Assertio Holdings, Inc. Q3 FY2022 Earnings Call

Good morning and welcome to the Assertio Holdings, Inc. Third Quarter 2022 Financial Results Conference Call. Note this event is being recorded. I would now like to turn the conference over to Matt Kreps from Dara Associates, Investor Relations to Assertio. Please go ahead.

Thank you, Terry. Good afternoon and thank you, everyone, for joining us today to discuss Assertio's third quarter 2022 financials. The news release covering our earnings for this period is now available on the Investor page of our website at investor.assertiotx.com. I would encourage you to review the release and the accompanying presentation as it is important to today's discussion. With me today are Dan Peisert, President and CEO; and Paul Schwichtenberg, Senior Vice President and CFO. Dan will open the remarks and provide an overview of the business, followed by Paul, who will review our financials. After that, we will open the call for your questions. During this call, management will make projections and other forward-looking statements regarding our future performance. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in this afternoon's press release, as well as Assertio's filings with the SEC. These and other risks are more fully described in the Risk Factors section and other sections of our annual report on Form 10-K. Our actual results may differ materially from those projected in the forward-looking statements and Assertio specifically disclaims any intent or obligation to update these forward-looking statements, except as required by law. And with that, I'll now turn the call over to Dan.

Thank you, Matt. Welcome to everyone joining us this afternoon. The third quarter and the weeks that immediately followed were one of the most important strategic quarterly periods for Assertio. We've pivoted from a period of restructuring in which we improved the profitability of our business to the creation of a new commercial platform and now towards growth. Not only did our financial results in the quarter once again exceed our forecast in nearly every metric, we were able to extend our debt maturity and cut our cost of debt capital from 13% to 6.5%, incredibly low in today's market. We exited an unprofitable segment of our business, increasing our future revenue and profit, and added a new source of accretive revenue in Sympazan that adds to the diversification of our top line. As a result of these actions, today we are better positioned to execute other possible business development transactions, and our stock is more attractive to existing and potentially new public and private investors. When we began 2022, we had five key priorities. I'm proud to say that with our actions in the third quarter, we have nearly achieved all five. In a tumultuous job environment, we set our first priority on retaining our employees and attracting new talent. We've had 100% retention in our employee base and have added eight new employees, over 42% growth. Our second priority was to prove the efficacy of our new commercial model. We were able to successfully transition Otrexup into the non-personal digital model without negative impact. Supply constraints and competitive pressures have shifted the growth targets we had for the brand in 2022 into 2023. Our third priority was to reduce the concentration in INDOCIN. The acquisition of Sympazan last month provides a good start on this priority, but we're not done by any means. We have far more to go. Fourth was the execution of a life cycle management opportunity for INDOCIN. We'll be requesting a pre-IND meeting with the FDA within a matter of days and should have feedback from them shortly after Thanksgiving. That will put us in a position to file an IND and begin a new clinical program for INDOCIN aimed at expanding the label, which is all expected to begin in early 2023. Our final priority was to improve our balance sheet and reduce our cost of capital. This goal became far more difficult than we imagined now that rates are nearly 400 basis points higher than they were this time last year. However, we executed on a refinancing transaction this quarter that pushes our debt maturity back to September of 2027, cuts our cash interest cost in half, and frees up a substantial amount of cash flow for business development. We think the M&A environment is very robust and buyer-friendly right now, which the Sympazan transaction exemplifies. We're able to acquire that asset for $15 million, including the milestone for the new patent. In the trailing 12 months ended September 30, Aquestive recorded $9.9 million in net sales. We've acquired an asset that is growing. We'll soon have patent protection to 2039 and has gross profit margins very close to our corporate average for 1.5 times trailing revenues. The refinancing was especially timely in this environment as this M&A environment continues to ripen and we now have the cash resources and balance sheet to add more products to the portfolio. In addition, we've built the internal resources and hired external resources to help us identify, diligence, and contract for more than one transaction at a time. Last quarter, we discussed enhanced commercial strategies for INDOCIN that would be implemented in our third quarter without much specifics on what these strategies were. Assertio has taken action to withdraw from the Medicaid drug rebate program, which includes 340B. Participation in these government programs is voluntary. As a result of the significant growth we saw in the utilization of our products inside the 340B program, we were incurring significant losses that summed to $6 million annually. By exiting, we expect to see an immediate increase of $6 million in our annual net revenue and profit. Our actions to remove our products from this program were made public in July. Since we wanted to avoid end customers that had seen the public notice by significant quantities of product under 340B ahead of our exit, we deliberately reduced channel inventories for INDOCIN in September to under 5 days from what is normally in the low 20s. This had a negative impact on our volumes and revenues in the quarter, which we expect to reverse in our fourth quarter. Offsetting this was a one-time reversal of an over accrual for expected product returns, which Paul described in further detail. Our estimates for a $6 million benefit assume that these unprofitable sales cease because this price is no longer available. However, while it's still far too early to conclude, the opportunity does exist for there to be upside to this. If customers find our products medically necessary and continue to acquire them. We are offering programs for customers to purchase directly from Assertio at a discount to the published list or WAC price as well. We're quite excited about the potential for Sympazan. It fits all of the criteria that we were looking for in our business development search. First, long-lived IP. Shortly after completing the acquisition, the Quest have received the notice of allowance for a patent which triggered the $6 million milestone payment that will be made later this month. We expect this patent to be issued and included in the Orange book during the first quarter of '23 and will extend IP protection to 2039. Second, it's on the market and accretive. Sympazan had been generating annual sales of about $9.5 million. On that basis, we expect it to add between $4 million to $4.5 million in annual adjusted EBITDA and $0.05 in adjusted EPS accounting for the full dilution from the convert. Third, it generates opportunities for growth. The Quest have reported $2.3 million in net sales for the third quarter, which represented year-over-year growth of 15%. From what we saw in diligence, there's very little competitive pressure and it's a stable and positive payer environment, a very different situation than Otrexup. The product has a nice niche to complete the treatment of LGS. Many of these children are put on a keto diet in addition to medical therapy to control their seizures. We noticed in diligence that few physicians were aware of the commonly used liquid clobazam products containing 33% or more of the daily carbohydrate limits under the restrictive keto diet. Sympazan has just 2% of the carbohydrate content that the liquid formulations have. In addition, we are excited about the opportunity to partner with the patient advocacy community, which is very strong in both epilepsy and LGS. We're proud to be part of this community now and raising awareness. November 1 was LGS Awareness Day and it also marked the beginning of epilepsy awareness month. Fourth, it fits within our commercial model. Quest have launched this product in 2018 with 30 reps. And prior to our acquisition, they had less than 10 filled territories. We think that Sympazan will fit very nicely into our non-personal platform, where we can expand upon the physician reach with what is largely an educational message to treating physicians who are very familiar with the clobazam molecule already. In terms of our goal to further diversify our business, while mathematically Sympazan does help, it was on the smaller side. As we had mentioned, we have seen the smaller-sized acquisitions and our M&A pipeline accelerate while the larger ones are being delayed. We are still pursuing those larger transformative transactions. We had originally set a goal of acquiring products that brought us an additional $50 million in gross profit by 2024. The approximate $10 million from Otrexup and now $8 million from Sympazan, we are a little over one-third of the way to accomplishing that goal. We have another year to go, a deep pipeline, a favorable M&A environment, and the capabilities to multitask, so I'm confident we can accomplish this goal. Finally, we're still expecting that 2022 is the pivotal year for our investment in NES. They are very close to being able to finish their NDA for submission to the FDA. As a reminder, our investment converts to equity upon FDA acceptance of the NDA. The FDA has up to 60 days to decide whether or not to accept. We do not expect to provide any update to investors until it is known whether or not the FDA has accepted the filing. Now, I'll turn the call over to Paul to discuss our quarterly results.

Thank you, Dan. This afternoon, I will go over the financial highlights from our third quarter of 2022. There are slides available on our website that I will refer to as I present the results. Starting with Slide 3, net product sales reached $34.3 million for the third quarter of 2022, compared to $26 million in the same quarter last year and $35.4 million last quarter. The increase in net sales from the prior year is mainly due to INDOCIN and the addition of Otrexup. The INDOCIN family saw a net sales increase of $7.3 million over the previous year, primarily thanks to higher net pricing. However, INDOCIN sales decreased by $1 million compared to last quarter due to reduced channel inventory levels, which was partially offset by a return accrual benefit recorded during the quarter. The return accrual adjustment of $1.5 million is a one-time benefit that won’t have future implications. Otrexup net sales for the third quarter were $3 million, up from $2.6 million last quarter. This $400,000 increase is primarily a result of higher volume this quarter, despite a slight decline in wholesaler inventory levels. Concerning recent supply constraints, we have received deliveries to meet existing demand and anticipate resuming full sample allotments in late Q4 and early Q1 2023, which we use to encourage new prescriptions. Additionally, we face ongoing payer pressures as members transition to more restricted benefit designs, while our key competitor has intensified their payer contracting strategies. We are focused on maintaining profitable payer access for Otrexup. CAMBIA's net sales were $400,000 below the prior year's quarter, mainly due to reduced volume as we scaled back promotions leading up to the loss of exclusivity in January 2023. The third quarter marked the first quarter following the discontinuation of SOLUMATRIX, and as expected, sales were negligible. Overall, portfolio net sales increased by 32% compared to the prior year quarter. For specific product level net sales information, please refer to our 10-Q. The cost of goods sold in the third quarter showed a decrease due to changes in product mix and improved margins on INDOCIN, yielding a gross margin of 88.3%. Excluding the one-time returns accrual benefit, gross margin would have been 87.8%, consistent with our earlier expectations. We continue to project gross margins in the high 80s for the full year. Our ongoing focus on profitability across the portfolio has resulted in increased net sales and gross profit margins achieved through reduced co-pay and consignment costs, as well as lower shipments of free goods, leading to decreased gross to net expenses and cost of goods sold. Furthermore, on Slide 3, adjusted EBITDA for the third quarter was $21.4 million, down from $22.9 million last quarter and up from $15.8 million in the same quarter last year. The adjusted EBITDA margin as a percentage of total revenue for the third quarter was 62.7%, compared to 65.2% in the prior quarter, which included a $2 million net insurance benefit. The third quarter non-GAAP adjusted earnings per share was $0.22, down from $0.28 in the prior quarter and $0.19 in the previous year’s quarter. As previously noted, we do not owe any royalties on the first $20 million in INDOCIN sales, which means the royalty impact on adjusted earnings per share will become evident as we calculate the payable royalties in our adjusted earnings per share. Earnings per share was also influenced by our debt refinancing, which I will address shortly. Summarized on Slide 4, adjusted selling, general and administrative expenses for the third quarter were $9.3 million compared to $8.6 million last quarter, which included a $2 million insurance benefit, and $7.9 million in the prior year quarter, which included a $750,000 legal settlement. Moving forward, we anticipate an increase in operating expenses in the fourth quarter compared to our year-to-date third quarter run rate, as we fund increased sampling and marketing costs for Otrexup and additional costs for Sympazan. Net income for the third quarter stood at $4.2 million, down from $7.8 million last quarter and up from $3.7 million in the prior year. This quarter marked our fifth consecutive quarter of positive net income. On August 25, we completed an offering of $70 million in aggregate principal amount, 6.5% convertible senior notes due September 2027. The net proceeds, after discounts and commissions, were $65.9 million, which were used to redeem our $59 million 13% senior secured notes due in January 2024, plus $3 million in accrued interest. The conversion price on the convertible notes is approximately $4.09. I want to highlight that we included a unique feature in the convertible notes, allowing them to be redeemed in whole or in part for cash at Assertio's option at any time after September 8, 2025, provided that the last reported sale price per share of common stock exceeds 130% of the conversion price for a specified period. We believe this feature allows us to manage or even avoid dilution from the conversion, keeping the interests of our equity holders in focus during this financing. We also believe the new convertible notes benefit us by halving our interest rate, carrying no amortization, and eliminating near-term maturities, all of which will support our business development efforts to bolster financial and negotiating strength, as demonstrated in the recent Sympazan acquisition. Moving forward, earnings per share will be calculated using diluted shares, which includes the if-converted impact of the convertible notes as mandated by GAAP. The full additional diluted share effect is 17.1 million shares, and accounting rules necessitate including all these shares, regardless of whether the convert is out of the money. As of September 30, 2022, our long-term debt balance was $66 million, as depicted on Slide 5, which includes the $70 million convertible debt balance less $4 million in unamortized debt issuance costs. Also on Slide 5, our ending cash balance on September 30, 2022, was $64.8 million. The net cash increase in the third quarter was $12.6 million, primarily attributed to operating cash flow and excess proceeds from our convertible debt offering. Net cash provided by operating activities for the third quarter was reported at $10 million. Year-to-date, we've generated $51.9 million in operating cash flow, marking our sixth consecutive quarter of positive operating cash flow. It's worth mentioning that the first quarter's cash flows were positively influenced by an $8.3 million income tax receipt, while the second quarter benefited from a net $2 million in favorable insurance settlements. Quarterly operating cash flows will fluctuate based on working capital timing, royalties, and interest payments. Looking ahead to the fourth quarter, our ending cash will reflect $15 million in total purchase price payments for Sympazan and a final purchase price payment of $10 million for Otrexup. Lastly, we are revising our guidance for the third time this year. Our updated annual guidance for 2022, summarized on Slide 6, indicates that product net sales are expected to exceed $141 million, compared to our prior projection of $129 million to $137 million. Adjusted EBITDA is now anticipated to be greater than $86 million, a significant increase from our previous guidance of $73 million to $79 million. The updated 2022 guidance reflects our most recent expectations regarding revenue, margin, and operating expenses for the rest of the year. There are several factors influencing this, including strong year-to-date results, favorable SPRIX volumes, channel mix adjustments across our portfolio due to lower volume and unprofitable channels, INDOCIN's net sales growth driven by new commercial and channel strategies, our exit from the 340B program, and a return to standard channel inventory levels expected to boost INDOCIN's net product sales. Additionally, we anticipate a rise in operating expenses in the fourth quarter tied to additional costs for Sympazan, Otrexup samples, and more hiring and related employee expenses. Overall, we are pleased with this quarter's results and the cash flow from operations, as they indicate continued progress in executing our business strategies and achieving goals for long-term sustainable growth. Now, I will turn the call back to Matt.

Thank you, Paul and Dan. At this time, we will take questions from our research analysts and institutional investor community. Terry, can you go ahead and provide the instructions for Q&A from our listeners, please?

The first question comes from Thomas Flaten of Lake Street.

Congrats on a great quarter. A couple of questions. Dan, any insight into demand from the 340B hospital segment that as of October 1 no longer had access? Any inclination as to how robust that demand has been? I know it's only been 5 weeks but curious to get any color on that.

Yes. It's been 5 weeks. And unfortunately, our data that would come from the wholesalers is on a lag. So we've got very little insight into that right now. But there is reason for optimism. However, what we're reflecting in our guidance and our plans going forward is just the cessation of those sales.

Got it. And just following up on the sampling for Otrexup. Is that on the glide path now? Or are there critical path items that could distort that situation even further? Or do you feel pretty good about the end of this quarter, early next?

No, they're starting to deliver on time for all of our POs and those are scheduled manufacturing timelines right now.

Got it. And then one final one. Anything you can share with what you're going to propose to FDA during our pre-IND meeting in terms of size, timeline, anything like that?

What I can disclose right now is what we're proposing is that it's just a single-arm trial. So the size of it will depend upon what ultimately the FDA does want. But I think it's too premature to get into the details until we get some FDA feedback and then later on submit our IND.

And just tacking on to that, from a strategic perspective, do you anticipate any issues if you get labeled for moderate risk but there's significant utilization high risk? You don't see the payers paying more attention to this and cracking down on utilization, do you?

I don't think so. We haven't seen a lot of payer pressure in this category. It doesn't seem to be something that is called out in addition to the procedure cost, and at a full list price, this is a one-time $700 item. So I don't anticipate it's going to be a material thing for payers.

The next question on the line comes from Scott Henry of ROTH Capital.

I think I'll start with INDOCIN. First, I'm a little confused with the idea of if you pulled out of the 340B program, which however those numbers go together. Typically, if I'm not selling to these hospitals, that would have a negative impact on revenues. Could you just kind of explain to me why you wouldn't be losing sales, even if they were unprofitable sales, there wouldn't be any contraction in revenues there?

Sure, Scott. This is Paul here. I'll elaborate on that. The 340B pricing was quite beneficial for the hospital, considering our position on pricing and the product's maturity; we were essentially at penny pricing. When we ship the product to the wholesaler, we incur a wholesaler fee. The product then gets sent to the hospital at a lower price. As a result, we were losing money on every shipment tied to 340B. By not shipping that volume, we eliminate the wholesaler fee and ultimately save money.

Okay. So you were losing money even at the revenue line, not just at the bottom line?

Correct.

I understand what you're saying. It's challenging to operate that way. That makes sense. Dan, one of the advantages the company has had over the past few years is acquiring products and adapting to this new selling model, continuously refining the process. As you get back into research and development, it's clear that not everyone has the same core competencies. How confident are you that you can effectively manage a clinical program and achieve the same level of success as you've had with your previous business model?

It's a very good question, Scott. One of the things we're doing is adding to the team. We are actively recruiting for a Head of Medical, who will support us not only with the INDOCIN clinical but also with some of the other opportunities in our current portfolio, particularly with the addition of Sympazan and the related opportunities. Regarding additional risks, we are not going back to the bench, and we are not dosing in mice. We are essentially conducting a confirmatory trial to ideally validate what some of the other clinicals sponsored by the NIH and others have shown.

Okay, fair enough. And then with regards to Otrexup, we've got a couple of quarters under the belt. Do you think long-term that can get to, and by long-term, I mean, in the next year or two, possibly? Does that mean a $4 million a quarter run rate or are we looking at kind of $3 million to $3.5 million? It sounds like we're a little over $3 million right now.

Yes. We're a little over $3 million right now. I don't think it's too big of a stretch to get to $4 million from where we are now. So longer term, I still think the opportunity is there. Certainly, the potential is to be able to double this product when you've got a 20 share in this market. And medium term, we're not making any product-specific or even forward-looking guidance for the whole company, but I don't think it's out of the realm of possibility to be able to grow that product like you're suggesting.

Okay. All right, great. And then on Sympazan, how should we think about amortization expense for that? I guess, it will be the whole, I want to say, $15 million or $16 million. What should we amortize that over what time frame?

$16 million over 10 years. So you're looking at $1.6 million a year.

Okay. And have you said about the gross margin profile? I know I can probably back into it with some of the guidance. But is it similar to your other products or higher or lower, I guess, just to make sure?

It's a little lower. It hovers in the high 70s or around 80% gross margin.

The next question on the line comes from Mitra Ramgopal of Sidoti.

First on Sympazan, I was just wondering if you have to make some additional investments to support the growth there. I believe you mentioned some personnel additions and some of that might be for Sympazan, but just curious if there are some additional investments that we should be expecting here?

There's nothing new in the plan at this moment. We're exploring a few options, potentially involving minor clinical studies to back up what we've learned during our research, but there are no significant additions required aside from the samples for this product and the FDA PDUFA fees. It's simply an extension of our current commercial platform.

Yes. And Dan, you mentioned, I believe you added about eight in terms of headcount. As you look out to 2023 and with Sympazan and expectations on NES, etc., do you expect to be even more aggressive on that front? And how is the labor market in terms of maybe having to pay up a little?

We haven't had to pay more yet, though there are currently three additional physicians approved in the organizational chart. One is the Head of Medical, and the others are meant to add more depth to our team. However, we don't have aggressive hiring plans, and we've found that we can offer an appealing package to attract talent to Assertio.

Okay. And then just coming back to the BD opportunities. If you can give us a sense in terms of what you're seeing out there as it relates to competitive better valuations and maybe your expectation in terms of being able to close a few of those deals over the next year?

We still see a very active business development pipeline. Currently, we have the ability to evaluate multiple opportunities simultaneously, and we are assessing several at the moment. We are confident that we will meet and hopefully exceed our goals as we usually aim to do. What we've noticed is that these situations are not highly competitive; there may be one or two lingering, but we've managed to win every situation we aimed for. The valuations we encountered, like in the Sympazan transaction, were favorable with minimal competition for assets like this, allowing for attractive acquisition prices. We are observing similar conditions in the other opportunities we are considering.

Okay. And then just the criteria. I think Sympazan is going to be accretive very quickly. Is that one of the things that you look at as you do these deals, aside from must-have nice revenue, attractive end market, etc.?

Yes. So we're always looking to do something that's accretive, at least for the time being with the business that we've got until we can diversify our overall revenue. So that is a core objective that we're looking for when we acquire something. The other component that we do is we do a cash-on-after-tax cash return where we're targeting north of 20% in an IRR.

Okay. And finally, regarding litigation fees and related matters, it seems quite calm on that front. Am I right in assuming there’s nothing significant to report?

Yes, there's been no movement at all. As far as I'm aware, we don't have any cases progressing.

The next question comes from Hamed Khorsand of BWS Financial.

Could you just talk about what your expectations are with Sympazan? Is it made for you as far as revenue is concerned? And what are your plans as far as doing the digital marketing for and what your expectations are with payers?

To address the last question first, we plan to transfer the existing Aquestive payer contracts to Assertio without expecting any significant changes. We will consider bidding on additional business as we move forward, likely focusing on the 2024 bidding cycle that is currently in progress. The payer environment we observed is quite favorable and stable, which gives us encouragement about this asset. Integrating it into our existing commercial infrastructure for the non-personal and digital platform will be straightforward, requiring minimal additional efforts. The main distinction of this product compared to some of our others will be our extensive involvement with patient advocacy communities. Aside from that, we have already begun selling this product, and due to the partial quarter, we anticipate generating at least $1 million in revenue for it in the fourth quarter.

The next question comes from Scott Weis of Senko.

Great quarter. Congratulations. I have two questions for you. In your opening comments, you indicated that this quarter is reflective of a shift to growth mode, and I want to ask, does that mean that you can show growth in '23 versus '22?

That is my goal, Scott. So that's part of the objectives that I have. We're not giving guidance for what 2023 is. We're updating what we had previously said. But that is our goal to grow this business.

Okay. My second question is around INDOCIN, and you made a comment about going direct with INDOCIN. I wanted to see if you could flesh that out a bit. How would that impact the relationship that you currently have with distributors? What would the margins on the direct business be? Can you talk a bit about that, please?

There's a large cushion between what the list price and what we ultimately get from a wholesaler and what the end customer is paying. So there's a large cushion where we can offer some discounts to make it attractive for them to purchase directly from us. The margins won't be materially different. It could be very close to the same. And the only additional thing that we're taking on is additional shipping costs and collections risk from the customer.

Okay. And so then how does going direct benefit you, bypassing the wholesalers?

It's more of a direct relationship with your customer and the ability to service them with priority.

We currently have no further questions. So I hand it back to Dan for any closing remarks.

Thank you. In conclusion, the third quarter was one of our most important strategic quarters for Assertio as we're now poised to accelerate the growth of our company. We extended our debt maturity, improved our margin profile on a key asset, added a new asset via a highly accretive transaction, and continued to generate cash flow that will fuel our strategic plans to diversify and enhance our asset base. I appreciate you all taking the time to join our call and hope you all have a good evening. Thank you.

This concludes today's call. Thank you all for joining. You may now disconnect from the call.