Knight Therapeutics Inc.

Good morning everyone, and welcome to Knight Therapeutics first quarter 2021 conference call. I am joined on today's call with Samira Sakhia, our President and Chief Operating Officer; Amal Khouri our Chief Business Development Officer; Arvind Utchanah, our Chief Financial Officer; and Jeff Martens, our VP, Commercial.

Since incepting Knight 2014, we have set out to build a rest of the world pharmaceutical company that brings innovative products that helps the lives of the patients. Since our 2014 founding, invested over $900 million of capital, while generating over $270 million in net income.

Today, we commercialized pharmaceuticals in Canada and ten Latin American countries with nearly 700 talented people. We are in the business of making people better, while creating shareholder value.

I’ve been faithfully reporting quarterly results to shareholders for the last 27 years or 104 quarters. Effective September, 1, 2021, I will assume the role of Executive Chairman and then talented and gets that done Samira Sakhia will assume the role of President and CEO.

In addition, Jim Gale, who has been Knight’s Chairman since founding will transition to the role of Lead Director. I will continue to direct Knight’s strategy and remain focus on non-operational areas where I can add the most value.

I have worked side-by-side with Samira for 18 years where I have had the privilege of watching her develop into a seasoned, top brass executive. Knight is my baby, and I would not - I would only entrust its stewardship to the best and brightest.

I will now turn over the call to Samira, who will walk through our corporate updates.

Thank you, Jonathan, and good morning, everyone. As I said yesterday, I started as CFO of Paladin in the summer of 2001 and it has been a privilege to have worked hand-in-hand with and learned from Jonathan for the last twenty years.

I am honored and humbled to take on the role of President and CEO of Knight and to lead an exceptionally talented and dedicated executive team and Knights across Canada and Latin America. Over the last 18 months, we have executed on a transformational acquisition and remain focused on executing on our strategy of building on our pan-American ex US footprints.

Thank you Samira. As we previously announced, we have entered into a definitive agreement to acquire the exclusive rights to manufacture, market and sell Exelon in Canada and Latin America as well as an exclusive license to use the intellectual property and Exelon trademark within Canada and Latin America.

This acquisition leverages our Pan American ex-US platform and further validates our rest of world strategy. Exelon will be the product that we will be selling across our entire territory.

At closing, we will pay US$168 million in cash and an additional milestone payment of up to US$12 million upon the achievement of certain conditions. The transaction will be funded with Knight’s cash and we expect to have remaining cash of at least $150 million to continue to execute on more business development opportunities.

The closing of this transaction is subject to anti-trust clearance in Brazil. At closing, we will enter into a transition service period during which Novartis will continue to distribute and sell Exelon until the transfer of marketing authorization, on a country-by-country basis.

During this transition period we will receive a net profit transfer. And once the marketing authorizations are transferred, we will begin distributing the product to our own local affiliates on a country-by-country basis.

Our business development team will continue to focus on leveraging our broader footprint to continue to position ourselves as the partner of choice for Canada and LATAM.

Thank you so much, Amal. Building on our hard work of 2020, the first quarter of 2021 to executional excellence on our new launches.

Our revenues on a constant currency basis increased by $4.1 million or 10% versus the prior quarter, driven by the launch of Cresemba, Lenvima, Halaven, Nerlynx and certain BGx products, as well as Trelstar, which Knight started to commercialize in April of 2020. In addition, in March we launched IBSRELA for the treatment of Irritable Bowel Syndrome with Constipation in Canada which is now covered by most private insurance companies.

We finalized our commercial leadership structure with the addition of a country manager in Colombia. It’s now today the management of our commercial operations is organizing five regions comprise of Brazil, Colombia, South Latam or SoLA, North Latam or NoLA in Canada.

Over the remainder of the year, we will focus on the execution of our new launches and will prepare for the upcoming launches of Lenvima and Halaven in Colombia, as well as Lenvima Halaven and Cresemba in Ecuador. I’ll now turn the call over to Arvind to go over our financial results.

Thank you, Jeff. In the course of this conference call, I will refer to EBITDA and adjusted EBITDA, which are both non-IFRS measures.

Knight defines EBITDA as operating loss or income, excluding amortization and impairment of intangible assets, depreciation, purchase price, accounting adjustments, and the impact of accounting under hyperinflation. Adjusted EBITDA excludes acquisition costs and run recurring expenses.

In addition, constant currency is also a non-GAAP measure excluding foreign currency fluctuations. Financial results at constant currency are obtained by translating the prior period results at the average foreign exchange rates in effect during the current period except for Argentina where we only exclude the impact of hyperinflation.

I am pleased to report that first quarter of 2021, revenues were $46 million, an increase of 1% compared to the same period last year. The growth of revenues from our new launches was offset by the depreciation of our LATAM currency.

As for gross margin, we reported $20.6 million or 45%, compared to $19.9 million or 43% in the same period last year. The increase is mainly due to lower inventory provision, and product mix partially offset by renegotiation of certain license agreements and the depreciation of the LATAM currencies.

Excluding the impact of hyperinflation, the gross margin would have been 47% for the quarter.

Thank you, Arvind. Looking ahead we remain committed to building Pan American ex-US specialty pharmaceutical company.

After closing Exelon, we will have at least $150 million in cash to continue to execute on our strategy to in-license and acquire innovative pharmaceutical, as well as developing our branded generic products for Canada and Latin America.

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

And this concludes our formal remarks. We would now open the call up to questions.

Operator?

Good morning and congratulations to both Samira and Jonathan. First question, Samira, do you have any changes in mind for when you take over as CEO?

Or will it be pretty much stay on the same path?

David, thank you. And definitely it’s business as usual.

When it comes to what the strategy is, this is exactly what we said has to do. This is what we were doing before Knight and this is what we will continue to be doing and in licensing and acquiring and bringing innovative products that help patients.

Okay. As far as the $150 million you’ll have on hand after the closing of the acquisition, what about the money that’s tied up in loans and investments and funds now?

Do you consider that is accessible capital if you had a larger acquisition in mind?

So, right now, the – as far as the financial assets are concerned, we may borrow against them, because what we’ve seen – if we were to sell them, we are likely not to receive the value that there was in the balance sheet. The other thing that we are looking to do after closing a loan is, add debt into the balance sheet in local currency to hedge against the currency exposure there.

So that’s clearly what’s going to give us a little bit more flexibility in capital.

Okay. And the last question is just a housekeeping question.

What exchange rates do you use when you report a quarter, the rate at the end of the quarter? Or the rate as the revenues come in or something else?

I will turn that over to Arvind to answer.

So, in terms of the conversion, the addition rate is really the average for the two. It’s converted from each – functional currency of each of our entities to its Canadian dollars using that rate.

The only exception that that we’d say to that rule is Argentina. The accounting rule and the headcount inflation is different and I would refer you to, we’ve posted on our website an illustration of how the conversion works for Argentina and I would point you out to that example posted online.

Okay. Thank you.

I’ll get back in queue.

Good morning, folks. Thanks for taking my questions.

First and foremost, congratulations Samira on the new title. There is really nobody better suited to lead Jonathan’s baby into the next stage of life.

A couple from me this morning. So first on the financial assets, I know you guys mentioned a variance here by Atea where mark-to-market in mid-May and the company in question looks like they are working on a COVID antiviral which I suppose explains the early performance as the market looks to vaccine update.

I am just wondering if you could help me understand how Knight ended up with such a significant exposure to that specific equity. Just taken outsized position here to the tune of, I guess, it looks like 30% allocation, is that what’s going on there?

Arvind, do you want to take that?

Yes. So, first of all on the first question on Atea, this was an investment made by one of our fund.

It was not a direct investment made by Knight and even though we are saying like there will be a reversal of gains, we’ve just decline that as you mentioned. We were still sitting on overall profit based on the cost base of where the financial into that company.

So that fund really invested in the company pre-IPO.

Okay. Got it.

Great. Thank you.

And just looking at revenues by therapeutic area here, it looks like you guys are seeing a nice uptick in infectious diseases which I guess might be helped by Cresemba here. But despite the launches in LATAM may have been other onc therapeutics, the onc hem line is still a bit under pressure.

Is that a function of continued COVID impact on hospitals and patients not being managed in a timely manner in LATAM or is there additional color you could add there?

Jeff, do you want to take that one on?

Sure. Yes.

So, the infectious disease piece, both Cresemba and we are seeing high series pool of patients in many of our LATAM countries where Cresemba can definitely benefit some of those patients. When a patient with COVID gets aspergillosis, they obviously need and require urgent care.

Additionally, we are starting to see maybe some potential traction with AmBisome in the same area for Brazil and in ICUs. As for the HemOnc piece, yes, we have continued to see decreased treatments for our oncology portfolio in LATAM for several of our brands.

Some of them like a Halaven which is infused product in hospital is challenged because of that, while others which are oral like the Lenvima benefit where doctors are looking to treat those patients externally. So, it’s a bit of a mix bag, but an increase.

Samira, anything that you’d like to add?

No, that’s exactly right. The – all of these products are actually – whether it’s Halaven, Lenvima and Cresemba, they are in launch phase and it’s also promotional efficacy are a little bit tougher and that’s also on Nerlynx and Trelstar in Canada.

We are seeing traction. When I look at Cresemba, which was launched pre-COVID in Mexico.

It is chugging along a lot better, because it is a great product and provides a lot of clinical efficacy and benefits.

Excellent. That’s helpful.

Thank you very much. And just looking at revenues another way by jurisdiction, Argentina seems to be disproportionately under pressure relative to other key territories.

Do you guys largely attribute this to the ongoing pandemic, hyperinflation in currency, things like that? Or is there additional color around Argentina specifically you could provide?

No, it’s really a currency issue and pandemic. The Argentina is a great pharma market.

Unfortunately, right now the financial crisis isn’t really allowing us to show to obtain the results that we’d like to get.

Got it. Great.

And then, just lastly, a small housekeeping item. On the non-recurring expenses, there is 874,000 in inventory write-off and you mentioned in a surety claim, is that claim expected to hit in Q2?

I think, that was for last year. Arvind, do you want to take that?

Yes. this was really a claim that’s in the rate of pressure due to a temperature excursion when we are shipping the product.

I don’t believe we provide any further updates on the claim but we were working towards.

Great. Got it.

I will hop back in the queue. Thank you very much for answering my question.

Thank you.

Hi, good morning. Thanks for taking my questions and congrats on the job.

A couple from me. First, I just wanted to ask, with the inventory building in the quarter as they have been building on depletion in the prior quarter.

So, do you think it is in a good spot right now as to the wholesalers?

Arvind , do you want to take that first, and then I’ll add if it’s necessary?

Sure. Yes, so, I mean, throughout 2020, we’ve been really working hard in really setting our process and controls and really making sure we have an efficient allocation of working capital and this really paid off, like you said at the end of 2020.

And really in this quarter where we see the current levels as a more given levels going forward. But also we keep in mind that depending on timing of purchases and sales, there could be fluctuation in working capital going forward.

And on the other side, as of to inventory in the trade, one of the things we know is, and it’s similar to Canada, where Q4 is because of the holiday season, it’s usually a little bit higher. We saw that unfortunately it’s really hard with COVID to know how much was wholesaler build up versus just really action to COVID-19.

Once the market stabilizes post-COVID, we’ll have a better idea.

Okay, great. I think, the next question is, I mean, first, congrats on launching those new products, but are you able to quantify what the constitution was in the quarter?

And where I am trying to get there is more kind of like how efficient were these launchings versus the more normalized environment?

So, we are not providing kind of the – we are not providing revenue by product. Part of that is both for confidentiality, as well as competitive reasons.

When we start have to market data, we’ll start to disclose that more. The issue – the other side is, as you know, when you are launching products, there is – they are not profitable, because there is a lot of promotional spend, you have a lot of people working and they are just doing an uptake in revenue.

We do expect all of the events that kind of outlined in the next three to five years to be big contributors. It’s not just to the top-line, but also to the bottom-line.

Okay, understood. One last one for me.

Are there any significant renegotiation agreements coming up, let’s say, in the next 12 months?

Amal, do you want to take that one?

Sure. I think what you should assume and you said there is always – it’s normal course to always have renegotiations and renewals coming up just because of the nature of the business.

Be it the scanners on – side specifically, they had partnerships for a long time and so it’s normal course to be renegotiating and maneuvering.

Okay. Right.

But are we going to be expecting any major impacts over the next year?

We are not. We are not expecting any, correct.

Great. Thank you.

That’s it for me. Thanks.

Good morning. Thank you for taking my call and congratulations on the appointment.

For Exelon, I know the sales were $47 million US last year. But just wondering if there was any pandemic impacts in that figures and how sales have trended over the past couple of years?

Amal, do you want to take that?

Sure. So, the - in the last couple of years, I would say, if you look at LATAM specifically, I think sales have been relatively flat.

In Canada, we have seen a decline because of generitization of the patch. And just how generic dynamics work in Canada.

On COVID-19 specifically, it’s really hard to tell. However, this is a chronic care product.

So it’s not a hospital. It’s not in-hospital and it’s not acute, right.

So, if there was an impact, it would be really hard to parse out that impact, because of the spike COVID patients would have continued their therapy. So, that that’s really what I can tell you and we are not seeing, again, any we are not seeing anything into sales that would tell us a bit by the COVID impact.

Okay. And what’s the split roughly of the sales between LATAM and Canada?

What we have said is two-thirds of the sales for Brazil and Colombia. So, it’s most of the sales are coming from LATAM.

Canada is a small contributor.

Okay.

And so, just to add there, I think when we also said that the current INM, like the Canadian sales are about $2 million less.

Okay. That’s helpful.

And when do you anticipate a close date again?

So, on the close date – so on the close date, the anti-trust process in Brazil is going faster than expected. We passed through the first level of review.

So, right now, we are expecting final clearance and hopefully closing in the next two to three weeks.

And that would be much sooner than – I think it was first described as it could close over a number of months, if I was correct?

That’s it. Yes.

The initial estimation looks 45 to 90 days. So, this will actually be just under 45 days.

It’s gone very well.

Okay. Thank you.

And then, just a final question on the global ERP system implementation. You know this was highlighted last quarter.

Just wondering how that’s going in if there is a timeline to complete that integration?

Arvind, do you want to take that one?

Yes. The new updation for the integration is progressing well as planned and as we have disclosed in the MD&A we expect substantially most of the work to be completed in the next 12 months.

And in the next 12 months, is that progressive throughout that or is it a system that basically you need to do all the work at the end of the 12 months and it’s ready to go or just are there any additional color on that timeline?

Yes. It’s really a progressive approach, given we have so many different entities and jurisdictions and the original way the ERP would work is also customized to the local rules for certain countries.

So, it’s really a progressive approach and it’s a roll out basically on a country-by-country basis for the next 12 months.

Okay. Thank you.

I appreciate you taking my questions.

Thank you, Justin.

Thanks.

Yes. Thanks for taking the follow-up.

Trelstar is considered a launch product, but unlike some of your other launch products, that was already selling as you took it on. I am wondering, what kind of growth if any are you seeing with Trelstar since you’ve taken over your sales?

Sure. And I am going to actually ask Jeff to answer that question.

Yes. Thanks so much for the question.

Yes, we do consider it a relaunch. So, when we acquired it, it was actually declining.

So there was lot of work that went into bending that curve and I think Q1, we are starting to see the benefits of our work. So, it was up by about 20% Q1 this year versus same time last year.

Okay. Okay.

And I think you said, you have full reimbursement for IBSRELA now. Did I hear that correctly?

I am happy to take that, Samira.

Yes. Please go ahead.

So, on IBSRELA, the primary market is going to be private and we have been able to attain a large portion of the private coverage in Canada.

Okay. Okay.

Thank you.

Yes. Good morning.

And congratulations from me, as well. Maybe you can talk, Samira about the trends within the South American marketplace as we enter a new season with respect to COVID and your thoughts on perhaps when we might see a light at the end of the tunnel here?

And then the second question just has to do with margins. Gross margins were a little bit better than we thought they’d be.

Can you maybe walk us through why that is? And what trends we could see with respect to those margins over the next quarter?

Sure. So, I am going to kind of speak to COVID.

The situation isn’t improving rapidly. That being said each of the countries is slowly advancing through vaccine distribution.

I know, for example, in Argentina, they are in lockdown. Our team is having to deal with another winter lockdown.

There is, as you’ve seen in the news, there is a lot more talk about trying to get vaccines into developing countries and hoping that, hoping that that will move things will work and we are really like our teams are looking at to what we can do to also vaccinate our teams. I do think that things will start on the back end of this year just start improving, because vaccine roll out will move faster.

And we will see an uptake. There is obviously a lot of uncertainty.

There is a bit of political unrest, as well. But I think that as countries see a turn to the better, we will are going to see an impact of that, as well.

Okay. Thank you.

And I am going to ask Arvind to answer the question on margin.

So, in terms of the margins, really the improvements that I referring to is really driven by product mix where higher margin products have outperformed expectations. And in terms of forecasting for the red alerts on this, I will say it’s really hard to predict, because of currency.

But what I can tell you is like we are still with the current business it’s, I would say, expectation should be low to mid 40s as what we guided to last year. And I am thinking as we quote it along, keep in mind this will be a net profit transfer before the M&As are transferred on a country-by-country basis.

And during that transition period, we will be recording net sales at the 100% gross margin.

Thank you very much.

It's Jonathan. Thank you for the confidence in the Knight team and for joining our Q1 2021 conference call.

Stay safe and be healthy.