Ahead of Q1 results, Stifel says buy Knight Therapeutics

Stifel GMP analyst Justin Keywood says investors can expect to see Knight Therapeutics (Knight Therapeutics Stock Quote, Chart, News TSX:GUD) use its recent acquisition to spur growth for the specialty pharmaceutical company.

Keywood issued an earnings primer to clients on Tuesday where he maintained his “Buy” rating and $10.50 target price, which at the time of publication represented a projected 12-month return of 46 per cent.

Ahead of first quarter fiscal 2020 results (ended March 31) due on Friday from Knight Therapeutics, Keywood said the Q1 will show the full impact of Knight’s 51 per cent ownership of LATAM drug company Grupo Biotoscana Investments (GBT) for $418 million, announced last fall, with the company currently angling to acquire the remaining 49 per cent through a mandatory tender offer.

Street estimates for Q1 are for sales of $55 million and EBITDA of ~$5 million (nine per cent margin) and near our estimates. We see the forecasts for Q1 as valid with COVID-19 potentially impacting Q2 with large exposure to the Brazil market (56 per cent of GBT’s sales). However, we also see resilience in GBT’s therapeutic areas, including Onco& Onco-Hematology (43 per cent of sales) and infectious diseases (36 per cent of sales),” Keywood wrote.

“The bar is low as well in our view on a year-over-year basis with a small operating business in Canada prior, relative to the capital structure. Although some caution is always prudent, given the current environment, we remain bullish on Knight and ahead of Q1 considering the overall reward to risk profile, including $400 million in cash,” Keywood wrote.

Knight, which has a current market capitalization of about $970 million, made a V-shaped recovery after the market pullback in February and March but has fallen off a bit since and sits down two per cent for the year. The stock finished 2019 down one per cent.

The company at the end of May provided a brief update on its business, vis a vis COVID-19, saying in a press release, “As a result of COVID-19, the Company and its employees have transitioned to working remotely, including our field sales and medical teams. The Company has taken steps to establish digital and virtual channels to ensure that physicians and patients continue to receive continued support.”

On its LATAM business, Keywood said the GBT purchase should accelerate growth, including in the Mexico market, while the analyst said infectious diseases are looking to be an area for elevated growth “for many years ahead” considering the R&D expertise at GBT which has over 50 research programs currently in progress.

Keywood said Knight is recession-resilient with its focus on therapeutics areas that can withstand external shocks and economic swings, while the company’s “exceptional” balance sheet, good liquidity and meaningful market cap are also pluses.

“We note that Knight’s pace of transactions is generally consistent with Paladin Labs, despite some patience required and now with the execution of a material transaction. GBT could be an inflection point for further M&A ahead, consistent with the prior Paladin path,” Keywood added.