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Ladies and gentlemen, my name is Robert, and I will be your operator today. Welcome to the Knight Therapeutics Inc. 2019 Fourth Quarter Financial 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, may -- many of which are beyond the control of the company and its subsidiaries, may ultimately prove to be incorrect. The company disclaims any intentions or obligations to update or revise any forward-looking statements, whether the result of new information, future events, except any required by law. We 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 e-mail to info@gudknight.com or via phone at (514) 678-8930. I would like to remind everyone that this call is being recorded today, March 30, 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 afternoon, everyone, and welcome to Knight Therapeutics' Fourth Quarter 2019 Conference Call. I am joined on today's call with Samira Sakhia, our President; Amal Khouri, our VP Business Development; and Arvind Utchanah, our newly promoted CFO. And this is well deserved. Arvind, congratulations. As we are all taking our call from our respective home offices, some are in our pajamas, I might add.I will turn over the call to Samira to take you through some of our activities and results. Samira?
Thank you, Jonathan. Good afternoon, everyone. First of all, I also want to congratulate Arvind on his well-deserved promotion. We're pleased to report that 2019 marked a transformative year for Knight as we furthered our mission to become the rest of the world pharmaceutical company and are now the premier pan-American ex USA specialty pharmaceutical company.For the last several years, we have been patiently seeking an attractive pan-Latin American specialty pharma company acquisition opportunity. In 2019, our patience was finally rewarded with a purchase of a controlling interest in Grupo Biotoscana. Knight now has 700 employees located in 10 Latin American markets, doing exactly what Knight does: making a difference in the health of patients through our innovative pharmaceutical products. The team remains focused on completing our acquisition of 100% of Biotsocana, and Amal will provide more details regarding the acquisition later in the call.In addition to GBT, we continued to advance Knight's Canadian product portfolio. On Jan. 9, 2019, Knight secured the exclusive Canadian rights to commercialize neratinib marketed as NERLYNX and received regulatory approval from Health Canada in July 2019 for the extended adjuvant treatment for adult patients with early-stage HER2-overexpressed/amplified breast cancer following adjuvant Herceptin therapy. Unfortunately, Pan-Canadian Oncology Drug Review Expert Review Committee, or pERC, published their report recommending that NERLYNX should not be reimbursed through public insurance plan. Knight is pursuing private reimbursement to ensure that patients have access to this novel, life-saving therapy. On February 20, 2019, the company entered into a USD 5 million strategic loan with Triumvira Immunologics Inc. for the development of novel T-cell technology. As consideration for the strategic loan, Knight entered into an exclusive license agreement with Triumvira to commercialize its future approved products for Canada, Israel, Mexico, Colombia and for TAC01-CD19 for Israel, Mexico, Brazil and Colombia. Triumvira is developing novel T-cell therapies that are safer and more efficacious than current gene therapy cancer treatments, including chimeric antigen receptor and engineered T-cell receptor therapies. In addition to the access to this early-stage pipeline, Knight also received warrants to purchase 3.5% of Triumvira's fully diluted common shares. Furthermore, in August, Knight reached an agreement with pan-Canadian Pharmaceutical Alliance for Probuphine. And as of today, Probuphine is listed for reimbursement through public insurance plans administered by Alberta, Saskatchewan, New Brunswick, Manitoba, Québec, Newfoundland, Nova Scotia, Veterans Affairs Canada and the Non-Insured Health Benefit program. Probuphine is indicated for the management of opioid dependence in patients clinically stabilized on no more than 8 milligrams of sublingual buprenorphine in combination with counseling and psychosocial support. Probuphine is now being promoted and distributed throughout Canada. Furthermore, in the year, we announced that Ibsrela, Imvexxy and Bijuva were accepted for review by Health Canada. Imvexxy is an applicator-free estradiol soft gel vaginal capsule, and Bijuva, a bio-identical combination HRT for the treatment of vasomotor symptoms associated with menopause, were both licensed from TherapeuticsMD and are both FDA-approved. Ibsrela was submitted for the treatment of irritable bowel syndrome with constipation and was licensed from Ardelyx. During 2020, we will pursue approval for neratinib and tenapanor for additional indications.Now turning to updates on corporate development. As a reminder, Knight commenced a Normal Course Issuer Bid on July 11, 2019, under which Knight may purchase for cancellation just over 12 million of its common shares. As at March 30, Knight has purchased approximately 9.4 million common shares for an aggregate cost of $68.1 million or $7.23 per common share, which represents approximately 78 purchase -- 78% of the maximum purchases allowed under the NCIB.Lastly, in November 2019, Knight and Medison entered into a definitive agreement pursuant to which Knight agreed to sell to the Medison group all of Knight's shares in Medison in consideration for $77 million payable in cash. The parties also agreed to release each other from all claims and withdraw all legal proceedings initiated by both parties. In addition, Medison, which, together with its affiliates, owns approximately 10.4 million shares of Knight, agreed to a 4-year standstill and will divest its position in Knight during this period. On March 16, 2020, subsequent to our year-end, Knight received 75% or $57.8 million of the consideration, and the remaining 25% or $19.3 million is being held by a trustee and is expected to be released to Knight upon the issuance of a tax certificate by the Israel Tax Authority.I'm now going to turn the call over to Amal for an update on business development.
Thank you, Samira. As Samira mentioned, in 2019, Knight was transformed into a pan-American ex USA company. On November 29, 2019, Knight completed the acquisition of a 51.2% controlling interest of Grupo Biotoscana, or GBT, an established and profitable Latin American pharmaceutical company headquartered in Montevideo, Uruguay. GBT is the Lat Am partner of choice for multinational pharmaceutical companies and has a diversified portfolio of innovative products as well as a portfolio of proprietary branded generics. As a consideration for the controlling interest, Knight paid BRL 10.96 per share or approximately BRL 596 million or $189 million. Following the close of the transaction, Knight initiated the process of launching a mandatory public tender offer to acquire the remaining 48.8% of GBT, which trades as Brazilian Depository Receipts on the Brazilian exchange. Assuming all public shareholders tender their shares, Knight expects to pay approximately BRL 568 million or $179 million. As previously announced, we expect the tender process to take 4 to 8 months from launch to complete. Upon completion of the full acquisition of GBT, Knight expects to have paid a total of approximately BRL 1.164 billion or $368 million for the common shares with an assumption of GBT's net debt as of December 31, 2019, of BRL 124 million or $40 million.Turning to our Canadian portfolio. In January 2020, subsequent to the quarter, Knight announced that it has entered into an exclusive agreement with Debiopharm that grants Knight the Canadian rights to commercialize triptorelin marketed as Trelstar. Trelstar is currently approved and sold in Canada for the palliative treatment of hormone-dependent advanced prostate cancer as well as for the management and relief of chronic pain associated with endometriosis. The agreement is expected to close during the first half of 2020, at which point, Knight will take over commercial activities and start recognizing related revenues.I will now turn the call over to Arvind to go over the financial results for the quarter and 12 months.
Thank you, Amal. In the course of this conference call, I will refer to Knight's adjusted operating income, which is a non-IFRS measure. Knight defines adjusted operating income as operating income or loss adjusted to exclude amortization, impairment of intangible assets, depreciation, acquisition costs and nonrecurring expenses incurred, but includes net interest income earned and cost related to leases. In addition, the adjusted operating income does not reflect the portion of GBT's earnings attributable to the noncontrolling interest.I am pleased to report that for the quarter ended December 31, 2019, we reported revenues of $37.3 million, an increase of $33.4 million or 859% versus the same period last year. For the 12-month period, we reported revenues of $47.5 million, an increase of $35 million or 280% compared to last year. These variances are explained by the consolidation of GBT's financial results, which accounted for $34 million of incremental revenues.I would like to remind listeners that the revenues of the GBT for the month of December 2019 were exceptionally higher than the average monthly fiscal year 2019 revenues due to timing of certain product shipments. Knight does not expect similar magnitude of monthly revenues to continue in the future. Our selling and marketing, G&A and R&D expenses for the quarter increased by $14 million or 344% over the fourth quarter of 2018 and increased by $22 million or 154% for the 12-month period compared to the same period last year. For both the 3- and 12-month periods, the consolidation of GBT's financial results accounted for $6.5 million of incremental expenses. The remainder of the increase for the quarter was mainly driven by the transaction fees of $5.5 million related to the acquisition of GBT. For the 12-month period, the GBT transaction fees were $8 million and the proxy fight expenses were $3.8 million. I would like to note that Knight expects to incur significant additional expenses in 2020 related to closing the GBT mandatory tender offer.Now moving on to amortization and impairment of intangible assets. For the quarter, our amortization of intangible assets is at $2.1 million, an increase of $1.7 million. And for the year, it is at $3.4 million, an increase of $1.8 million versus the prior periods.The increase is related to the amortization of the definite-life intangible assets that we have acquired in the GBT transaction. In addition, during the quarter, we recorded an impairment charge of $4.2 million due to changes in commercial expectation on certain products.Moving on to interest earned on our cash, marketable securities and strategic loan for the quarter. We reported interest income net of interest expense of $4.4 million, which is a decrease of 26% or $1.5 million compared to the fourth quarter of 2018. The decrease is due to $644,000 of interest accretion on the liability related to the mandatory tender offer of GBT as well as the interest expense on GBT's loans.For the 12-month period, interest income net of interest expense was $22.5 million, an increase of 8% or $1.6 million over the same period last year. The increase is due to higher average loan balance and an increase in interest rates offset by interest expense and a decrease in the average cash and marketable securities balance.For the quarter, adjusted operating income was $11.7 million, up 108% or $6 million compared to the same period last year. The consolidation of GBT's financial results accounted for $9 million of the increase, offset by an increase in Knight selling and marketing activities due to new product launches as well as an increase in certain general administrative expenses. For 2019, adjusted operating income was $26.4 million, an increase of 52% or $9 million compared to last year, mainly due to the consolidation of GBT's results.Now moving on to changes in the fair value of our financial assets, which is not reflected in our adjusted operating income. For the quarter, we recorded a net gain on financial assets measured at fair value through profit or loss of $1.1 million due to a realized gain of $2.6 million on our strategic investments offset by unrealized losses of $1.5 million on the revaluation of Knight's financial assets.For the 12-month period, we recorded a net gain on financial assets of $20.7 million due to the unrealized gains of $14 million and unrealized gains of $6.7 million, mainly driven by the strategic fund investments. Given the current market volatility, we expect the value of our financial assets on our balance sheet to decline significantly. I would like to point out that we have recorded a current liability of BRL 567 million or $184 million related to the mandatory tender offer to buy the remaining 48% of GBT. We have also entered into foreign exchange contracts to buy BRL 510 million or $164 million, which represent an average exchange rate of $3.12 per BRL.At every reporting period, we will revalue the liability to Canadian dollars, and we expect any gains or losses to be offset by the revaluation of the foreign exchange contracts.I will now turn the call back to Samira.
Thank you, Arvind. As we embark on to 2020, we are facing an unprecedented situation with the COVID-19 pandemic. As a pharmaceutical company, Knight is working to alleviate some of the pressures that the global COVID-19 pandemic has placed on our health care systems and to ensure that we maintain supply of our medicines to patients. The company and its employees have transitioned to working remotely, including our field sales and medical teams, and that's in Canada as well as in Latin America.These steps are being taken to minimize personal interactions as much as possible to stem disease spread and to flatten the curve. In the field of pharmaceutical marketing, increased social contacts, such as interactions between sales representatives and medical science liaisons with health care providers, has the potential to counteract these important public health initiatives and to put our employees, patients and health care professionals at risk.The company is taking steps to establish digital and virtual channels to ensure that physicians and patients continue to receive continued support. We are committed to ensuring the safety of our employees and the uninterrupted supply of our medicines. We're actively working with our partners to minimize business interruption and to ensure uninterrupted product supply. As of today's date, the outbreak has not had a material impact on the company's results.I'll now turn the call back to Jonathan for his concluding remarks.
Thank you, Samira. As Knight embarks on a new phase, I am proud of the significant progress made in the execution of our strategy to build the Canadian and rest of the world pharmaceutical company. Looking ahead, we remain committed to improving the health of Canadians and now Latin Americans while delivering sustained shareholder value. In light of the pandemic, we want to thank all the doctors, nurses, paramedics and all health care workers who are on the front lines of this battle against COVID-19. We also want to thank the truck drivers, cashiers and folks who are working in pharmacies and grocery stores to make sure that we are all safe and healthy in our homes. These are truly modern-day heroes. Thank you.Thank you for your support and confidence in the Knight team. This concludes my formal remarks. I would now like to open up the call to questions.
[Operator Instructions] Your first question comes from the line of David Martin with Bloom Burton.
The first one is have there been or do you anticipate any significant changes with any of the major Biotoscana products? I'm thinking either new competition or agreements about to expire or on the flip side, are there any new major products that you're licensing in or that you expect to launch in the near term?
Dave, this is Samira. I'm going to ask Amal to answer that question.
Thank you, Samira. David, so I think, first of all, in terms of launches -- the launches, when you look at the current portfolio that the company has, the launches are staggered. We're talking, of course, about the company operating across 10 countries in Lat Am. So some products have been launched in certain markets, not in others. So within the current portfolio, there are still new launches that are coming up. In terms of changes to the current products or the current agreements, I mean as you know, some of the older agreements -- this is a company that really came together as 4 different companies put together. So there are some of the older agreements that were initially signed that were short term. So there may be -- we're currently in the process of analyzing the portfolio, and we may be looking at renegotiating as some of these agreements come up for renewal. So I hope that answers your question on launches, on agreements, current products. And in terms of new deals, I think that was the other part of your question. I mean again, we're -- we continue to work as a BD team on bringing in new products, whether it's for Canada or Latin America. That's really why we did that transaction is to be able to add products. So we're actively -- we continue to actively work on that.
And how about Mexico? That was a country where Biotoscana had a relatively small presence, and you thought you could start building there. Has that started? Or will that wait until you get the remaining 49% of the company?
No, we started right away. We started really from day 1. So actively looking at adding critical mass in Mexico as well as products to the portfolio across the territory.
Okay. I also had a question. So it was mentioned that the financial assets, it's expected that they'll take a hit with the market turbulence, but what about the marketable securities? I added up the current and long term, and it was about $362 million at December 31. Are they exposed to the market turbulence? And do you expect a sharp drop in those as well?
David, that's actually a great question. The marketable securities are really more in GICs. Some of it is actually more liquid than others. The stuff that's liquid is locked in at actually higher interest rates, and we'll continue to benefit from that. The portion of -- especially the more current is more liquid. And as the rates have flown down, interest income on those will come off.
Okay. Great. And just back to the potential changes at Biotoscana as far as products go, I know before you bought the company, the Actelion products went away for Biotoscana. Is there anything like that potentially going to happen in the near term?
So like Amal said, there are certain agreements that -- especially the ones that were older, which were entered into on a more shorter-term basis. We are assessing those, and we will be discussing with partners -- with those partners to see what their expectations are and what they're doing. As you can -- the thing that I go back to is that some of these products are older and not as relevant in those companies' portfolio. But given where we don't know how the partners will react, there may be some renegotiation to continue to retain these.
Okay. But the Actelion -- the idea I got was that was rather a material size to the business. Is there anything that is big like that that is uncertain at this point?
It really depends on the country specific. There are certain agreements that are a little bit more material on a country basis, but we're working through with the company and their partners.
Your next question comes from the line of David Novak with Raymond James.
This is Archit on for David. So just the first question that I have is around regulatory activity. Do you guys...
I'm sorry to interrupt, we only took your question because we thought you were David. I'm joking. Go ahead.
I'm happy about that. Do you guys anticipate any delays in regulatory activity related to your upcoming filings or approvals, considering the increased burden on the agency at this time?
That's a really great question. So far, the team that's really reviewing the file is continuing to progress. We continue to receive normal-course responses as we would expect, and we haven't seen anything to date on those. And that being said, we are here -- sorry, I do want to add we are hearing from organizations that are like pCPA and pCODR that given where they're focused, there may be delays when it comes to reimbursement.
I see. Okay. Great. And could you maybe share some additional color on the standstill agreement that's in place between Knight and Medison. Specifically, could you talk a little bit about the types of restrictions that are in place and perhaps when and how much Medison is allowed to sell?
Sure. So as far as the standstill is concerned, there -- the issue is really more around are there any sort of shareholder activity, and that is -- he's no longer able to do anything like that. As part of selling the shares, he has the -- 4 years to sell, but more in a structured manner, so as to not impact the share price in any way.
Okay. I see. Fantastic. And my guess -- my last question is are you seeing any particularly interesting M&A opportunities or business development opportunities in light of the current market environment and depressed valuations?
Sure. I'm actually going to pass that on to Amal, but before I let you go, please send our love to David.
Thanks, Samira. So yes, I mean in terms of -- to answer your question on the BD side, we continue to monitor, as we've been monitoring for the last few years. And we continue to be ready to act if and when the good opportunities are there. I think if you're asking about the current -- kind of the impact from the current COVID-19 situation, today, it's probably a little bit early to see kind of the full impact of that. So we keep doing what we're doing and monitor and be ready to act. Keep in mind that after we complete the full 100% acquisition of Biotoscana, we're still going to have about $400 million to invest -- continue investing and continue executing. So we're going to be ready to act when the opportunity comes.
Your next question comes from the line of Endri Leno with National Bank.
Just a few from me. First, if you can elaborate a little bit on the impairment of financial assets, that $4.2 million, what change in commercial expectations? Can you elaborate a little bit? What is it related? Is it one product, multiple products, please?
Sure. I'm actually going to pass that on to Arvind to answer.
Thank you, Samira. So regarding the impairment of $4.2 million on the intangible assets, this is really coming off from -- given the pricing guidance that came out at the end of November from PMPRB. And also given a more difficult reimbursement landscape, we have reassessed our whole product portfolio. And as a result, we took down an impairment of $4.2 million. So this doesn't come from just one product. It's coming from multiple products across our portfolio.
Okay. Arvind, do we expect any more related to this issue? Or should it be stable at least for the foreseeable future?
At this point, we don't expect anything as material as what we have taken in Q4 of '19.
Okay. Great. Next question is on NERLYNX. I was wondering if you can -- or if you are able to quantify what the private reimbursement market would be versus a combination of the public and the private one.
Endri, it's Samira. I actually haven't -- we haven't provided any sort of guidance as to the revenue potential for NERLYNX nor how much was public or private.
Okay, okay. The next question is on Biotoscana. I think as of the last update there as management, anyways, there was an interim CEO. So I was wondering if you had made any progress there. I mean do you have somebody more permanently placed? Or what's the strategy there?
That's a really interesting question. So there is an interim CEO and an interim CFO. As we kind of think through what a global Knight will be, it really isn't -- makes sense to have one person who runs kind of the entire operation. And we're really working with the team that's there to build the infrastructure that makes sense for the entire organization, including the Canadian piece as well as the Lat Am piece.
Okay. And do you have any time lines where you might come to a conclusion of how it will be best structured?
We're looking to kind of put that into place as we get to the 100%.
Okay. Great. And the other question will be a bit more kind of accounting like. How would you reconcile -- and we can take it offline if it's easier, but how do you reconcile adjusted operating EBITDA that you reported -- adjusted operating income to EBITDA, particularly for Biotoscana?
There is a schedule that's included in the press release. Sure, we can reconnect after if that's not sufficient.
Okay. Great. And the very last one from me. I'll jump in the queue. But do you expect any inefficiencies related to the COVID-19 and the social distances -- social distancing measures, particularly between the sales reps and the doctors and their team?
What do you mean, sorry, when you say inefficiencies?
In terms of -- I mean are they hitting their -- all the doctors that they needed to reach out to and the time that they needed to spend with each one of them, and things of that nature.
So that's really a great question. So the issue that we run into is that they are trying to reach the physicians that they have in their call list. They're trying with digital means as much as they can. Obviously, we want to make sure that the physicians are dealing with the crisis, which is obviously more important. And in the meantime, we're getting them to take on a little bit more training. And when it comes to our MSLs, we're starting to use them for supporting either regulatory submissions, reimbursement submissions, training, material preparation and really trying to use the resources on different means right now, different parts of the business, while they're at home.
Your next question comes from the line of Justin Keywood with Stifel.
I know it was mentioned that the December month was much higher than normal. Are you able to give an indication of what a more normalized level would be? And should we expect some impact in Q1?
Justin, I'm going to let Arvind answer that question.
So GBT actually has also just reported their 2019 results. And if you -- if I refer to their results, they reported about BRL 743 million, which approximate an average of $20 million of revenue per month. And the revenues in December was really onetime, and it's really because of higher shipments in December. And it's a cut-off issue that created that higher revenues. Going into Q1, we expect it to be more stabilized at the $20 million range that I just mentioned.
Okay. That's helpful. And then for the MTO for the remaining portion, what's the expected timing that it would close now?
So as we previously announced that from the launch date in December, it would take about 4 to 8 months, and we're still in the same time horizon.
Okay. And then the pro forma cash position after the transaction and considering the return of the medicine investment, do you have a number there?
So as Amal mentioned, it's about $400 million.
And that includes the Medison investment?
The Medison -- that's right. That's getting all of it. We've already gotten $57.7 million, and it's the -- including the rest of the $19 million that we're expecting later in the year.
And sorry, one more question. Would that include the $40 million in debt from GBT? Is that like a net cash basis?
No. That does not include the $40 million in debt at GBT.
And your next question comes from the line of David Martin with Bloom Burton.
Yes. One housekeeping question, then a couple others. Just want to make sure you recognize 100% of GBT's December revenues, not 51%. Is that correct?
That's right.
Okay. Next question. With NERLYNX, despite the no reimbursement recommendation from pERC, can you give us some ideas about how is it going as far as selling with the reimbursement potentially only coming from the private payers? Do you have any metrics that you're measuring? How is the product selling?
So we've kind of phased the -- we're phasing the launch right now. We have MSL working on it. There is a lot of interest in the product. We are starting to see some patients apply through -- like some physicians put patients through our patient support program, both for the adjuvant treatment as well as for metastatic, and we're continuing to work through kind of on a one-by-one basis with each of the -- either the benefits managers or the insurance companies.
Okay. Sorry, I'm typing. When you were partnered with Medison or part owners of Medison, the belief was that the 2 companies could work together to license products for their respective territories, and that didn't really work out the way it was expected. I'm wondering, do you anticipate that this will be easier to do with Biotoscana? And if so why?
So I'm going to take the first half of the question, and then I'll pass it to Amal to give a little bit of more real world. So the big difference between Medison and Knight is that we operated at 2 different BD teams. Today, we are one business development team because we are going to be owning 100% of Biotoscana. The second point is that Canada and Israel, very -- both very interesting specialty pharmaceutical markets, but not regionally as cohesive as pan-American ex USA. And we think that the regional aspect as well as the coordinated 1 team business development is going to be a lot more effective than what we've done before. And Amal, please feel free to add more.
No, I think Samira said it perfectly. It really goes down to these key points. And yes -- and going into this deal and deciding that Latin America is going to be our first significant foray into the rest of world, that was the idea, is to have this kind of cohesive geographic coverage. And having had discussions in the past with different potential licensors, so far, we've had positive reactions as do this makes sense. Now we just have to make sure that we execute and we get deals for the territories. But I think Samira really hit the key points on the difference.
So you've already started seeking out new assets jointly. You're not waiting for the integration process to be fully complete, I guess?
We're not waiting at all. We really started from very early on. We started operating as 1 BD team and really chasing assets, whether it's -- yes, really chasing assets together for the entire geography.
There are no further questions at this time. I turn the call back over to the presenters.
Thank you for attending our conference call, and please stay safe.
Ladies and gentlemen, thank -- this concludes today's conference call. Thank you for participating. You may now disconnect.