Jonathan Ross Goodman, president and CEO of the then newly formed company Knight Therapeutics, in his new office in Montreal, Feb. 28, 2014.Christinne Muschi/The Globe and Mail
The argument for investing in Montreal-based Knight Therapeutics Inc. is simple: Jonathan Goodman, the founder and chief executive officer of the specialty pharmaceutical company, did wonders for Paladin Labs, his previous company, and he can do it again with Knight.
The problem? Investors have nothing to show for their faith in top management so far.
Knight shares have slumped 32 per cent over the past five years, underperforming the S&P/TSX Composite Index by about 70 percentage points.
The shares are down 8 per cent over the past 12 months, even as the company’s three largest peers in the Canadian specialty pharma sector – HLS Therapeutics Inc. , Theratechnologies Inc. and Bausch Health Cos. Inc. – are up an average of 75 per cent over the same period.
The bullish bet here is that patience will pay off, just as it did when Mr. Goodman led Paladin. Under his leadership, Paladin’s share price rose from its initial public offering of $1.50 in 1995 to a high of $151 before the company’s sale to Endo International PLC in 2014.
Knight was spun out from Paladin during the takeover with a single drug – Impavido, used to treat the parasitic disease leishmaniasis. More importantly, the new company came with similar ambitions and management. Mr. Goodman led the new company. Samira Sakhia, Knight’s president and chief operating officer, was previously the chief financial officer at Paladin.
The new company had plenty of cash and management’s solid track record for acquiring mature products from bigger pharmaceutical firms. In investor presentations, management dubbed the company Paladin 2.0.
Underscoring these ambitions for growth, Knight announced a deal in 2019 to acquire Brazil-based biopharmaceutical company Grupo Biotoscana, giving Knight an extensive footprint in Latin America, where the pharmaceutical market is growing at a faster pace than developed markets.
With the deal, completed last year, Knight now has a portfolio of products focused on gastrointestinal medicine, ophthalmology, women’s health and oncology. Revenue is rising with the acquisition: It increased 48 per cent in the fourth quarter, year-over-year, beating analysts’ estimates.
However, profits and profit margins during the quarter, which ended Dec. 31, missed expectations. Although the stock price has risen about 10 per cent since the quarterly results were released last week, the price is down 34 per cent since the Grupo Biotoscana announcement in 2019.
The pandemic has complicated efforts to integrate the Brazilian company, roll out new products and provide clarity on growth prospects. Transporting drugs can be slow in Latin America, and there are delays in getting treatment for some illnesses as the world focuses on COVID-19.
These short-term challenges aren’t turning away some enthusiastic investors and analysts, though, who remain locked on what they see as stellar potential in the company. Analysts expect the shares can rally to $7.50 within a year, on average, implying a gain of 38 per cent, as valuations rise with greater confidence in the company.
But the longer-term bet is this company can deliver bigger returns to investors who can wait out the setbacks.
“Bottom line is they are great people, with a good platform in a tough environment, particularly in Brazil,” Tim McElvaine, president of McElvaine Investment Management, which owns Knight shares, said in an e-mail.
Mr. Goodman, who many observers believe is still the key reason to buy the stock, is bolstering the belief that the shares are cheap at current levels.
Last week, he ended a conference call with analysts by pointing to the low price at which the company has been buying back its own shares this year.
“As you know, I’m frugal. Some say cheap. And we have purchased in 2021, year-to-date, 2.9 million shares at $5.25 a share. I’ll just leave it at that,” Mr. Goodman said.
Of course, buying shares when they’re down is the easy part. Driving the share price higher is what investors are waiting for – and seven years is a long wait.
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David Berman