KHTRF - Knight Therapeutics Inc. (KHTRF) Q2 2023 Earnings Call Transcript
2023-08-10 12:36:09 ET
Knight Therapeutics, Inc. (KHTRF)
Q2 2023 Earnings Conference Call
August 10, 2023, 08:30 ET
Company Participants
Samira Sakhia - President, CEO & Director
Arvind Utchanah - CFO
Amal Khouri - Chief Business Officer
Conference Call Participants
Douglas Miehm - RBC Capital Markets
Andre Uddin - Research Capital Corporation
Endri Leno - National Bank Financial
Presentation
Operator
Good morning, ladies and gentlemen. My name is Eric, and I will be your operator today. Welcome to Knight Therapeutics Second Quarter 2023 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 these 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 info@knighttx.com or via phone at 514-484-4483.
I would like to remind everyone that this call is being recorded today, August 10, 2023, and would now like to turn the meeting over to your host for today's call, Samira Sakhia. Please go ahead, Ms. Sakhia.
Samira Sakhia
Thank you, Eric. Good morning, everyone, and welcome to Knight Therapeutics Second Quarter 2023 Conference Call. I'm joined on today's call with Amal Khouri, our Chief Business Officer; and Arvind Utchanah, our Chief Financial Officer.
I'm excited to report that Knight achieved record revenues of over $90 million for this quarter. Furthermore, during the first 6 months of the year, Knight has delivered revenues of over $172 million and adjusted EBITDA of over $32 million, a growth of 24% and 4%, respectively, compared to the same period last year. This strong performance is a testament to the hard work and dedication of our team and continued success of our portfolio.
In addition, our team continues to focus on advancing our pipeline with the approval and submission of innovative and branded generic products across our territories. During the quarter, Knight submitted the marketing authorization for 2 innovative products, Minjuvi in Mexico and Pemazyre in both Argentina and Mexico.
In addition, we advanced our branded generics portfolio, particularly in Chile, with the submission of marketing authorizations for Rembre or dasatinib and Karfib or carfilzomib and obtaining regulatory approval of Xetrane or pomalidomide.
Subsequent to the quarter, we submitted fostamatinib for regulatory approval in Mexico and Colombia and obtained regulatory approval in Brazil for Minjuvi. Upon obtaining Anvisa approval for Minjuvi in Brazil, we submitted an application for pricing approval to CMED. CMED is the regulatory body that establishes maximum prices allowed for drugs sold in Brazil.
In Brazil, prior to being able to launch, we do need CMED approval of pricing. The timing and outcome of this pricing approval is process is uncertain and could take up to 2 years. The commercial launch of Minjuvi is dependent upon obtaining a favorable CMED price.
I will turn the call now over to Arvind to provide an update on our financial results.
Arvind Utchanah
Thank you, Samira. When speaking of our financial results, I will refer to EBITDA and adjusted EBITDA, which are non-IFRS measures as well as adjusted EBITDA per share, which is a non-IFRS ratio. Knight defined EBITDA as operating income or loss, excluding amortization and impairment of noncurrent assets, depreciation, purchase price accounting adjustment and the impact of accounting under hyperinflation but to include costs related to leases. Listed EBITDA excludes acquisition costs and nonrecurring expenses. Knight defined adjusted EBITDA per share as adjusted EBITDA over the number of common shares outstanding at the end of the respective period.
In the second quarter of 2023, as Samira mentioned, we delivered record revenues of over $90 million. Our revenues, excluding hyperinflation, grew by more than $15 million or 20% and on a constant currency basis by more than $13 million or 17% versus prior year. This growth is mainly driven by our infectious disease portfolio, which delivered $45.6 million of revenues. Excluding the impact of the planned transition and termination agreement of -- with Gilead effective July 1, 2022, the portfolio grew by $19 million or 71% compared to the same period in the prior year.
This growth is driven by our key promoted products including the previously announced AmBisome contract with the Brazilian Ministry of Health for $18 million. As for our oncology and hematology portfolio, our revenues, excluding hyperinflation were $27.9 million, a growth of $1.9 million or 7% compared to the same period last year. Our key promoted brands, including Lenvima and Trelstar as well as the addition of AKYNZEO contributed $5.9 million of incremental revenues. This was partially offset by a reduction in sales of approximately $4 million on certain mature and branded generic products due to their life cycle and entrance of new competitors.
Now moving to our other specialty portfolio. During the quarter, revenues, excluding hyperinflation, was $16.9 million. The portfolio declined by approximately $7.5 million, excluding the change in the accounting treatment for Exelon. The decline is due to advanced purchases of Exelon in the first quarter of 2023 and the second quarter of 2022 related to the commercial transition from Novartis to Knight. As a result of the advanced purchases, we had recorded higher revenues in the first quarter of 2023 due to the transition for Mexico and in the second quarter of 2022 due to the transition of Brazil and Colombia.
Now moving to gross margin. Excluding the impact of hyperinflation, we reported $40.2 million or 45% of revenue in the second quarter of 2023 compared to $40.8 million or 54% of revenue in the same period last year. The decline in gross margin as a percentage of revenue is partially explained by the change in the accounting treatment related to Exelon. I would like to remind everyone that in the second quarter of 2022, Exelon was recorded as a net profit transfer from Novartis.
If Knight had reported revenues and related cost of sales for Exelon instead of a net profit transfer, the adjusted gross margin would have been 50% for Q2 '22. The decrease in the adjusted gross margin of 50% in Q2 '22 to 45% in Q2 '23 is due to the product mix of our revenue.
Now moving on to our operating expense, excluding hyperinflation. For the second quarter, our operating expenses were approximately $38 million, an increase of $3.9 million compared to the same prior year period. The increase is mainly due to our expanded sales structure, promotion and medical activities and certain variable costs such as logistics expenses, which rose as a function of higher sales.
Moving on to adjusted EBITDA. For the second quarter of 2023, we reported $14.3 million of adjusted EBITDA, a decrease of $3.6 million or 20% compared to the same period last year. In addition, Knight's adjusted EBITDA per share was $0.13, a decrease of $0.02 per share or 15% over the same period last year.
Now moving on to gains or losses on our financial assets, which are not reflected in our adjusted EBITDA. In the second quarter, we recorded $3.9 million of net unrealized gain on financial assets measured at fair value to profit or loss. This gain is driven by positive mark-to-market adjustment as a result of the increase in the share price of the publicly traded equities held by our strategic fund investments.
Moving on to our cash flows. During the second quarter of 2023, Knight had cash outflows from operations of approximately $1.5 million compared to cash inflows from operations of $13.2 million in the same period last year. The cash outflows from operations during the second quarter of 2023 is due to the settlement of our accounts payable, mainly related to inventory purchases of our key promoted products and the planned transition and termination of our Gilead agreement. The transfer of inventory under the Gilead transition led to an increase of $6 million in our accounts receivable, which will be collected in Q3.
I will now turn the call back to Samira for concluding remarks.
Samira Sakhia
Thank you, Arvind. Just to provide you an update on our NCIB. During the second quarter 2023, we purchased approximately 2.9 million common shares for aggregate cash consideration of $13.7 million at an average price of $4.78. Subsequent to the quarter, on July 14, 2023, we launched a new Normal Course Issuer Bid under this NCIB, we can purchase for cancellation up to approximately 6 million common shares.
Turning over to our financial outlook for 2023. I'd like to remind everyone that this guidance is provided on a non-GAAP basis due to the difficulty in predicting Argentinian inflation rates. We have updated our financial guidance on revenues and expect to generate between $310 million to $330 million in revenues, an increase of $10 million on the lower and upper end of the range. Our adjusted EBITDA is expected to be between 16% to 17% of revenue. The increasing financial outlook is primarily due to an improvement in LATAM currencies against the Canadian dollar in the first and second quarter of 2023.
This 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. Considering the recent volatility in certain of our currencies, we will continue to monitor and revise our foreign exchange assumptions, which may materially impact our results and forecast. Looking ahead, we remain committed to continuing to build a leading pan-American ex-U.S. specialty pharmaceutical company. We have over $140 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 to in-license and acquire innovative pharmaceuticals as well as develop our branded generic product portfolio.
Thank you for your support and confidence in the Knight team. This concludes our formal remarks. I'd now like to open up the call for questions. Eric?
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from Doug Miehm with RBC.
Douglas Miehm
Yes. Congratulations on a strong quarter. First question is maybe mostly for Arvind. When we look at the gross margins and the 45% that was reported this quarter and taking into account under the AmBisome contract and the Exelon accounting treatment. Would you say that margins are going to stay within this 45% or so range? Or could you -- could we see some significant fluctuations in that number moving forward?
Arvind Utchanah
So the 45% gross margin, as I've mentioned, is really driven by the Exelon treatment and as well as the product weight. And what I can say about gross margin going forward. We don't provide guidance on gross margin, but we did provide the guidance on EBITDA margin that Samira mentioned that it would be in the 16% to 17% range of revenues.
Douglas Miehm
Okay. And then maybe for Amal, just she could walk through how she sees the pipeline, how it's changed over the last little while? Has it increased? Are there different things that you're looking at today relative to, say, 6 months or a year ago in maybe comment on pricing, and I'll leave it there.
Amal Khouri
Sure. So the -- I would say maybe the bottom-line answer is we haven't really seen any significant or fundamental changes in the deal flow, the types of opportunities that we're looking at. So we continue to look, as a reminder, for products or transactions that bring us products with existing sales as well as pipeline assets, and that's both on the innovative and the branded generic side in addition to developing our internal branded generics and the therapeutic areas, we're still looking within our therapeutic areas.
We, of course, when we added Exelon that brought with it an additional focus on adding CMS products to complement, and we're always evaluating to see if there are different therapeutic areas that we are not in today that could become interesting and also depending on the pipeline, if there is one particularly interesting opportunity in the then we look to see if that -- if that's an area that we need to accelerate BD behind.
In terms of valuations, there too, I would say I haven't really seen big changes from our perspective and for the deals that we're looking at.
Operator
Your next question comes from Andre Uddin with Research Capital.
Andre Uddin
Samira and Amal, maybe you could just elaborate a little bit more on the business development side. Are you still seeing interesting opportunities in Mexico? I know you're sort of looking at that area. Is that still the case? And are you looking at any other regions like emerging market regions like, for example, Eastern Europe or the Middle East or is sticky right now with pan-America?
Amal Khouri
Sure. So we're -- I would say on the second part of your question, we're still focused right now on our current geographic footprint, so Canada LATAM. And we are still looking at Mexico. Again, the -- our business, as we said before, our business there is subscale as it is in Canada, and both of these geographies. We are -- we continue to look for opportunities so we need to increase the presence. So we're continuing -- so we're still staying on the course until we find the right opportunity to execute on and that's really the focus outside of Canada LATAM for now is not something that we're working on.
Operator
Your next question comes from Endri Leno with National Bank.
Endri Leno
Congrats on the good quarter. I'm using the tag on to the BD development questions as well. And I'm just going to try to ask it in a little bit of a different way, but the commentary on the earnings was that the focus is on advance of the pipeline with the submission of innovative and branded generic products. I mean is this just kind of a writing? Or is there more focused on advancing the portfolio rather than adding to it new products?
Amal Khouri
It's really both. They're not exclusive, right? So when we bring in products through business development activities, we have 1 of our -- one of the imperatives is to actually execute on those transactions and progress those products and launched them, I guess, [indiscernible] time launched in time and that's really what our team has been doing. So that's why we're highlighting advancing the portfolio. And our continues to be very active to identify additional opportunities. So if you recall, in 2021, 2022, we brought in about 9 products between the acquisition of Exelon and the rest was really all pipeline products.
So again, it's really important to continue to progress these products, and you're starting to see the impact that those BD deals have had, not just on the portfolio itself, in terms of products with existing sales, but also on the pipeline, and we see them actually progressing so that hopefully, soon announce, you'll start seeing the contribution on the revenue and on the bottom line. But that doesn't mean that we are decelerating the BD effort, the BD effort continues in parallel.
Samira Sakhia
I just want to add, it's actually a flow brings it in. It goes over to our quality and regulatory teams to regionalize and prepare dosage, and then it goes to our commercial team. So that pipeline has to continue to move. And each of our teams continue to execute on all of that.
Endri Leno
Okay. That's great to hear. And 1 more kind of follow-up under the same topic. And I know Amal, you mentioned that you haven't seen any kind of big changes in valuation on changes. But I was just wondering if you can comment a bit at least in the competitors on the potential companies that you could buy from that to monitor. I mean, have you seen any increased financial stress, let's say, in the companies you monitor given where the interest rates where they are right now?
Amal Khouri
Again, we're not -- we're -- I guess, it depends on kind of what you have in mind. When you're looking at bringing in product and licensing pipeline products, we're not really seeing that impact. And in fact, if there is a distressed company, where we have question -- big question mark to their ability to continue developing the product that would be actually a question or reason to pause maybe for us. So that's not necessarily something that's helping to increase or that's not necessarily an opportunity, I would say, that type of distressed company will not be an interesting opportunity for us.
In terms of acquisitions, again, it really depends on a case by case. If we're looking at company acquisitions we're monitoring. So if again, we really look at it on a case by case to see what would be the right opportunity with the right risk profile and the right price tag attached to it.
Endri Leno
Great. That's good color. And 1 more for me, and I'll jump in the queue. But in the prior quarters or updates with the guidance mentioned competition was cited as a reason for the guidance that was given at the time, especially earlier this year. So I was wondering if you can talk on specific countries. If you can talk a little bit about whether there's been any changes there or better or hopefully not worse. Any color there?
Samira Sakhia
Sure. So that's a great question. What we are seeing is we are seeing competition. And this is like the -- the reason for the guidance earlier in the year, there was 2 reasons that we were -- 2 or 3 reasons that we were bringing in down. One was currency because we do -- what we do is when we rely on our currencies, we're relying on people a lot smarter than ourselves to forecast currency and they will -- their guidance was a devaluation, and that's what we use.
The second thing was the termination of Gilead. So we knew that those top line numbers weren't going to be there. And the third was competition on our branded generics products, primarily in Argentina and Colombia. What we have seen, especially in Colombia, is that competition has been slower to arrive, and that's really a function of the Colombian agency. And the second thing is the ones that are there, while they are pushing for price decreases, and we are seeing price erosion. It hasn't been as aggressive as we had initially thought because we thought there would be more players in the field than there are today.
We do expect them to come. It's not a question of if, it's a question of when. And as long as we can continue to take the benefit, we will, and we'll continue to do what we set out to do, which is in license, acquire, develop, get those products approved and commercialized, and our teams are executing on all of that, and we see it in our numbers.
Operator
[Operator Instructions]. At this time, there are no further questions. Please proceed with your closing remarks.
Samira Sakhia
Once again, thank you for your confidence in the Knight team and for joining our Q2 '23 conference call. Have a great morning.
Operator
This concludes your conference call for today. You may now disconnect your lines. Thank you.
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Knight Therapeutics, Inc. (KHTRF) Q2 2023 Earnings Call Transcript