Knight Therapeutics, Inc. (OTCPK:KHTRF) Q2 2022 Earnings Conference Call August 11, 2022 8:30 AM ET
Company Participants
Samira Sakhia – President & CEO
Amal Khouri – CBO
Arvind Utchanah – CFO
Jeff Martens – Global VP, Commercial
Conference Call Participants
Andre Uddin – Mackie Research
Endri Leno – National Bank
Sahil Dhingra – RBC
Operator
Good morning, ladies and gentlemen. My name is Joe, and I will be your operator for today. I’d like to welcome everyone to the Knight Therapeutics, Inc. Second 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 a result of new information, future events, except as required by law. We’d also 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 info@knighttx.com or via phone at (514) 484-4483.
I would like to remind everyone that this call is being recorded today, August 11, 2022.
And now, I would like to turn the meeting over to your host for today’s call, Samira Sakhia. Please go ahead, Ms. Sakhia.
Samira Sakhia
Thank you, Joe. Good morning, everyone, and welcome to Knight Therapeutics second quarter 2022 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 Knight achieved record quarterly revenues of $75.8 million for the quarter, which represents an increase of $10 million or 15% compared to Q2 2021. We continue to see growth in our key brands driven by market penetration as COVID-19 restrictions are lifted as well as the impact of the acquisition of Exelon.
Almost one year after closing that transaction, we have completed the Exelon marketing authorization transfers tonight in our key LATAM territories and have assumed commercial activities in Colombia. We also continued to execute on the business development front and entered into exclusive distribution and supply agreements with Helsinn and Rigel in our key territories.
Turning to the NCIB. During the second quarter of 2022, we purchased approximately 1.5 million common shares for aggregate cash consideration of $7.7 million at an average price of $5.30 per share. Subsequent to the quarter, we announced the acceptance by the Toronto Stock Exchange of our notice of intention to relaunch a normal course issuer bid, which commenced on July 14, 2022. Under the 2022 NCIB, Knight may purchase or cancellation up to 8 million shares over the next 12 months.
I will now turn the call over to Arvind to provide more details on our financial results.
Arvind Utchanah
Thank you, Samira.
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 include cost related to leases. Adjusted EBITDA excludes acquisition costs and non-recurring expenses.
With respect to our reported revenues, I will focus on the growth related to Exelon, and Jeff will provide an update on the rest of the portfolio.
During the quarter ended June 30, 2022, revenues excluding the impact of hyperinflation under IAS 29 was $75 million, an increase of $9.8 million or 15%. For the second quarter ended June 30, 2022, Knight recognized revenues of $12.4 million for Exelon, an increase of $8.2 million or 200% compared to the same period last year. The increase in revenues is driven by the full quarter effect of the acquisition of Exelon, which was executed on May 26, 2021. Included in the $12.4 million of revenues related to Exelon, $4 million to $4.5 million is due to the purchasing pattern of certain customers as well as higher sales in Brazil in anticipation of the transfer of the commercial activities from Novartis to Knight. I would like to remind everyone that the majority of the Exelon revenues for the first half of this year has been accounted for as a net profit transfer and not net revenues.
Moving on to gross margin. For the quarter ended June 30, 2022, we reported $38.3 million or 51% of revenues compared to $28.9 million or 44% of revenue in the same period last year. Excluding the impact of hyperinflation, the gross margin as a percentage of revenue would have been 54% for the second quarter of 2022. The increase in gross margin, both in dollars and as a percentage of revenues, is due to the change in product mix, including the acquisition of Exelon and its related revenues recorded as a net profit transfer.
With the transfer of the commercial activities of Exelon in Colombia, we started accounting the related revenues on a net revenue basis starting in June 2022, which was not material in the quarter.
Our total operating expenses for the second quarter of 2022, excluding the amortization of intangible assets, increased by $3.7 million compared to Q2 of 2021. As we return to normal commercial activities post-COVID restrictions, we see an increase in our sales and marketing activities for our key promoted brands as well as Exelon. In addition, we saw an increase in compensation expenses as we expanded our structure, including the management team and certain variable costs such as logistic fees, consulting and professional fees.
Moving on to adjusted EBITDA. The adjusted EBITDA was $17.9 million for the second quarter of 2022, an increase of $8.5 million or 90% compared to the same period last year. The variance is due to the increase in gross margin, offset by the increase in operating expenses.
Now moving on to net gains on our financial assets, which are not reflected in our adjusted EBITDA. In the second quarter of 2022, we recorded $7.7 million of net loss on financial assets measured at fair value through profit or loss, which was mostly unrealized. The loss is driven by the continued decline in the share prices of the publicly traded equities in our strategic financial investments due to general market conditions.
Moving to our cash flow from operations. Knight generated cash inflows of $11.5 million for the quarter ended June 30, 2022. The cash flow from operations is driven by our operating results as adjusted for non-cash items such as depreciation and amortization, net loss on financial instruments, unrealized foreign exchange gain or loss and change in working capital.
Finally, as the commercial activities of Exelon transition to Knight, as I mentioned earlier, we will record net revenues with related cost of sales instead of a net profit transfer, which will lead to a decrease in our gross margin as a percentage of revenues. Furthermore, we expect additional investments in working capital with an increase in the level of trade accounts receivable and inventory in the next two quarters that will negatively impact our cash flow from operations for the rest of the year. The working capital levels are expected to normalize at the beginning of 2023.
I will now turn the call over to Jeff to provide an update on our commercial activities.
Jeff Martens
Thank you, Arvind.
Building on our hard work of 2021, our efforts in 2022 remain focused on execution excellence of our new product launches while delivering competitive growth for a mature promoted portfolio. As previously discussed by Arvind, we started commercialization of Exelon in Colombia in June and expect commercialization activities to start in Brazil in Q3, while Mexico and Chile will start during the fourth quarter of 2022.
In addition to the increase of revenues from Exelon described by Arvind, we had a growth of $2.1 million in our oncology/hematology portfolio in Q2 2022 versus the same period last year. This includes the contribution from our launches of Lenvima, Halaven and our dasatinib branded generic Rembre in Colombia as well as penetration of our oncology/hematology portfolio in other territories. This increase was partially offset by a decline in certain branded generic products due to entrance of new competitors.
As for our infectious disease portfolio, it remained relatively flat due to lower COVID-related usage, estimated to be between $4.5 million to $6 million. This lower demand is offset by an increase in sales related to certain customers’ buying patterns as well as the organic growth from our new product launches and an increase in patient treatments as our markets reduce COVID restrictions.
On a year-to-date basis, our oncology portfolio grew by $7.4 million or 17% versus last year. Our infectious disease portfolio grew by $5.4 million or 10% versus last year. While our commercial efforts were hindered by COVID last year with return to field this year, we are resuming normal commercial activities and with patients returning to physicians, we are starting to see the impact of our efforts.
I will now turn the call over to Amal to provide a business development update.
Amal Khouri
Thank you, Jeff.
As Samira previously mentioned, in the second quarter, we announced the signature of two agreements that added three innovative products to our portfolio. First, we entered into an exclusive license distribution and supply agreements with Helsinn for Akynzeo for Canada, Brazil and other LATAM countries, and Aloxi for Canada. Both products are highly synergistic with our oncology portfolio and commercial footprint in Canada, Brazil and the remaining countries.
In July, we assumed commercial activities in Brazil and Argentina for Akynzeo, and we will begin commercial activities in Canada following a transition from Helsinn’s current partner. We also entered into an exclusive license and supply agreement with Rigel for the exclusive rights to commercialize fostamatinib in Latin America. Fostamatinib is commercially available in the United States under the brand name TAVALISSE, and in Europe, under the brand name TAVLESSE for the treatment of chronic immune thrombocytopenia. Both of these deals are highly synergistic with our oncology and hematology portfolio and further validate our strategy to in-license innovative products.
We will continue to focus on leveraging our Pan-American ex-U.S. footprint to build our portfolio along our three-pronged growth strategy, which includes acquiring products or companies with existing sales, in-licensing innovative pipeline assets and developing and licensing branded generic products.
I will now turn the call back to Samira for concluding remarks.
Samira Sakhia
Thank you, Amal.
Looking ahead, we remain committed to building a leading Pan-American ex-U.S. specialty pharmaceutical company. We have over $136 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 open up the questions — open up the call for questions. Joe?
Question-and-Answer Session
Operator
Thank you. Before we begin the Q&A, may I please remind everyone that questions during today’s call will be taken from analysts only. Should there be 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].
And our first question will come from Andre Uddin with Mackie Research. Please go ahead.
Andre Uddin
Good morning, everyone. There’s a bit of a curve ball for you. In 2016, there were some rumors that Knight was trying to buy Paladin from Endo. And given that Endo is likely going to fall for Chapter 11, any comment if Knight will take another look at this opportunity? Thanks.
Samira Sakhia
Hi Andre. So what I can tell you is, when it comes looking for M&A and acquisitions, we’ve always prioritized Canada. We’ve — and this is nothing new. We’ve prioritized Canada. We’ve prioritized Mexico. These are two markets where our operations, I’m going to say, are suboptimal. That doesn’t mean that we wouldn’t look at markets like Colombia or Brazil.
When it comes to Paladin and Endo, what I can tell you is the issues that the bankruptcy is an $8 billion Chapter 11. Paladin is not worth anywhere near that. We would obviously look at such an acquisition, but we will be opportunistic if it makes sense, we will get it done. I don’t know the timing. You have to remember, Chapter 11 in the U.S. takes a really, really long time. We don’t know if they’ll be filing for bankruptcy in Canada, very complicated. So if there is an opportunity, we will look at it. Otherwise, we’ll just wait it out, and we’ll continue to build our business, in-license, acquire as we see fit.
Andre Uddin
That’s a great answer. So just in terms of — could you also just comment a little bit in terms of the color and what you’re seeing in business development in terms of prices? Are prices going up, down? And are you seeing more opportunities? Can you comment a little bit more on that? That would be great. Thanks.
Samira Sakhia
Amal, you’ll take that one.
Amal Khouri
Sure. Yes, so we’re — I mean deal’s alive. We continue to see a lot of deal flow, prices and valuations. We really haven’t seen anything dramatic. You have seen kind of on the macro industry side, you’re seeing M&A pick up and that’s really — there’s a lot of opportunities kind of for some of the big pharma who are quite cash rich. But on — for us, really, the deal flow is continues to be healthy, but nothing dramatic in terms of change of prices or valuations.
Operator
And with no further questions, we will conclude our question-and-answer session. I would like to turn the conference back over to Samira Sakhia for any closing remarks.
Samira Sakhia
Thanks, Joe. Thank you for the confidence in the Knight management team and for joining our Q2 2022 conference call. Actually, I think we have some more questions coming up. Maybe, Joe, do you want to take those?
Operator
Absolutely. [Operator Instructions]
Samira Sakhia
Okay.
Operator
All right. Thank you for your patience. Our next question will come from Endri Leno with National Bank. Please go ahead.
Endri Leno
Thank you for taking my questions. Congrats on the good quarter and apologies if I repeat something, it’s that I just jumped on the call, I had like three at the same time or if this was in the prepared remarks. But the first question I wanted to ask is that there were, say, $4 million, $4.5 million lift from Exelon revenues, which could potentially be classified as one-time. So the question I have there is that should we apply any margin to that as it partly goes to EBITDA? Or is it just a direct flow through?
Samira Sakhia
So the thing that I can tell you is, as we’ve said before, when it comes to Exelon, we’re recording net profit transfer. So that dropped straight to the gross margin and EBITDA. What we’ve also said is that that $4.5 million, yes, yes, it’s a little bit one-time because there’s a shift in buying patterns and a shift between quarters, but about half of that is loading into the channel in advance — in Brazil in advance of taking over logistics and commercial activities in Brazil. So that’s actually going to have an impact in Q3.
Endri Leno
Thank you, Samira. And is that part of the reason why you are keeping guidance to change for the balance of the year? Or I didn’t see it in the press release anyways or —
Samira Sakhia
Yes. So that’s part of it. That’s one part of it. And the second one, just as a reminder, is — and we announced this in Q4, is that we are — we were transitioning and terminating our agreement with Gilead when it comes to the Andean, HIV, HCV portfolio and that shows up as an impact in the back half of the year because that ended as of the middle of the year.
Endri Leno
Yes. Okay. That’s good to hear. Thank you. And the other question I have, we’ve seen some reports of some drug shortages in Brazil, especially in hospitals. So can you talk a little bit, is there any impact on Knight? Either way, they are positive or negative? Or any color you can give us?
Samira Sakhia
Not really. I think there is a little bit of gain and a little bit of — like we had a little bit of a delay or one of our competitors had a little bit of a delay, offset each other. We haven’t really seen anything major when it came to our products.
Endri Leno
Okay. Great. Thank you. And since we are on Brazil, but I guess a little bit about Colombia. They just had an election. Brazil will have an election soon, and Chile did too. Any color — I mean what are the expectations that you expect from kind of any of these candidates? Any changes you can highlight that could come to Knight’s business in those countries?
Samira Sakhia
We haven’t — so Peru and Chile went on the left and last year or earlier this year, in the case of Colombia, the inauguration was just last weekend. We expect a change in Brazil. The macro concerns that we’ve always had kind of during COVID; post-COVID is the payers. And as these economies try to recover from COVID to manage their budgets and how that impacts, what they will pay for pharmaceuticals, and the pricing and reimbursement pressures that we may see going forward. As these government changes, we’re going to continue to monitor, and that’s one of the other reasons why we have kind of this blended portfolio of innovative assets as well as branded generics that we can try and bundle and to have savings for the payers.
Endri Leno
That’s okay. Thank you. Thanks for color. And the last one for me, in terms of the ERP systems that I mean are they still on track to complete by the end of the year?
Samira Sakhia
Arvind, do you want to take that?
Arvind Utchanah
Yes. Sure. Yes, we’re on track. We’ve been progress according to our timelines. We’ve actually already implemented in eight different countries and over 20 entities as of today. And by year-end, we should be going live in all countries, excluding Argentina.
Endri Leno
Okay. And that leads into a bit of a follow-up for Argentina. Why are you leaving Argentina out? And do you need to implement something specific in that country? Or is it good as it is?
Arvind Utchanah
It’s the — for Argentina, it’s with respect to the nature of the business. If you can recall, we have our manufacturing facilities in Argentina, and the whole ERP implementation with the manufacturing activities is a whole different project in itself. That’s why it’s going to be a project for next year.
Operator
[Operator Instructions].
Our next question will come from Sahil Dhingra with RBC. Please go ahead.
Sahil Dhingra
Hi, this is Sahil Dhingra for Doug Miehm. Thank you for taking our questions. My questions relate to — on the infectious disease portfolio. Is that product portfolio stable now given that you highlighted that there’s a $4.5 million to $6 million impact because of the higher base of last year? So are you seeing any changes in the trends there? Or is that stable? And related to that, on the oncology portfolio, previously it was highlighted that because of lifting of COVID restrictions, you are seeing increased demand of those products. So are they back to pre-pandemic levels? Or is there still some room to grow? Thank you.
Samira Sakhia
Thank you, Sahil. So on the infectious disease side, as I mentioned earlier, one of the things that’s going to be happening in the back half of the year is, we will see a drop in connection to the Gilead portfolio, which we’re — where we’ve terminated the agreement. We may do some small distribution, but that’s really not going to be material to the numbers anymore.
As far as COVID in that portfolio, we really see minimal sales related to COVID. There are pockets, and we — I think in Q1, it was about $1 million-ish. In Q2, it was about $1 million-ish, where it was several million dollars last year.
When it comes to markets going back to normal, most of our markets in LATAM are really back to normal and patients are going to — doctors are seeing our reps and patients are seeing their doctors. So we expect to see continued growth in our oncology portfolio behind that, not just in LATAM, but also in Canada. The thing that I will mention is that Canada has been a lag when it comes to patients seeing — doctors seeing their patients on a face-to-face basis, but we see that ramping up a little bit over the summer, but there’s still more to go there.
Sahil Dhingra
Okay. Thank you. And are you seeing any early signs of COVID in Latin America?
Samira Sakhia
Well, most of our bigger countries have just gone — like has just gone through summer. So Brazil, Argentina, Chile, Uruguay, Peru, they’re in winter right now. Just like we’re in summer, they’re in winter. And this is — hopefully, that’s the worst that they’ve seen, and they are going into their summer months, which hopefully bodes well for a country like Canada because they’ve gone into winter, and they had very minimal shutdowns or closures.
Sahil Dhingra
Okay. Perfect. Thank you. Those were all the questions from my end.
Operator
Our next question is a follow-up from Endri Leno with National Bank. Please go ahead.
Endri Leno
Thank you. yes. I just had a quick follow-up. I just wanted to mention, on the last call, it was discussed how the sales reps were about to go in the field, and we’re going to see a bit more kind of higher expenses this quarter. So I was wondering, is the sales force back on the field right now and kind of fully operational? And just to kind of tie back, I mean is this the cost structure that you have in Q2? I mean barring any kind of increases for growth, but is this a good kind of cost basis for going forward what you had in Q2?
Jeff Martens
Yes. I’ll take that question, and maybe I’ll pass it back to Samira for further comments. Endri, thank you for it. So it is very much business as usual. I think Samira mentioned that things are a little slower in Canada. So I think we’re slowly building back to normalcy in Canada. For LATAM, yes, it has been business as usual reps in the field. I will say, though, that expenses will — we expect expenses will rise with some of our targeted investment on Exelon as we commercialize in some of those countries in the back half of this year. Samira, anything to add?
Samira Sakhia
Sure. So Endri, there’s a couple of things when it comes to spend. Spend will rise a bit because especially on a — because more activities will happen during Q3. Hopefully, a little bit more, especially because we are launching a sales force behind Exelon in Brazil. So we had a focused team in the front half. As we take on logistics, we’re going to expand that team.
Operator
And with no remaining questions, we will conclude our question-and-answer session. I’d like to turn the conference back over to Samira Sakhia for any closing remarks.
Samira Sakhia
Thanks, again, Joe. Thank you for your confidence in the Knight team and for joining our Q2 2022 conference call. Have a great morning.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.
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