Assertio Holdings, Inc. Q2 FY2023 Earnings Call

Good morning, and welcome to the Assertio Holdings Inc Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would like to turn the conference over to Matt Kreps from Darrow Associates, Investor Relations for Assertio. Please go ahead.

Good afternoon, and thank you, everyone, for joining us today to discuss Assertio's second quarter 2023 financials. The news release covering our earnings report is now available on the Investor page of our website at investor.assertiotx.com. I would encourage you to review the release and tables in conjunction with today's discussion. With me today are Dan Peisert, President and CEO; Paul Schwichtenberg, Senior Vice President and CFO; and Tom Riga, outgoing CEO of Spectrum Pharmaceuticals, for which we closed the acquisition earlier this week. Dan will open remarks to provide an overview of the business. Tom will provide additional insights on the progress of Spectrum, and Paul will review our financials. After that, we'll 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 today'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 those forward-looking statements, except as required by law. And with that, I will now turn the call over to Dan.

Thank you, Matt. Good afternoon, everyone, and welcome to our new shareholders and employees from Spectrum Pharmaceuticals. The acquisition of Spectrum marks a significant turning point for Assertio, providing immediate diversification of revenues, a sustainable near-term growth driver, and long-term patent protection. The asset, the commercial infrastructure, and sales model are also aligned with our vision of where we can effectively operate in this competitive pharmaceutical landscape. Our intelligent contracting and market access are the foundation of the go-to-market model. I'm extremely proud of what we have accomplished here at Assertio. In an internal employee memo following the shareholder meeting results, I reflected on our situation only 3.5 years ago, where Assertio had just two assets to pay off its debt and was left with an extremely concentrated portfolio of just CAMBIA and ZIPSOR. Today, those two assets together represent only 7% of our second quarter net product sales and only 4.6% if you include down sales. In that time, we've acquired two businesses and two additional assets and paid off $195 million of debt. Our financial discipline and specifically our focus on cash flows have contributed to this success to date. Now with a healthier balance sheet and a growth asset, that discipline will remain to help foster this company towards sustainable growth. We've proven we can manage through the ups and downs of loss of exclusivity, and we've built and now acquired a first-class commercial team from Spectrum that can only enhance our capabilities to grow assets and scale. Now I'd like to turn the call over to Tom Riga to talk about Spectrum's second quarter and why we are confident in its growth trajectory.

Thanks, Dan. And good afternoon, everybody. The launch trajectory of ROLVEDON continues to be extremely positive, and that momentum has continued in the second quarter of 2023. Net sales for the second quarter were $21 million versus $15.6 million in Q1, an increase of 34%. This is the third consecutive quarter of exceptional performance, and it is a credit to the execution of our experienced team ensuring ROLVEDON continues to be clearly differentiated as the first novel product to enter the long-acting GCSF space in over 20 years that is not a biosimilar. This is a highly competitive market, and our people are proving to be one of the most valuable assets during this launch. Beyond the strong Q2 revenue number, we made important progress on customer growth in terms of breadth, meeting the absolute number of customers using ROLVEDON and depth meeting same-store sales. Targeted accounts purchasing ROLVEDON increased 50% over Q1 2023 to about 300 in total. Additionally, we are seeing increased depth within accounts as customers become more comfortable with ROLVEDON's unique J-code and streamlined reimbursement process. Through Q1, customer demand was primarily driven by the largest community oncology GPO, which represents approximately 50% of the segment's business. In the second quarter, we initiated sales with the second largest GPO that represents approximately 40% of the Community Oncology business. This was very helpful in the second quarter but, more importantly, is a growth opportunity going forward. Our focused launch strategy is hitting its stride and has played out largely as expected. The combined company has additional opportunity to drive breadth and depth across the market. At this point, ROLVEDON has approximately 2% market share of the overall long-acting GCSF market, which underscores the tremendous opportunity ahead. That said, we have been candid throughout that this marketplace is highly competitive, and every share point gained requires market knowledge, a thoughtful and pointed strategy, and exceptional execution. As Spectrum transitions to be a part of Assertio and takes the next steps in ROLVEDON's growth trajectory, every one of our employees should take great pride in the excellent ROLVEDON performance to date. As I sign off and turn the reins over to Dan, I must say I am extremely confident in the team he has acquired and have come to respect his leadership and the capabilities at Assertio. With that, I'll turn the call back over to Dan.

Thank you, Tom, and I share your enthusiasm for the future of ROLVEDON. Today, we're not able to provide guidance as we initially intended. We just learned a few hours ago that the FDA has approved a generic indomethacin product. When we issued guidance, we like to have as much information at our disposal as possible, and now we believe it's prudent to withdraw our outlook until we know more information. Today, all we know is that a single competitor was approved, and they received CGT status, which means no other generics can be approved for 180 days. We are not aware of their launch timing. What I can offer is that Assertio is not afraid of this, nor are we hiding from this. It has been well known that indomethacin had no intellectual property nor exclusivity protecting it, and generic entry risk was always in the background. So we have been preparing for it, and we are ready to defend it. One example of how we can defend is evident in our financials this year. As many of you know, we lost exclusivity for CAMBIA in January of this year, and three competitive generics entered the market in addition to one authorized generic. Normally, in these situations, the brands do not do well in the first 6 to 9 months following LOE. However, year-to-date, we've retained 36% of the prior year volumes and 34% of the prior year revenues, which is an outstanding result when many of the analogs in a competitive market like this suggest retention rates near 10% of volume and between 0% to 10% of revenue because of reduction in end customer inventory. This is all due to the outstanding execution of our commercial team preparing for the LOE and the early identification that patient refills were still being covered by commercial insurers and quickly utilizing the resources in our hub and our patient support programs to encourage a high refill rate. An example of our market access programs and strategy at work. We're confident that we can do something similar with INDOCIN, and in this case, we only have a single competitor, and the analogs are far better than with four as was the case with CAMBIA. I'll provide more details in my prepared remarks, but I want to comment on a few things as they relate to Assertio's core business and also the second quarter performance. When we acquired Zyla, one of the products that came with the acquisition was a former Egalet product called OXAYDO, which is an abuse-deterrent opioid. While a small contributor, this product carries strong margins and cash flows because we put no marketing or sales support behind it. However, relative to its financial impact from an operations viewpoint, it's been a challenge in both supply and DEA quota. So we've made the decision to stop sales of this product and have notified the FDA that we will discontinue OXAYDO. As a result, the company is officially out of the opioid business. This decision will have a drag on our second half results. And for reference, we reported $1.7 million in OXAYDO sales in the second half of last year. I think this is an important decision for us as we mark this new turning point in our history. I'm very excited to announce that in the second quarter, we've made notable progress in the opioid litigation, where we were dismissed from a significant minority of our NAS cases or what is commonly referred to as the baby opioid cases. Now, in aggregate, we've been dismissed from just shy of 40% of all of the opioid cases that have been filed against the company without paying a penny. I think this speaks volumes about the company's potential liability and that our defense strategy is being awarded. SYMPAZAN continues the trends I discussed last quarter, achieving new monthly and quarterly TRX count demand peaks, as measured by Symphony Health, as well as a mix shift towards the higher strengths resulting in higher average selling price, so that our quarterly net revenues grew 5% sequentially. Our first half of 2023 net revenues are just over $5.1 million for the product, which represents 7.1% growth over the prior year period reported by Aquestive. We're off to a good start so far and are starting to develop our longer-term strategic plans for the product and have reasons for optimism about its potential. We're starting to get back on track with OTREXUP as we recover from the supply challenges we experienced last year. Our volumes are up 18% year-over-year and in the low single digits over last quarter. However, our net revenues were up 37% year-over-year and 27% sequentially as we focused on profitable volumes. A direct contrast to our primary competitor, who continues to report declining net revenues in ASPs as they keep bidding contract prices downward to maintain market share. This is just one small example of what I described as our business strategy overall. Smart, disciplined contracting and market access are the building blocks of everything we do, and then we allocate our sales and marketing dollars efficiently. Our efforts now shift to the integration of Spectrum and ensuring the continued launch trajectory of ROLVEDON. I will now turn the call over to Paul.

Thank you, Dan. This afternoon, I will review the financial highlights from Assertio's second quarter of 2023. My comments on the second quarter, except for otherwise noted, will be on Assertio's stand-alone business, excluding Spectrum. For full details, please refer to the tables and financial statements in our earnings release and 10-Q. Net product sales were $40.1 million for the second quarter of 2023, compared to net product sales of $35.4 million in the prior year quarter and $41.8 million last quarter. The increase in net sales versus the prior year quarter is primarily driven by Enderson and the addition of SYMPAZAN, which more than offset the expected decline in Cambia. INDOCIN family net sales in the second quarter increased by 23% over the prior year, primarily due to a volume mix shift to more profitable channels. OTREXUP and SYMPAZAN combined net sales for the second quarter were $6.2 million, reflecting 17% sequential growth over the prior quarter due to strong volume and favorable channel mix for both products. Overall, portfolio net sales were up 13% versus the prior year quarter despite the CAMBIA loss of exclusivity on January 1. Gross margin as a percentage of product net sales was 88.1% in the second quarter versus 87.2% in the prior year quarter. The increase in margin is due to a shift in product sales mix to INDOCIN, which carries a higher gross margin. Adjusted selling, general, and administrative expenses in the second quarter were $11.4 million compared to $11.9 million last quarter and $8.6 million in the prior year quarter, which included a net benefit of $2 million from an insurance settlement. The increase versus the prior year quarter is primarily due to additional costs for both SYMPAZAN and OTREXAT, along with personnel costs due to new headcount additions. Adjusted EBITDA for the second quarter was $24.8 million compared to $25.6 million last quarter and $22.9 million in the prior year quarter. The year-over-year increase was driven by $4.7 million of additional product net sales and the SG&A spend changes previously mentioned. Adjusted EBITDA margin reflected as a percentage of total revenue in the second quarter was 60.4% versus 65.2% in the prior year quarter. The second quarter non-GAAP adjusted earnings per share was $0.19, versus $0.29 in the prior quarter and $0.28 in the prior year quarter. Again, please note that earnings per share is now calculated using diluted shares, including the if-converted impact of the convertible notes as required under GAAP. There were $70.1 million total diluted shares in the second quarter, including the fully weighted additional diluted share impact of 9.8 million shares. The Spectrum merger will add approximately 38 million shares. Net income for the second quarter was $8.5 million compared to a net loss of $3.5 million last quarter and $7.8 million in the prior year quarter. The second-quarter net income was impacted by $3.4 million in transaction costs associated with the acquisition of Spectrum Pharmaceuticals. Net cash provided by operating activities, as reported in the company's statement of cash flows for the second quarter, was $18.6 million versus $22.7 million last quarter and $14.4 million in the prior year quarter. The year-over-year increase in operating cash flow is due to increased net sales, partially offset by higher operating expenses versus the prior year. Ending cash on June 30, 2023, was $70.2 million, reflecting a $1.6 million increase versus the prior quarter. On June 30, 2023, our long-term debt balance was $38.2 million, reflecting the $40 million convertible debt balance less unamortized debt issuance costs. We did not take on any additional debt from the acquisition of Spectrum. Looking ahead, please note that the third quarter results will be impacted by purchase accounting, transaction costs, and restructuring costs related to the Spectrum acquisition on July 31. And now I'll turn the call back over to Matt.

Thank you, Paul, Tom, and Dan. At this time, we have completed our prepared remarks, and we'll use the balance of our allotted time to take questions from our sell-side analysts. Operator, can you please provide the instructions for Q&A from our listeners and launch the first question?

Our first question comes from Thomas Flaten at Lake Street Capital Markets.

Dan, given the uncertainty around INDOCIN, I was wondering if you could comment a little bit on the Spectrum staff that's coming over. Did you have any vacancies in the field? How is kind of morale? Any kind of qualitative or quantitative thoughts you could give us on the team that's coming over?

Yes. I'll provide some initial comments, and then Tom, I'll open it up to you as well. So I've gotten to know a lot of this team; we're taking over the whole entire team intact as is. As far as I'm aware, there are no vacancies. There is one position that will be filled in mid-August. I'm sure the news today will be a little bit of a morale boost as it will be across the entire company. But that shouldn't dissuade anyone from the success they are having with the launch of ROLVEDON. And as Tom said, the people here are the most valuable assets in the company, and that applies not just to Spectrum but to Assertio too. So the people are even more valuable now than they were yesterday. We are going to put even more emphasis behind this launch, and it is just as important to this company as it was before. And Tom, any other comments about the commercial team?

No, I think you said it, Thomas. First, performance speaks for itself. But outside of that, this is a rock solid group of people that know what they're doing. They're professionals, they're resilient, and they play to win. I expect that will continue. And it really starts with leadership, and I think Dan is adopting an exceptional leadership team. I think they will thrive.

And then, Dan, any thoughts on ROLVEDON for 2023? I know that sits kind of adjacent to the legacy business, but I think if any thoughts you can share on expectations for that product as a stand-alone?

So I don't — Thomas, we have — there's a point estimate that Assertio put in the S-4. I would tell you that I don't think our opinion of the launch has changed too terribly much from that estimate we put out in the S-4 other than to say that it has been tracking slightly better than our original expectations.

And then one final one, if I might. Given the INDOCIN news, any preliminary thoughts on how you might proceed with the planned study in moderate ERCP patients and the amount of risk?

Yes. A very, very good question, and I think appropriate, and it's something that we're evaluating. We had been evaluating options regarding a regulatory strategy anyway. I think with the news today, we're going to — so I'll be upfront, the life cycle management option that we had was a different dosage strength of this product that is more convenient for an ERCP procedure. I think with this news today, what we might be looking to do is find a way to accelerate that to market. There are some backup options that we had before that did not bring an exclusivity option with them, and those might be something that we start to accelerate, but that's obviously something we as a management team have to discuss and align with our Board before we make a decision.

Your next question comes from Mayank Mamtani with B. Riley. Mayank, please go ahead.

Congratulations on completing the Spectrum acquisition. As you mentioned, ROLVEDON's performance appears to be exceeding expectations. Can you discuss the anticipated long-term cash flow on a stand-alone basis, considering the balanced mix of commercial and digital spending you plan to implement? Additionally, what incremental operating expenses should we expect, especially given the impact of pulling in the top line?

So Paul and I will have to — yet another reason why we pulled guidance is what is going to be the operating expense in the base business. What we anticipate bringing over now, we had originally assumed $60 million of operating expenses from Spectrum when we announced the deal. Now, as we're through most of the integration work and planning process, we're now anticipating that that's going to be $55 million of incremental operating expenses to operate that asset on our platform. So the big question that's still open now is what is the base of Assertio's operating expenses. So I can't give you a go forward, but I know it's going to be an incremental $55 million of ROLVEDON.

Sure. And maybe just following up on the question about integrating the two teams there. I know that you're sticking with Spectrum's game plan and the commercial team, then layering in the associated digital platform on top. Maybe can you just get some more color on how that integration is going?

I would tell you that the planning was, I would say, flawless. They did an amazing job coordinating together to plan this integration. When it came to the commercial side, because we are pulling over the entire team, and we're not trying to disrupt anything, it's little things like how long do we get to keep our Spectrum email address? And if we want to launch new marketing materials, which promotional review committee do we go to? So it's not massive disruption; it's minor disruption. The commercial changes shouldn't be large, and the overlay of the digital does not have to happen right away. That is going to be probably more towards late this quarter. The planning part of that is going to happen as we speak. And then later this quarter, early next quarter is when that will actually start taking place. So there's plenty of activity, as Tom said, that he just opened up a new GPO. So there's plenty of growth avenues open for that team right now before we start throwing more at them.

Okay, sure. Maybe just one quick follow-up. I think you mentioned in the past that so I guess we're going to expect the synergies from the digital being layered on to later in 3Q, you said. Just wondering if you could comment on what kind of synergy we're looking at. I think previously, you mentioned opening up new geographies for ROLVEDON. I'm wondering if there's anything additional to that.

So just — what I think might be correct is something you said. I wouldn't look at the digital platform as a synergy, maybe a revenue synergy, but not an operating expense synergy. We're not going to be using the digital platform as a way to reduce the current spectrum; it's going to be add-on to it and enhance it and hopefully go to areas or geographies, as you said, that they're currently not able to go. So that is what our current vision of this is and to be able to possibly accelerate the launch in that manner.

Our next question comes from Roman Khorsand with BWS Financial.

So first off, I just wanted to see how closely you were aware of this was happening? And what are your expectations of how this would be — your competitor would be able to manufacture this generic and be successful in launching in the U.S.?

I would say we were not aware of this at all. This came as a complete shock and surprise — so the last we had heard of this potential competitor, they were working on a 100-milligram dose, and we had thought they were done. So we were not aware that they were at the FDA. The fact that they had competitive generic therapy approval tells you it was an accelerated approval, so it was relatively quick. So this came as a complete surprise to us.

What preparations are you making to retain market share, considering a potential generic entering the market?

We've been making preparations for that ever since I took over as CEO. So for the last three years, we've been making preparations for this. I'd rather not tell you on an open conference call what they are. I appreciate that you'd like to know what they are, but I don't want Zydus, who is likely listening, to be aware of what they are.

Fair enough. I guess the other question I had was given the ASA guideline changes, have you seen any — the market expands? Where are you seeing the demand, if any?

So we hadn't — we hadn't seen it. So one of the things that we were going to talk about was some of the market research that we have been doing and some of the other awareness campaigns that we had launched. There was the continuing medical education program that we had funded just launched on July 26, and we had something like 1,000 viewers of it on day one. So we are pretty excited about that. Some of the market research we had done in the quarter showed that we surveyed a bunch of physicians, and we had what was it, Polly at 90%, were unaware of the ASGE changes. So that led us to believe that there was some good opportunity for awareness. So we believe that there's some good opportunity for awareness and reasons to be hopeful, but that whole section of the prepared remarks was removed today.

Our next question comes from Jim Sidoti with SIDOTI & Company.

The $55 million of operating expenses that's coming on, can you break that out? Is that primarily SG&A? And can you just break out what's SG&A, what's R&D, and other components?

Yes. Sure, Jim. I can give you a breakdown of that. Breaking down the $55 million, about $40 million is going to be sales and marketing, the team that we brought over, and as Dan mentioned, about $12 million is G&A, including a variety of functions, QA, manufacturing, and other back office, and about $3 million is R&D.

Okay. And as you said earlier, you've been through with CAMBIA and products coming off of exclusivity. How good were you at predicting what happened with CAMBIA? Do you think you're better now? And do you think you'll get a better handle on what will happen with INDOCIN over the next few weeks? Or how long do you think it will take?

In terms of timing, CAMBIA was a known LOE event. We had the Paragraph IV settlement. So we knew everyone was coming on January 1 of this year, but we have been preparing, so basically running more games here internally as if it was coming tomorrow. So while I tell you this was a surprise in terms of timing, the team is ready and responding as we speak.

Our next question comes from Scott Henry from Roth Capital.

And I apologize I missed a lot of the call. Had some phone problems during travel. But Dan, I did want to ask you just about INDOCIN: when we think about potential generics, how do you think the distribution channel will impact this when we compare it to the potential competition relative to other more traditional products, if at all?

I'll try and answer it as best I can, Scott. The analogs that we look at: there's multiple ways you can look at an analog in a generic erosion. One of which is one entrant versus four, in the case of CAMBIA. It certainly erodes far faster with one versus four. The other way is it's not just the distribution channel but where it's used. So if it's in a retail setting as opposed to a hospital, it tends to erode far faster in retail than in hospitals. This tends to be because of the retail pharmacies' profit motivation to switch. So what we've seen is that single entrant hospital generics typically allow the brand to retain a far greater share, and the pricing tends to be better. So that is one of the things that gives us some optimism in this particular situation: we have one competitor in the hospital setting. It's a difficult-to-manufacture dosage form, which we've been talking about for years. So supply may not be 100% readily available. There are a number of factors that suggest this situation may lend itself to one where the brand could maintain a decent share of this market going forward.

And one other question, and I do apologize if it's competitive, but the ROLVEDON revenues in the quarter, $21 million. Was that a relatively same quarter in terms of stocking? I mean, is it fair to say that based on Q2, there was a roughly $85 million run rate already? Or was there any give or take in the quarter?

From what I've seen, it's a pretty clean quarter. It was a good quarter for demand, and they were able to turn on a new account, as Tom said, and it's off to the races from here on.

Thank you. There are currently no further questions at this time. So this concludes our question-and-answer session. I would like to turn the conference back over to Dan Peisert, President and Chief Executive Officer, for the closing remarks.

Thank you. While the news today wasn't as we had planned, and we certainly weren't aware of the generic coming, it does highlight our strategic need to diversify the business and why the merger of Spectrum was important. We will have some short-term obstacles to overcome, but we are a strong and committed team, and we will overcome them. We are a far stronger company now than we were a few years ago, and I believe that we are well positioned to come through this even stronger and create value for all shareholders. In addition, we've just made a large step in mitigating our legacy legal uncertainties. Thank you, and have a good evening.

This concludes today's call. You may now disconnect.