Knight Therapeutics is still a big question mark, this investor says

It’s been literally years of waiting for Canadian specialty pharma company Knight Therapeutics (Knight Therapeutics Stock Quote, Charts, News, Analysts, Financials TSX:GUD) to let the proverbial dogs out and now, with a new CEO at the helm, shareholders may be wondering where GUD is headed. Portfolio manager Jason Mann says the future may still be rosy but the stock is staying in the “show me” category until earnings start to improve.

“This is a funny one because obviously it had kind of a superstar CEO in Jonathan Ross Goodman that that took Paladin Labs from zero to a major acquisition and came out with the same fanfare [with Knight Therapeutics], raised a lot of money in the early days and kept doing deal after deal in terms of raising cash but then never really put that cash to work,” said Mann, chief investment officer of EHP Funds, speaking on BNN Bloomberg on Tuesday.

It’s a new day for Montreal-based Knight Therapeutics, as former Chief Operating Officer Samira Sakhia officially took the reins on September 1, as previously announced in May, and giving Goodman a job as Executive Chairman while remaining GUD’s largest shareholder. 

“I have worked side by side with Samira for 18 years where I have had the privilege of watching her develop into a seasoned, top brass executive. Knight is my baby, and as such, I would only entrust its stewardship to the best and brightest. As Executive Chairman and Knight’s largest shareholder, I will remain engaged and focused on non-operational areas where I can add the most value,” said Goodman.

Under Sakhia’s leadership, Knight, which acquires and commercializes proven pharmaceutical products for the Canadian and Latin American markets, looks to continue its acquisitions, the latest of which being the exclusive rights to Alzheimer’s drug Exelon in Canada and Latin America. First approved way back in 1997 and available worldwide, Knight bought Exelon for US$168 million in cash plus additional milestone payments up to US$12 million. Knight said Exelon had 2020 revenues in Canada and Latin America of US$47 million.

That purchase was small compared to GUD’s 2019 shell-out of $420 million for LATAM biopharm company Grupo Biotoscana, which really put Knight on the map as a Latin American-focused business.

But the trail must seem like a long one for some Knight investors, with the company starting out in 2014 as a spinout from Paladin at the time of its sale to Endo Pharmaceuticals. That makes seven years and counting with Knight still looking to some like a company in the set-up phase of expansion.

Mann says Knight’s patience in terms of pulling the trigger on more licensing deals could now be looked at as either virtue or vice.

“That was the challenge — you had this big pile of cash and you could look at it and say that’s just good discipline in not overpaying in a biotech market that was running too hot. Or you could look at it and say, ‘Well, why do I keep giving cash if nothing’s going to happen with my investment, shouldn’t I just move on?’” Mann said.

“So, we actually had a short position in this we are long-short, say, six months ago and we covered that recently as the share price has sort of bottomed out here,” Mann said.

“Knight has actually been putting some of that cash to work including doing share buybacks, [but] the problem for us is it’s still sort of sitting here with poor price momentum,” Mann said. “It’s not very volatile but there’s not a whole lot going on that would cause volatility, but really not a lot of earnings to speak of still,” he said.

“And that’s the problem for us. It’s expensive on an EV/EBITDA or cashflow or a price to equity, a fantastic balance sheet, they still have tons of cash so they can do lots of deals, [but] I think it’s a ‘show me’ story at this point. It’s just neutral for us and waiting for something more to happen on the acquisition and the growth front,” Mann said.

Knight last reported quarterly financials on August 13 where revenue climbed 24 per cent year-over-year to $65.8 million and adjusted EBITDA grew 23 per cent to $9.4 million. Knight said the topline growth came from increased demand for its fungal infection products due to the COVID-19 pandemic, the acquisition of Exelon and growth related to a number of recently launched products.

“During the last six months we executed on multiple fronts with our business development team closing Exelon and already beginning work on integration, the commercial team delivering on strong growth of our key brands and the operational teams executing on integration and systems implementation,” said Sakhia in a press release.

Knight’s share price hit a high of about $11.00 back in 2017 but the stock has been sliding over the ensuing years. GUD has been flat over 2021 so far and trades around $5.50 per share.