RE:Mackie Research Says Take a Pass on KnightAlternative perspective to Mackie...as per usual
RBC - BUY - OUTPERFORM - A marathon, not a sprint
Our view: We view Knight’s Q4/18 results as neutral and have no changes to our outlook. Not surprisingly, most of the focus on the conference call remained on the ongoing director dispute along with the company’s recent business development efforts. While Medison’s concerns around the pace of expansion are valid, we attribute this to a far more competitive deal environment rather than to management failures and/or conflicts of interest.
Results summary – no surprises. Revenues of $3.9MM were higher than our $3.2MM estimate and consensus of $2.7MM. Operating expenses came in ~$1.0MM ahead of our estimate, largely due to higher professional fees (associated with business development) along with the timing of certain expenses. Additionally, GUD reported EPS of $0.00, compared to our $0.02 estimate and consensus of $0.03. The release also indicated that Medison’s board of directors declared and approved a $4.5MM dividend payable to Knight (last received in Q3/17). The company ended 2018 with ~$787MM in cash and cash equivalents
Business development and other highlights. Following the recent acceleration in the pace of business development, there was increasing focus on Knight’s pipeline of products. The company indicated that a considerable portion of its commercialization efforts for Probuphine would be focused on physician training and reimbursement. Furthermore, it expects an Iluvien launch later in 2019 (likely in H2). Finally, the company also noted that it received a Notice of Non Compliance (“NON”) from Health Canada regarding its NDS for Netildex. However, the NON centers around manufacturing, rather than any clinical concerns. Despite an increase in the pace of dealmaking recently, we stick to our view that a large, transformative transaction(s) may still be some time away.
Our thoughts on the Medison situation. We continue to have a high degree of confidence in Knight’s management team and reiterate our view that GUD shares represent an attractive risk/reward scenario for longterm investors (currently 1.1x P/B vs. Paladin Labs’ historical average of 2.0x). We also believe that the relatively modest pace and size of business development are a function of management’s discipline/conservatism in a spec pharma deal environment that is substantially more competitive than it was at Paladin, rather than a conflict/failure on management’s part. In our view, Knight’s share price performance since inception (~5- year period) is hardly a “failure”, especially considering the two-decade journey of Paladin under which the shares still managed to provide an ~30% return compounded annually until its takeout, despite large-scale business development that took place mainly in the latter part of its history.