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

Good morning, ladies and gentlemen. My name is Karen, 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 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) 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.

Thank you, Karen. Good morning, everyone, and welcome to Knight Therapeutics Fourth Quarter and Year-end '22 Conference Call. I am joined on today's call with Amal Khouri, our Chief Business Officer; Arvind Utchanah, our Chief Financial Officer; and Jeff Martens, our VP of -- 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 promoted 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 3 products to our branded generic pipeline, which include the rights to the 2 largest markets in LATAM, Brazil and Mexico. On the regulatory front, we continued to advance the pipeline and submitted tafasitamab or Minjuvi in Brazil, Colombia and Argentina as well as 2 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.

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 hyperinflation, 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 hyperinflation. 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 a $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 plan -- and the planned transition in termination of the Gilead Agreement effective July 1, 2022. Now moving to our other specialty portfolio. During the year, revenues, excluding hyperinflation, 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.

Thank you, Jeff. In the course of this conference call, I will refer to EBITDA and adjusted EBITDA, which are non-IFRS's 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 high penetration, but to include costs related to leases. Adjusted EBITDA excludes acquisition costs and nonrecurring 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 high penetration, 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 hyperinflation, 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 on to our operating expenses, excluding hyperinflation, 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. 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 spend behind the relaunch 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 logistics expenses, which rose as a function of higher sales. Moving on to 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 year 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 on to 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 PP&E and intangible assets in Argentina. The main reason for the write-down in Argentina is the increase in the value of nonmonetary assets due to the hyperinflation adjustment under IFRS. Under hyperinflation accounting, the net carrying value of nonmonetary assets, including PP&E and intangible assets, is adjusted by the inflation index and converted back to Canadian dollar at the closing rate of the reporting period. During a period where the inflation index is higher than the devaluation of the Argentine peso relative to the Canadian dollar, the net carrying value of the nonmonetary assets will increase in Canadian dollar, which can lead to an impairment. Now moving on to gains or losses on our financial assets, which are not reflected in our adjusted EBITDA. In 2022, we recorded $20.7 million of net unrealized losses on financial assets measured at fair value to profit or loss. The loss is driven by the market mark-to-market adjustment of underlying assets as a result of a decrease in the share prices of the publicly-traded equities held by our strategic funds. Moving on to our cash flows. In 2022, Knight generated cash inflows 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 along with the International Finance Corporation for $52 million denominated in Brazilian real, Colombian, Mexican and Chilean pesos. 5-year loan has customary financial and nonfinancial covenants and is secured against certain assets of Knight as well as a restricted cash collateral of 35% on 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 loan further strengthens our balance sheet while providing a natural 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.

Thank you, Arvind. Now turning to our financial outlook for 2023. Excluding the impact of IAS 29 or hyperinflation, 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 Argentinian 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 for where 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 faced headwinds with the entrance of new competitors on certain of our branded generics products as well as incur investments related to launch products, Knight is expected to continue to drop 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 for questions. Back to you, Karen.

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) 484-4483. [Operator Instructions] We'll take our first question from David Martin with Bloom Burton.

A few questions. Great quarter. You mentioned [ phasing ] generics in the upcoming year. I'm wondering, is this year expected to be more heavily genericized than in the past? Or is this pretty status quo as far as generic threats? And is Exelon one of the products where you anticipate generic threat?

Thank you, David. So 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 that have been 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.

Okay. Okay. And 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%?

So 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.

Okay. And then lastly, can you give any commentary on your business development pipeline right now? Does it look as strong as ever or there been any changes that you've seen?

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 3 work streams; so acquisitions 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 3.

We'll take our next question from Endri Leno with National Bank.

The first one is 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 products that you can launch to counter some of that, be branded generics or new ones? Or do we expect that generic impacts to continue throughout the year and into 2024 with -- so basically, can you offset that with any new things?

So we are offsetting. So when it comes to our branded generics portfolio, they -- 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. What -- 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 is the new launches happening versus as the erosion. And this is why our BD team has been extremely busy on all 3 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.

Great. And in terms of then the cost. I mean, do you expect any increases in the cost, for example, versus what you did in 2022, in '23? Or are they generally kind of more stable?

So the -- when I look at kind of the dollars that we have in our OpEx this year, we expect '23 to be flattish.

Great. And you also -- there was a mention, a comment on the press release about investing more in 2023, doing some investments. Can you specify what those investments could be? I mean, are there more in personnel? Or are you adding any manufacturing capacity or any new launches or anything like that?

Well, as you know, a lot of our products, when I look at the innovative portfolio, there is a relaunch of Exelon. There is a relaunch of AKYNZEO. We are doing planning and prep for in Minjuvi. We've Lenvima and Halaven in Colombia. Those are investments that are going to continue to be ongoing. What as I said before, the total value of those dollars is not going to change between '22 and '23.

Great. And one last one for me. 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 it and describe it a little bit. What is it for? Any reason why it could be only one time, 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, let's say, to repeat again?

So I think in this case, the government had some experience with AmBisome and during the kind of the public side of the business would have had some experience due to COVID. I -- 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. We don't expect it again.

[Operator Instructions] We'll take our next question from Scott McAuley with Paradigm Capital.

Samira, congrats to you and the team on the strong quarter and finishing the year. Just one for 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 -- the number would come down year-over-year relative to 2022. So just despite the growth in topline 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.

Sure. So as we've said, like 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 some more a heavier hit to the bottom line and the loss of margin on that product drop straight to the bottom line.

Got it. So it's more on the kind of gross, as I think you said, you expect kind of costs and other things on personnel to be flattish. It's more on that gross margin impact from the branded generics.

Exactly.

We'll take our next question from Sahil Dhingra with RBC Capital Markets.

This is Sahil for Doug Meem. My first question is just wanted to confirm on Exelon. Is 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.

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 won't 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.

Okay. And the difference -- my second question would be the difference between with 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 generic competition in the branded generics? Or is there something else?

No. The real issue that we're dealing with is our -- we face new entrants, the head-to-head competition from our -- in our branded-generics portfolio. As that happens, what we see is that we have to lower our price. That's a straight margin hedge 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 on our BGx portfolio, we'll ride this wave out going into the future.

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

It all really depends on the country and the product. So it's kind of hard to predict right now, but we do expect them coming in.

Our next question, we'll return to Endri Leno with National Bank.

Two more questions for me. For 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 at replacing some of the lost sales that you get from the branded generics? Or is the strategy still continuing to try and grow the footprint in Canada and in Mexico?

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. So that, 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.

I'm just going to add, if you look at kind of what we did -- so I'm just going to add to her. If you look at what we did in '21, we added Exelon. We added the [ insight ] 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 the 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's really nothing that's changed in our BD strategy. We're going to continue to execute on the same strategy.

Great. And as a follow-up there, have multiple changed at all when you look at across your geographies? Or have they remained as they were?

So the deal landscape remains competitive. Of course, the level of competitiveness depends on the type of deal and type of product. But the -- we haven't seen anything kind of dramatically different in terms of valuations or multiple, but the landscape remains competitive.

Got it. The last one for 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?

That's a really great question. So 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 payers or public payers 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 are -- 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 payers.

[Operator Instructions] 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.

Thank you, Karen. Thank you for your confidence in the Knight team and for joining our Q4 '22 conference call. Have a great morning.

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