Knight Therapeutics Inc.

Good morning, everyone and welcome to Knight Therapeutics’ Third Quarter 2020 Conference Call. I am joined on today's call by Samira Sakhia, our President and Chief Operating Officer; Amal Khouri our VP, Business Development; and Arvind Utchanah, our Chief Financial Officer.

This quarter we completed a significant step with the acquisition of all the remaining shares of GBT and our knee-deep integration work, which is complicated by COVID-19. In addition, we remain focused on execution of business development initiatives in licensed and acquired innovative pharmaceuticals for the Canadian and Latin American markets.

I will now turn the call over to Samira, who'll walk through the development of our portfolio and corporate updates.

Good morning, everyone. Thank you, Jonathan.

I will provide an update on our products, which have continued to advance this quarter. As we discussed on our last call in July 2020, Knight obtained regulatory approval for Lenvima or lenvatinib in Ecuador for the treatment of advanced liver cancer as well as advanced kidney cancer in combination with everolimus and differentiated thyroid cancer.

In August 2020, we also obtained regulatory approval for Halaven in Ecuador for the treatment of metastatic breast cancer. Knight has the license to Halaven and Lenvima from Eisai for all of Latin America, excluding Mexico.

During the quarter both Imvexxy and Bijuva were approved by Canada. Imvexxy, an estradiol vaginal insert has been approved for the treatment of postmenopausal moderate-to-severe dyspareunia, a symptom of vulvar and vaginal atrophy, due to menopause.

Bijuva, a once-daily combination of estradiol and progesterone in a single oral capsule was approved for the treatment of moderate-to-severe vasomotor symptoms due to menopause. Knight expects to launch both products in 2022.

Finally in October, Knight announced a new exclusive agreement with Gilead for the commercialization of AmBisome, a liposomal amphotericin B that is used to treat antifungal infections. AmBisome has been part of our Brazilian affiliates portfolio for over 20 years and the new agreement is effective Jan 1, 2021.

Thank you, Samira and good morning, everyone. As we previously announced the acquisition of 100% of GBT was by way of a two-step transaction.

The first step was the acquisition of 51.2% majority stake through a private transaction that closed last year on November 29, 2019 giving Knight controlling interest. On July 15, 2020 following approval by the Brazilian Exchange and Securities Commission, we launched the tender offer to acquire the remaining 48.8% of GBT.

In accordance with the offer, BDR holders were eligible to tender their BDRs at the auction that took place on August 14. Following the completion of the auction, 99.6% of the public BDR holders tendered their BDRs at the alternative offer price of BRL10.40 per BDR in cash.

Knight paid an aggregate purchase price of BRL538 million or $171 million and acquired all of the outstanding BDRs. As of October 23, 2020 the BDR program in Brazil was canceled.

I will now turn the call over to Arvind to go over the financial results for the quarter.

Thank you, Amal. In the course of this conference call, I will refer to Knight adjusted earnings, which is a non-IFRS measure.

Knight defines adjusted earnings as operating loss or income adjusted to exclude amortization and impairment of intangible assets, depreciation, acquisition costs and non-recurring expenses incurred, but includes net interest income earned and costs related to leases. I am pleased to report that for the quarter ended September 30, 2020, we reported revenues of $45.2 million, an increase of $41.2 million compared to the same period last year.

The growth in revenues is explained by the consolidation of GBT's results, which accounted for $40.6 million of incremental revenues. GBT generated revenues of $16 million in Brazil, $8.5 million in Argentina, $7.7 million in Colombia and $8.4 million in the rest of Latin America.

For the quarter ended September 30, 2020, we reported a gross margin of $19.5 million or 43% compared to $3.3 million or 82% in the same period last year. The gross margin would have been 46%, if we were to exclude the impact of hyperinflation accounting.

Furthermore, during the quarter we recorded an inventory provision of $1.8 million due to the impact of COVID-19 on certain new product launches.

Thank you, Arvind. Since the recent outbreak of coronavirus or COVID-19, our focus has been on ensuring the continuity of products supplied to patients in Canada and Latin America and ensuring the safety of our colleagues and their families.

At the end of Q3 2020, we had net cash, cash equivalents and marketable securities of $348 million. From this strong cash position, we continue to execute on the integration of Biotoscana and in bringing new business development opportunities to grow the business.

I'll now turn the call back to Jonathan for his concluding remarks.

Thank you, Samira. Thank you for your support and confidence in the Knight team.

This concludes my formal remarks. So now, I'd like to open the call up to questions.

Operator?

Good morning, folks. Thanks very much for taking my questions.

Just two for me this morning. I guess first on the LATAM operations.

Now we understand COVID-19 continues to impact operations in some of your more significant markets an unfortunate situation, which is really beyond anyone's control. However, beyond COVID in GBT's December financials, a number of changes were discussed which have impacted the operational environment in Argentina.

Could you guys provide some insight into some of the issues which you're still facing here and how that may be impacting timing of future launches of new products?

Sure. So over the last year one of the things we continue to see, it's not just COVID.

Obviously, there is still hyperinflation and that continues to go through and is continuing to impact the business. So when you look at what we have reported, we did report under IAS 29, which is hyperinflation accounting as well as under historical accounting.

And one of the things that you may have noted is that at the end of last year, a new government was elected. The government continues to -- the government came in right as COVID was, so they have put in some legislation when it comes to certain price increases.

At the beginning they have let that go. They continue -- one of the things due to COVID that they have done is, they've put a firing freeze into legislation and we continue to work through that.

The business -- as far as our business is concerned, the business continues to operate. We've had -- we have -- we've been submitting our bids.

We've continued to sell and it's -- we're executing.

Great. Thank you so much.

And I guess just secondly, turning it over to the Canadian operations on neratinib specifically. Assuming approval of the SNDS, is the plan here to reengage with the pERC on potential public coverage following that SNDS approval?

The team is continuing to assess based on not just SNDS, but also the competitive market what else will be out there. And we're also looking to see if there is additional data that we might be able to provide later on and we'll know as the product gets approved.

Got it. Great.

That's it for me. Thanks very much guys.

I'll hop back in the queue.

Thank you.

Hi. Good morning, Thanks for taking my questions.

A couple for me. First I was wondering if you can talk a little bit on the sales in Latin America, how do they look like compared to last year in terms of be it similar currency excluding FX or volume-wise.

I mean any way you want to define it something that is like-for-like basically?

Good morning. That's a really great question.

Before I turn it over to Arvind, it's a little hard to do like-for-like during a pandemic. But I'll get our -- I'll turn it over to Arvind to answer more on the questions of currency and like how it's happening?

Thanks for the question. So what I can tell you in terms of currency is like we continue to see further depreciation of the LATAM currency across all the countries and this has been further accentuated with COVID.

So even in this year's numbers, we see declines in currency for Q3 versus Q1 and Q2 of this year. And the other area where it makes it even harder to compare to last year and even this year, when it comes to our sales is, what we're seeing is wholesalers and distributors in LATAM are really trying to manage their stock and inventory because of their cash flow and liquidity concerns.

So that also had an impact on us.

Okay. Thank you.

Well, so -- but then looking forward and let's say I mean pandemic aside for a second, what would be good run rate for the LATAM business?

So going forward...

Sorry. Go ahead, Arvind.

So for me going forward, I mean it's -- given the pandemic and also how FX is moving in LATAM, it's -- and also trying to guess how the wholesaler will be making their buying in the next one year because of pandemic it's something that's really hard to forecast at this point.

Okay. Thanks.

And then the next question I mean, are there any new products that you're planning to launch then in Latin America? And how much of it would you scale back because of the pandemic?

That's a great question. So we are launching -- we are in launch phase on quite a few products.

We have Halaven and Lenvima that are in different phases of launch depending on the country and under regulatory approval still for example in Colombia. So that's potentially a launch I'm going to say in 2022.

In the -- and there's also Cresemba under launch in all parts of LATAM again at a different place in launch. What we are doing is given pandemic making sure that the activities that we have address digital means, address clinical experience and working through that.

So we're redirecting how it's -- how we're commercializing. Obviously it's a lot more difficult to be launching without face-to-face interaction, without hands-on experience.

The other thing that we are seeing and we're seeing that it's not just a Latin American issue, it's a Canadian issue, it's a global issue is due to pandemic fewer patients are going to see their doctors. And because of that the number of diagnoses has also slowed down.

And that's not just a Knight or a Can/LATAM, that is a global issue.

Okay. Thank you.

And one more for me before I jump in the queue. Can you just give us a time line on, how do you think the integration of the LATAM assets progresses?

In terms of -- I mean, will it be done by mid-2021, end of 2021 earlier than that? Thanks

That's a great question. Depending on the issues, certain things are moving faster than we -- as fast as we would like.

Certainly, things are moving slower. The issue really is about being able to be there to make some of the changes to work with the team directly.

And as I mentioned, for example, due to pandemic we have legislation issues that prevent us from making certain changes, but we're working through them. We are at a -- depending on the issue and one of the things I've kind of said before was, we were looking at things like systems and processes and those continue to advance.

So, depending on the system or the process, it will -- the system will launch Q1, Q2, Q4, or phase in through until the end of the year. So everything is continuing to move forward.

Okay. So, we'll say by mid-next year, I mean you should have made substantial progress.

Is that a fair statement?

On quite a few things, not on everything.

Okay. Thank you.

Good morning guys. Thank for taking my questions.

So firstly, you highlight that, the Mexico rights to Abraxane terminated in August. I'm wondering how meaningful this is to revenue.

I believe it was a top six drug at some point in 2019. And also just, wondering when those contracts for Abraxane and Vidaza in Brazil come up for renewal because I think these are also pretty meaningful contributors.

And maybe they were impacted by the acquisition of Bristol-Myers acquiring Celgene.

Hi, Tania. That's a great question.

I'm going to let Amal answer on agreements.

Hi, Tania. Good morning.

So for ABRAXUS in Mexico, it was actually a -- it was a small product. And it was something that we were expecting that BMS would actually take back.

For the other products, I mean, we're not -- or the other agreements I should say, we don't provide specific terms per agreement. But I can tell you that, kind of the way you should look at it is overall, this is a business that has been in existence for a long time.

A lot of these agreements have been there for a long time and kind of renewals of these agreements are going to be part of normal course. So different agreements come up for renewals at a different time and we continue to work on that from an alliance management perspective.

Okay. Great.

Thank you. Secondly on Imvexxy and Bijuva, great news on those two drugs.

When will you start hiring that sales force? And how many people do you intend on hiring?

So, Imvexxy and Bijuva are now going to start going through the reimbursement process. We expect -- given the type of products, we do expect that that will take many months.

We don't expect to really have launch activities until 2022, so it'll be right around that time.

Okay. And in 2022, how many people do you think you would hire to support these two drugs?

The team is continuing to make that assessment. This is a market -- while it's a large market, it's not a very noisy market.

So we will structure around the potential and who else is there yes.

Okay. One last one for me.

For AmBisome, the Brazil market, are you able to tell us how much -- what proportion of revenue that makes up of GBT and if there were any material changes to that contract?

Sure. So, we haven't disclosed revenue by product, both from a partnership confidentiality as well as market intelligence.

The terms is kind of what we had guided to before. We knew that the terms would be different, but we don't disclose the terms either.

And Amal, I'll turn it over to you to add some more.

Yes. I mean, the only thing I would add Tania is that, we -- I think the new terms are in line with what we were expecting when we're doing the transaction.

Okay. Great.

That’s all from me. Thank you, very much.

Good morning and thank you for taking my call. I was wondering, if you could provide an update on M&A initiatives, as it appears that the balance sheet remains very strong, just under $400 million in cash.

So is now the time to be a bit more conservative, or are you still seeing opportunities either in Latin America or in Canada?

I'm going to let Amal answer that question.

Hi. Justin.

Yeah, we continue to see and chase opportunities across all of our territories. Kind of is now the time?

I mean for us, it's -- the time is always the right time to look at opportunities and assess and move forward when we see the right opportunity. Having said that, with the pandemic there were some discussions that were put on hold or delayed.

But we continue to see good deal flow, and we continue to be -- to work very hard on different opportunities.

Okay. And does the pandemic disrupt the due diligence process at all, or can that all be done through virtual means?

It's all being done through virtual means. I mean the -- and again, as you can imagine this is not specific to Knight.

I think everyone has been adapting to switching all to virtual.

Okay. And then, my next question, just given all the currency volatility, I'm wondering if there's a hedging program in place or, if that's feasible or maybe just too complicated with the amount of countries that GBT is involved in.

I'm going to let Arvind take that one.

Hi. So, from an operational standpoint, we were looking at hedging our risk.

It's really by the debt we have in the local country. So we do have debt in Brazil, that is denominated in BRL, and that's a natural hedge against our operating activities.

And that's how we're looking at it going forward. And we're in the process of looking at adding additional debt in different countries and different currencies.

Just so I understand, because I believe that that's pretty low in the overall business. Would that be enough to hedge against the currency fluctuations?

Yeah. So, I mean we do have -- the debt level is around BRL 160 million, which is around CAD 40 million, which is more than a couple of years of current adjusted earnings.

So we do have some cash Justin, for additional debt in some of our countries, and that's what we're looking at.

Okay. That’s helpful.

Thank you for taking my questions.

Thank you.

Thank you. Good morning, everyone.

First question just has to do with this sequential decline in revenues relative to what we saw in Q2. Perhaps you could put it in the frame of what's going on in the ground with respect to COVID in these countries relative to North America, and why we saw a material decrease in revenues and if things are stabilizing in those countries such that outlook for Q4 and Q1 might be a bit more reasonable.

That's a really good question. I am going to turn it over to Arvind, and let him -- and he'll walk you through kind of the various reasons why we did have a sequential decline.

Thanks. So if you look at our revenues we did have swings.

Like if you look at Q1 compared to Q2 and Q3, we did have some significant swings. Well, there's really two big reasons that's explaining the swing.

The first one is FX depreciation. That's creating the swing when we convert the revenues to Canadian dollars.

So Q3 was another hit compared to Q2 and it's even a bigger hit when you look at it compared to Q1. So that's one of the reasons.

And as I mentioned also earlier, the other trend we've been seeing in the past and during 2020 is the inventory level management of our wholesalers. And most specifically, in Brazil like we do see them as trying to manage their inventory that they hold.

So they're really managing how much they buy from us and trying to manage their cash flow and liquidities because of the COVID situation.

Yes. Makes sense.

Go ahead. Sorry.

I think that makes a lot of sense. But I guess my question is -- those are a result of what I think what's going on in the ground with respect to COVID both foreign exchange and how they're approaching inventory levels.

And what I was hoping is to get a better view point of what's going on there with respect to the virus and the impact on the economies.

Right. Okay.

So the -- there's a couple of things. So one of -- the big thing for our business is that our products are high specialty.

And our field forces normally go into a hospital and they can't. We've got infectious disease products and we've got oncology products.

And we really are seeing both due to -- there is an impact on the business because our field forces are just not able to be seeing physicians and it's just not as effective. Whether it's here or there rep and sales force effectiveness has gone down by, let's say, 40% to 50%.

And when it comes to diagnosis, we're seeing the diagnoses come down, because patients aren't seeing their physicians. These aren't chronic products.

The other thing that I want to add is that our products whether it's Cresemba, Halaven, Lenvima throughout our countries are in launch phase. So physicians are -- physicians will turn to something that they know in a crisis time and they say, I can manage the toxicity.

I know how to do that, rather than trying something new on a patient. And that's another thing that we're facing is that they're not trying something new.

And across the -- one of the things that our teams have done is really try and adjust and get clinical experience happening and get physicians trying, but it's -- the growth curve and the launch curve has flattened because of COVID right now.

Okay. Another just sort of housekeeping question.

When you think about the NCIB and where you are in the COVID curve and the longer-term over the next say year or two, do you think it's a good idea to start to use that NCIB to more significant extent, or what's your thinking on that?

So, we're going to be opportunistic with the NCIB. One of the things as Amal was mentioning her team is super busy when it comes to business development.

So we also want to be able to have powder to be able to execute and execute quickly. The fact that we have this pan-American ex-U.S.

structure, we're looking at various kinds of opportunities both, small and large. So we're going to remain opportunistic with the NCIB.

And make sure that we have powder to execute.

Okay. Thank you.

Hi. A couple of follow-ups for me, I mean the first one, I wanted to ask, I guess, I Arvind, but we're talking about the inventory management and how that is kind of shifting and changing because of the COVID.

But do you think -- or what discussions have you had with your -- with the wholesalers, in terms of when are this inventory levels going to stabilize? I mean are they at a point right now that is more or less stable, or do you expect further changes and shifts as we head into the next few quarters?

Hi. Thank you for the question.

So I mean we've seen dramatic drops in the levels, over the last couple of months. But again it's hard to predict, how they will be buying for the rest of the year and into next year.

But I would expect -- I would not expect any further dramatic decline of levels from this point.

Okay, okay. Thank you.

And then more of a general kind of outlook question. I mean, Samira you've mentioned before that, as Latin American countries they get into recessions, I mean you expect a bit of a slowdown, as people lose their insurance plan, and then it comes up when those areas, they surpass that recession.

I mean, do those things still hold true, number one? And number two, how has that picture changed from, let's say, six months ago to now?

We -- each of the markets has responded very differently to pandemic. Right now the certain -- like I think a major market like Brazil there have -- they have seen some decline in employment but not a lot.

But that's also a company that has stayed pretty much open throughout pandemic. But it's -- and I think whether it's our market or kind of globally, it's really too early to tell how long, -- whether we'll have what sort of bounce back we'll have, whether it's a K, or V, a W, and how long the recession if at all will last.

We were kind of monitoring on a weekly, monthly basis. We're seeing effect on the business because of physician and prescribing habits.

We haven't seen it come out so far on the economic tools. But it's still too early to tell.

Okay. Thank you.

That's it for me.

Thank you. I'd just like to remind everyone that, the road to success in Latin America is never straight.

But long-term, this is the place we want to be, because we know we're going to grow a very substantial, profitable business. Thank you for your confidence in the Knight team.

And for joining our Q3 2020 conference call. Please stay healthy and stay safe.