Knight Therapeutics is now a Buy, says Stifel

Stifel GMP Analyst Justin Keywood is keying back in on Knight Therapeutics (Knight Therapeutics Stock Quote, Charts, News, Analysts, Financials TSX:GUD), upgrading to a “Buy” rating from his previous “Hold” with a revised target price of $6.50/share (previously $5.95/share), projecting a return of 24.8 per cent in an update to clients on September 22.

Founded in 2014 and headquartered in Montreal, Knight Therapeutics is a public specialty pharmaceutical company that focuses on acquiring or in-licensing pharmaceutical products for the Canadian and select international markets, with Knight coming to life as a product of Paladin Labs after it was acquired by Endo Pharmaceuticals in 2014.

Keywood’s rating upgrade comes with increased confidence in the company’s financial reporting for its third quarter, which is expected in November.

“Q3 will show the first full quarter contribution of Exelon (Alzheimer product) that generated $4 million of EBITDA in Q2 but only for five weeks, and we estimate a contribution of $9 million for Q3,” Keywood said. “There is also continued expected strength from Knight’s infectious disease portfolio, where certain medicines are being used to help treat COVID-19 symptoms in LATAM as other new product launches start to gain traction.”

Keywood believes the company will outperform Street projections, as he projects EBITDA of $13 million for the upcoming third quarter compared to the Street call for $10 million.

The optimistic forecast also keys into Keywood’s 2021 EBITDA projection of $40.4 million, representing a 17 per cent margin on the 2021 revenue projection of $235 million. The 17 per cent EBITDA margin projection remains in place for 2022, with Keywood projecting $46.9 million in EBITDA on a revenue projection of $280.5 million.

Consequently, Keywood’s EV/EBITDA projections take a sharp dip from 74.5x in 2020 to a projected 13.3x in 2021, then to a projected 11.4x in 2022.

Keywood also projects steady gross margins of 45 per cent ($106 million) and 46 per cent ($129 million) for 2021 and 2022, respectively. Meanwhile, Keywood also foresees the EV/Revenue multiple dropping from 2.7x in 2020 to a projected 2.3x in 2021, then to a projected 1.9x in 2022.

The earnings-per-share picture looks slightly different, with Keywood projecting a drop from the expected $0.34/share in 2021 to $0.10/share in 2022, with the price-earnings ratio projections going the other way, moving from a projected 15.3x in 2021 to 52.1x in 2022.

Keywood notes the company has built a streak of 26 consecutive years with record revenue going back to its Paladin Labs days, and Keywood believes Knight will continue to acquire and launch new products to add to its portfolio of over 130 drug assets.

“The business has been relatively stable on a constant currency basis through a tough pandemic backdrop but growth returned in Q2 with new products generating $5 million or nine per cent year-over-year,” Keywood said. “Although the pandemic remains dynamic, we expect more normalized sales patterns to continue improving with greater selling access.”

The company’s success has not gone unnoticed, as The Globe and Mail recently placed Knight Therapeutics 27th in its list of Canada’s Top Growing Companies.

“The success of the last three years results from our team’s remarkable execution on our strategy to build a leading specialty pharmaceutical company and to expand Knight’s operations into Latin America,” said Samira Sakhia, President and Chief Executive Officer of Knight Therapeutics in the company’s September 24 press release. “We are proud to have successfully launched a Canadian born business onto the global stage and we will continue to work relentlessly to grow our pan-American ex-US footprint in order to fulfill our mission of bringing innovative and high-quality branded treatments to improve the health of patients in Canada and Latin America.”

The company also remains busy, as it has entered into a supply and distribution agreement with Switzerland-based Incyte Biosciences International Sàrl for the exclusive rights to distribute tafasitamab (sold as Monjuvi in the United States and Minjuvi in Europe) and pemigatinib (Pemazyre) in Latin America, with Incyte executing the development, manufacture and supply of tafasitamab and pemigatinib to Knight, who will seek regulatory approvals to distribute both medicines in Latin America.

Overall, Keywood believes there is an opportunity for potential investors to get solid value on Knight shares.

“There is a solid reward to risk tradeoff for Knight, heading into Q3 with better-than-expected results forecasted and downside support with shares trading near a 52-week low, at 11x EBITDA with an active NCIB near the $5 level,” Keywood said. “We see an opportunity to accumulate shares at these levels.”

Knight Therapeutics’ stock price has bumped up slightly, reporting an increase of 2.8 per cent for the year to date with a high point of $5.69/share coming on January 20.