Knight Therapeutics Inc.

Good morning everyone, and welcome to Knight Therapeutics second quarter 2021 conference call. I'm 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.

After 104 quarters of leading publicly traded specialty pharmaceutical company since the tender age of 28 and with the majority of these quarters with Samira on my side, it is the right time for both Knight and for Canadian society for me to step aside and make room for a female superstar. I look forward to facilitating my new boy as sheriff and endorse and our talented team to the best of my abilities.

I do this not just because I am the goodest and the largest Knight shareholder, but because teams support each other during both GUD good times and bad times. Thank you to our shareholders and to Amal Khouri, Jody Engel, Corey Richardson, Arvind Utchanah, Georgette Lessard-Boyer, Gerry Mazzei, and many others who followed me from Paladin Labs for their confidence over the last 27 years.

A special thank you goes to James Gale, Managing Partner of Signet Healthcare Partners for assuming the role of lead Director, imagine what we are going to do now that we have just warmed up. I will now turn the call over to Samira, who I will have to start being nice to in 17 more days as Samira will become Knight's new talented orchestra conductor.

Samira?

Thank you, Jonathan and good morning everyone. It has been a privilege to have worked hand-in-hand with and learned from Jonathan over the last 20 years, and it was just a couple of weeks ago that we actually did celebrate our 20-year anniversary.

I'm honored and humbled today to take on the role of CEO of Knight and to lead an exceptionally talented and dedicated exemplar team at Knight's across Canada and Latin America. Now for the quarter I am excited to announce that for Q2 Knight achieve record quarterly results despite the ongoing challenges posed by the pandemic.

During the last six months we executed on multiple fronts with our business development team closing Exelon and already beginning to work on transition, the commercial team delivering on strong growth on our key brands and all of our teams executing on integration and systems implementation. Turning now to the NCIB, we completed the 2020 NCIB on July 15, 2021 and purchased a total of 6,193,169 common shares at an average price of $5.33 per share.

Subsequent to the quarter, we announced the acceptions by the Toronto Stock Exchange of our notice of intention to make a Normal Course Issuer Bid which commenced on July 14, 2021. Under the 2021 NCIB, Knight can purchase for cancellation up to 10.2 million shares over the next 12 months.

As of August 11, 2021, Knight has purchased 2.3 million shares for an aggregate cash consideration of $11.9 million or $5.17 per share. I will now turn the call over to Amal for an update on BD activities.

Thank you, Samira. During the quarter, as you know, we completed the acquisition of the exclusive rights of Exelon for Canada and Latin America for which we paid a total consideration of CAD $217 or US$180.

This acquisition leverages our Pan American ex-U.S. platform and further validates our rest of world strategy.

Exelon is our first global brand that we are selling across our entire territory. In addition to the Exelon acquisition, our business development team remains focused 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 and licensing innovative pipeline assets and developing our branded and generics portfolio. I will now turn the call over to Jeff to provide a commercial update.

Thank you, Amal. Building on our hard work of 2020, our efforts in 2021 remain focused on executional excellence of our new product launches.

Overall our revenues on a constant currency basis, pardon me, increased by $14.4 million or 28% during the quarter versus Q2 last year. The growth in revenues is driven by incremental demand estimated to be between $5.5 million and $7 million primarily due to our infectious disease products that treat invasive fungal infections associated with COVID-19.

$4.8 million related to the growth of our recently launched products and $4.2 million from the acquisition of Exelon. Furthermore, on July 06, 2020, one, Health Canada has approved Nerlynx to treat HER2 positive metastatic breast cancer patients in Canada.

Over the remainder of the year we remain focused on the execution and acceleration of our launches and continue our work on the return to field plan in all of our territories. I will 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, as well as constant currency which are all non-IFRS measures.

Knight defines EBITDA as operating loss or income excluding amortization and impairment of intangible assets, depreciation, purchase price accounting adjustment, and the impact of accounting under hyperinflation, both to include costs related to leases, adjusted EBITDA exclude acquisition costs and nonrecurring expenses. In addition, constant currency is also a non-GAAP measure used to exclude 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'm excited to report that for the second quarter of 2021 we achieved record revenues of $65.8 million, an increase of $14.4 million or 28% on a constant currency basis.

As for gross margin, we reported $28.8 million or 44% of revenues compared to $22.2 million or 42% of revenues in the same period last year. The increase is mainly due to higher revenues, lower inventory provision and a change in product mix, partially offset by the re-negotiation of certain license agreements and the depreciation of the LATAM currencies.

Excluding the impact of hyperinflation, the gross margin would be 46% of revenues for the quarter. Our total operating expenses for the second quarter increased by $1.7 million or by $1.3 million in constant currency compared to the same period in 2020.

The increase is mainly due to an incremental expense of $1.2 million related to the extension of stock options held by certain executive offices, directors, and employees, partially offset by lower costs of restructuring versus the second quarter of 2020. Moving on to EBITDA, the EBITDA for the quarter was $9.3 million compared to an EBITDA of $6 million on a constant currency basis in the second quarter of last year.

Adjusted EBITDA was $9.4 million for the quarter compared to an adjusted EBITDA of $6.4 million on a constant currency basis in the same period last year. The increase of $3 million or 47% was mainly driven by the previously mentioned increase in gross margin, partially offset by higher operating expenses.

Now, moving on to certain items that are not reflected in our adjusted EBITDA. During the quarter we recorded $28.5 million of net gain on financial assets measured at fair value to profit or loss, which is mainly coming from our strategic fund investments.

The unrealized gain was driven by several of our strategic fund investments including an unrealized gain of $30.5 million on Singular Genomics Systems and investments held by Domain, which had an initial public offering in the quarter. The unrealized gains in the quarter were partially offset by an unrealized loss of $13.5 million on the shares of Atea, a public company held by Sectoral NEMO II.

On a life-to-day basis Knight has recorded an unrealized gain of $8.9 million on Atea. I would like to remind listeners that our financial assets are subject to equity price risk.

For example, Singular Genomic Systems has seen a material decline in its share price subsequent to the second quarter and at the current price level, Knight would record an unrealized loss or reverse part of the second quarter's unrealized gain by $14 million. Finally, Knight generated cash inflows from operations of $12.4 million in the second quarter of 2021, an increase of $4.3 million or 54% over the same period last year.

The significant increases in cash from operations is driven by an improvement in our operating results, and working capital, as well as interest collected on the maturity of certain marketable securities during the quarter. I will now turn the call back to Samira.

Thank you, Arvind. Looking ahead we remain committed to continue to building a leading Pan-American ex-U.S.

specialty pharmaceutical company. After closing Exelon, we have over $160 million in cash, cash equivalents and marketable securities to continue to execute on our strategy to in-license and acquire innovative pharmaceuticals as well as developing our branded generic portfolio.

Thank you for your support and confidence in the Knight team. This concludes my formal remarks and I would like to turn the call over for questions.

Kathy?

Thank you, and I guess the first comment I'd like to make is and I'm sure I’ve done this before, but congratulations to you both, Jonathan it's been great to work with you for such a long time as CEO and good luck to you Samira as you move ahead in this new role. First question that I have just has to do with the sustainability of the anti-fungal strength that you saw in the quarter.

Can you talk about what you expect to see or are seeing in Q3 and how we can expect that to move through the remainder of the year?

First of all, thank you so much for your congratulations and I'm looking forward to continuing to work with you. So I'm going turn it over to Jeff to answer the sales related to our products.

Yes, thanks so much for the question, Doug. So yes, as far as sustainability we expect due to COVID that our sales will continue to remain lumpy.

Right? We're going see probably movements and in both directions, but what I can say is that there are really two factors.

Right? There is our infectious disease products which are used in some cases in patients that are co-infected with COVID.

And for those patients obviously as long as COVID is there we will continue to see positive upside, but there's also the other element which is, after COVID behind us, have had the experience with these customers been positive and we like to think that some of the positive experience that they've had with our medicines will continue. So, I think there will be some sustainability, but it will be up and down.

One other thing Doug, -- just kind of to wrap up a little on the COVID is going up and down in our territories. So what we saw for example in Q2 was that Mexico patients were getting a bit better, that there was pick up in Brazil, is starting to turn a little, where Mexico is getting worse in the Q3, things are getting slightly better in Brazil, so it really depends on a market-by-market basis as well as hospitalizations.

Okay that makes perfect sense. And then just a related question, you did start to get some traction in your product launches and maybe what we're ultimately going to see is that as COVID starts to wane, you're going to get more traction on those product launches, but perhaps you could expand a little bit on that?

And I'll leave it there.

Sure. So as Jeff mentioned, one of the things that we are counting on is the utilization so far on a product like Cresemba during COVID is going to carry forward in utilization post COVID because they get familiarity on how to use it.

Then there's products like Halaven and Lenvima, both of which continue to advance, maybe not as fast as we'd like, but we do -- as our reps start to go back in the field, patients start to go back to doctors and diagnosis start to happen, we expect that to rise and the same thing in Canada behind Trelstar, Nerlynx, and Ibsrela.

Great, thank you.

Good morning folks, thanks for taking my questions. And I guess, I'll just echo Doug here, and Jonathan sending you the absolute best as you transition out of this in your role, that said you know, I know nothing really changes here as you and Samira are and always have been completely on the same in human genius wavelength.

Nonetheless, what a hell of a good GUD of course, quarter to I guess, just moving on to questions, so first from me just building on Doug’s former question, is it fair to assume that the largest revenue contributors from the infectious disease portfolio are Cresemba and AmBisome? And if so, could you give us a bit of perspective into what the historical run rate for these products were pre-pandemic while noting that historical run rate may not be reflective of go forward run rate, particularly if you can establish additional loyalty or physician comfort with these assets just having some historical context would be helpful?

So that's a great question. So in the case of Cresemba there's very little run rate because it was an early launch phase, especially in a market like Brazil where we only launched it in late March just as the world was shutting down.

And every kind of -- every extra, every dollar we're making is actually an extra dollar that we didn't have last year, or even in the last Q because we are seeing a spike in the queue as well. As far as AmBisome is concerned, like one of the things is, we are not disclosing product by product data.

We did see a spike happen in the Q and we don't -- we expect it to temper over the next few quarters for two reasons; one is really going back to infections and hospitalizations, but also we're seeing vaccinations in these territories also start to go up and that will kind of drive that down as well.

Got you, great. And that actually leads well into my next question, so thinking about the LATAM market from a macro perspective here, emerging markets like LATAM are likely to take a bit longer coming out of that cyclical downturn from COVID relative to North America and can you share any views around changes quarter-over-quarter you're seeing with respect to things like unemployment, vaccine uptake, et cetera in these markets which may help us zero in on a rebound to economic growth in these particular jurisdictions?

Sure, so as you know we are all, like they do saying these are emerging markets. There's a whole amount of -- like the economy is partial, the informal economy and so a lot of these countries stopped being in shutdown just because they couldn't afford it that much longer.

What we are seeing when it comes to vaccinations is they are moving pretty rapidly there about six months I’m going to say three to six months behind us depending on the territory. So markets like Argentina and Brazil, latest data is showing that 50-ish, mid-50s have gotten at least one dose.

In markets like Mexico and Colombia it is late 30s, early 40s and then the smaller markets are behind that. So, we do -- hopefully as North American and then European markets are not vaccinating as much, vaccines are to move South and that continues to ramp up.

We know for a fact that in our team in Brazil over 70 people -- 70% of the people have received their first dose and we expect that by kind of end of September they will be past their second dose. In Colombia we were able to, through the Chamber of Commerce, acquire vaccines for people and I believe by the end of this month they'll all have first dose, and hopefully by the end of October, early November their second dose.

Excellent, that's very helpful, thanks so much. And I guess just lastly from me and then I'll hop back in the queue is that Samira you've recently spoken about your thoughts around the potential to secure LATAM domiciled debt facilities that hedge against volatility in the LATAM markets, now this is a bit of a change from Knight and Paladin's historical anti-debt perspective, but could you just share your current thinking around the strategy as it stands today?

That's a great point. One of the things we will be doing and this is less about adding debt and shoring up our cash flows, it's really more about hedging currency exposure.

So, we are looking to and Arvind is working very hard on this, is to add to debt in Real, Colombia, and Mexican and Chilean peso so that we can hedge the cash flows that are coming in especially behind Exelon from those countries.

Excellent thanks so much. That's very helpful.

I'll hop back in the queue.

Hi, good morning. This is Antonia on the line for Dave.

So just two questions from me, can you give us a bit of insight into the diagnosis and treatment of cancer patients, are things going back to normal in the LATAM countries? And then also for Exelon, are sales still expected to be in that 45% to 50% range or has anything changed since the acquisition?

Thanks so much for the question and maybe I'll start with answering the oncology diagnosis rate and treatment in LATAM and Canada, then I'll pass it over to Amal for the other question. So on this, I guess we're in a situation where the waves of COVID vary country-to-country.

So, for example, Mexico actually was showing a significant decline where we're seeing diagnosis rates increasing, but there was a spike in Brazil and Argentina, et cetera, which hindered the ability for doctors to diagnose and patients obviously being apprehensive with cancer to go in and, or condition to get diagnosed. So I would say the diverse footprint that we have probably leads to some countries showing an increase in diagnosis rates at times and others less.

So there is some variability. But one thing is absolutely certain.

As the vaccination rates continue to progress, the diagnosis rates will continue to increase and we positioned our new product launches to successfully obtain some of those patients. So that, that is really I think the situation of the diagnosis rate.

But and we've actually seen examples of this in the countries as well. So I guess it's a matter of us just it holding tight and waiting for the vaccines to eventually let these businesses to open up.

I think that answers the question. I will maybe pass it over to Amal.

Sure, thank you Jeff. So for Exelon I think your question was on was on performance and if anything changed since we closed the deal.

So if we look at the first five weeks kind of from when we closed which was May 26, that will be end of the quarter. The performance curve was actually ahead of what we were expecting, but that's because there is some lumpiness in buying patterns.

Overall expectations are still the same as we have communicated previously, so we expect the spend to be flattish, but to remain in the similar range to what we saw last year, so in the mid $50 million range.

The other thing, Antonia, I would add is, especially on Jeff’s comment on where what we're seeing as far as vaccinate -- as far as kind of treatment and diagnosis, our territories are really not that different from Canada or the U.S. We are -- as doors open and we saw this at the end of 2020 a little bit, especially in a market like Brazil where they were actually in their summer months.

And there was a lightness and we saw diagnosis happen and then it shut down again as they went into winter. Over the next couple Qs they're going back into summer and vaccinations are going out, so we do expect diagnosis to continue to start going back up.

Okay, thank you.

Hi, good morning. Thanks for taking my questions.

And I'll add my congratulations on the transition from Jonathan to Samira, congrats to both of you. A question that I had, a couple, but I wanted to start a bit with vaccinations.

I mean, it has come up several times. I was wondering if you have any comments on, for example, the efficacy of some of some vaccines that have been used, and even though people had been vaccinated, I mean, there were still waves and there were still shutdowns in Chile, for example.

Is there something that has been observed in the other geographies or not to date yet?

So one of the things is, we did, all of these countries are getting different types of vaccines. We did see early on that Chile went in and out of shutdown.

What they are now seeing is that some of the other vaccines, while they are efficacious, they may not be efficacious enough in preventing infection. They are still quite good in preventing serious infection and hospitalization.

And that's kind of the feedback that we're seeing. We saw that in Chile, we saw that in Uruguay as well, where cases continued to spike, but then they started to really come off as well.

These countries are continuing to monitor. So there's conversations that are happening in the U.S.

and Canada about their doses. Those same conversations are happening in markets like Chile and Uruguay where -- and other markets as well.

Okay, great thank you. That's very helpful.

The other question I wanted to ask is on the newly launched products, have they been launched in all the intended geographies? And it's just a question of brand them up or are any new countries that still have not been launched in yet?

Thanks so much for the questions Jeff, I'll take that question. So we do have a couple launches pending, so maybe I'll start there.

So we do expect to see Halaven and Lenvima approval in Colombia later this year. And we're also waiting for the final cadets review for in vaccine and we are bullish that we'll see a positive outcome there and look forward to launching those two products here in Canada.

So those are the pending launches. All the rest of the medicines have been launched in all jurisdictions where we can get an indication.

I would say and just to name them, so Nerlynx in Canada, Lenvima, Halaven in our LATAM countries pending Colombia. Trial started here in Canada is obviously a bit of a turnaround product.

referred to that as a launch because we assumed it and it's been responding beautifully to promotion here in Canada. So there are those pending launches.

But where we have launched, obviously, in a COVID environment, it has been a bit slow. Some of the uptake in some of those areas, but we're really seeing traction now as COVID starts to get under control.

That's great. Thanks, Jeff.

One more last question from me on Exelon sales, are they, are we to assume they directly go to EBITDA or is there a margin that needs to apply to that sales number?

Sure, there is a little bit of spend in the OpEx, but the number that we reported is net revenues, so that is going straight to gross margin.

Great, thank you. That's it from me.

Good morning. Thanks for taking my call and nice quarter.

I was just wondering if there's any seasonal strength in Q2 that perhaps didn't show up as pronounced last year in the early days of the pandemic?

Actually, no. I think what we -- really what's happening is, even though there wasn't really any seasonality in the Q2 of last year, a lot of what was happening in Q2 of last year was the total crisis that the whole planet was under with shutdown.

What we're seeing in this quarter is really about the treatment, but we're seeing growth in our products. We see the addition of Exelon.

And what's really driving in our infectious disease products is utilization in association with COVID infections and very busy ICUs.

Got it and can you just remind us, is there any seasonality in the GBT business just in general?

In general, there is a little bit similar to Canada and a little bit in Q4 and that's really around the Christmas season that we see where wholesalers and hospitals do like to stock up because of Christmas vacations. It's hard to tell right now between Q4 of 2019 and Q4 of 2020.

As we go in, we're going to continue to monitor and be careful. Just because of COVID a lot of that seasonality has been hard to measure.

Okay. And for Exelon, was it a full quarterly contribution?

Hi, Justin this is Amal. We closed May 26, so it was a five weeks of contribution during the quarter.

Okay, so we should see that to progress. Just in general, the adjusted EBITDA reported in the quarter, is that a good level to assume going throughout the remainder of the year?

So, Justin, it's really hard to guide because we are -- we're kind of still going through this crisis and the lumpiness that it drives to the top line as well as margin. If you look at our margin, it's also been swinging quite a bit and that's really dependent on product mix.

The one thing I can say is, our teams are working really hard. We are focused on continuing to execute on our launches and manage through COVID.

We do expect some of our expenses to rise over the next Qs as we start to go back to field and open things like travel, but we're driven to profitability as well. And the other thing that that I'd like to remind you guys is that we are, like you said, going to be getting full quarter contribution behind Exelon.

Understood. And my last question is just on the ERP project and how that implementation is going and any timeline to completion?

So we continue to progress and as last discussed, like it's going out into multiple phases on a country-by-country basis. So the last guidance we gave was about nine to 12 months and we're still in the same time zone by mid of next year we should be substantially completed.

Okay, thank you for taking my questions.

Thank you for your confidence in the Knight team and for joining our Q2 2021 call. Please stay healthy and stay safe and hope to see you soon.