Knight Therapeutics scores top and bottom line beats, Paradigm reports

Paradigm Capital Markets analyst Scott McAuley is still a fan of Knight Therapeutics (Knight Therapeutics Stock Quote, Charts, News, Analysts, Financials TSX:GUD), maintaining in a research note to clients on Friday a “Buy” rating on the company while his target price from $7.75/share to $7.50/share.

Founded in 2014 and headquartered in the Montreal suburb of Westmount, Knight Therapeutics is a specialty pharmaceutical company focused on acquiring, inlicensing, selling and marketing pharmaceutical products in Canada, Latin America and other international markets.

McAuley’s latest analysis arrives after Knight Therapeutics reported its third quarter financial results; though McAuley noted the results to be better than expectations, other factors fuelled the decision to lower the target.

“We are lowering our target to $7.50 (was $7.75) based on the average of 1.2x book value per share and 2.0x EV/Revenue on our 2022 estimates,” McAuley said. “This decrease is driven by changes in cash and other financial assets instead of changes to our estimates.”

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Knight’s financial quarter was headlined by $73.3 million in revenue for a 62 per cent year-over-year increase, while also significantly outstripping the Paradigm estimate of $55.3 million and the consensus expectation of $58.7 million. South America continues to be the big money-maker for Knight, as its top three markets are Brazil ($31.3 million in sales), Colombia ($14 million) and Argentina ($10.4 million).

The company’s margin performance provided largely in-line readings, with the gross margin coming in at 51.5 per cent compared to the Paradigm estimate of 52.3 per cent, though Knight’s $17.3 million EBITDA quarter (compared to the consensus $8 million estimate and Paradigm’s $8.5 million projection) fuelled a jump in the company’s EBITDA margin to 23.6 per cent, performing well against the projection of 15.3 per cent.

However, there were a few down spots, namely a 17 per cent sequential drop in the company’s cash flow from operations on account of having extra inventory on hand, as well as a $21.3 million loss in its strategic fund investments primarily driven by the decline of Singular Genomics Systems, a subsidiary of Domain Associated LLC.

The company does retain a solid liquidity position, with $156 million in cash and marketable securities available, along with $33.9 million in loans outstanding, $6.7 million in direct equity investments and $148.9 million in fund investments compared to $36.3 million in outstanding bank loans for debt.

“During the last nine months we executed on multiple fronts with our business development team closing Exelon, entering into an exclusive supply and distribution agreement with Incyte while the commercial team continued to deliver on strong growth of our key brands and the operational teams executing on integration and systems implementation,” said Samira Sakhia, President and Chief Executive Officer of Knight Therapeutics Inc. in the company’s November 11 press release.

The company was also busy in the personnel space, as it brought in Monica Percario as the new Global VP Scientific Affairs, Daniela Marino as the new Global VP of Legal and Compliance, and Susan Emblem as the new Global VP Human Resources.

The company’s newly released financials have prompted a few updates to McAuley’s financial projections, raising his 2021 revenue expectation to $244.6 million from the previously estimated $234.5 million for a potential year-over-year increase of 22.6 per cent, though the 2022 projection remains at $281.6 million for a potential year-over-year increase of 15.1 per cent.

McAuley also projects an uptick in the company’s 2021 EBITDA as he now projects it at $41.7 million for a margin of 17 per cent compared to his initial estimate of $37.4 million and a 15.9 per cent margin. As for 2022, McAuley’s previous projection of $53.2 million of EBITDA remains, for a margin of 18.9 per cent.

In relation to the consensus, the Paradigm revisions are essentially in line for 2021, with the consensus projecting $242.5 million and $42.8 million for revenue and EBITDA respectively, while the consensus is slightly more optimistic about 2022 with projections of $288.7 million and $54.9 million for revenue and EBITDA.

“These results demonstrate GUD’s improving operations,” McAuley said. “However, given the temporary nature of the antifungal revenue with high levels of COVID hospitalizations and lumpy Exelon orders, we do not see this as a normal quarter moving forward.”

Despite the look of a roller coaster, Knight Therapeutics’ stock chart has been fairly consistent over the course of the year, having lost 2.6 per cent of its value to date, highlighted by a high point of $5.69/share coming on January 20 and only dropping below $5.00/share once, at $4.99/share on March 24.

At the time of publication, McAuley’s new $7.50 target represented a projected 12-month return of 42 per cent.