Good morning, everyone, and welcome to Knight Therapeutics' Q3 2021 conference call. I'm joined today, on today's call with Amal Khoury, our Chief Business Officer, Arvind Utchanah, our Chief Financial Officer, and Jeff Martens, our Global VP of Commercial. I will now walk you through some of our corporate updates. We are pleased to announce that for the second consecutive quarter, Knight achieved record quarterly results despite the ongoing challenges posed by the pandemic. In fact, similar to last quarter, it is due to the pandemic that we have seen an increase in our sales of our infectious disease products that were used extensively by physicians to save lives. In addition to the great results, we also had some significant changes to our management team last quarter. Not just myself and Jonathan, but more importantly, the addition of three seasoned executives.
Monica Percario joined Knight in September as Global VP of Scientific Affairs with nearly 30 years of experience in the pharmaceutical industry. Monica joins us after a successful career at Sanofi in Brazil, where she had been working since 2008, most recently as head of regulatory and center of expertise for LatAm. At Sanofi, she also participated in the integration of Aventis with Medley, a Brazilian branded generic pharmaceutical company, and developed a strong expertise in the generics market as well as mature products. Further, she implemented the regional regulatory functions with teams across Latin America. Prior to Sanofi, Monica worked in various regulatory roles at Farmasa, now a part of Hypera Pharma. During her time there, she created the pharmacovigilance department and participated in clinical research studies in the development of biologic products.
Daniela Marino joined us as Global VP of Legal and Compliance with over 20 years of experience in the legal field and the pharma industry. Daniela was previously at Bausch Health, formerly Valeant, in Brazil, where she had been working since 2013. Most recently as Head of Legal and Compliance for Latin America. At Bausch, she was responsible for all activities carried out by the Legal and Compliance department in Latin America, including supporting the various business units throughout Latin, LatAm, as well as providing transaction support to both legal and corporate teams. In addition, she was responsible for managing all activities related to the legal department and the compliance area. Prior to Bausch, Daniela was at a specialty law firm in São Paulo, where she advised clients on mergers and acquisitions, corporate reorganizations, and deal negotiations. Finally, Susan Emblem joined Knight as Global VP of Human Resources.
Susan worked for over 20 years at Paladin Labs, where she held a number of leadership roles, including vice president of HR and corporate communications. In fact, Susan played a key role in the integration of Paladin into Endo. Monica and Daniela are based in São Paulo, and Susan is based in Montreal. We also continued to execute on expanding our portfolio through our business development activities, and we closed a distribution agreement with Incyte for two innovative products. Turning now to the NCIB. We launched a 2021 NCIB on July 14, 2021, and under this NCIB, we can purchase for cancellation up to 10.2 million shares.
During the quarter, we purchased approximately CAD 3 million common shares for an aggregate cash consideration of CAD 15.3 million at an average share price of CAD 5.18 per share. Subsequent to the quarter, Knight has purchased an additional 1 million common shares for an aggregate cash consideration of CAD 5.3 million or CAD 5.21 per share. I will now turn the call over to Jeff to provide more details on our product results.
Thank you, Samira. 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 increased by CAD 27.4 million or 62% during the quarter versus Q3 last year. The growth in revenues is driven by an incremental demand estimated to be between CAD 9.2 million and CAD 11.5 million, primarily due to our infectious disease products that treat invasive fungal infections associated with COVID-19. Of this amount, we estimate that approximately CAD 3.2 million to CAD 4.2 million were not utilized during the nine-month period. In addition, we had an increase of CAD 6 million in net revenues related to the growth of our recently launched products and CAD 9.9 million from the addition of Exelon.
Overall, the remainder of the year will remain focused on the execution and acceleration of our launches in our infectious disease portfolio and in our oncology portfolio, as well as for the commercial efforts behind Exelon. With vaccination rates improving in many of our territories, we have started to cautiously return to the field. I will now turn the call over to Arvind to go over 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 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, but to include costs related to leases. Adjusted EBITDA excludes acquisition costs and non-recurring expenses. In addition, constant currency is also a non-GAAP measure used to exclude for 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.
As Jeff already mentioned, we achieved record revenues of $73.3 million, an increase of $27.4 million or 62% on a constant currency basis, partially due to increased demand for our infectious diseases portfolio as a result of the pandemic. As for gross margin, we reported $37.8 million or 51% of revenues, compared to $19.5 million or 43% 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 renegotiation of certain license agreements and the depreciation of the LATAM currencies. Excluding the impact of hyperinflation, the gross margin would be 54% for the quarter.
Our total ex-operating expenses of CAD 22.5 million for the Q3 increased by CAD 1 million compared to the same period last year. Excluding the non-recurring costs, such as the unified tender costs incurred in the Q3 of 2020, the increase was CAD 5 million. The increase is mainly due to an increase in variable costs such as logistics expenses, variable compensation, and an increase in medical and marketing initiatives on the new product launches as well as Exelon. Moving on to EBITDA. The EBITDA for the quarter was CAD 17.3 million compared to a negative EBITDA of CAD 700,000 on a constant currency basis in the Q3 of last year.
Adjusted EBITDA was CAD 17.3 million for the quarter, compared to an adjusted EBITDA of CAD 3.7 million on a constant currency basis in the same period last year. The increase of CAD 13.6 million or 369% was mainly driven by the previously mentioned increase in gross margin, partially offset by the higher operating expenses. Now moving on to certain items that are not reflected in our adjusted EBITDA. During the quarter, we recorded CAD 21.3 million of net loss on financial assets measured at fair value through profit or loss, which is mainly coming from our strategic fund investments. The unrealized loss in the quarter was mainly driven by Singular Genomics Systems, a public company held by Domain, whose share price significantly decreased during the quarter.
On a life-to-date basis, Knight has recorded an unrealized gain of CAD 12.9 million on SGS. Furthermore, the NEA-MedImmune II investment fund managed by Sectoral was liquidated in the Q3 of 2021, following the sale of the shares of Atea Pharmaceuticals, Inc. We have realized a life-to-date net gain of approximately CAD 9.6 million in connection with Atea. Despite the unrealized loss on financial assets recorded in the Q3 of 2021, we have recorded a net gain on financial assets of CAD 16.6 million for the nine-month period ended September 30, 2021. The net gain was driven by unrealized as well as realized gains on our strategic fund investments.
Finally, Knight generated cash inflow from operations of CAD 10.3 million for the Q4 of 2021, and $40 million for the nine-month period ended September 30, 2021. The cash flow from operations generated is driven by our operating results. I will now turn the call over to Amal to provide an update on business development activities.
Thank you, Arvind. As Samira previously mentioned, during the quarter, we entered into an exclusive supply and distribution agreement with Incyte for Latin America for the rights to tafasitamab, sold as Monjuvi in the US and Minjuvi in Europe, and pemigatinib, marketed as Pemazyre in the US, Europe and Japan. Tafasitamab is approved in combination with lenalidomide in the US and Europe for the treatment of adult patients with relapsed or refractory diffuse large B-cell lymphoma who are not eligible for stem cell transplant. DLBCL is the most common type of non-Hodgkin lymphoma, and there are approximately 12,000-16,000 new cases each year in Latin America.
Pemigatinib is approved in the U.S., Europe, and Japan for the treatment of adult patients with locally advanced or metastatic cholangiocarcinoma with a fibroblast growth factor receptor two or FGFR2 fusion or rearrangement that have progressed after at least one prior line of systemic therapy. Cholangiocarcinoma is the most common cancer of the bile duct. FGFR2 fusions or rearrangements have been observed in 10%-16% of patients with intrahepatic cholangiocarcinoma, whereas the incidence in patients with extrahepatic cholangiocarcinoma is rare. There are approximately 4,000-6,000 new cases of intrahepatic cholangiocarcinoma each year in Latin America. We expect to file both products for regulatory approval in key LatAm markets in the second half of 2022. In addition, our team has been actively working on onboarding Exelon, which we acquired in the Q2 of this year.
We also 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 and licensing innovative pipeline assets and developing our brand and generics portfolio. I will now turn the call back to Samira for concluding remarks.
Thank you, Amal. Looking forward, we remain committed to continuing and building a leading Pan-American ex-US specialty pharma company. We have over CAD 155 million in cash equivalents, and marketable securities to continue to execute on our strategy to in-license and acquire innovative pharmaceuticals, as well as developing our brand and generic portfolio. Thank you for your support and confidence in the Knight team. This concludes our formal remarks. I would now like to turn the call over to questions. Over to you, Leanne.
Good morning, Samira and everyone else. First question is, can you explain what's meant by CAD 3.2 million-CAD 4.2 million not utilized during the nine months? Is that excess stock that was built up in the channel inventory?
That's pretty much it. One of the issues there was quite a pandemic crisis in some of these major countries, especially Brazil and to a certain extent in Mexico. What we were tracking was everybody was trying to make sure that inventory was available. What we saw kind of closer to the end of the quarter, to the best that we could, is that there is probably somewhere between CAD 3 million-CAD 4 million of inventory that didn't end up being utilized because the cases started to come down and hospitalizations started to come down a bit.
Was that mostly infectious disease products?
That's it, yes.
Okay. Another question on the infectious disease products. The revenues are holding up very well, despite the fact that case counts, as you said, were down, people are getting vaccinated. You've got two things going on here, the launch of new products and COVID. Coming out of COVID, do you anticipate that franchise will be at a substantially higher level than it was pre-COVID, even once COVID goes away, because of the launch of the new products and, you know, maybe better familiarity with your products and gaining market share?
It's a little bit multifactorial. There's two real products in this category. One is Ambisome and the second is CRESEMBA. Ambisome is a well-established brand, and it's used for different kinds of fungal infections that come after multiple types of utilization. Whether it's bone marrow transplant, whether it's oncology patients that are immunocompromised that may develop a fungal infection. The second one is CRESEMBA, which is in early launch phase. During COVID, a lot of the surgeries and treatments that would normally happen that would drive utilization of Ambisome didn't happen. CRESEMBA was being launched during COVID. Both of those brands stumbled a little bit because of COVID. The last few months, we've been seeing a lot of utilization. What we do expect is that there is familiarity now.
It's really, in the case of Ambisome, treatments to start going back up, whether it's oncology, bone marrow transplant, or whatever else it can be used for. In the case of CRESEMBA, our commercial teams capitalizing on that experience and continuing to reinforce that message.
Okay.
Jeff, I don't know if you want to add something else.
Well, maybe the only thing I would add is because of the inventory build, you can expect maybe a softening in Q4 because of that excess inventory you asked about earlier. Other than that, yes, there's been some positive experience, especially with CRESEMBA in the new launch. We have a plan of action.
Sorry, is it CRESEMBA only that is used in COVID patients or AmBisome as well?
Both.
Both. Okay.
Just kind of they're both for the treatment of invasive fungal infections. One has a little bit of a broader indication, but it really depends on what fungal infection has been diagnosed. In the case of AmBisome, if they don't have time to figure it out, they're able to use AmBisome.
Okay. Do you see sales at the end user level? Like, the infection rates have dropped off substantially in Brazil. Are you not only seeing drawdown of inventory, but less use of the products, or is their rate of use holding up?
The use in relation to COVID is coming.
Yeah
down, obviously.
Yeah.
The issue is that that's not what they were designed for. They were designed for fungal infections that could come for whatever reason, right?
Yeah.
A patient who is immunocompromised. The issue with that is that kind of utilization rate we expect to pick up as those treatments start to happen. What you usually see is a few months of gap between the treatment and the need for a fungal infection product.
Okay, thank you.
Hi. Good morning, folks. Thanks for taking my questions. Just two quick ones. Starting on the top line here, looking at revenues by jurisdiction, you know, you showed really healthy growth across your key geographies, but Brazil really sticks out here at almost 95% growth year-over-year. Could you share any comments on the uniqueness of that particular market?
Sure. One of the issues is really related to COVID. One of the bigger products in the Brazilian market is AmBisome. Like I mentioned earlier, AmBisome took a big hit last year because it was being utilized for patients who were being treated for in oncology, in hematology, whatever the case may be. Because those treatments weren't happening, sales of AmBisome had come down. In this quarter, what you're seeing and CRESEMBA was in a very early launch phase. What you see in this quarter on a year-over-year basis is both of those products were used heavily by physicians because COVID infections were so high, hospitalizations were high, and fungal infections with that, with patients in ICUs happened.
As Jeff said, what we expect is that Q4, there will be softness on this, but we expect that as the world, and especially Brazil, returns to normal, these brands will start to pick back up in the long term.
Got it. Is the majority of inventory for CRESEMBA and AmBisome that's moving through the channel, it's being utilized in Brazil versus your other sort of key jurisdictions? Is that sort of what I'm understanding here?
We have AmBisome primarily in Brazil. We have CRESEMBA throughout our region. That one is kind of a little bit all over the place.
Oh, okay. Maybe more specifically of the, you know, $15-$16 million growth that we saw in the quarter in Brazil, could you sort of paint a relative picture as to what that would be from CRESEMBA or AmBisome?
Yeah. I don't have it off the top of my head, but there is also Exelon that's in Brazil. I can get that to you later.
Okay, no worries. Just lastly, I don't mean to beat a dead horse here, but based on, you know, what you're seeing on the demand side and your own projections. The inventory that's currently sitting in the channel for CRESEMBA and AmBisome is that likely to destock in Q4? I guess what would be helpful here is to understand the probability-
Sure
of any potential inventory write-downs or anything like that going forward.
Sure. We don't expect a return of this inventory. We do expect all of it to be utilized in the queue. What we also expect in the queue, because this is Q4 and there's usually a bit of seasonality of high purchases in advance of the holiday season, some of that will be, like, some of that kind of downturn of this 3.2 will be offset by the seasonality. We don't expect any write-downs or returns.
Excellent. Great. Thank you so much. I will hop back in the queue.
Hi, good morning. Thanks for taking my call. Just on the impact of the infectious disease products related to COVID, are you able to quantify what that did to the adjusted EBITDA in the quarter?
Like, you see what our margins are, right? That would have been dropping to the, it's kind of the similar rate as the margin.
Sorry, the consolidated EBITDA margin or the gross margin?
The gross margin.
Okay. All right. That's helpful. Then as we look into Q4, like, just to get an idea of the, you know, softness for those two infectious disease products, should we assume basically zero contribution just given the extra inventory in the channel? Or do you still anticipate some, you know, seasonal purchasing ahead of the holiday season?
We do. We do expect. This isn't a quarter's worth of inventory. I'm going to say this is normally somewhere between 6-10 weeks of inventory that's here, the CAD 3 million-CAD 4 million. That's kind of the estimate of what we have. The rest of it is that there will be a little bit of pickup because of the holiday season.
Okay, understood. A few moving parts here. I'm wondering, just as we look into next year, you know, obviously, there's some new drug launches and some variability with the infectious disease products, but do you have any broad target goals for organic growth in the business?
We're working on that right now. As we come out of COVID, a lot of the teams are kind of working through what the uptakes would be, and we'll be providing guidance when we announce Q4.
Okay, thanks. Those are my questions. Good to see the operating leverage in the business.
Hi, guys. Good morning. Thank you for taking my questions. I'm just calling in for Andrew. I know you guys touched upon the infectious disease products quite a bit already. Outside of that, looking at oncology, hematology, and the other products, now with reopenings and things coming back to a little bit of normalized levels in LATAM, how are you seeing those other products trending?
I'm going to turn that over to Jeff.
Thanks for the question, Steven. Our oncology products in both oncology and heme had a year-over-year growth of 20% in the quarter. These launches or these drugs include VIDAZA, HALAVEN, TRELSTAR, NERLYNX and some of our heme onc branded generics medicines as well. COVID did negatively impact some of the diagnosis rates. I'd have to say that this impact probably varies widely depending on the country, the vaccination rate situation that they were in. Overall, I think I'm encouraged that we showed this 20% growth even during a pandemic.
Okay, [crosstalk]
Just to add, just kind of to answer a bit more your question. What we are seeing is that if you take, for example, a market like Canada where we have significant vaccinations, the pace of return is there, but it's still pretty slow. We expect that that's going to continue into the pace will be a slow uptake into the first half of the year. You have to remember markets like Brazil, Argentina, Chile, they're going into their summer months and summer vacations. There is a return, but it's slow in pace.
Got it. That's great. My next one here, just how have you seen the new product launches pick up that you've done recently? Do you have any more significant launches coming up in the near future?
Sure. I'm going to answer a little bit and then I'll ask Jeff to add to it. The launches that we have coming up in the first half of next year are LENVIMA and Halaven in Colombia. Those products are pending approval right now. We are in launch phase on those two products in a couple of other markets, including like Chile and Argentina.
In Canada, we have the launch of Trelstar and Nerlynx. The issue that we have is we don't disclose revenue by product, and in the case of the LatAm markets, the third party like IMS or IQVIA data is not as readily available. But we do have some info on the Canadian products.
Yeah. Maybe the only thing I'd add is, yeah, I think we already mentioned that CAD 6 million on the Q was related to these launches. And those drugs, yes. Nerlynx, CRESEMBA, LENVIMA, HALAVEN, TRELSTAR, and there's also some BGX launches in there as well. Maybe the only other pending launches that I want to comment on was IMVEXXY and BIJUVA in Canada. We're currently evaluating the CADTH situation, and we'll evaluate launch for those two medicines, hopefully in next year.
Okay, perfect. That's great color. Just my last one here. I know you've mentioned in the past that agreements are renewed throughout the year. Do you have any other ones coming up soon that are worth highlighting?
Hi, Steven, this is Amal. I mean, agreement renewals are a normal course for this business. You may have seen, or you will see that we disclose that we signed a new agreement with Bristol Myers Squibb in the quarter. This has been a long-standing relationship that we have had, and this was a renewal that we signed in the quarter for ABRAXANE and Vidaza in Brazil.
Okay, perfect. That's all my questions. Thanks.
Morning, everyone. Thanks for taking the question. I wanted to switch a little over to Exelon and just wanted to ask if there's been progress on changing the Exelon kind of registration transfers kind of from Novartis to Knight, and how much, you know, of the Exelon revenues at the moment are kind of the profit transfers versus, you know, revenue and sales from the products kind of fully from you guys.
Hi, Scott, this is Amal. Thank you for the question. For Exelon, we're still working on executing the transfers with Novartis. We have started to file for MA transfers, but we haven't had any MA transfer already. We expect the first to occur in the first half of 2022. So far, the numbers that you're seeing are really the profit transfer that we're booking.
Got it. That's great. Just one last one. In terms of, you know, on the ground, you know, physicians' offices and marketing, you know, conferences and things like that, how are things opening up in the various kind of LatAm countries? You're obviously getting growth in some of those launch products, but just a bit of color in terms of kind of how things are working on the ground.
Sure. It really depends on the country and their vaccination rate. Things are picking up. Give you an example. For example, in Canada, depending on the therapeutic area, some physicians continue to see patients through telemedicine, and they're seeing their reps through telemedicine as well. In markets like Chile and Brazil, things are opening up. Most physicians are starting to see patients. Markets like Colombia, it's somewhere in the middle right now.
Got it. No, that's great. Thank you very much.
Yeah. Good morning. I think both of these questions will be mostly for Amal, but, Amal, when I look at the revenues associated with the Exelon, they were a bit stronger than we'd anticipated. Is there any seasonality to that product or anything that occurred with Exelon during the quarter that helped out the revenues or profit share?
Sure. It's not so much seasonality, more like buying patterns, because it's not all kind of retail. There are some institutional buying that happened. That's why you see the numbers. I think overall, we haven't changed really our view of the product. We're still expecting the product to remain flattish to the levels that we acquired at. It's kind of in the mid CAD 50 million range on an annual basis.
Just generally, as you look at other opportunities in various markets that you're looking at right now, can you tell us what that pipeline looks like, if it's changed in regard over the last quarter or two?
The pipeline continues to be quite full. The team is quite busy across. If you look at our growth strategies, we've kind of outlined really three prongs to increase our product portfolio. In terms of acquisitions, looking at products or portfolios or companies with existing sales, in licensing of innovative assets and on the BGX side, development and in licensing as well. Across all three, the team is quite active and deal flow continues to be quite strong across the territory.
Okay, great. Thanks very much.
Thanks for taking the follow-up. I may have missed it, but when you signed the new agreement for Abraxane, did you say your economics got a little less than they were previously, or do things stay the same?
We didn't announce the terms, and we didn't comment on the terms, but there is nothing materially different.
Okay. What percentage of your LATAM revenues is represented by licensed products versus products that you own?
Actually, I know that our brand of generics were about 1/3 of our business. It's shifting with Exelon. That's the issue, so I don't have the number. It used to be about 30/70, but that's without Exelon.
I just wanted to go back to CRESEMBA and Vidaza once more quickly. Would you say the markets that they were previously used in are bigger than the COVID market, or is COVID a bigger market than where they were previously used? Or they're still used, but to a lesser extent?
The-
Maybe I'll hop in and answer this, then I'll pass it back to you, Samira, if there's anything you'd like to add. The COVID market is an in and out. It's a flash in the pan. You'll see big swings on a quarter. The baseline business, which is fungal infections caused by all kinds of reasons, right? Including bone marrow transplantation, hematology patients that are immune-compromised, oncology patients that are immune-compromised. That base business over the long term is far more sustainable in larger size. I don't know if that helps answer the question. Samira, anything to add?
No, that's it.
Okay. Okay. Thank you.
Thank you, Leanne. Thank you for joining our Q3 2021 conference call and for the confidence in the Knight team. We'll speak soon.