Earnings Call Transcript - ASRT Q4 2021

Operator, Operator

Good morning and welcome to the Assertio Holdings, Incorporated Fourth Quarter and Full Year 2021 Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Max Nemmers, Head, Investor Relations and Administration. Please go ahead.

Max Nemmers, Head, Investor Relations and Administration

Good morning and thank you all for joining us today to discuss Assertio’s fourth quarter and full year 2021 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 Chief Executive Officer; and Paul Schwichtenberg, Senior Vice President and Chief Financial Officer. Dan will open the remarks and provide an overview of the business followed by Paul, who will review our financial results. 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. With that, I will now turn the call over to Dan. Dan?

Daniel Peisert, President and Chief Executive Officer

Thank you, Max. Welcome to everyone joining us this morning. Last quarter I made some remarks about everything that had happened in the prior year and how much change had taken place here at Assertio. In addition to what I mentioned at that time, we've also closed the acquisition of Otrexup from Antares and have now integrated it into our business. This was the first acquisition of a product by Assertio since 2015 and the first hiring in the management team, and to date all has gone extremely well. As you can see from the results we released this morning, and that Paul will expand upon in a few minutes, we had a very strong fourth quarter. We delivered top line growth of 7% versus the prior year, despite discontinuing a product line, and 23.8% versus the prior quarter. Our adjusted EBITDA results reflect an increase of 118% versus the prior year and 12.7% versus the prior quarter, demonstrating the success of our restructuring. In a short period of time, we were able to transform this company, especially since we generated more in adjusted EBITDA in the fourth quarter of this year, versus the entire year of 2020. Looking forward to the next 12 months, we see a lot to get excited about. To build on our momentum, I have created our corporate priorities for 2022 to ensure continued success. These are as follows. First, retention of our employees, attraction of new talent and to continue to build upon our culture of teamwork including end results. Second, prove the efficacy of our new commercial model as we transition Otrexup from traditional in-person to non-personal promotion in what looks like it could be an environment where COVID-19 is moving to endemic. Third, reduce our reliance or concentration in Indocin. Fourth, execute on a comprehensive Lifecycle Management Program for Indocin and finally, improve our balance sheet and reduce the cost of capital. We're keenly focused on integrating Otrexup, expanding upon the reach and frequency of promotion, improving its market access, finding new avenues of growth and doing so in a capital efficient manner. This should allow us to build confidence and interest in the business model, not only from investors but also potential new business partners. We're also aggressively targeting new business development opportunities and have added both internal and external resources indeed accelerating our efforts here. It is largely through acquisitions that we expect to reduce our reliance on Indocin. We have not wandered from our goal of adding $50 million in incremental gross profit to the business by 2024. Otrexup accounted only for one-fifth of this goal. We believe there is a favorable acquisition environment right now. We're seeing a lot of new product acquisition opportunities, increasing activity from those looking to sell as conditions ease up post the pandemic. Many of our peers who have been and would like to be buyers are far more leveraged than we are. There is no doubt that Indocin is currently an important part of the business and we intend for that to continue into the future. We're actively working our plans to grow and expand the label for the product, and once we have clarity on the timing and costs of these development programs, we'll communicate those to investors. Paul and I are both extremely focused on our balance sheet and are looking for the right balance of reducing our cost of capital, leaving flexibility for future acquisitions, extending our maturities and balancing our debt to market cap. We're currently evaluating multiple proposals for refinancing weighing the appropriate options and timing. Execution against our business plan and these priorities over the next 12 to 18 months will be key to our success. Fortunately, management time looks like it won't be distracted by the legacy legal liabilities that have chewed up a lot of our time historically. Thanks to first, the resolution to the antitrust and shareholder litigation that we drove to settlements recently. And second, as was the case in 2021, we expect no movement in the opioid lawsuits for what is likely the next 12 months and possibly longer. Recently, we were dismissed from two additional cases, bringing the total to 82 dismissals. These two cases were on track to go to trial sometime in early 2023. But now we can focus our time in managing the business and executing on these priorities. Additionally, we're optimistic that our investment in MDS will mature inside of this timeframe. This represents a nice source of upside optionality for Assertio as we have the potential to be approximately 12% equity owners of a life-saving drug for an ultra-orphan condition for which there is no available treatment, and a priority review voucher. Our strategic interest in this investment is not simply to be an equity participant, but be either the marketing partner or owner. Before I turn the call over to Paul to discuss our quarterly results, I'll spend a minute on our guidance for 2022. We expect to generate net product sales of $126 million to $136 million and adjusted EBITDA of $64 million to $72 million in 2022. This represents growth of 15% to 24% on the top line, and 31% to 47% in EBITDA. Our revenue forecast reflects the net pricing benefit from Indocin offset by the loss of exclusivity for Zipsor, which we expect later this month, as well as the inclusion of Otrexup. For your awareness, after completing the acquisition we did not sell any Otrexup in December, nor through most of January this year as we normalized the level of inventory in the distribution channel. For Indocin, we've seen an increased mix of heavily discounted product sales through 340B in the last few months of 2021 and early 2022. This mix is unpredictable and ebbs and flows through the year. Our full year forecast, however, assumes that we continue to see an elevated mix from this channel. Our EBITDA forecast reflects the full year benefit of the restructuring we completed in the third quarter last year, as well as the elimination of nearly $6 million of one-time costs in 2021 for the legal settlements net of insurance proceeds. Now I'll turn the call over to Paul, who will walk through our quarterly results and guidance in more detail.

Paul Schwichtenberg, Senior Vice President and Chief Financial Officer

Thank you, Dan. This morning I will review the financial highlights from our fourth quarter and full year 2021. There are slides available on our website that I will reference as I discuss these results. Starting with Slide 3, net product sales were $32.2 million for the fourth quarter 2021 compared to net product sales of $30.1 million in the prior year quarter and $26 million last quarter. The increase in net sales versus the prior quarter is driven by Indocin, Cambia, and Zipsor. Full year 2021 net sales were $109.4 million versus $92.1 million in 2020, representing a 19% year-over-year increase. Cambia and Zipsor net sales in the fourth quarter reflect one-time price favorability driven by a shift toward more profitable sales channels in the fourth quarter while maintaining consistent overall volume relative to the prior three quarters. Indocin net sales in the fourth quarter increased by $3.8 million over the third quarter and $5.9 million over the prior year quarter on comparable volume, due to an improvement in net realized price that is expected to continue into 2022. Overall portfolio net sales were up 24% versus the third quarter. Please refer to our 10-K for specific product level net sales information. Cost of goods sold in the fourth quarter included a one-time inventory reserve for Sprix due to a single manufacturing batch that didn't meet the required specifications, resulting in a decline in the gross margin versus the third quarter. Absent this charge, gross margin in the fourth quarter increased 730 basis points over the prior year quarter. Also on Slide 3, adjusted EBITDA for the fourth quarter was $17.8 million, compared to $15.8 million in the third quarter, reflecting 13% quarter-over-quarter growth. EBITDA in the fourth quarter represents the third sequential quarter of growth after adjusting for one-time legal matters, an increase of 118% over the prior year quarter. Adjusted EBITDA for the 12 months ended December 31, 2021 was $48.8 million, reflecting $32.5 million or 200% growth over the prior year adjusted EBITDA of $16.3 million. It is worth noting that the fourth quarter 2021 EBITDA has exceeded the full year EBITDA for 2020. Summarized on Slide 4, adjusted selling, general, and administrative expenses in the fourth quarter were $10.1 million versus $7.9 million in the third quarter. Full year 2021 adjusted SG&A expenses were $48.1 million versus $73.1 million in 2020, reflecting a decrease of $24.9 million or 34%. Excluding the net impact of one-time legal matters of $5.6 million recorded earlier in 2021, adjusted SG&A expenses were $42.6 million reflecting approximately $45 million of savings versus the annual second half operating expense run rate in 2020 representing a greater than 50% reduction. Net income for the fourth quarter was $4.6 million, compared to the third quarter net income of $3.7 million. The full year 2021 net loss was $1.3 million, compared to a net loss of $28.1 million in 2020. As was stated previously, 2021 net income was impacted by one-time legal matters expense of $5.6 million, and also a loss of $3.9 million for the change in fair value of contingent consideration. On December 31, 2021, our Senior secured debt balance shown on Slide 5 was $70.8 million. On November 1, 2021, the company paid scheduled interest in principal of $9.7 million. Also on Slide 5, ending cash on December 31, 2021, was $36.8 million. The net decrease in cash of $21.9 million from the September 30, 2021 balance of $58.7 million is primarily attributable to the initial payment of $18 million on December 15, 2021 for the acquisition of Otrexup and other working capital changes in the fourth quarter. As of December 31, 2021, the company's net debt to find a senior secured debt less cash to trailing 12-month adjusted EBITDA ratio was 0.7, reflecting a substantial reduction from a ratio of 3.65 at the end of 2020. Net cash provided by operating activities as reported in the company's statement of cash flows for the fourth quarter was $4.1 million, reflecting the third quarter of positive operating cash flow. For full year 2021, the company generated $5.5 million of operating cash flow, with $8.8 million generated after the completion of our restructuring in the second half of 2021. This amount includes nearly $10 million for one-time legal settlements and the extension of the Indocin supply agreement. Absent these payments, the operating cash flow generated in the second half of 2021 was approximately $18.8 million. As was stated on the prior earnings call, we had been expecting an income tax refund of $8.3 million in the fourth quarter of 2021, which has continued to be delayed due to IRS processing. If this tax refund is further delayed, it will impact our operating cash flow in the first half of 2022 because there are other large outflows such as interest payment on the senior secured debt and timing of inventory purchases that are expected in this timeframe. On an annual basis, we expect cash flows to be positive, but due to the timing of working capital and interest payments, the quarterly operating cash flows will fluctuate. Lastly, our annual guidance for 2022 summarized on Slide 6 is as follows. Product net sales of $126 million to $136 million and adjusted EBITDA of $64 million to $72 million. The guidance for 2022 reflects the following factors. Indocin net sales growth driven by favorable pricing, partially offset by higher mix in discounted channels, addition of Otrexup sales and expenses, initial sales of Otrexup were delayed to late January 2022 due to the high level of channel inventory that existed at the time of the product acquisition on December 15, 2021. Also reflected in the guidance are the loss of exclusivity for Zipsor in March of 2024, increased rebates and discounts to maintain managed care access for Cambia, and finally, the discontinuation of Solumatrix sales. Overall, we are very pleased with how the business has performed in 2021 through the efforts of our dedicated and committed team. We are very optimistic about the outlook for 2022 and we continue to focus on positioning Assertio for long-term sustainable growth. And now I'll turn the call back over to Max.

Max Nemmers, Head, Investor Relations and Administration

Thank you, Paul. At this time, can we open the call for Q&A please?

Scott Henry, Analyst

Thank you, and good morning. A couple of questions, first on Indocin, how should we think about the duration of the pricing power for that product? Obviously, the price has gone up, would you expect that to be, what sort of duration do you think is reasonable to think about there?

Daniel Peisert, President and Chief Executive Officer

In terms of our ability to continue, I would say, it's…

Scott Henry, Analyst

But do you think it will bring new competition? How long do you expect before you start to see competitive factors there?

Daniel Peisert, President and Chief Executive Officer

Okay, so we don't think that this, the price, the net pricing benefit that we experienced here in the fourth quarter is something that attracts potential new competition, or attracts it more. If the product has been attractive in the past, I think it continues to be. And the fact that it's been branded, for as long as it has speaks to the difficulties in manufacturing and other things that prevent people from competing with this product.

Scott Henry, Analyst

Okay. I guess shifting gears, Dan, you spoke a little bit about this orphan drug investment that the company has. I caught a lot of that, but I missed a little. Could you just talk about that asset in how we should think about it and what kind of value that asset could have?

Daniel Peisert, President and Chief Executive Officer

Yes, it's for an ultra-rare condition called neonatal antiviral sepsis. It typically affects about 7,000 newborns a year. These are children who, in most cases, contract a virus during birth. Due to weakened immune systems, the disease can be fatal. When these babies present to the hospital, they are severely ill, with many of them needing ECMO immediately, and this product would be the only available treatment for this disease. The data shows that it's life-saving. So it's a very important medicine that we want to be part of bringing to market, not only financially, but also strategically for this company; we think this would be an ideal asset for us to be promoting, which is why we got into this investment in the first place. At a minimum, it will come with seven years of exclusivity and, if approved, it would also come with a priority review voucher.

Scott Henry, Analyst

Okay and what would the timeline be in terms of approval?

Daniel Peisert, President and Chief Executive Officer

They have experienced some delays. The CDC is a crucial partner for them in testing many of their samples, and due to COVID, the CDC has faced some backlog. As a result, they are behind their expected timeline to file with the FDA, but they still anticipate filing in the second quarter of this year. The typical review period for these kinds of applications is six to ten months, depending on whether the FDA has any inquiries. Therefore, there is a possibility that we might see approval by the end of this year, and it is certainly on track to be ready for the next season in 2023.

Scott Henry, Analyst

Okay, great. And how do you think about kind of peak revenues for a product like this? I don't know if you can think of just, general terms, but just trying to get a sense?

Daniel Peisert, President and Chief Executive Officer

Yes, so I think that's a very relevant question. The question really comes down to what do you think the pricing could be? We haven't completed our pricing work for this yet. But we think that if you just look at other similar products, it's not a stretch to assume that you can get a price on an annual basis, north of $200,000 a year. That is not uncommon in this type of environment. Whether or not that's true for this product is yet to be seen. The net pricing can be very attractive.

Scott Henry, Analyst

Okay, and how many patients are there typically treated in a year?

Daniel Peisert, President and Chief Executive Officer

We think the annual occurrence is about 7,000 patients a year.

Scott Henry, Analyst

Okay. Regarding Assertio's economic participation, how should we view it? Do you own 12% of this asset, is that correct? Is there any other aspect related to your participation?

Daniel Peisert, President and Chief Executive Officer

Today, it is recorded on our balance sheet as a convertible note, and we currently carry debt at half of our initial investment. This investment will convert into equity upon FDA acceptance of their NDA. Based on the current timeline, we expect to achieve approximately 12% equity ownership, as you noted. If there are delays in their timelines, interest will accrue on the note, potentially increasing our economic interest above 12%. However, we prefer to see this come to market sooner rather than later.

Scott Henry, Analyst

Okay and then are there any royalties involved, or just said that 12% is how we should think about it?

Daniel Peisert, President and Chief Executive Officer

Just that 12% right now.

Scott Henry, Analyst

Okay, great, very interesting. I guess, just a couple more quick questions. Otrexup, now that you've got a couple of months under your belt any surprises there or is that asset meeting your expectations?

Daniel Peisert, President and Chief Executive Officer

No, as I said in my prepared remarks, everything is going well. The assets are meeting expectations. I'm really excited about getting it into our commercial engine further, so that we can start to see what we can do with it.

Scott Henry, Analyst

Okay, great. And then, I guess the final question, which is sort of a big picture question relative to the virtual model, I felt like when you started out with this strategic initiative, the thought there would be without the face-to-face promotion, you would have an erosion at whatever rate, perhaps 10% a year or whatever. But then as it's turned out, you've actually grown the prescriptions for a lot of these products. How should we think about organic growth under this virtual model based on the data points you have so far?

Daniel Peisert, President and Chief Executive Officer

I think that's a very fair question. A lot of people have answered it. One of the reasons why we switched to this model wasn't necessarily just because we thought we could grow it faster. It's more the economic side of things. So we don't think that promotion, nor how you promote for assets like these, is the single greatest barrier for that growth or the accelerator pedal for growth. The one that is more important to it, is spending more time and resources on market access. Not only contracting with PBMs and working your deals with the wholesalers but building the infrastructure to deliver to patients, like we do with our hub and network pharmacy design where we can offer attractive copay benefits. So, it's getting those things right that can be the biggest governor of your growth. We don't think that necessarily moving from in-person to digital is what drives that. We believe we just derive a better ROI on those investments.

Scott Henry, Analyst

Okay, great. Well, Dan, thank you for taking all the questions. I appreciate it.

Daniel Peisert, President and Chief Executive Officer

All right. Thank you very much, Scott.

Operator, Operator

Our next question comes from Scott Weis from Semco Capital. Your line is open.

Scott Weis, Analyst

Thank you, guys. Congratulations on the turnaround in 2021, really great job.

Daniel Peisert, President and Chief Executive Officer

Thanks, Scott.

Scott Weis, Analyst

I've got a couple of questions. One on Indocin, is there an alternative to this drug in the marketplace? And secondly, how can we think about the TAM and the size of the market as we look forward over the next couple of years?

Daniel Peisert, President and Chief Executive Officer

So, in terms of an alternative right now, no, there isn't. There are other things that people have tried, but the only thing that's available on the U.S. market is Indocin. The question about TAM and also I think about an alternative is really about the new possible indication for Indocin that we're exploring right now, which is the prevention of pancreatitis in ERCP surgeries. There are about 400,000 of those procedures done annually in the United States and at the current pricing of roughly $700 per procedure, there's a very attractive TAM in front of us. So it's something that we're looking to see how fast we can penetrate into that market, as well as how deeply. Today, Indocin is recommended in its guidelines, largely just for the high-risk segment of that 400,000 procedure market, which is about 20% of that total patient pool. The other two segments, which are moderate and mild account for about 40% of that market each. We think that the bigger opportunity here is to receive a broad label for this indication and then start promoting to physicians the benefit of the product, not only in high-risk but also in moderate and low-risk patients as well.

Scott Weis, Analyst

Okay, so this drug has grown quite a bit since 2020 and there's no reason assuming you think it can penetrate, that this couldn't be an $80 million to $100 million drug over the next couple of years?

Daniel Peisert, President and Chief Executive Officer

It's certainly on that path, Scott.

Scott Weis, Analyst

Okay. Regarding the refinance, your comment was, you're weighing proposals. Can you give us some perspective on the timing? Do you think it's the first half of 2022 type of an event? And then what would the refinance look like? Would it be a straight refi of the debt with a lower interest rate, would it include some cash, any color around that would be appreciated?

Daniel Peisert, President and Chief Executive Officer

Yes, so we are, as I said, weighing some alternatives right now. The key thing in the timing has been executing on our diversification of the business enough on the top line. The fact of the matter is that Indocin on a quarterly basis still earns as much revenue as we expect Otrexup to do inside of a full year. We need to keep that in perspective as we go out right now. Like I said, we're trying to do what's best for the business and for shareholders. The goal is to extend maturities, reduce the cost of capital, and ideally, leave flexibility for business development. That is, above all, the number one thing is making sure that we have the flexibility and additional financial capacity. The ideal situation is a straight refi of the existing term, with a lender that has the ability to expand and continue to fund it so we can benefit from future deals down the road. We certainly think that with our guidance of $64 million to $72 million of EBITDA, the fact that we've reported two consecutive quarters of stable business and now growing business here in the fourth quarter, that will increase the confidence that these lenders will have in our business and their ability to allow for leverage.

Scott Weis, Analyst

Okay. All right, thank you very much, guys.

Daniel Peisert, President and Chief Executive Officer

Thank you, Scott.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back to Dan Peisert, President and Chief Executive Officer, for any closing remarks.

Daniel Peisert, President and Chief Executive Officer

Thank you. In conclusion, 2021 was an important and transformative year for Assertio. It has laid the foundation for growth in 2022. I trust you all now see why we're excited about the opportunities that lie ahead for Assertio. We're scheduled to present next week at the ROTH Conference on March 14, and we hope to see and speak to some of you in person. None of this could have been possible without the talented, committed team and Board we have here at Assertio. We’re all aligned in creating value for all of our stakeholders under the clear responsibility we have to the patients' community. Thank you for joining us this morning and have a good day.

Operator, Operator

The conference has now concluded. Thank you for attending. You may now disconnect.