OGI - Assertio Holdings: Here's A Contrarian Opportunity In The Health Care Sector

2024-01-08 00:03:36 ET

Summary

• Assertio Holdings has dropped substantially and is down more than 70% in the past year.
• Assertio Holdings appears to have been oversold based on quantitative factors. It trades at a very low enterprise value to revenue ratio compared to its peers.
• Diversification is important in managing the risk associated with distressed equities like Assertio. I'm issuing a Buy rating but suggest diversifying.

Investment thesis

Okay, admitted: This one's a troubled child. At one point in 2015, the common stock of Assertio Holdings, Inc. ( ASRT ) traded at ~$130. Less than a year later it had lost more than half of that value, and with the exception of a spike in late 2016, Assertio's share price has known only one way: Down.

In addition to the poor performance on the stock exchange, Assertio caught the eye of Beckers Hospital Review which placed Assertio on its list of 31 drug makers at high risk of going bankrupt.

In the past year, troubles have continued: The share is down more than 70%:

On Seeking Alpha, several analysts had issued a "Buy" or even "Strong Buy" rating during 2023.

But by the end of the year, the tone had changed: Citing "major insider selling", one analyst turned on the issue and called it a "Must Sell".

On January 3, the cascade of trouble went full circle: Assertio announced its CEO, Dan Peisert, would step down . He's replaced by independent director Heather Mason.

With such poor performance and investors heading for the exits, perhaps now is the time to examine if the market is missing something. In this analysis, I discuss quantitative and qualitative factors that point to Assertio rebounding and outperforming going forward.

Based on my findings, I'm taking a contrarian approach: I'm issuing a Buy rating for Assertio.

What caused Assertio's poor price performance

Assertio actually had quite a nice run during much of 2023: For much of the year, the stock was up about 50%.

Then as Assertio announced earnings for Q2 2023, the company broke news that the FDA had approved a generic competitor drug that rivals Assertio's main drug, Indocin. It was almost as if the earnings call was news in the making:

We just learned a few hours ago, the FDA has approved a generic indomethacin product today - Assertio Holdings CEO, Dan Peisert

Management's response was prompt:

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 - Assertio Holdings CEO, Dan Peisert

The market reacted just as promptly: The stock was almost cut in half on a single day of trading in early August.

The stock has not recovered but has trended down since then. This is what makes it interesting to examine if perhaps the stock has come down too much.

It's in the numbers: These quantitative factors point to future outperformance

Assertio's ratio of enterprise value to revenue (EV/R) is 0.41. This is quite a low figure, especially compared to its peers as listed by Seeking Alpha:

I'm using the EV/R ratio because it's more appropriate with distressed equities than conventional metrics like P/E or P/FCF.

The EV/R ratio measures what a buyer for control would need to pay to buy all bonds and equities at the market relative to the revenue produced. Buying all bonds and equities would clear the company assets of creditor and shareholder claims. The investor would be left with the turnover produced by those assets.

Typically, you can't measure price against earnings or free cash flow since distressed companies often won't produce earnings or free cash flow as they are navigating whatever adversity hits them. In other words, the EV/R ratio is just a proxy for more conventional metrics. It probably compares best to the price to book (P/B) ratio, although it is calculated very differently.

In my opinion, a low EV/R ratio - especially when it's below 1 and low relative to peers - is a quantitative factor that signals future outperformance. Prices have a tendency to normalize - to revert to the mean, as some call it.

This is supported by the fact that Assertio is a small-cap stock. Small caps have a tendency to trade at statistically abnormal levels to a wider degree and for longer than large caps.

Having said that, numbers are one thing: Sometimes they need real-word support, which is why I'll turn to discuss some recent management actions.

What management has done to address the issues at Assertio

Assertio is a specialty pharmaceutical company that acquires, commercializes, and develops therapies relating to the nervous system and neurology.

Assertio's core holdings are:

• Indocin - a drug for arthritis
• Otrexup - a drug for arthritis
• Sprix - a pain reliever drug
• Cambia - a drug for migraine
• Sympazan - a drug for epilepsy syndromes

For fiscal year 2022, Indocin was by far the most important drug making up more than half of Assertio's revenue. No wonder competition against this affects the performance of Assertio. Indocin had also grown revenues substantially over the past few years (revenue in thousands):

Which brings me to what I find is Assertio's strategy: Diversification. The action management has taken in this regard actually came in 2022 with the acquisition of Sympazan.

Sympazan is an epileptic drug that was bought from Aquestive Therapeutics in 2022. It doesn't contribute nearly as much revenue as Indocin, but its sales are growing. In its most recent earnings announcement , the company said Sympazan had delivered another new monthly high on a 4% increase in total prescription volume quarter over quarter.

It's still a long way up to Indocin. Sympazan delivered $7.2 million of revenue for the first three quarters of 2023 whereas Indocin delivered an entire $76.4 million.

Aside from Sympazan, Assertio had acquired Otrexup in 2021. It started showing sales for Assertio in 2022, bringing in ~$11 million for the fiscal year.

The diversification was needed not just because of Indocin's competition. Revenue from Sprix has been under pressure as well (revenue in thousands):

Cambia's revenue had been trending downward as well, further underlining the need for the diversification efforts taken with Sympazan and Otrexup (revenue in thousands):

Aside from diversifying its portfolio of drugs and thereby extending the life of its portfolio, Assertio maintains a strong cash profile. Assertio had $76.9 million in cash and equivalents as of its last earnings report (this is against a market cap of ~$96 million).

Total current assets stand at ~$185 million against total liabilities of roughly the same. In other words, if you add up Assertio's accounts receivable, inventory, and cash, it would be about enough to clear all liabilities. This means you're basically not paying for the actual operations of the business.

Management also laid out a plan in 2023 aimed at maximizing the value of each drug. For Otrexup and Sprix, it involves a digital promotion program to drive sales up. For Cambia, it involves attempting to maximize profitability after that drug lost exclusivity in January 2023 (although management did not state what that involved in detail). And for Indocin, the plan involves enhancing existing sales channels.

Risks

Even if you're the most level-headed person trading the markets, you can't help but feel a little scared with an issue like Assertio. Long-term investors of Assertio have seen most of their holdings wiped out.

While I'm dismissing speculations of bankruptcy, I acknowledge the troubles that make this one a distressed equity. Investing in distressed opportunities doesn't necessarily require an in-depth understanding of the company's turnaround plan - supposing there is one - or even assessing the strength of its balance sheet.

What it does take is making sure that there is a statistical advantage in the numbers: A significant decline in the stock price coupled with a low valuation rate following the drop could signal such an advantage.

You can secure such an advantage with each particular issue by examining its numbers - but also on a broader scale secure the advantage by diversifying and holding issues that display similar properties.

Based on this, I suggest managing the risk that any distressed equity such as Assertio involves by holding it in a diversified portfolio.

Key takeaways

Assertio is a specialty pharmaceutical company that holds a portfolio of drugs approved by the FDA.

Assertio's most profitable drug, Indocin, lost exclusivity in 2023. This caused a very substantial drop in the share price, which hasn't recovered since. The stock is down about 70% in the past year.

With so much negativity in the stock, I dug into the numbers and found that on a statistical level, Assertio now trades at a very low valuation. Its EV/R ratio is less than its peers at just ~0.4. This signals now could be a buying opportunity.

Management is diversifying the portfolio of drugs and added the seizure drug Sympazan in 2022. It's showing growth and could help offset the effects of Indocin sales declining from the introduction of a generic competitor.

Regardless of the low valuation and management initiatives, Assertio is a distressed issue. It's best to hold such an issue in a diversified portfolio.

Based on the above, I'm rating Assertio a Buy.

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