Knight Therapeutics Inc

Knight Therapeutics Inc (TSX: GUD) is a specialty and generic drug manufacturing company. Its principal business activity is 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 Highlights

• Robust Growth in Revenue and Adjusted EBITDA: In Q3FY21, the company registered higher growth in revenue as well as in adjusted EBITDA, where revenue increased by 62% to CAD 73.3 million against CAD 45.2 million, while its adjusted EBITDA grew enormously by 311% to CAD 17.3 million from CAD 4.2 million in pcp. The company is consistently generating good revenue and adjusted EBITDA, both of which are considerable.

Source: Company

• Exclusive Supply and Distribution Agreement with Incyte Biosciences: Incyte Biosciences International Sàrl and the company recently struck an exclusive supply and distribution agreement for tafasitamab and pemigatinib. Under the terms of the deal, GUD will be responsible for securing all necessary regulatory approvals and distributing both medicines in Latin America. Both drugs have been approved for adult patients in the United States, Europe, and pemigatinib has also received approval for adult patients in Japan.
• Rising Cash Inflow from Operations: GUD's cash inflow from operations was CAD 10.3 million, compared to a cash outflow of CAD 8.4 million in the prior period, driven by the operating income adjusted for non-cash items such as depreciation and amortization offset by an increase in working capital of CAD 7.6 million.
• Reduced Debts Burden: The company was able to reduce its debt load, which is commendable. Bank loans amounted to CAD 36.3 million on September 30, 2021, down CAD 15.4 million or 30% from the previous period, owing mainly to CAD 14.9 million in loan repayments and a further CAD 2.9 million due to foreign exchange revaluation.

Financial Overview of Q3FY21 (in CAD thousands)

Source: Company

• In Q3FY21, the company's revenues increased to CAD 73.3 million, against CAD 45.2 million in the previous corresponding period. This was mainly due to increased demand for certain products for treating invasive fungal infections associated with COVID-19 and higher sales from new product launches.
• Primarily on the back of higher revenues and lower cost of goods sold, the company clocked a higher gross profit of CAD 37.8 million against CAD 19.5 million in pcp.
• It also witnessed higher operating expenses. However, it realized an operating income of CAD 4.0 million compared to a loss of CAD 7.7 million in pcp.
• GUD's net loss amounted to CAD 9.9 million compared to a profit of CAD 17.1 million in the prior period. The company booked loss mainly due to a loss on financial instruments.
  

Risks Associated with Investment

The company's products are subject to regulatory approvals and might be time-consuming, impacting the product pipeline. It is also exposed to additional risks related to investing and operating in international locations, including emerging markets. Operating in such markets carry substantial inherent financial, legal, and political risks. 

Valuation Methodology (Illustrative): EV to EBITDA

Stock Recommendation

Recently, the company announced its Q3FY21 financial numbers, where it achieved record quarterly results for the second consecutive quarter despite the ongoing challenges posed by the pandemic. It has performed well on several fronts in the last nine months. Its business development team is closing the Exelon transaction and is already working on its integration, which is significant. In addition, GUD is focusing on creating branded generics for Argentina and other LATAM countries. Moreover, it is concentrating on increasing the regional reach of branded generics that have already been produced. The firm maintained a high rate of cash flow generation while reducing debt, which is commendable. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 5.36 on November 25, 2021. We have considered HLS Therapeutics Inc, Hamilton Thorne Ltd, etc., as the peer group for comparison.

One-Year Technical Price Chart (as on November 25, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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