Knight Therapeutics upgraded to “Buy” at Mackie Research

Knight Therapeutics (Knight Therapeutics Stock Quote, Chart, News TSX:GUD) is still in the early innings of its growth trajectory, says Mackie Research analyst André Uddin.

On Monday, the analyst rerated GUD and upped his target price, now calling the stock a “Buy” (previously “Hold”) with a target price of $10.80 per share (previously $8.20 per share).

Montreal-based commercial-stage specialty pharma company Knight Therapeutics finally pulled the trigger on a major acquisition on Monday, announcing an agreement to buy Latin American drug firm Grupo Biotoscana Investments for $418 million. The sticker price implies a 22.2-per-cent premium on GBT’s 30-day volume-weighted average price as of October 18, 2019.

Knight Therapeutics upgraded to “Buy” from “Hold” by analyst André Uddin…

“This transformational acquisition establishes Knight as a premiere pan-American (ex-US) specialty pharmaceutical company. With scale and a strong regional infrastructure, we will be well positioned as the pan-American (ex-US) in-licensing partner of choice,” said Jonathan Ross Goodman, CEO Knight, in a press release. “The combination of Knight and GBT creates a compelling platform in large, fast growing markets. GBT is a natural strategic fit, with a similar business model to Knight and strong relationships with global partners.”

Uddin calls the deal a transformative acquisition done at a reasonable price, putting the $418-million price at 8.5x LTM adjusted EBITDA of 1.7x LTM EV/Sales. The analyst says that GBT, an oncology drug specialist, has some strong Latin American marketing partnerships with Celgene (now Bristol Myers Squibb), Basilea Pharmaceuticals, Gilead, Eisai, Pierre Fabre and CSL Behring.

“This transaction will transform Knight into a pan American (ex US) specialty pharma, greatly diversifying its revenue base and scale and provide a pan-Latin American presence across ten countries. We believe this enhances Knight’s ability to attract pan-America (ex-US) in-licensing opportunities,” says Uddin.

The analyst is assuming that GBT would generate sales of $299 million in 2020 and increasing gradually to $356 in 2023. GBT had a 48-per-cent gross margin in Q2 of 2019.

Uddin says that Knight Therapeutics remains well funded with over $250 million in cash and is likely to make more deals going forward.

“GUD’s CEO, Jonathan Ross Goodman, was the CEO of Paladin Labs. Under his leadership, Paladin was very successful as the company generated 19 years of consecutive record revenues,” writes Uddin.

“We believe Mr. Goodman’s successful experience at Paladin is one of the main reasons why investors are interested in GUD. We also expect Mr. Goodman to replicate his success at GUD,” he says. “2019 represents the sixth year of the GUD business. Compared to Paladin’s growth trajectory, we believe GUD is still in the early innings. With a war chest of over $250 million post the GBT acquisition, we believe GUD should be very resourceful to obtain products down the road which would fit into the company’s sales platforms in Canada and select ROW markets.”

Uddin’s $10.80 target price represented a projected 12-month return of 44 per cent at the time of publication.

Since the GBT announcement, Knight Therapeutics’ share price has increased by over 14 per cent as of early-day trading on Thursday.