Knight Therapeutics keeps “Buy” rating at Stifel GMP

Stifel GMP analyst Justin Keywood likes what he sees so far from Knight Therapeutics (Knight Therapeutics Stock Quote, Chart, News TSX:GUD) as the company looks to repeat the success of CEO Jonathan Goodman’s previous Paladin Labs.

In an update to clients on Tuesday, Keywood reviewed Knight’s latest quarter and reaffirmed his “Buy” rating and $10.50 target price, which at the time of publication represented a projected 12-month return of 71 per cent.

Montreal-based specialty pharma name Knight Therapeutics released its fourth quarter and year ended December 31, 2019, results on Monday, with Q4 sales coming in at $37 million, including $3.4 million for Knight’s Canadian business and $34 million from its newest acquisition, 51 per cent of Latin American pharmaceutical company Grupo Biotoscana (GBT).

In the quarterly press release, Goodman said 2019 represented a transformative year for Knight in its mission to become a ‘rest of the world’ specialty pharmaceutical company.

“The past several years we have focused on expanding into Latin America, resulting in this year’s acquisition of a controlling stake in Grupo Biotsocana,” said Goodman. “In addition, we advanced our Canadian product pipeline with the in-licensing of three new drugs and received regulatory approval for two additional products, while three submissions are pending approval from Health Canada.”

“Looking ahead, we remain committed to supplying the medicines our patients need as our community faces an unprecedented health crisis and will continue leveraging our strong balance sheet to build a business our shareholders can be proud of,” he said.

On the GBT purchase, Knight is currently in the process of acquiring the remaining 49 per cent through a mandatory tender offer which is expected to close within the next four months, according to Keywood, who said that GBT will act as a beachhead for GUD in its LATAM expansion, particularly in Mexico.

On the quarter, Keywood called it a good start with GBT, as revenues of $34 million came in well above his estimate of $20 million. Looking ahead, Keywood pegged Knight’s pro-forma cash position at $360 million or about $2.60 per share, enough of a war chest to enact further M&A, the analyst said.

“We view GBT as validating Knight’s strategy in replicating past success at Paladin Labs,” Keywood said. “The expected transaction multiple paid of 8x LTM EBITDA is also seen as favourable and de-risking to a certain extent. Knight’s pace of transactions has been similar to Paladin and now with evidence of execution on a large transaction.

Paladin had 19 consecutive years of record revenues and another streak is in progress at Knight.”

The analyst has added 2020 estimates, now calling for $242.0 million in revenue and EBITDA of $39.4 million with fully diluted EPS of $0.28 per share.

“Our target price remains unchanged at $10.50 based on an estimated NAV at the end of 2020 and 1.4x multiple. As the GBT transaction progresses and strategic growth plans for the asset become clearer, our NAV and estimates will refine but a strong balance sheet and track record of management supports value ahead,” Keywood said.