Good morning, ladies and gentlemen. My name is Michelle, and I will be your operator today. Welcome to Knight Therapeutics Inc 2020 second quarter final results conference call. Before turning the call over to Jonathan Ross Goodman, CEO of Knight, listeners are reminded that portions 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 but cautions that these assumptions regarding the future events, 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 statements, 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@knighttx.com. Again, that is info@knighttx.com or via phone at 514-678-8930. I would like to remind everyone that this call is being recorded today, August 13th, 2020. I would now like to turn the meeting to your host for today's call, Jonathan Ross Goodman. Please go ahead, Mr. Goodman.
Good morning, everyone, welcome to Knight Therapeutics second quarter 2020 conference call. I am joined on today's call with Samira Sakhia, our Chief Operating Officer, Amal Khouri, our VP of Business Development, and Arvind Utchanah, our Chief Financial Officer. Despite the setbacks due to COVID-19, we continue to advance our acquisition of Grupo Biotoscana with the launch of our tender offer to buy the remaining 48.8% of GBT. We've advanced our commercial presence and product pipeline with the regulatory approval of IBSRELA in Canada, Lenvima in Ecuador, and the Canadian in-licensing and onboarding of Trelstar. I will now turn the call over to Samira, who will walk through the development of our portfolio and corporate updates. Samira?
Thank you, Jonathan. Good morning, everyone. I'll provide an update on our products, which has continued to advance in the quarter. As announced in January, Knight has partnered with Daiichi Sankyo in an exclusive agreement that grants Knight the Canadian rights to commercialize triptorelin, marketed as Trelstar, an LHRH agonist for the treatment of prostate cancer. This quarter, with the transfer of the marketing authorization, Knight took over the commercial activities of Trelstar in Canada. In addition, as we discussed in our last call, in April 2020, Knight obtained Health Canada's approval for IBSRELA or tenapanor for the treatment of irritable bowel syndrome with constipation. We expect to be launching IBSRELA in early 2021.
In addition, on June 30th, 2020, our partner, Ardelyx, announced that it had submitted a new drug application to the U.S. Food and Drug Administration for the control of serum phosphorus in adult patients with chronic kidney disease on dialysis. 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. Lenvima is sold by GBT under an exclusive license agreement with Eisai. Moving on to our corporate update. During the second quarter, we announced that we had completed the 2019 NCIB and had purchased a total of 12,053,692 common shares at an an average price of CAD 7.14 per share.
Subsequent to the quarter on July 10th, we announced the acceptance by the Toronto Stock Exchange of the company's notice of intention to make a normal course issuer bid, which commenced on July 14th, 2020. Under the 2020 NCIB, Knight may purchase for cancellation up to 10.8 million shares over the next 12 months. As of today, Knight has not purchased any shares under the 2020 NCIB. I'm now going to turn the call over to Amal to update on BD activities.
Thank you, Samira, and good morning, everyone. As we previously announced, the acquisition of 100% of Grupo Biotoscana was by way of a two-step transaction. The first step was the acquisition of 51.2% majority stake through a private transaction that we closed on November 29th, 2019, and that gave Knight a controlling interest stake. In December of last year, we started the process for the second step, which is the mandatory tender offer for the minority BDR holders. On July 15th, 2020, following approval by the Brazilian Securities and Exchange Commission, we launched the tender offer to acquire the remaining 48.8% of GBT. In accordance with the offer, BDR holders are eligible to tender their BDRs at the auction, which will take place tomorrow, August 14th.
At the end of the auction, Knight, through its wholly owned subsidiary, will take up all BDRs tendered at the auction and will settle within two business days. If at least 67% of the participating BDRs to the auction are tendered, all as further described in the offer notice, Knight will discontinue the BDR program and delist GBT. If after the tender, the remaining BDRs represent less than 5% of the total shares outstanding, which include both BDRs and common shares, then Knight will proceed with a squeeze-out process, all as outlined in the offer notice. I will now turn the call over to Arvind to go over the financial results for the quarter.
Thank you, Amal. In the course of this conference call, I will refer to Knight adjusted earnings, which is a non-IFRS measure. Knight defines adjusted earnings as operating loss or income, adjusted to exclude amortization and impairment of intangible assets, depreciation, acquisition costs, and non-recurring expenses incurred, but includes net interest income earned and costs related. In addition, the adjusted earnings do not reflect the portion of GBT's earning attributable to the non-controlling interest. I am pleased to report that for the quarter ended June 30th, 2020, we reported revenues of CAD 53.3 million, an increase of CAD 50 million or 1,562% compared to the same period last year. The growth in revenues is explained by the consolidation of GBT's financial results, which accounted for CAD 48.9 million of incremental revenues.
GBT generated CAD 21.8 million in Brazil, CAD 10.7 million in Argentina, CAD 8.5 million in Colombia, and just under CAD 8 million in the rest of Latin America. The increase of 35% or CAD 1.1 million in Knight's revenues for the quarter was mainly attributable to the timing of sales from Impavido, growth in Movantik sales, and the in-licensing of Trelstar. We also reported a gross margin of CAD 22.2 million or 42% of net sales, compared to CAD 22.9 million or 92% of net sales in the same period last year. The change in gross margin in CAD and as a percentage of sales was mainly attributable to the consolidation of GBT's financial results. Furthermore, we recorded an inventory provision of CAD 1.6 million due to the impact of COVID-19 on certain new product launches in Canada and Latin America.
In addition, after excluding the impact of hyperinflation in accordance with IAS 29, the gross margin as a percentage of sales would have been 47% or 5% higher than reported. I would like to remind listeners that a presentation explaining the basics of accounting under hyperinflation is still available on Knight's website under the investors relation presentation section. Our selling and marketing, G&A, and R&D for the quarter increased by CAD 13.3 million or 214% compared to the same period last year. The variance is explained by the consolidation of GBT's financial results, which accounted for CAD 15 million of incremental expenses. Knight's portion of selling, marketing, G&A, and R&D decreased by CAD 1.7 million compared to the same period last year, mainly due to non-recurring expenses in the same third quarter of 2019 related to Medison's shareholders activist campaign.
I would like to add that Knight expects to incur significant additional expenses in the second half of 2020 related to closing the GBT mandatory tender offer. Moving on to amortization of intangible assets. Over the quarter, our amortization of intangible assets is at CAD 5.8 million, an increase of CAD 5.4 million versus the prior period. The increase is related to the amortization of the definite life intangible assets that we have acquired in the GBT transaction. Knight's interest earned on our cash marketable securities and strategic loans was CAD 3.7 million, a decrease of CAD 2.5 million or 40% compared to the second quarter of 2019 due to a decrease in the average cash and marketable securities balance, partially offset by a higher average loan balance.
In addition, we recorded interest expense for the quarter of CAD 2.3 million due to the interest expense on GBT's bank loan of CAD 1.1 million, as well as interest accretion of CAD 1.2 million on the liability related to the mandatory tender offer of GBT. For the quarter, adjusted earnings were just under CAD 10 million, up 119% or CAD 5.4 million compared to the same quarter last year. The consolidation of GBT's financial results accounted for CAD 7.6 million of increase, which is partially offset by a decrease in Knight interest income. The non-recurring adjustments made to the operating loss for the second quarter of 2020 is CAD 304,000 and represent additional restructuring activities in connection with the integration of GBT. Moving on to gains and losses that are not reflected in adjusted earnings.
For the quarter, we recorded a net gain on financial asset measured at fair value through profit or loss of CAD 16.5 million, mainly due to unrealized gains and revaluation of the strategic fund investments. In addition, we recorded a net gain on the mandatory tender offer or MTO liability of CAD 3.2 million due to the unrealized gain on the foreign exchange revaluation of the Brazil real denominated mandatory tender offer liability, offset by an unrealized loss on forward and non-deliverable forward contracts. Furthermore, we recorded a realized gain of CAD 1.3 million on our NCIB's automatic share purchase plan. Lastly, we recorded a foreign exchange loss of CAD 4.5 million due to the consolidation of GBT's financial results, as well as Knight's related losses on certain US dollar-denominated financial assets. I will now turn to key balance sheet items as at June 30th, 2020.
At the end of the quarter, Knight had CAD 567 million in cash equivalents, restricted cash, and marketable securities, an increase of CAD 30.1 million compared to the end of the fourth quarter of 2019. The increase is mainly due to proceed from the sale of shares in Medison, partially offset by the purchase of shares through the NCIB and the acquisition of intangibles. Furthermore, cash equivalents, restricted cash, and marketable securities were CAD 25.7 million lower than the first quarter of 2020 due to the CAD 17.9 million of purchases related to the NCIB, CAD 10.1 million invested in intangible assets, CAD 6.8 million of bank loan repayment, offset by CAD 8.1 million generated from operating activities. Trade and other receivables were CAD 77.8 million, a decrease of CAD 30.3 million compared to Q4 2019.
Of the decrease, CAD 22.8 million relates to the decrease in both short-term and long-term trade receivables due to the depreciation of LATAM currencies, the net collection of receivables, and the credit loss provision recorded in 2020. The remaining difference is mainly due to the collection of a distribution receivable from an investment and a decrease in interest receivable due to the timing of the maturities of the marketable securities, as well as a decline in interest rates. Our inventory balance at the end of the quarter was CAD 71.8 million, an increase of just under CAD 1 million compared to the end of last year. The increase is due to the timing of inventory purchases and the impact of hyperinflation adjustment, partially offset by inventory provision and the depreciation of LATAM currencies.
The total accounts payable, accrued, and other liabilities of CAD 68.5 million, a decrease of CAD 27.6 million or 29% compared to Q4 2019. The decrease is mainly due to payments of inventory purchases, payments of GBT transaction fees, the depreciation of LATAM currencies, and a lower accrued balance as compared to December 31st, 2019, due to timing. Lastly, Knight reported a total debt of CAD 46 million, a decrease of CAD 9.6 million or 17% compared to Q4 2019, mainly driven by the loan payment of CAD 7.5 million and a foreign exchange revaluation, partially offset by an additional loan issued to GBT. I will now turn the call back to Samira.
Thank you, Arvind. Since the outbreak of coronavirus or COVID-19, our focus has been on ensuring the continuity of product supply to patients in Canada and Latin America, while at the same time ensuring the safety of our colleagues throughout the region and their families. While we continue to work from home, we are continuing to execute on the integration of the Biotoscana, closing the 100% acquisition and working on business development opportunities to grow the business. I'll now turn the call back over to Jonathan for his concluding remarks.
Thanks, Samira. We remain committed to improving the health of Canadians, and now Latin Americans, while delivering sustained shareholder value. Thank you for your support and confidence in the Knight team. This concludes my formal remarks, and now I'd like to open up the call to questions. Operator?
At this time, if anybody would like to ask a question, please press star one on your telephone keypad. Again, that would be star one on your telephone keypad. Again, we will be only taking questions from analysts. Your first question comes from David from Martin. Your line is open.
Hi. Yeah, good morning. Congratulations on the good quarter. First question, in Brazil, you had some shipments that were supposed to occur in Q1 that moved into Q2. I'm wondering how much of an impact, how big were those orders in Q2?
We don't usually provide the shift that happened, but it explains a bit of the growth that we have.
Okay.
Of Qo Q.
Okay. Also in Q1, you mentioned several things, the slowdown in new cancer diagnoses and slowdown in the use of other hospital drugs. Also, the impact of COVID on your CRYSVITA launches in various countries and your integration of GBT. I'm wondering have any of those issues normalized at all or are you still feeling a full impact?
Throughout the market, there is a slowdown. We're seeing this in all of the markets. It's dependent on a market by market. Sorry. Certain treatments are continuing depending on the market. We have some products that are in the retail. We have some products that are institutional and specialty. Depending on the product or the territory and the level of shutdown, we're seeing a different response. There is slow pickup, but similar to, and this is not just a Knight or GBT impact. You're seeing this throughout the industry where fewer patients are going in, and fewer diagnoses are happening. We are seeing that in oncology. We are seeing that a little bit in, we're seeing that also in infectology. Our sales teams, our medical teams are continuing to deliver the message digitally in all markets. There is interest in the product.
It is going to take time to normalize back.
Okay. What about your integration of GBT? Have you been able to accelerate that process?
We're continuing to work really hard both here and in South America. Everybody's really focused on execution. The teams are looking at things like basic stuff like systems and processes, where things are slowly starting to advance. Integration is on multiple fronts and multiple teams, and things are starting to come together. This is going to be a long process still over the next few months.
Is adding products to the portfolio kind of in the background until the integration's finished, or are you looking at that in parallel?
Absolutely not. I'm going to ask Amal to add, but her priority is really to add products.
Absolutely, David. BD never took the back seat. It's always been front and center. We haven't at all deprioritized or stopped working. We've been quite busy on the BD front even from as soon as we closed the private transaction. We've been active.
Are you seeing opportunities where you'll be able to get products for both Canada and South Central America?
Yes.
Okay. Last question. Trelstar, a mature product that hadn't been promoted. Have you started to see a positive impact on sales of the product now that you started promoting it? Or is it too early?
Yeah. It is a little bit too early because it was in the middle of Q2. We've had really good interactions with physicians, but it's a little too early to tell. Remember, at this point, any and all of those interactions are all virtual.
Okay. Okay. Thank you.
Again, if anybody would like to ask a question, please press star one on your telephone keypad. Your next question comes from Justin Keywood from Stifel. Your line is open.
Good morning, thanks for taking my call. I was just wondering if there was any type of pandemic relief program that contributed to the profit in the quarter and if that's an opportunity in the near term.
Hi, Justin. No. I assume you're talking about things like government grants.
Correct
that we would have taken advantage of.
We did look at this early on. The only market that is providing, of the ones that we're working in, that is providing pandemic relief is in Canada, and we wouldn't be eligible. In the rest, this is really continued work by the teams on executing.
Okay. Understood. Then just a bit of a broader question. Just as far as business development opportunities, now obviously the business is more focused in LATAM. Is Canada still a priority? Are you looking at new assets here or is the shift more to the LATAM region?
We're-
Yeah, sure. We're looking across our territory. We're looking at opportunities for Canada and LATAM. Ideally, we'd like opportunities for the entire territory, but we remain flexible for some opportunities that may either only be available for one versus the other or may have a better fit in one portfolio versus the other. We continue to look for opportunities in Canada as well as LATAM.
Okay. I know Mexico was mentioned as possibly a good opportunity to increase that exposure of GBT, but obviously they're having some challenges there with the COVID-19 outbreak. Has that changed your opinion at all as far as potential acquisitions in the area? Has that delayed it or the conversations, are they continuing?
It hasn't really changed the interest and the importance of the Mexican market. There has been some delays, not just from Mexico, but across the board. Some conversations and some processes have been delayed or temporarily put on hold because of the pandemic, and some conversations continue.
Okay. Just one last question. Just on the EBITDA or gross margins, is this a good level to use as far as modeling in the near term with possibly some expected improvement ahead, or should we maybe anticipate some greater costs in the near term?
That's a great question. I'm going to turn it over to Arvind.
Hi. On the EBITDA, just as a reminder, on the gross margin, what you see on our financial statement includes hyperinflation. One thing to consider is the gross margin without hyperinflation, and we do provide a schedule in the press release where we show the gross margin without hyperinflation. That's one thing to consider. In terms of impact to gross margin in the long to medium term, it's really a multiple factor question and it's not a straightforward answer. There's really three things I would consider. One is contract renewal. As we have negotiation for renewal of contracts, we generally would expect an erosion on margin. The second one is FX. We do have high volatility in the Latin currency, and that too, would create volatility in the margin. The third point to consider is your product mix.
As we launch product in the year and in the coming years, we will have a change in product mix, and that too, will impact the margin. Given all the multiple factors that I just mentioned, it's hard to predict the gross margin and really where we will land in the medium to short long term. I believe you could look at the historical fluctuation of GBT's margin. If you go back to the last two years, it's usually fluctuating plus or minus 5% on average on a yearly basis.
Okay, that's helpful direction. I appreciate you taking my questions. Thank you.
Thank you.
Again, if anybody would like to ask a question, please press star one on your telephone keypad. I have no further questions in queue. I turn the call back over to the presenters for closing remarks.
Thank you for your confidence in the Knight team and for joining our Q2 2020 conference call. Please stay healthy, stay safe, and stay connected.
Thank you, everyone. This will conclude today's conference call. You may now disconnect.