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Second Largest Knight Therapeutics Shareholder Calls for Substantial Change

  • Medison Biotech sends open letter to Knight Board of Directors
  • Letter highlights Knight’s lack of strategic vision and poor execution as well as CEO’s significant conflicts of interest and the Board’s lack of independence and expertise

/EIN News/ -- PETACH TIKVA, Israel, Feb. 28, 2019 (GLOBE NEWSWIRE) -- Medison Biotech Ltd. (“Medison”), which together with its affiliates owns more than 10.4 million shares, or 7.3% of Knight Therapeutics, Inc. (TSX:GUD) (“Knight” or “the Company”) has sent an open letter to Knight’s Board of Directors highlighting the urgent need for change at the Company. A copy of the letter is included below:

Ratio of Price to Tangible Book Value Per Share
Source: FactSet.


Dear Fellow Directors:

I write on behalf of Medison Biotech Ltd. (“Medison”), which together with its affiliates is the owner of more than 10.4 million common shares of Knight Therapeutics, Inc. (“Knight”). Medison and its affiliates are Knight’s second largest owner. In addition to being the founder and Chief Executive of Medison, I am its majority owner and, as you know, Medison’s representative on the Knight Board of Directors (the “Board”).

I am extremely troubled by the lack of strategic vision and poor execution at Knight. I also believe that Jonathan Goodman, Knight’s founder and CEO, has very serious conflicts of interest and that the Board lacks the independence and industry experience necessary to provide objective oversight.

I have tried, for many months now, to address these topics with you in the privacy of the boardroom (and in private meetings and correspondence outside the boardroom) – including by providing you with a comprehensive and critical review of the current strategic issues, along with a revised business plan that I believe would create significant value – to no avail. It is with great reluctance that I am now addressing these issues publicly. I believe that Knight can create substantial shareholder value and I cannot allow that opportunity to be further delayed, or lost entirely. Knight’s shareholders deserve better.

Mr. Goodman was a leader in the Canadian pharmaceuticals business, after following his father and brother into the industry. He built Paladin Labs with energy, vigor and vision. The global pharmaceutical industry was amazed when he sold Paladin for a significant premium to Endo Pharmaceuticals as part of a creative tax-inversion transaction. I believed – when I agreed to swap stock in Medison for stock in Mr. Goodman’s new venture, Knight, in 2015 – that Mr. Goodman, in partnership with Medison, could build the leading innovative pharmaceutical company for the “rest of the world.”

Three years later, I now realize that I was mistaken.

Lack of Strategic Vision and Execution at Knight

When Knight was spun-off from Paladin as part of the Endo transaction, Mr. Goodman’s stated vision was to create a powerhouse, Canadian-based specialty pharmaceutical company. Unlike his father and brother, who have succeeded in the generic drug business, Mr. Goodman told investors that Knight would provide innovative therapies for life-altering conditions in Canada and select international markets.1

But, five years later, Mr. Goodman has still not built a specialty pharma business at Knight.

In fact, Knight’s pharmaceutical business generated just $11 million of revenue from just three products (one of which was inherited from Paladin) over the last twelve months. Yet, Canadians spend more than $25 billion annually on pharmaceuticals. By comparison, Medison operates in a country (Israel) that spends one-tenth the amount that Canada spends on drugs. And yet, we grew our business by more than $65 million in the last three years alone by, among other things, adding twelve global partners that contributed 15 newly approved products and multiple pre-approved products.

Priorities appear to be different at Knight. Instead of building a sustainable business development program that energetically licenses and launches specialty pharma products in Canada, Mr. Goodman and Knight have been investing cash in venture capital funds, loaning money to a variety of healthcare companies (including generic drug companies, over-the-counter medicine companies, makers of medical devices, and a Mexican generic pharmaceutical distribution company) and, mostly, sitting on a large pile of excess capital.

Every year, Medison adds to Knight’s cash by providing dividends. Since the time of the Medison / Knight stock swap in 2015, Medison has provided Knight with nearly $12 million in dividends from Medison’s successful business. (Knight has never paid a dividend.) Additional dividends from Medison will soon be distributed to Knight with respect to Medison’s 2018 profits.

But Knight has failed to put this capital to work for shareholders: it has more than $745 million of idle cash, equal to nearly 70% of Knight’s market capitalization. With all that cash earning essentially no return, it is not surprising that Knight’s stock is flat since the time Medison became an owner, more than three-and-a-half years ago.

Knight’s shareholders did not invest in the company to own cash, limited partnership interests in venture capital funds, or to lend money to healthcare companies with no strategic value. But this is exactly what Knight shareholders have funded.

In fact, Knight is currently being valued in the stock market like an asset holding company, not a growth-oriented, specialty pharma company. The stock trades at just slightly above book value – the balance sheet value for its limited partnership stakes in venture capital funds, minority equity investments (including in Medison), loans and cash – and without much regard for Knight’s self-described bright future of pharmaceutical sales and profits from its licensing and commercial operations.

The public markets are seemingly skeptical that Knight, Mr. Goodman and this Board will ever produce attractive returns from the assets we have been entrusted to manage. And, as shown in the chart below, the market’s confidence in Knight’s use of its balance sheet has never been lower.

A photo accompanying this announcement is available at http://www.globenewswire.com/NewsRoom/AttachmentNg/ad9eb9ca-4a1b-4f1e-b45d-3cf5c1901d26

This skepticism is not surprising, given Knight’s most recent use of shareholder capital. Earlier this month, Knight loaned $10 million to a Mexican pharmaceutical company, Moksha8, which distributes mostly generic drugs. Knight is committed to lend up to $125 million to Moksha8 and will appoint two observers to Moksha8’s board to “boost Moksha8’s capabilities.”2 I do not believe this loan or commitment of management’s time and resources is consistent with Knight’s declared strategy and I fail to see how it will ever generate an attractive return for Knight shareholders. With no product rights, Knight’s “upside” on this transaction is purely that of a financial counterparty, as if Knight were a merchant bank or credit fund, instead of a specialty pharma company. In short, this loan is an example of rudderless leadership, a loss of focus and a lack of strategic direction.

Even when Mr. Goodman and Knight attempt to focus their efforts on the pharmaceutical business in Canada, the execution has been wanting. Most of Knight’s licensing transactions have been for mature, non-innovative therapies that lack the growth potential, IP protection and margin opportunity Knight claims to covet.

For example, in September, Knight announced a licensing deal with Jaguar Health Inc. for Mytesi.3 But Mytesi has marginal sales (net sales of less than USD $2 million per quarter) in the United States (a market approximately twenty times the size of Canada and Israel combined) and no signs of significant growth. Jaguar Health’s stock recently traded at $0.23 per share, down 90% over the last year, in recognition, I believe, of the lack of global opportunity for Mytesi. At Medison, we would never have licensed this product because it will never be a big driver of sales or profitable growth.

Licensing and marketing prosaic compounds or those that treat primary-case diseases was not the original mission of Knight and does not, in my view, put the company on the path to greatness.

Knight should be laser-focused on (and should use its substantial capital base for) obtaining licenses to commercialize highly innovative, cutting-edge compounds that use new mechanisms of action or other innovations to treat rare or severe diseases. Knight should obtain licenses for Canada and other "rest of the world" markets and become the go-to partner for producers of such compounds. At Medison, we have proven that the licensing, commercialization and distribution of such products is economically appealing, delivering steady growth, profitability and attractive returns on capital. In contrast, Knight seems willing to chase, license and distribute mundane compounds with limited lifespans, modest peak sales and substantial competition.

I believe this is a significant strategic mistake that will produce mediocre shareholder returns, at best.

Conflicts of Interest and Lack of Board Independence

I am equally worried about Mr. Goodman’s potential conflicts of interest and the Board’s inability to faithfully serve shareholder interests through objective oversight of the company and its leadership team.

Mr. Goodman is a substantial, indirect owner of Pharmascience, a large and well-respected pharmaceutical business started by Mr. Goodman’s father and run by his brother, Dr. David Goodman. In fact, I believe Mr. Goodman’s percentage ownership in Pharmascience exceeds his stake in Knight. This means a dollar of profit at Pharmascience is worth more to Mr. Goodman, I believe, than a dollar of profit at Knight.

Until recently, Knight and Pharmascience had very different business models and plans, which mitigated the potential conflict of interest. Pharmascience was focused on manufacturing and distributing generic drugs in Canada; Knight was supposedly focused on specialty pharma products. But this has changed.4

Pharmascience’s wholly owned subsidiary, Pendopharm, announced in 2016 that it “is actively engaged in licensing, partnering, developing and marketing specialty prescription medicines.”5 And since then, Pendopharm (and its parent, Pharmascience) have been investing in, and licensing products for Canada from innovative, specialty pharma companies, including companies with which, in my opinion, Knight should be doing business.

I was astonished to learn, for example, that Pendopharm and Pharmascience received distribution rights in Canada from EDESA Biotech,6 Vivo Cannabis7 and RDD Pharma,8 all highly innovative companies that could (and should) be doing business with Knight. These are exactly the sorts of products Knight should be licensing. Instead, the Goodman family business has licensed them.

Mr. Goodman, by virtue of his significant ownership stake in Pharmascience, wins either way. He owns a stake in the profits of these compounds in Canada whether they are licensed by the family’s Pharmascience company or by Knight. But Knight – the company to which this Board owes fiduciary duties – and its public shareholders only benefit if Knight moves with agility and skill to license valuable compounds such as these ahead of Pharmascience. So far, at least, Pharmascience has out-maneuvered and out-paced Knight, though it is unclear that Mr. Goodman is personally any worse off economically.

I am sure our shareholders expect that such conflicts of interest are managed carefully by a vigilant and independent Board. But, as you know, this Board has its own independence issues that make vigorous oversight practically and socially difficult.

James Gale, our Chairman, for example, has numerous business dealings with the Goodman family. He is business partners with the Goodman family through their joint ownership of an investment management business, Signet Healthcare Management, according to filings with the U.S. Securities and Exchange Commission.9 One of the funds Mr. Gale manages was a co-founder with Pharmascience of a pharmaceutical business in the United States that appears to have global ambitions.10 Mr. Gale serves on the board of that business with Mr. Goodman’s brother, David, who is the CEO of Pharmascience.11 In another conflicted transaction, Knight provided the debt financing for an acquisition in which Signet (owned by Mr. Gale and the Goodmans) was the equity backer.12

In my opinion, the number, depth and complexity of Mr. Gale’s economic relationships with the Goodman family make it quite difficult for shareholders to have confidence that he, as Knight’s Chairman, can provide independent, vigorous and objective oversight of Knight’s business and its conflicted CEO, Jonathan Goodman.

Each of the rest of you have been close to Mr. Goodman for decades, having been school friends, neighborhood pals or business associates. I admire the loyalty and friendship you show Mr. Goodman. But frankly, I do not believe you can review Mr. Goodman’s performance or conflicts with independence, given these longstanding relationships. I believe this Board is thus critically missing the independence and dedication to shareholder interests that are the hallmarks of good corporate governance. Friendship is not a good criterion for public company Board service. 

Moreover, other than Mr. Goodman and me, no one on this Board has operated a pharmaceutical business. Without independence and domain expertise, even the most well-meaning professional cannot effectively provide oversight.

Conclusion

As I have conveyed in the boardroom, I believe Knight is strategically adrift, failing to execute on its full potential. The Board has tolerated Mr. Goodman’s indolence, the stockpiling of excess capital and significant conflicts of interest for far too long. With the stock trading near a three-year low, it is time for change.

I believe Knight needs unconflicted leadership and an unwavering commitment to its founding mission of creating an innovative pharma leader serving the Canadian and other “rest of the world” markets. This Board should insist that Mr. Goodman relinquish his role at Knight or his financial stake in the competing family business. And, the Board should select new, experienced directors that are able to provide objective oversight of the management team with undivided loyalty to Knight’s shareholders.

If you are unwilling to accept these suggestions, I plan to exercise my rights as a shareholder to further the interests of all of Knight’s owners.

Sincerely,

Meir Jakobsohn
Chief Executive Officer

Medison has engaged Olshan Frome Wolosky LLP and Goodmans LLP as legal advisors.

About Medison

Medison is one of the world's largest commercial partners of leading global biotech companies. Backed by three generations of experience in the healthcare industry since 1937, Medison is uniquely qualified to provide the complete spectrum of integrated services for international companies looking to enter or expand their presence in Israeli and selected ROW markets. Medison runs Medison Ventures, a corporate venture arm with a dedicated research and evaluation team boasting deep scientific and commercial backgrounds. Medison Ventures operates a scouting program to cater its partners and is an active investor in life science projects around drug development and digital health.

Additional information can be found at www.medison.co.il.

Forward Looking Statement

This news release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words "expect", "may", "will", "should", "believe", "plans" and similar expressions are intended to identify forward-looking information or statements. The forward-looking statements and information are based on certain key expectations and assumptions made by Medison. Although Medison believes that the expectations and assumptions on which such forward-looking statements and information are based are reasonable, undue reliance should not be placed on the forward looking statements and information because Medison can give no assurance that they will prove to be correct. By its nature, such forward-looking information is subject to various risks and uncertainties, which could cause the actual results and expectations to differ materially from the anticipated results or expectations expressed. Readers are cautioned not to place undue reliance on this forward-looking information, which is given as of the date hereof, and to not use such forward looking information for anything other than its intended purpose. Medison undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.

For more information:

Investors

Shorecrest Group
Christine Carson
647-931-7396

Media

Longview Communications & Public Affairs

Joel Shaffer      
416-649-8006     

Peter Block
416-649-8008

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1 See Knight Therapeutics, Inc. Notes to the interim condensed consolidated financial statements for the three-month period ended March 31, 2014. Page 1: “The Company is a specialty pharmaceutical company and its principal business activity will be developing, acquiring, in-licensing, out-licensing, marketing and distributing innovative pharmaceutical products.

2 https://globenewswire.com/news-release/2019/02/18/1733742/0/en/Knight-Signs-GUD-Bueno-Latin-American-Strategic-Funding-Deal-with-Moksha8.html 

3 https://globenewswire.com/news-release/2018/09/24/1575304/0/en/Knight-Therapeutics-and-Jaguar-Health-Announce-Strategic-Partnership.html

4 Indeed, Knight acknowledged in 2017 that Pharmascience is now one of its principal competitors. See Knight’s 2016 Annual Information Form (published in March 2017) at page 20 (noting that Knight “competes with specialty pharmaceutical companies such as … Pharmascience Inc.” Available at https://www.gud-knight.com/wp-content/uploads/2016-Knight-AIF.pdf

5 http://pendopharm.com/newsroom/pendopharm-launches-vibativ-in-canada/.

6 https://www.newswire.ca/news-releases/edesa-biotech-completes-financing-to-develop-novel-dermatology-and-anorectal-treatments-646005543.html.

7 https://markets.businessinsider.com/news/stocks/vivo-partners-with-pharmascience-to-develop-novel-cannabis-products-1027589851.

8 http://www.preipopharma.com/press-releases/RDD-Pharma-Raises-$9.5M-in-Series-B-Funding-to-Fuel-Global-Development.

9 https://adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=284087.

10 http://www.bionpharma.com/Investors.html.

11 http://www.bionpharma.com/bod.html.

12 https://www.medicure.com/news_details.php?id=122490.

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