is sold in an oral form, which is the capsule. The capsules have been genericized for a long time. So the market is -- I would say there's a lot of generics, and brand share, we can assume, is lower, as expected in a genericized market. The bulk of the sales, however, are in the patch form, where generic competition is much more limited. And if we look at especially within LatAm, we actually have some branded generic competition, not pure generics. And in some markets, in some countries, we don't have any branded generics. So that's kind of to give you a sense of what the generic competition looks like across the territory.

And just in terms of Canada, if you look at the patch, I haven't checked yet, is -- does Sandoz have a generic version of it? And is -- if not, if it's -- is there anything in your Novartis agreement to prevent Sandoz from launching a generic patch?

So the generic -- so Sandoz has a generic patch in Canada that's not -- we didn't buy that. That was not part of what we bought. So they continue to sell. And if you look at the data, again, they have been on the market for a few years, so I think kind of the generic impact has been seen. And this is really the -- they don't have a generic patch outside of Canada and the rest of our territory.

Our next question today is coming from Doug Miehm.

Yes, RBC Capital Markets. Maybe, Amal, you can walk through what the last 3 years of revenues associated with Canada and the other countries looks like. And then secondly, just with respect to the margins anticipated on this product, can you walk us through what that's going to look like from a gross and EBITDA perspective? And then finally, as it relates to revenue recognition and timing during that transition period, how exactly is that going to work?

Sure. So I'll start -- let me start with the -- your first question on historical sales. So as I just mentioned before, Canada, you see in the last few years the generic patches -- sorry, the generic patch had been launched. So if you look at that time period, there is -- the decline is really in Canada because of the genericization. And the rest of the territory has been relatively flat. On the margin guidance, so we're not providing specific guidance. But if you compare to what we have today, it's going to be a better margin versus what we have today overall. And I think your last question was on timing of the kind of the transition and revenue recognition. So maybe just to give you the context on how the transition will actually work. So first, we need to close, which is going to be following antitrust clearance. Once we close, we're going to enter into a transition period. And during that time, Novartis will continue to distribute the product for us in the territories, and we will be most likely recording that profit transfer as net revenue. So you're going to have it at 100% margin during the transition period. And then once the marketing authorization is transferred on a country-by-country basis, then we start recording sales, cost of sales, other expenses, et cetera. So you're going to see that kind of -- how we're reporting, that changes over time depending on the transition and then which countries we start taking over.

Okay. And sorry, how are you going to audit how they calculate net profit?

I mean they have to -- there is a reporting. And again, we're talking about a big company in terms of reporting. They also follow IFRS in terms of reporting the sales and the profit transfer reporting.

Our next question today is coming from David Martin.

David Martin from Bloom Burton. So one follow-up to Doug's question. The patch recently genericized in Canada, how many years ago was that? And are the sales of the patch still declining in Canada? Or have they stabilized somewhat now?

The -- it's not a recent genericization. It's been a few years. And I would say the -- kind of the big cliff you already saw, I would say, over 2 years ago. So the decline is stabilizing.

Okay. Next question. How promotion-sensitive will this be in any of your territories? Is there any opportunity to reverse declines, grow sales? And how many CNS reps do you have in each of the major territories? And do you plan to add to those?

David, that's a great question. So on this product, what we are expecting is revenues will stay flattish. And that's really because we do expect some more -- some declines in some of our countries. But we do expect to do some promotion in some of the countries as well. We have a really small sales force today in CNS by way of Fycompa and Inovalon. And we may expand in a couple of territories.

Our next question today is coming from Tania Gonsalves.

This is from Canaccord Genuity. I think most of my questions have been asked already, but just a couple for me. I think you talked about once the transaction actually closes, there will be a period of marketing authorization transfers on a country-by-country basis. Could you talk to how long that takes on average?

Sure. So the -- it varies -- again, it varies by country. I would say, overall, I think we're looking at transition period to last up to 18 months. But again, within that time period, some countries will transfer faster than others.

Perfect. And then I think you also licensed the IP and trademark from Novartis. Is there a specific term on that license deal?

No, it's perpetual.

Our next question today is coming from Eduardo Garcia.

Eduardo Garcia from National Bank. I have actually a couple here. I wanted to know like which countries are you planning to target first when you're doing the whole transition period.

The -- I mean we'd have work on a transition plan with Novartis, and there are a lot of considerations to look at. But of course, the -- I would say the general answer would be focusing on the bigger market and ensuring those trends for a while.

Okay. Also, I wanted to understand how the sales trended last year, how the pandemic impacted. And how do you see it in the near future?

So in the last year, there was -- I'm sure you've been hearing us talk about the COVID impact in general and specifically on the FX in our region. So that also -- there was an impact. The FX impact, of course, you would see on this product as well last year. Overall, in terms of COVID impact on the product, this is primarily a pharmacy product and it's a chronic therapy. So it's -- we would have expected the impact on it to be less than what you would see on more acute care type therapies.

Okay. I have one more question. Do you expect Novartis to launch more generics in your other geographies?

So again, the product already has generics in different markets around the world and branded generics in our territory. So whether it's -- I mean regardless of who the players are, we really look at it as brands with -- how brand retention works in these markets. And in LatAm, brand retention is much better than what we see in Canada and the U.S., for example. So that's really how we're looking at the market.

Our next question today is a follow-up from Doug Miehm.

I just wanted to follow up on this whole generic question. So in Canada, we have seen the patch generic. You're saying that 2/3 of the revenue are coming from Brazil and Colombia. Besides the capsules, has the patch been genericized in those 2 countries? And it would be -- would it be Sandoz' intention to genericize the product in those countries?

So in Brazil, we don't have any generic or branded generic competition to the product. It is something that we're -- we would be expecting new entrants into the market. In Colombia, there is already a branded generic to the patch. And again, whether it's Sandoz or any other generic, the impact eventually in the market dynamics would be the same regardless of who the seller is. But again, I would keep in mind that this is mostly a -- if we talk about generic competition, we're really talking about branded generic competition.

[Operator Instructions] Our next question is coming from David Martin.

What is the price differential between brand and generic in LatAm? We know in Canada the differential is lower than it is in the U.S. Is it even closer, the pricing, brand and generic in LatAm?

It really varies by -- it varies a lot from country to country. And again, it's one thing to -- when you think about discounting versus generics, again, here, we're looking at wherever we have competition, it's branded generics. So kind of pricing strategy is different whether it's -- how -- because they still have to promote the product as well. So it is different dynamics from when you're looking at pure brand versus generic price differential. And again, it varies from country to country so it's really difficult to give a general answer.

Right. How about in Brazil specifically, where you could see new branded generic competition? How close are the prices there?

So I can't predict what they're going to decide to price at. Today, there are no -- there is no competition. There's no branded generics to the patch in Brazil.

Okay. I just meant in general, where does Brazil sit on the spectrum of brand to generic differential?

I would have to get back to you on that, David.

Okay. You mentioned that you may promote in some territories. What characteristic of a territory would lead you to promote there?

David -- go ahead.

Sure. So maybe I can turn to Samira.

Okay. So David, it's really about where we think that over the next few years, whether there is a branded generic in the territory or not, that we can capitalize on either slight growth or retaining our share. That's really what we're trying to do. That's what we're going to be trying to do. And again, remember that the bigger markets is really about -- 2/3 of our sales are in Brazil and Mexico -- are in Brazil and Colombia. And in Brazil, we don't have a generic competitor -- a BGx that has launched today.

Our next question is coming from Tania Gonsalves.

Could you guys provide any information on what the milestone payments are linked to?

Sure. It's related to certain MA renewals and transfers.

And then the -- you also bought the rights to manufacture the drug. Will you be using the same CMO as Novartis? Or will there be a transition happening?

The plan is to use the same CMO, particularly for the patch. We're not planning on disrupting that.

We have no further questions in queue at this time.

Thank you, Kate, and thank you for your continued support and confidence in the Knight team and joining us for this conference call.

Ladies and gentlemen, this does conclude today's event. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.