Knight Therapeutics continues to gain exposure to innovative R&D, says Paradigm

Paradigm Capital analyst Christopher Lam likes the way Knight Therapeutics (Knight Therapeutics Stock Quote, Chart, News: TSX:GUD) is using its balance sheet to gain access to innovative research and development without taking on undue risk.

On Wednesday, Knight Therapeutics announced it had expanded the exclusive distribution agreement the pair signed in August of last year.

“We are happy to have strengthened our partnership with Ember, which has bolstered its value proposition with these recent acquisitions,” said Knight CEO Jonathan Ross Goodman. “Notwithstanding the currently challenging health care equity markets, we are hopeful that Ember can ignite the continued development of its BMP-7 pipeline for the treatment of osteoarthritis and kidney fibrosis.”

Lam says Knight’s stratgey means it is both hitting singles and reserving the potential for home runs.

“In our view, the expanded relationship with Ember Therapeutics highlights the strength of Knight’s unique loan strategy,” says the analyst. “Knight’s loans carry 12–15% interest rates and create value on their own. The inclusion of product rights with the loan either immediately sweetens the deal, or acts like a call option on development-stage assets. To date, Knight has entered into 15 loan agreements that have yielded distribution rights to >15 products. While most of these products are not expected to produce near-term revenue, they represent significant growth potential and leverage to the original loan IRR. As a secured lender with product rights, this also highlights Knight’s ability to use its balance sheet to participate in innovative R&D without having to bear the clinical risk and ballooning operating expense. There is clearly more to the Knight story than a potential blockbuster deal as the company is continuing to execute on its core strategy of building a diverse product pipeline. As such, we maintain our positive long-term outlook.”

In a research update to clients today, Lam maintained his “Buy” rating and one-year price target of $9.00 on Knight Therapeutics, implying a return of 10 per cent, including dividend, at the time of publication.