Knight Therapeutics Inc. (TSX: GUD) is a specialty and generic drug manufacturing company. The company's principal business activity is focused on developing, acquiring, in-licensing, out-licensing, marketing, and distributing innovative pharmaceutical products, consumer health products, and medical devices in Canada and select international markets.

Key Updates:

• Healthy Debt/Equity ratio: The company reported its D/E ratio of 0.05x, in Q3FY21, as compared to the industry median of 0.45x, giving relief from the interest expenses, which could drain the profitability. Moreover, long-term debt to total capital stood at 0.3% in Q3FY21, as compared to the industry median of 26.4%. This illustrates that the company has a lower balance sheet risk.

• Positive cash flows: The company reported cash flows from operations of CAD 39.9 million in 9MFY21, as compared to a cash outflow of CAD 16.5 million in pcp. This will help the company to sustain the headwinds in the near term to keep the operations running smoothly.

• Improved performance metrics: On 9MFY21, the company reported improved revenue and profitability, which is encouraging. Revenue stood at CAD 182.8 million in 9MFY21, up 33% on y-o-y on constant currency basis. This increase in the revenue is attributable to the growth in the new product releases and the expiration of its distribution agreement of Abraxus in Mexico. On the other hand, the company’s Adjusted EBITDA stood at CAD 32.3 million in 9MFY21, significantly higher than CAD 12.4 million in pcp.
  

Risks: The group reported a higher input cost, which is a reason for concern for the company, as it is dampening the company’s profitability. Continuation of the above trend would likely hamper the overall operating performance. Moreover, the products of the company are subjected to regulatory approvals and any delay in the approvals would impact the company’s product pipeline.

Q3FY21 Financial Highlights:

Source: Company Filing 

• GUD declared its quarterly result, wherein the company registered a revenue of CAD 73.3 million in Q3FY21, significantly higher than CAD 45.2 million in pcp. The surge was driven by strong growth from Brazil, Colombia and Argentina.
• The group witnessed higher selling and marketing costs, coupled with an increase in the Research & development expenses. For the similar quarter, the company reported its operating income of CAD 4.0 million, as compared to an operating loss of CAD 7.7 million in pcp.
• The company reported a gain in financial instruments amounting to CAD 21.3 million, v/s a loss of CAD 12.8 million in pcp along with a foreign exchange gain of CAD 7.1 million, v/s a foreign exchange loss of CAD 0.7 million in pcp.
• Net loss for the period stood at CAD 8.5 million, as compared to a net profit of CAD 17.4 million in pcp due to higher foreign exchange loss as mentioned earlier.

Valuation Methodology (Illustrative): EV to Sales based

Analysis By Kaline Group

Stock Recommendation:

The company reported a higher quick ratio of 2.02x in Q3FY21, as compared to the industry median of 1.53x. This indicates an improved liquidity position, which is a key positive. The stock of GUD closed above its crucial simple moving averages of 50-days and 100-days, respectively, indicating a bullish pattern. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Hamilton Thorne Ltd, Medexus Pharmaceuticals Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating at the current market price of CAD 5.35 at 9:48 AM Toronto time on February 22, 2022.

One-Year Technical Price Chart (as on February 22, 2022). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.