Good morning, ladies and gentlemen. My name is James, and I will be your operator today. Welcome to the Knight Therapeutics, Inc., 2020 third quarter financial results conference call. Before turning the call over to Jonathan Ross Goodman, CEO of Knight, listeners are reminded that portion of today's discussion may, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. The company considers the assumptions on which these forward-looking statements are based to be reasonable at the time they were prepared, cautions that these assumptions regarding the future event, many of which are beyond the control of the company and its subsidiaries, may ultimately prove to be incorrect. The company disclaims any intention or obligation to update or revise any forward-looking statement, whether a result of new information, future events, except as required by law.
We would also like to remind you, questions during today's call will be taken from analysts only. Should there be any further questions, please contact Knight's Investor Relations Department via email to info@goodknight.com, info@knighttx.com, or via phone at 514-678-8930. I would like to remind everyone that this call is being recorded today, November 13th, 2020. I would now like to turn the meeting over to your host today for today's call, Jonathan Ross Goodman. Please go ahead, Mr. Goodman.
Good morning, everyone. Welcome to Knight Therapeutics' third quarter 2020 conference call. I am joined on today's call with 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 was complicated by COVID-19. In addition, we remain focused on execution of business development initiatives and license and acquire 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'll provide an update on our products, which have continued to advance in 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 Health 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. 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 January 1, 2021. Moving on to corporate updates.
On July 10th, we announced the acceptance by the TSX of our notice of intention to make a normal course issuer bid, which commenced on July 14th, 2020. Under this NCIB, we can purchase up to 10.9 million common shares over the next 12 months. During the quarter, Knight has purchased just under 800,000 common shares for an aggregate cash consideration of approximately CAD 4.8 million. I'm now going to turn the call over to Amal for updates on BD activities.
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 29th, 2019, giving Knight controlling interest. On July 15, 2020, following approval by the Securities and Exchange Commission of Brazil, we launched a 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 14th.
Following the completion of the auction, 99.6% of the public BDR holders tendered their BDRs at the alternative offer price of BRL 1,040 per BDR in cash. Knight paid an aggregate purchase price of BRL 538 million, or $171 million, and acquired all the outstanding BDRs. As of October 3rd, 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 an 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 30th, 2020, we reported revenues of CAD 45.2 million, an increase of CAD 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 CAD 40.6 million of incremental revenues. GBT generated revenues of CAD 16 million in Brazil, CAD 8.5 million in Argentina, CAD 7.7 million in Colombia, and CAD 8.4 million in the rest of Latin America. For the quarter ended September 30th, 2020, we reported a gross margin of CAD 19.5 million, or 43%, compared to CAD 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 CAD 1.8 million due to the impact of COVID-19 on certain new product launches. Our operating expenses for the quarter increased by CAD 14.8 million over Q3 2019. The variance is explained by the consolidation of GBT's results, which accounted for CAD 13 million of incremental expenses. The remainder of the increase is explained by CAD 3.5 million of expenses related to the unified tender offer completed in Q3 2020, compared to CAD 2.5 million of expenses related to the GBT transaction incurred in Q3 last year.
The interest earned on cash marketable securities and strategic loans was CAD 3.2 million, a decrease of CAD 2.9 million, or 47%, compared to the third quarter of 2020 due to an increase in interest rates as well as our cash marketable securities and loan receivable balances. We recorded interest expense for the quarter of just above CAD 800,000 on our bank loans.
Adjusted earnings for the quarter was CAD 6.6 million, or 18%, or CAD 1 million compared to the same quarter last year, mainly due to GBT's incremental adjusted earnings, which is partially offset by a decrease in interest income. Moving on to gains and losses that are not reflected in adjusted earnings. For the quarter, we recorded a net gain on financial assets measured at fair value through profit or loss of CAD 12.9 million, mainly due to gains on our strategic fund investments. I will now turn the call back to Samira.
Thank you, Arvind. Since the recent outbreak of coronavirus or COVID-19, our focus has been on ensuring the continuity of product supply 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 equivalents, and marketable securities of CAD 348 million. From this strong cash position, we continue to execute on the integration of [inaudible ]and on 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. Now I'd like to open the call up to questions. Operator?
Thank you. Before we begin, may I please remind you, questions during today's call will be taken from analysts only. Should there be any further questions, please contact Knight's investor relations department via email to info@goodknight.com, info@knighttx.com, or via phone at 514-678-8930. If you'd like to ask a question, please press star followed by the number one on your telephone keypad. If you're using a speakerphone, please lift your handset before pressing any key. Our first question comes from the line of David Novak with Raymond James. Go ahead, please, your line is open.
Good morning, folks. Thanks very much for taking my questions. Just two from 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. Over the last year, one of the things which 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. When you look at what we have reported, we did report under IAS 29, which is hyperinflation accounting, as well as under historical accounting. One of the things that you may have noted is that at the end of last year, a new government was elected. 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. One of the things due to COVID that they have done is they've put a hiring freeze into legislation, and we continue to work through that. As far as our business is concerned, the business continues to operate. We've been submitting our bids. We've continued to sell, and we're executing.
Great. Thanks so much. 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 pCPA on potential public coverage following that sNDS approval?
The team is continuing to assess based on not just this NDS, but also the competitive market, what else will be out there. We're also looking to see if there is additional data that Puma 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.
Our next question comes from the line of Endri Leno with National Bank. Go ahead, please. Your line is open.
Hi. Good morning. Thanks for taking my questions. A couple from me, but 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 assuming be it similar currency excluding FX or volume wise? 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. I'll turn it over to Arvind to answer more on the questions of currency and how it's happening.
Thanks for the question. What I can tell you in terms of currencies, we continue to see further depreciation of the LatAm currency across all the countries. This has been further accentuated with COVID-19. Even in this year's numbers, we see a decline in currency for Q3 versus Q1 and Q2 of this year. 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 concern. That also has had an impact on us.
Okay. Thank you. Looking forward, and let's say, pandemic aside for a second, what would be a good run rate for the LatAm business?
Going forward.
Sorry. Go ahead, Arvind.
For me, going forward, given the pandemic and also how FX is moving in LatAm, and also trying to figure out how the wholesaler will be making their buying in the next one year because of pandemic, it is something that is really hard to forecast at this point.
Okay. Thanks. The next question, are there any new products that you're planning to launch, then, in Latin America? How much of it would you scale back because of the pandemic?
That's a great question. 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. That's potentially a launch, I'm going to say 2022. There's also AmBisome 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. We're redirecting 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. That's not just Knight or CanLatAm, that is a global issue.
Okay. Thank you. One more from me before I jump in the queue. Can you just give us a timeline on how do you think the integration of the LatAm assets progresses in terms of will it be done by mid-2021, end of 2021, earlier than that? Thanks.
That's a great question. Depending on the issue, certain things are moving faster than as fast as we would like. Certain 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. As I mentioned, for example, due to pandemic, we have legislation issues that prevent us from making certain changes. We're working through them. Depending on the issue, and one of the things I kind of said before was we were looking at things like systems and processes, and those continue to advance. Depending on the system or the process, the system will launch Q1, Q2, Q4, or phase in through until the end of the year. Everything is continuing to move forward.
Okay. We'll say by mid-next year, you should have made substantial progress. Is that a fair statement?
On quite a few things, not on everything.
Okay. Thank you.
Our next question comes from the line of Tania Gonsalves with CGF. Go ahead, please. Your line is open.
Good morning, guys. Thanks for taking my questions. 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. 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. For Abraxane in Mexico, 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, or the other agreements, I should say, we don't provide specific terms per agreement. 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 renewals of these agreements are going to be part of normal course. Different agreements come up for renewals at 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?
IMVEXXY and BIJUVA are now going to start going through the reimbursement process. Given the type of products, we do expect 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. 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. We will structure around the potential and who else is there. Yeah.
Okay. One last one for me. For AmBisome, the Brazil market, are you able to tell us what proportion of revenue that makes up of GBT, and if there were any material changes to that contract?
Sure. We haven't disclosed revenue by product, both from a partnership confidentiality as well as market intelligence. The terms, it's kind of what we had guided to before. We knew that the terms would be different. We don't disclose the terms either. Amal, I'll turn it over you to add some more.
Yeah, I mean, the only thing I would add, Tania, is that I think the new terms are in line with what we were expecting when we were doing the transaction.
Okay, great. That's all for me. Thank you very much.
Again, as a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from the line of Justin Keywood with Stifel. Go ahead, please. Your line is open.
Good morning, 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 CAD 400 million in cash. 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, the time is always the right time to look at opportunities in a sense 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 a good deal flow. We continue to work very hard on different opportunities.
Okay. 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. Again, as you can imagine, this is not specific to Knight. I think everyone has been adapting to switching all to virtual.
Okay. 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. From an operational standpoint, the way we're looking at hedging our risk is really by the debt we have in the local country. 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. We're in the process of looking at hedging all debt in different countries and different currencies.
Just so I understand, because I believe the debt's pretty low in the overall business. Would that be enough to hedge against the currency fluctuations?
Yeah. We do have the debt level is around BRL 160 million, which is for around CAD 40 million, which is more than a couple of years of the current adjusted earnings. We do have some capacity 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.
Our next question comes from the line of Douglas Miehm with RBC Capital Markets. Go ahead, please. Your line is open.
Thank you. Good morning, everyone. First question just has to do with the sequential decline in revenues relative to what we saw in Q2. Perhaps you could put it in the frame of what's going on on 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 the 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 he'll walk you through kind of the various reasons why we did have a sequential decline.
Hi. 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. 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 dollar. Q3 was another hit compared to Q2, and it's an even bigger hit when you look at it compared to Q1. That's one of the reasons.
As I mentioned also earlier, the other trend we've been seeing in the past during 2020 is the inventory level management of our wholesalers, and most specifically in Brazil. We do see them as trying to manage their inventory that they hold. They're really managing how much they buy from us and trying to manage their cash flow and liquidity because of the COVID situation.
Yeah.
Go-
I think that-
Sorry. Go ahead.
I think that makes a lot of sense. I guess my question is, those are a result of what I think what's going on on the ground with respect to COVID, both foreign exchange and how they're approaching inventory levels. What I was hoping is to get a better viewpoint of what's going on there with respect to the virus and the impact on the economies.
Right. Okay. There's a couple of things. One of the big things for our business is that our products are high specialty. 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 force is just not able to be seeing physicians, and it's just not as effective. Whether it's here or there, rep and field force effectiveness has gone down by, let's say, 40%-50%. When it comes to diagnoses, 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 CRYSVITA, HALAVEN, LENVIMA, throughout our countries, are in launch phase.
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. That's another thing that we're facing, is that they're not trying something new. One of the things that our teams have done is really try and adjust and get clinical experience happening and get physicians trying. 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? What's your thinking on that?
We're going to be opportunistic with the NCIB. One of the things that Amal was mentioning, her team is super busy when it comes to business development, 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. We're going to remain opportunistic with the NCIB and make sure that we have powder to execute.
Okay. Thank you.
Again, as a reminder, if you'd like to ask a question, please press star then one on your telephone keypad. Our next question comes from the line of Endri Leno with National Bank. Go ahead, please. Your line is open.
Hi. A couple of follow-ups from me. The first one I wanted to ask, I guess, Arvind, we're talking about the inventory management and how that is kind of shifting and changing because of the COVID. Do you think, or what discussions have you had with the wholesalers in terms of when are these inventory level 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?
Thank you for the question. I mean, we've seen dramatic drops in the levels over the last couple of months, again, it's hard to predict how they will be buying for the rest of the year and into next year. I would not expect a further dramatic decline of levels from this point.
Okay. Thank you. More of a general kind of outlook question. Samira, you've mentioned before that as Latin American countries, they get into recessions, 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. Do those things still hold true, number one? Number two, how has that picture changed from, let's say, six months ago to now?
Each of the markets has responded very differently to pandemic. Right now, the certain take a major market like Brazil, they have seen some decline in employment, but not a lot. That's also a company that has stayed pretty much open throughout pandemic. I think whether it's our markets or kind of globally, it's really too early to tell 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're 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, it's still too early to tell.
Okay. Thank you. That's it from me.
There are no further questions at this time. I'd like to turn the call back over to Mr. Goodman for some closing remarks.
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.
Ladies and gentlemen, this does conclude today's conference call. Thank you for joining. You may now disconnect.