Knight Therapeutics Inc. (TSX:GUD, Financial) is a specialty pharmaceutical company headquartered in Montreal, Canada and listed on the Toronto Stock Exchange. It's run by Jonathan Goodman, who built Paladin Labs, another specialty pharmaceutical company that was taken private in an all-cash deal, making its shareholders very happy. With Knight, investors are hoping that he can repeat this feat.
The Paladin story
In 1995, Goodman co-founded Paladin Labs, the predecessor company to Knight Therapeutics. It launched an IPO in that year at $1.50 per share. In 2014, Endo Pharmaceuticals, an American pharmaceutical company, acquired most of the assets of Paladin Labs for $3 billion, or $151 a share, a 100 times increase from its IPO price.
As part of the transaction, Knight Therapeutics was spun off to the shareholders of Paladin. Goodman owns about 20% of Knight and is its largest shareholder and executive chairman. He is also connected to Pharmascience Inc., a privately held Canadian pharmaceutical company which is run by his brother and father.
About Knight
Knight Therapeutics operates in Canada, Latin America and select international markets, engaging in developing, acquiring, in-licensing, out-licensing, manufacturing, marketing and distributing pharmaceutical products as well as financing or investing in other life sciences players and private equity venture companies with the goal of securing product distribution rights. As of the third quarter of 2021, Knight had invested $153.20 in its investment ventures.
Knight’s international strategy in and outside its home country of Canada is focused on identifying products and companies that fit within its existing business model, but that are located in select areas such as Latin America, Middle East, Australia, Sub-Saharan Africa and other countries, excluding the U.S., Western Europe, Japan and China. Knight believes Latin America and its other areas of interest will provide potentially significant growth and value opportunities. Knight focuses on licencing late stage products which have already gone through clinical development. The company's strategy is to get involved in procuring regulatory approvals and go-to-market strategies; it does not have a interest in basic research or clinical development.
Focus on South America
In October 2019, Knight acquired Brazilian speciality drug product company Grupo Biotoscana to establish a Latin American growth platform. The cost of the acquisition was 418 million Canadian dollars ($332 million). Knight's integration of Grupo Biotoscana is still ongoing.
Knight has also continued to in-license products from external partners in 2021. For example, in May 2021, it acquired the exclusive rights to manufacture, market and sell Exelon® (aka rivastigmine, a treatment for dementia associated with Alzheimer’s and Parkinsons) in Canada and Latin America for an upfront and milestone payment of C$217,331 and entered into exclusive supply and distribution agreement with Incyte (INCY, Financial) for oncology drugs tafasitamab and pemigatinib for Latin America.
Source: Knight Therapeutics investor materials
Balance sheet
The company's balance sheet is still quite robust despite spending a large amount of cash on acquisitions in the last three years. The company is mostly funded by equity and has low debt.
The company is beginning to show increasing revenue and some operating profit on the bottom line. Prior to 2019, the profits were from financial activity and not from operations.
The company is undertaking heavy capital expenditure in acquisitions and integration, so free cash flow is deeply negative.
Knight is pretty much in an investment mode right now, but analysts are expecting revenue and operating income to ramp up in the years ahead, issuing mostly bullish targets with an average upside of 35% over the next 12 months.
The company has been deploying some of its cash in buying back stock. Most recently, it repurchased 12,321,864 common shares in 2021. I think this is a good idea as the stock appears to be undervalued.
| Ticker | Company | 3-Month ShareBuyback Ratio | 6-Month ShareBuyback Ratio | 1-Year Share BuybackRatio | 3-Year Share BuybackRatio |
| TSX:GUD | Knight Therapeutics Inc | 3.65 | 6.27 | 9.40 | 6.20 |
Jon Goodman and other insiders have been buying the company's stock, according to Canadian Insider data. This would support the thought that the stock is undervalued.
The GF Value chart also shows that the stock is significantly undervalued, though the GF score is not too great, suggesting lackluster gains going forward based on the back testing conducted in the GF Score studies. However given the short operating history of the company my feeling is the score is too pessimistic.
Conclusion
Now, that Knight has built up its platform in Canada and Latin America, investors are waiting for results. I think it's going to be a slow and steady climb from here. Investors just must be patient as Goodman and his team build up value.
To a large extent, investors are betting on the jockey here. Knight is an interesting opportunity as it gets us into the niche specialty pharmaceutical market in Canada and Latin America. These markets do not get much attention from the large players, and unlike the major markets such as the U.S., Europe, China and Japan, they are under-exploited.
Knight is run by a proven entrepreneur who has delivered tremendous value to shareholders before and is well connected in the pharmaceutical world, particularly in the areas of acquisitions, dispositions, and licensing. However, this investment is a slow-build, and investors may have to wait for years before they can expect any kind of windfall.
I view Knight as an adult version of the famous "marshmallow test,". The lesson is delayed gratification is the key in investing. The stock has not appreciated much over the last 7+ years since the IPO and pays no dividend. As the company builds its platform it's a bit like watching paint dry. We have a choice between instant gratification (one marshmallow) or waiting until later to get better rewards (a bag of marshmallows).
