Earnings Call Transcript - COLL Q3 2020

Operator, Operator

Greetings and welcome to the Collegium Pharmaceutical, Inc. Third Quarter 2020 Conference Call. As a reminder, this conference is being recorded.

Alex Dasalla, Head of Investor Relations

Welcome to Collegium Pharmaceutical's Third Quarter 2020 Earnings Conference Call. This is Alex Dasalla, Head of Investor Relations for Collegium. I am joined today by Joe Ciaffoni, our Chief Executive Officer; Paul Brannelly, our Chief Financial Officer; and Scott Dreyer, our Chief Commercial Officer. Before we begin today's call, we want to remind participants that none of the information presented today is intended to be promotional, and that any forward-looking statements made today are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. You are cautioned that such forward-looking statements involve risks and uncertainties, including and without limitation, the impact of the COVID-19 pandemic, the risks that we may not successfully commercialize Xtampza ER and the Nucynta franchise, and that we may incur significant expenses and may not prevail in current or future opioid industry litigation and investigations, patent infringement litigation or other litigation pertaining to our products. These risks and other risks of the company are detailed in the company's periodic reports filed with the Securities and Exchange Commission. Our future results may differ materially from our current expectations discussed today. Our earnings press release and this call will include discussion of certain non-GAAP information. You can find our earnings press release, including relevant non-GAAP reconciliations, on our corporate website at collegiumpharma.com. I will now turn the call over to Collegium's CEO, Joe Ciaffoni.

Joseph Ciaffoni, CEO

Thanks, Alex. Good afternoon, and thank you, everyone, for joining the call. I want to start by acknowledging the challenging situation the COVID-19 pandemic continues to present for so many people. Our thoughts and hearts go out to everyone who has been impacted. I'm pleased to report that our people are healthy, our supply chain is secure, and our business is strong. In a year of extraordinary challenges, 2020 will be a transformative year for Collegium Pharmaceutical. We are on track to achieve our operational objectives in 2020 while concurrently setting the foundation for success in 2021. I want to take a moment to thank my colleagues at Collegium for their commitment to our mission to become the leader in responsible pain management. I appreciate the effort that they put forth every day and admire their adaptability and resolve. Business highlights from the third quarter include record net revenue of $79.2 million, which represents an 8.5% increase over the third quarter of 2019; Xtampza ER third quarter net revenue of $32.1 million, which represents a 21% increase versus the third quarter of 2019; total prescriptions were up 19% versus Q3 2019. As anticipated, Xtampza ER grew at a moderated rate on a sequential basis, and we expect prescriptions to grow at a similar rate in the fourth quarter. Nucynta franchise net revenue of $47.1 million, which represents a 1% increase versus the third quarter of 2019. Total prescriptions were down 10% versus Q3 2019. But it is worth noting that franchise prescriptions were stable sequentially, and that Nucynta ER TRx share has grown or been stable for 6 consecutive quarters. OpEx for the quarter was down compared to the third quarter of 2019 and sequentially. We remain committed to leveraging, not growing, Collegium's cost structure in 2020 and beyond. We were profitable on a GAAP basis for the third consecutive quarter, meaningfully increased cash on hand, and paid down debt. And we settled the Teva, Xtampza ER ANDA litigation. The settlement contemplates a generic launch no earlier than September 2033. We believe this settlement confirms the strength of the Xtampza ER patent estate. Looking forward to 2021, we believe that we have set the foundation upon which Xtampza ER will accelerate beginning in January and upon which sequential annual revenue stability will be achieved with the Nucynta franchise. Our market access team has done a great job executing our portfolio payer strategy. As it pertains to Xtampza ER, Collegium's market access team has secured additional exclusive ER oxycodone formulary wins that cover approximately 7 million commercial and Medicare Part D lives. The biggest new win is UnitedHealthcare's Medicare Part D AARP PDP preferred business, which is a highly controlled plan and the second largest plan in terms of ER oxycodone prescriptions. Starting January 1, 2021, Xtampza ER will be the exclusive ER oxycodone for over 92 million commercial and Part D lives. In addition, the team has secured parity formulary positions that cover approximately 5 million lives. These wins also take effect on January 1, 2021. From the perspective of managed care pull-through, our commercial team's focus in 2021 will be on three buckets of growth: new 2021 wins, 2020 exclusive wins, and the 2020 Optum commercial parity win, which covers approximately 17 million lives. With regards to the Nucynta franchise, we improved rebates with a few plans and opted not to renew some unfavorable contracts that we inherited. We anticipate that the evolution of the payer landscape will have a positive impact on revenue, meaningfully offsetting any pressure on prescriptions. As the company committed to being the leader of responsible pain management, we will continue to work with payers whenever possible to remove nonclinical barriers to our pain portfolio, which health care providers view favorably and as highly differentiated. The Collegium team is encouraged by, but not satisfied with the progress that we have made thus far in 2020. Every person in our organization is focused on finishing 2020 strong, while simultaneously preparing for a fast start to 2021. I'm confident that we have the people and the portfolio to make it happen. I will now hand the call over to Paul for a discussion of the financials.

Paul Brannelly, CFO

Thanks, Joe. Good afternoon, everyone. In the face of COVID-19, we ended the third quarter in a strong financial position. In the two quarters since we've closed the Nucynta transaction, we generated $78 million in cash from operations and repaid $25 million of our term loan. Our September 30 cash balance was $165.4 million compared to our June 30 cash balance of $145.7 million. Total product revenue was $79.2 million for the third quarter of 2020. Xtampza ER revenue was $32.1 million, which is an increase of 21% from the third quarter of 2019 and a decrease of 4% from the second quarter of 2020. The gross to net discount for Xtampza ER was 60.9% for the third quarter compared to 59% in the second quarter. The increase in our gross to net discount was driven by Medicare coverage gap. We continue to expect gross to net discount may be lumpy throughout the year and to be in the low 60% range for 2020. Nucynta revenue was $47.1 million for the third quarter of 2020, which is a 1% increase from the third quarter of 2019 and a 6% increase from the second quarter of this year. Operating expenses were $28.6 million for the third quarter of 2020, which is a 10% decrease from the second quarter of this year. Our GAAP net income was $11.3 million for the third quarter of 2020 compared to a GAAP net loss of $6.1 million for the prior year quarter. Our non-GAAP adjusted income was $36.1 million for the third quarter of 2020 compared to $1.7 million for the prior year quarter. Similar to the last two years, we expect to issue 2021 financial guidance in January. We anticipate providing guidance for adjusted EBITDA instead of non-GAAP adjusted income, like we did this year. We believe that adjusted EBITDA is a more helpful metric for investors and analysts. Please see our earnings release and 10-Q for additional information about adjusted EBITDA. In the third quarter, we had record net income, generated significant cash flow from operations, and we continued to maintain financial discipline. We are on track to make 2020 a financially transformative year for the organization, and we've built a strong foundation upon which we can continue to grow in 2021 and beyond. I will now hand the call over to Scott for a commercial update.

Scott Dreyer, Chief Commercial Officer

Thanks, Paul. As COVID-19 cases increase across the country, it continues to adversely impact in-office patient visits and in-person calls by our sales professionals. It's estimated that weekly in-office patient visits are down about 20% versus pre-COVID levels, which manifests in a corresponding decrease in the new-to-brand market. Our field force is adapting and continues to make progress. That being said, in-person calls are still down about 40%. As we've described previously, we believe the growth rate of Xtampza is adversely impacted by these dynamics, and conversely, the Nucynta franchise benefits from continuity of care. In the face of these dynamics, Xtampza ER grew modestly in the third quarter, achieving new highs in total prescriptions, market share, and total prescribers. Total prescriptions for Xtampza ER grew to 142,686, up 1% versus the second quarter of 2020. Xtampza ER extended-release oxycodone market share grew to 24%, and there were 14,700 unique prescribers. The Nucynta franchise stabilized in the third quarter. And for the first time in over 3 years, the prescriber base for both Nucynta ER and IR grew. Nucynta ER has now had stable or growing market share for six straight quarters. I appreciate the efforts of the commercial team, and I'm encouraged by the progress that we're making. Although we don't anticipate a return to normal in 2020, I believe that we can and will do better the remainder of the year. We're focused on improving execution and impact of both remote and in-person interactions, pulling through our strong market access positions and leveraging our new capabilities to generate momentum in the fourth quarter. Turning to 2021, our market access team has done a great job executing our portfolio payer strategy. We put a foundation in place to accelerate Xtampza ER beginning in January and to achieve annual net revenue stability for the Nucynta franchise. I'm pleased to announce that the market access team has strengthened the formulary position of Xtampza ER, securing new exclusive and parity wins across 12 million lives. These wins will fortify the foundation for accelerated growth in 2021. In 2021, the commercial team will be focused on three buckets of growth. The first bucket is the new exclusive ER oxycodone wins taking effect on January 1. The most significant new win is the UnitedHealthcare Medicare Part D AARP PDP preferred business. This is a high control plan and the second largest individual plan as measured by OxyContin prescriptions. Xtampza ER is now the exclusive ER oxycodone for all of UnitedHealthcare's 10 million Medicare Part D lives. We've also secured several new exclusive wins with regional commercial plans, representing approximately 3 million lives. The second bucket is the 2020 exclusive ER oxycodone wins, which represent significant opportunity for continued growth in 2021. In both commercial and Part D, our team is focused on capturing the market share that we anticipated getting in 2020. In addition, many plans are making operational adjustments to drive better formulary adherence. The third bucket is the Optum national commercial formulary win, where Xtampza ER was moved into a parity preferred position in 2020. As a reminder, this win went into effect in July and is the first parity position for Xtampza ER, covering approximately 17 million lives. Optum commercial will serve as a bellwether and impact our contracting strategy for 2022. The team also achieved several parity wins with smaller regional plans that take effect in January and cover approximately 5 million lives. For the Nucynta franchise, the team was able to improve rebates at several plans. We also opted not to renew several contracts that were underperforming. Although these decisions will pressure Nucynta franchise prescription volume, they will result in increased revenue. As a company committed to being a leader in responsible pain management, we continue to engage payers to remove nonclinical barriers that complicate access to our pain portfolio, which health care providers view favorably and is highly differentiated. The commercial team is focused on generating portfolio momentum for the remainder of 2020, while preparing to accelerate growth with Xtampza ER and maximize the potential of the Nucynta franchise in 2021. I'm confident that the team has set the foundation to accomplish both of these objectives. With that, I'll turn it back to Joe.

Joseph Ciaffoni, CEO

Thanks, Scott. I will now open the call for questions.

Operator, Operator

Our first question is coming from David Amsellem of Piper Sandler.

David Amsellem, Analyst

And just a couple of questions. So first, on the formulary wins and particularly the United Part D. Can you talk about how we should think about the pace of new Xtampza adds or pace of switching? One thing we've seen in past years when you get a big exclusivity contract is a big bolus of volume growth in the first quarter and then moderates to some extent in the second quarter and moderate further in the second half of the year. So should we think about the dynamics next year as being similar to past years? So that's number one. And then number two, just on gross to net. Can you talk through what you think gross to nets will be for Xtampza? And I'm particularly interested in what your gross to nets will be on the Nucynta franchise given the discontinuation of certain contracts, how we should think about those dynamics for 2021.

Joseph Ciaffoni, CEO

David, this is Joe. I'm going to pass the United Part D question over to Scott, and then Paul will take the gross to net question.

Scott Dreyer, Chief Commercial Officer

Yes. Thanks, David. So yes, to answer your question first about the PDP win. We do expect acceleration right out of the gate in the first quarter, like we see every time we have an exclusive win. To give some perspective, the PDP business right now has about a 5% market share. And as a high control plan, we know that will accelerate. It will be more protracted as a PDP, right? So compared to commercial, it will be a little more protracted throughout the year but will absolutely accelerate aggressively in the first quarter.

Paul Brannelly, CFO

Great. David, regarding Xtampza's gross to net, we believe we can maintain it in the low 60% range moving forward. We will provide guidance in January and can offer more details then after we complete our modeling for next year's uptake. As for the Nucynta franchise, it has been stable in the low 50% range, and we may see improvements in gross to net as we revise payer contracts. This will also be part of our preparations for the 2021 guidance and our communications related to it.

David Amsellem, Analyst

Okay. And then if I may just ask a follow-up. This is for Joe. You talked about biz dev in the past. I wanted to get your latest thoughts. And you talk about the addition of an asset that has some line of sight into commercialization down the road, obviously, looking at keeping an eye on the loss of exclusivity on Nucynta in a few years. So just with all that in mind, what are your latest thoughts? And what are you prioritizing these days?

Joseph Ciaffoni, CEO

Yes, David. Thank you, and I appreciate the question. As always, when I get that question, I'd like to emphasize the confidence that we have in the runway of the core business and how it is that we anticipate that it will perform. In terms of our focus, our focus remains the same. Our highest priority is looking at late-stage development in non-opioid pain solutions. I would say we're focused; we know what it is that we prioritize, and we're active from that perspective. And then I guess the final point that I think is always important for us to emphasize is because of the strength of the overall business, we're also really locked into value and making sure that not just in terms of value of the asset in terms of being a meaningful solution but also being able to action around it in a way that we think makes sense for the organization and the utilization of our capital.

Operator, Operator

Our next question is coming from Tim Lugo of William Blair.

Lachlan Hanbury-Brown, Analyst

This is Lachlan on for Tim. So I was just interested, can you give a sense of sort of what your penetration into current plans is? And as you think about your sort of future growth sort of 2021 and beyond, how that's going to be driven by increasing penetration versus continued expansion of coverage and formulary, lives on the formulary?

Scott Dreyer, Chief Commercial Officer

Yes. Thanks for the question, Lachlan. So yes. So with the wins we just announced, in commercial, about 45% of lives will be in an exclusive position, and about 42% of Part D lives. So strong penetration. But obviously, if we need to pull that lever more, there's still more room to grow from a standpoint of exclusivity. The parity wins are big. That's 22 million additional lives will be in parity with Optum and some of these regional plans.

Operator, Operator

Our next question is coming from Greg Fraser of Truist Securities.

Gregory Fraser, Analyst

It's Greg Fraser on for Greg Gilbert. On the recent Part D, the United Part D plan, can you give us a sense of the volume of that plan in terms of oxy prescriptions? You mentioned 5% market share. I wasn't sure if that referred to the volume or the size of that plan.

Joseph Ciaffoni, CEO

Yes. So Greg, this is Joe. On United Part D, what I would say right now, we're really confirming the final numbers as we work through our forecast for 2021. And as you know, there's ins and outs of lives. What I can tell you with confidence is it's the second biggest individual payer of extended-release oxycodone. OxyContin, obviously, in this case, is what is most important. And as Scott referenced and it speaks to the level of control at United PDP, we currently have a 5% market share, which is why we expect to see significant growth right out of the gate in 2021.

Gregory Fraser, Analyst

And that's the second largest payer for Part D or overall oxy?

Joseph Ciaffoni, CEO

That's the second largest individual payer of OxyContin.

Gregory Fraser, Analyst

Got it. Okay. And then just curious what you see as the potential implications on the oxy ER market or potential opportunities for you due to the new ownership structure of Purdue and what that company is going through?

Joseph Ciaffoni, CEO

Yes. I'll address that. I don't want to speculate on the situation of one of our competitors. However, from Collegium's perspective, we are confident that our pain portfolio is seen as highly distinctive and favorable by pain specialists. We are excited about the foundation we are building to accelerate Xtampza and stabilize the Nucynta franchise in terms of annual revenue. Our focus is on executing our strategy at Collegium, and we believe there is significant growth potential ahead. We are committed to our goal of having Xtampza become the leading branded ER product by 2023.

Operator, Operator

Our next question is coming from Serge Belanger of Needham & Company.

Serge Belanger, Analyst

A couple of questions for me. First, can you talk about the current business and growth environment for both Xtampza and Nucynta? And has there been any improvement throughout the third quarter? I think in the past earnings update, you talked about the slowing down in new patient starts mostly due to a reduction in patient visits. How do you think about that ahead of another opportunity starting in January?

Joseph Ciaffoni, CEO

Serge, this is Joe. I apologize, but we couldn't hear your question because there were connection issues. Could you please repeat it? We just couldn't catch what you said.

Serge Belanger, Analyst

Got it. Can you hear me now?

Joseph Ciaffoni, CEO

It's still in and out. You're still breaking up.

Scott Dreyer, Chief Commercial Officer

No, worse.

Operator, Operator

Our next question is coming from David Steinberg of Jefferies.

David Steinberg, Analyst

I have a couple of questions. The first is, this year, the ramp of the scripts has been slower than most people thought, largely attributed to the fact that there's just been a lot of less in-person visits to the doctor in order to get the handover from OxyContin to Xtampza script-wise. And I was just curious, in the third quarter, has there been any improvement in the number of direct meetings between patient and physician in order to facilitate that? Or is it still pretty sluggish given the pandemic? And then secondly, you touched on business development. I was just curious, we're getting different messages from different companies. Some companies say they've paused business development because they can't have face-to-face meetings during the pandemic or the valuations have gotten too expensive. Just curious, are you still active? Or has your activity declined a bit because of the pandemic and the related issues thereof? And what are you seeing in terms of valuations of companies you're interested in?

Joseph Ciaffoni, CEO

Okay. David, this is Joe. I'm going to pass the first question off to Scott, and then I'll come back and talk about business development.

Scott Dreyer, Chief Commercial Officer

Yes. Thanks, David. Look, when we look at patient visits, really what we're seeing is still they're down over 20% since pre-COVID time period. And with cases rising across the country, we don't really see any improvement in that, and we're not counting on that for the rest of the year.

Joseph Ciaffoni, CEO

And then, David, from a business development perspective, what I would say is we're focused; we're active. I think the key for us because of the strength of the overall business is we're going to be selective, both in the belief in the program, the differentiation of it, and also what it is that we're looking to do from a value perspective. So I would say active but selective.

Operator, Operator

Our next question is coming from Brandon Folkes of Cantor Fitzgerald.

Brandon Folkes, Analyst

Congratulations on the win. Joe, you previously mentioned that increasing prescription growth in the second half of the year is a priority. You noted, as Scott mentioned, that challenges persist with in-person sales and patient visits. How do you envision moving forward with this? Could the parity contract assist in driving growth, not just in the beginning of the year but also in the latter half, particularly for Xtampza? Any insights you could share would be appreciated.

Joseph Ciaffoni, CEO

Yes. Brandon, so thanks for the question. I appreciate it. The first thing is with regards to exclusive plans and as we look to 2021. I think, one, we're excited about the new plans that will be taking effect on January 1 and look at those as a source of acceleration and with a trajectory kind of in line to what we have seen when we've implemented exclusive plan. The second pool or bucket of growth that I really want to emphasize is the opportunity for the plans that took effect on January 1 in 2020. And you may recall in previous calls, we talked about at the beginning of the year when you added all of those new plans in, our market share in exclusive plans went from 60% down to about 40%. Right now, we're in the low, approaching the mid-50%. So the difference of that 60% and the mid-50s of where we would expect to end this year, we think, is the opportunity to capture share than we would have anticipated capturing this year. When you look at the parity wins, in particular, Optum, which is the biggest, but overall, we have 22 million lives; we think that that will have a different trajectory and will continue to be something that improves each month as time goes on and will be a different curve than the exclusive. So to the degree, when there's a return to normal, in terms of in-person business and the ability of our sales professionals to see physicians in person, I think that will be a more consistent and steady growth, which certainly we would anticipate having a positive impact in the second half of the year.

Operator, Operator

Our next question is coming from Kevin Kedra of G. Research.

Kevin Kedra, Analyst

Joe, you mentioned that 60% level for the exclusive plans. Just wondering on the parity plans, what sort of level of share within those plans would you need to get sort of on the same level from an economic standpoint as what you're getting on exclusives? I mean, obviously, I would imagine that you need less penetration on a parity plan, given favorable pricing. But can you give us any sort of color around where that would have to come out to kind of be on par with the economics you would get with an exclusive plan?

Joseph Ciaffoni, CEO

Yes. So Kevin, I appreciate the question. For a multitude of reasons, I'm probably not going to give you a specific answer. But what I would say to you is, it is correct. Because it is better margin, we would need to achieve a much lower market share from an economics perspective.

Kevin Kedra, Analyst

Okay. Even considering the timelines, do you think that within 2 years on a parity plan, you could start reaching an economic level similar to what you expect to achieve in the first year on an exclusive plan?

Joseph Ciaffoni, CEO

Kevin, I won't go into too much detail. One thing to keep in mind about the parity approach is that Optum is the first we've seen. We call it a bellwether because, while we have theories and models about what we think will happen, we actually need to observe it, especially in a post-COVID world. This particular plan and the overall parity positions will help us understand what we can achieve in this area. It will definitely influence our contracting decisions moving forward, depending on our observations.

Kevin Kedra, Analyst

Great. That's helpful. I wanted to ask about your plan for 2021, where you mentioned you would provide adjusted EBITDA instead of a net income outlook. What is the reasoning behind this decision? Is it related to potential volatility in the tax rate due to the use of NOLs? Additionally, how should we consider NOL utilization in 2021?

Paul Brannelly, CFO

Yes, it's a great question, Kevin. The main reason for us to provide adjusted EBITDA is that it's a more comparable metric for investors and analysts to use when comparing Collegium to other companies they follow. Regarding our tax rate moving forward, we shouldn't pay any federal income tax for 2020 and 2021 due to our net operating losses shielding us at the federal level. We will, however, have a minimal amount of state tax exposure during that time. As you may know, some states have altered the use of net operating losses because of the pandemic and their budget challenges. We expect to pay a couple of percent in state taxes over the next year or two, and we anticipate becoming a full taxpayer around 2023.

Kevin Kedra, Analyst

Okay. And if I could squeeze one last one in. You guys have recently published some real-world data on Xtampza and kind of misuse and abuse. There was a time when the FDA was kind of really pushing the idea that that kind of data could eventually find its way onto a product label. Is there still an opportunity or a pathway there with the FDA to eventually put some real-world abuse data on the label? Or are we kind of past that point?

Joseph Ciaffoni, CEO

Yes. So Kevin, this is Joe. I would say, look, the data that we continue to see we're encouraged by. We certainly share it and make sure the agency is aware of it. And along those lines, we also have some close marketing regulatory requirements that we need to fulfill. And I'll leave it there.

Operator, Operator

At this time, I would like to turn the floor back over to Mr. Ciaffoni for closing comments.

Joseph Ciaffoni, CEO

Thank you. Thank you, everyone, for participating in our call this afternoon. Collegium Pharmaceutical is on track to make 2020 a transformative year. And we look forward to updating you on our progress. Have a great evening. Be well.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and log off the webcast at this time, and have a wonderful day.