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

Good morning, ladies and gentlemen. My name is John, and I'll be your operator today. Welcome to Knight Therapeutics' 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 considered assumptions on which these forward-looking statements are based to be reasonable at the time they were prepared, but cautions that this assumption regarding the future statements, many of which are beyond the control of the company and its subsidiaries, may ultimately prove to be incorrect. The company disclaims any intentions or obligations 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 that questions during today's call will be taken from analysts only. Should there be any further questions, please contact Knight's Investor Relation 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 11, 2025. I would like to turn the call over to your host today, Ms. Samira Sakhia. Please go ahead, ma'am.

Thank you, John. Good morning, everyone, and welcome to Knight Therapeutics' conference call. I'm joined on today's call with Amal Khouri, our Chief Business Officer; and Arvind Utchanah, our Chief Financial Officer. As announced this morning, we have entered into an agreement with Endo to acquire all of the assets of Paladin. Knight was formed as a spin-off in the Paladin/Endo sale transaction in 2014. Given that history, we are thrilled with the reunion of Knight and Paladin. This synergistic transaction adds critical mass and significantly increases the size of our business in Canada. In addition, the acquisition adds a portfolio of stable cash flow-generating pharmaceuticals that will help fund our growth in Canada and in Latin America. I will now turn the call over to Amal, who will provide an overview of the transaction.

Thank you, Samira. As announced, the purchase price for this transaction will be $100 million, plus $20 million for inventory, all payable in cash at closing. In addition, Knight may pay future contingent payments of up to USD 15 million as on achievement of certain sales milestones. The acquisition will be funded with Knight's cash on hand, which was at $151 million at the end of Q3 2024. As a reminder, the closing of this transaction is subject to the satisfaction of customary regulatory conditions, including antitrust clearance in Canada. The transaction is expected to close in the middle of 2025. In 2024, Paladin generated revenues of $70 million, excluding products that Paladin has stopped commercializing or is in the process of discontinuing. The Paladin portfolio mainly consists of the [indiscernible] primarily owned assets as well as promoted licensed product. The promoted portfolio includes products in neurology, which is a key therapeutic area for Knight, as well as the [ hospital ] products. Amongst those promoted products, Paladin's more recent launch was XCOPRI, which is an innovative product indicated as adjunctive therapy in the management of partial-onset seizures in adults with epilepsy who are not satisfactorily controlled with conventional therapy. In addition to the marketed product portfolio, Paladin's latest additions to the pipeline includes the addition of Wynzora cream, a fixed-dose combination of calcipotriene and betamethasone dipropionate for the topical treatment of plaque psoriasis. I will now turn the call over back to Samira.

Thank you, Amal. In the past decade, we have made significant progress on our strategy of building a rest of world pharmaceutical company. In Canada, we are in a growth phase with multiple recent and upcoming launches, which come with team expansion. With this transaction, we are adding a portfolio of profitable products that will further enable us, enable that growth and provide great synergies and great opportunities for both teams. We remain well positioned to continue 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 open up the call for questions.

Thank you. Before we begin, may I please remind you questions during today's call will be taken only from analysts. 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] And the first question comes from the line of Andre Uddin from Research Capital.

Samira and team, congratulations on getting Paladin back. It's been a long process, I'm sure. Can you provide a little bit of color in terms of how SG&A and gross margins are going to be impacted? Are you providing any guidance on that? That would be great.

So one of the things is -- I think what we did announce is that the business is doing about $70 million of revenues. As you can imagine, this is much smaller relative to the rest of our business. It is really much more impactful on our Canadian business. As we go -- we're really not providing any information on just this sole business on margins. It is -- what I can say is, it's similar to what we have. Over the next year is where we're going to really start to see some efficiencies, synergies, especially in our Canadian business.

Does Paladin have any debt right now?

We would -- this is an asset acquisition, so we're only acquiring the products and the personnel.

Okay. And what about the subsidiaries like Pharmaplan and stuff that Paladin used to have. Would that be included, or is it just Canada?

They -- I don't know if they still have those. We're just buying really those legacy -- the Canadian assets. And if the actual Canadian assets, for example a product had more than just Canadian rights in -- from that Canadian business, then we have that.

And in terms of your tax rate, are you also -- like I remember [indiscernible] tax credits, are those coming with the company as well?

So we're not buying the company, we're only buying the assets. And -- right? The asset structure allows us to have some tax advantages that we will benefit from.

And the next question comes from Michael Freeman from Raymond James.

Samira, Amal, and Arvind, congratulations on this great acquisition and reunion. I wonder if you could describe how the company is -- I guess how these assets and their revenue have been growing during the last couple of years and how you're thinking about the growth prospects on this specific portfolio that you brought in?

So what I can say is -- as Amal mentioned, this $70 million really represents products that Paladin, over the next year, will be moving forward for. This is a bit of a step down versus last year, where it really includes some products where the license expired and was not renewed or certain smaller products that they don't believe that they will be able to solve supply issues. The rest of the business, when you think of kind of mature assets, similar to when we were running the company, small decline. There is some promoted products that will grow, and that kind of keeps it flattish over the next couple of years.

Okay. All right. This is helpful. Now -- next question is on sort of helping with cash -- calculations on cash remaining. I noticed, at third quarter, you had $153 million in cash and marketable securities almost split down the middle. Will there be, I guess, I suppose, but I'll ask here, will there be a material liquidation of your marketable securities? And also thinking about your financial assets, might there be any liquidation of any of those in order to fund this acquisition?

Sure. So I'm going to repeat the question just in case, because there was a lot of static. You really -- you're asking about the cash and marketable securities. On the marketable securities, are we going to have a liquidation? Are we going to liquidate any of our financial assets? Is that the question?

Exactly.

Okay. So when it comes to the financial assets, we are not planning to liquidate. When -- we treat marketable securities just like cash, so yes, we will be using the marketable securities to fund this transaction. What I would like to add is, when you look at our -- the debt on our balance sheet, as a debt-to-EBITDA ratio, it's very low. And after this transaction, which is EBITDA accretive, we have a lot -- we continue to have debt capacity and the ability to borrow and be able to continue to execute on transactions of acquisitions and in-licensing. And we're going to look at whatever makes the most sense for our capital structure.

Okay. Great. And could you -- if you have these figures top of mind, could you remind us just the total borrowing capacity you currently have?

So we're at less than 1x EBITDA as at September.

And how much room do you have to borrow on that?

So we're generally aiming for somewhere in the middle of 2s to -- depending on the transaction, because remember, [ we think ] that the transaction that we would be doing is EBITDA accretive. We could consider going up to 3x.

Okay. Great. Well, okay. Well, congratulations on the transaction, and I'll pass it on.

And the next question comes from the line of Scott McAuley from Paradigm.

Just on the sales infrastructure. I know you had talked in the past about focusing on Canada and wanting to invest in building up the sales infrastructure. And you had mentioned that this deal includes the assets and the salespeople -- salespeople and other kind of HR assets. So is this now give you the platform that you need for your expansion in Canada? Or are those personnel really just going to focus on the existing products that they have from Endo and then the current pipeline that you're developing, you're going to continue to add salespeople and other commercial infrastructure to support that ongoing growth?

Scott, this is -- that's a great question. The -- what we expect is -- and we're going to go look at product by product and the [ call list ]. Right now, what we think is really exciting is that we have launches coming up. They have products in launch, and we should be able to find efficiencies between the two where their teams and our teams can support each other. We will be looking -- like if I look at XCOPRI versus Jornay PM, it is a different -- both of those products are in CNS, but it is a different [ call list ]. So we need to be -- we probably will be adding some, but maybe not as many as we had originally planned.

That's great. And then in the transition, is there a time frame, like I think similar to prior deals, I'm thinking, I think Exelon, like, is there a time where they will continue to promote and sell the products and you'll be receiving net profits? Or is it as of the close, revenue and every revenue cost, all that will flow kind of directly onto your balance sheet? Or is there a transition period there? Hello? [Technical Difficulty]

This line seems -- like the speaker got disconnected. We'll just wait for them to reconnect. One moment, please. Please bear with us. Thank you.

Hello?

Please stand by. We're experiencing some technical difficulty as of the moment. We're just waiting for the speakers to rejoin. Yes, Samira, you're back.

Thank you.

Scott, if you can repeat your question?

Yes, definitely. Samira, Scott here. Can you hear me?

Yes. Sorry, we got kicked out of the call.

Yes, no problem. So I'm not sure if you heard the question, but I'll repeat it. So is there any transition period for recognizing the revenues or net profits? I'm thinking of the Exelon example, where there was a time frame where you recognized kind of the net profits and then slowly transitioned place by place. Or is it as of once the deal closes, all the revenue costs, et cetera, will be immediately on your financial statements?

It's actually the latter. So while there is a transition, starting from closing we are having 100% of the revenues and 100% of the expenses. The transition is -- it is [ a maze ], but the way this transaction has been structured, we run the business from day 1.

Got it. That's great. And then finally, I know there's the additional USD 15 million on sales milestones. Any additional color on that? Is that a particular product? Is that the portfolio overall? Any other details you could share on that?

It is really behind the promoted assets. And we're -- I mean growth is what we expect. And if the milestones hit, we're all going to be very happy.

And the next question comes from Tania Armstrong from Canaccord.

Congrats on the transaction. To start, I know you mentioned that the deal is accretive to EBITDA. Could you confirm, is this immediately accretive to EBITDA, or is this factoring in efficiencies and synergies you need to drive over the next year?

It will be immediately accretive. The products are cash flow EBITDA positive, but we expect to see more starting in '26.

Okay. Excellent. And of the product portfolio that you're buying, you said that some are owned, some are licensed rights. Could you elaborate on the split and let us know if there are any particularly large products where licenses are coming up for renewal or expiry that could fall off in the coming years?

Tania, this is Amal. The majority -- so right now, if you look at the top line, the majority is coming from the portfolio of mature products. Again, because the promoted products include some recent launches and new launches. So this will work out over time. So over time the mix might change, but the -- for the portfolio, the majority of these products are owned. And for the promoted products, these are licensed assets. But again, it's -- we're not expecting any -- one of the attractive things about this portfolio, both mature and promoted, is that it's quite diverse. So there is really -- there is a contribution coming really from across the different products.

Okay. Perfect. And last question from me, if I could just ask, was this part of a broader tender process? And how -- I guess if you could provide some background of how the whole process initiated, how long it's been going on for, were you're bidding against other companies, et cetera?

So all I can say is there was no formal process.

And the next question comes from Justin Keywood from Stifel.

Is there -- apologies if I missed this -- is there a material product concentration risk in any particular asset, or is it relatively diversified?

It's actually extremely diversified as a portfolio. There's almost -- or just over 40 products in this portfolio that are generating $70 million of revenue.

And if we were to look beyond that comment of steady expected growth over the next few years, would we be getting into a better growth mode, or is there potentially some products rolling off of the exclusivity where there could be a bit of a transition period?

So it's -- what I'm going to say is over the next couple of years, the business is actually flattish, not steady growth. The other thing is, when we look at the mature assets, which are what we've said are cash flow positive, EBITDA positive, the majority of them have already lost exclusivity and are in that state where they're going to continue to have that small decline. And as Amal mentioned, the promoted assets are very early in their launch phase and have exclusivity for quite a while.

And -- I understand the EBITDA and cash flow accretive comment, any indication of the margin profile?

We haven't provided any information about that.

Okay. On the leverage, do you have a pro forma number?

So we have actually -- we're paying for this all with cash and we have the cash on the balance sheet to be able to do this.

As a dollar value, do you have what you're comfortable with as far as capacity after the transaction?

So we have less than 1x, as we reported at the end of last year. We would want to stay in that range, maybe go up a little bit. If we have another transaction -- which is where we would need to be for this kind of product, this portfolio. If there is another asset that we look to acquire, we'd be comfortable going up to 3x EBITDA. But whatever we would be acquiring would be bringing EBITDA.

Understood. And if we were just to take a step back, I think I calculate Canada would represent 1/4 of the business on a pro forma basis -- if you could correct me if I'm wrong there. But is there a target percentage or a way to look at it, as far as geography, how we should see Knight, let's just say, over the next 3 to 5 years?

Your -- the range is right. It will -- by the end of this year or going into '26, it will be about -- Canada will be about 1/4 of our business. Canada will become the second in our ranking of countries, still a far second behind Brazil. When I look at -- we don't really have a target and we don't want to have a target for any territory. What is really nice about building the Canadian business is it's really where -- there's no currency fluctuations that we deal with, whereas with Brazil, Colombia, there's always currency issues. This is hard currency, no translation impact, and it will bring stability to the entire organization.

Understood. Maybe just one more. Any tariff implications within Paladin to be aware of?

We're not aware of any.

And the next question comes from David Martin from Bloom Burton.

Congratulations. I had to switch phones. I wasn't polling in on the other one, so I may have missed some things. But I think you mentioned, there is opportunity to -- for this acquisition to benefit your LatAm business as well. Is that correct? And how would that be the case? Are some of the products in Canada you plan on registering in LatAm?

No. I think there's a little bit of miss there. We expect this business to be more efficient for our Canadian business. As you know, we're in the process of launching a couple of products that launched last year. More products coming this year, next year, the year after. And I think that there is synergies between both of our companies where we don't have to add as many people because we're acquiring so many people.

Okay. Okay. I misheard it. Do you have any other big acquisitions that are pretty far along?

We don't really announce that until they're done.

Okay. Okay. But from the sounds of it, you won't be taking down more debt unless there is another acquisition?

That's exactly right.

Okay. And then, I may have missed it or I may be asking it in a different way, but how much of cash and noncash operating expenses does this add?

We haven't provided -- so let me kind of take a step back. When you say noncash OpEx, you're talking about amortization?

Amortization and stock-based compensation?

Sure. So this is -- so let me start with the accounting a little bit. We're paying $100 million plus $20 million of inventory. This will be treated as a business combination, because it is a business. There will be amortization related to the allocation of that purchase price as well as amortization on the inventory that has to happen. Where -- we haven't gotten to stock-based comp because right now, they're still Paladin employees, where -- they have whatever LTI that they have with Endo, that doesn't transfer to Knight.

[Operator Instructions] And we have a follow-up question from Tania Armstrong from Canaccord.

If I could just get one more in there. On the personnel that you're acquiring, could you provide a number of personnel that you're acquiring, the split, how they -- how many are coming from sales and marketing, et cetera?

We're not providing that at this point in time. What I can say is that we're in a growth phase. We are -- like if I kind of look at our company, we -- in Canada, we have less than 60 employees, and 1/4 of them have global functions. So our Canadian business is really fairly -- and when you think of the Knight organization, that's over 750 people. Only 60 are in Canada. And of that 60, 1/4 of them have global roles. So the addition of this is really that critical mass that we need to continue to build the business here.

[Operator Instructions] It seems like there are no further questions at this time. I will now give the call back over to Ms. Samira Sakhia for closing remarks. Please go ahead, ma'am.

Once again, I want to thank you for your confidence in the Knight team. We're really excited about this acquisition, and thank you for joining this call. Have a great morning.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.