Summary
- Assertio is a truly impressive turnaround story that is now set to grow, mostly through M&A.
- The crucial ingredient is the digital-only sales model, which puts acquired drugs on a much lower cost basis while maintaining sales.
- The company can rinse-repeat this as they have a long list of M&A targets.
- Despite an impressive rally, the shares are still very modestly priced.
The shares of drug company Assertio Holdings ( ASRT ) have rallied strongly but despite that rally, the shares are still very reasonably priced. We'll look at what's behind the rally and see several reasons to still be bullish on ASRT shares:
- The business model works and generates high margins and cash flow.
- The cash flow is used to reduce debt and buy the rights of additional drugs, which can be made much more profitable under their business model.
- Rinse-repeat.
Introduction
Let's recap the essence of the company. After a near-fatal dabble in opioids (Nucynta, which was sold for $375M in early 2020), which left the company with huge debts and legal vulnerabilities, new management has put the company on sound footing again.
The crux of this remarkable turnaround was a shift, late in 2020, to an online sales model only, born out of necessity, from the February 2023 IR presentation :
ASRT IR presentation
It has done wonders for margins:
And it has produced a remarkable turnaround in cash flow:
Which has enabled the company to significantly reduce its debt:
The lineup of products:
ASRT IR presentation
Growth
ASRT IR presentation
Management feels that its financial base is now sound enough to look for growth opportunities again, and this is also already working:
Where is this growth coming from? From the 10-Q:
ASRT 10-Q
Growth comes from two sources, INDOCIN and the addition of Otrexup, which the company bought from Antares for a total of $44M at the end of 2021, the other drugs in its lineup are either stagnant or actually declining (like Zipsor).
Otrexup is facing payer pressures (due to an aggressive competitor) and suffered from supply problems which will be cleared late Q4 or early Q1.
These are all nonsteroidal anti-inflammatory drugs ("NSAID") and are sold in three markets (rheumatoid arthritis, migraine, and pain relief).
INDOCIN trial
We were a little surprised to see the company move into R&D as (Q3CC):
Fourth was the execution of a life cycle management opportunity for INDOCIN. We'll be requesting a pre-IND meeting with the FDA within a matter of days and should have feedback from them shortly after Thanksgiving. That will put us in a position to file an IND and begin a new clinical program for INDOCIN aimed at expanding the label which is all expected to begin in early 2023.
Sympazan acquisition
At the end of October 2022, the company announced it had bought the rights of Sympazan for a total of $15M, although $6M of that depends on Sympazan getting a patent extension to 2039 (which has succeeded ).
This acquisition sees the company move beyond NSAIDs as Sympazan is an oral film version of clobazam, a benzodiazepine used for keeping seizures under control for patients suffering from Lennox?Gastaut Syndrome.
Sympazan's revenue was $9.5M in the last 12 months and management expects it will add $4M-$4.5M to adjusted EBITDA and $0.05 to adjusted EPS in the next 12 months.
We have to see what wonders the direct sales business model can work for Sympazan, but management is optimistic:
ASRT IR presentation
Sales were already growing by 15% in the latest quarter before the acquisition and (Q3CC):
Quest have launched this product in 2018 with 30 reps. And prior to our acquisition, they had less than 10 filled territories. We think that Sympazan will fit very nicely into our nonpersonal platform, where we can expand upon the physician reach with what is largely an educational message to treating physicians who are very familiar with the clobazam molecule already.
This underscores both the growth potential as well as the inherent profitability of Assertio's digital-only business model. If they manage to maintain growth without these 30 sales reps, Sympazan will be inherently more profitable under its new owner.
The company is not done acquiring new drugs either (Q3CC):
We are still pursuing those larger transformative transactions. We had originally set a goal of acquiring products that brought us an additional $50 million in gross profit by 2024. The approximate $10 million from OTREXUP and now $8 million from Sympazan, we are a little over 1/3 of the way to accomplishing that goal.
Margins and profits
ASRT IR presentation
Apart from rising sales of INDOCIN, in July 2022 the company withdrew the drug from the Medicaid drug rebate program which includes 340B as this sells INDOCIN at a discount which produced $6M in annual losses.
There might be an upside to that $6M savings if enough patients will still acquire the drug at higher prices, which seems to be the case as the $7M in increased revenue from INDOCIN in Q3/22 (from Q3/22) was mostly a price effect, rather than a volume effect.
Valuation
The company has $66M in long-term debt (+$2.1M that is current) in the recently introduced 2027 notes with a conversion price of $4.09. The company can redeem the notes for cash if the share price exceeds 30% of the conversion price for a specified time, and we're getting close to that possibility. From the 10-Q :
ASRT 10-Q
Investors might also appreciate the sharp reduction in interest cost as the 2027 notes pay just 6.5% compared to 13% for the redeemed 2024 notes, and this is in a strongly rising interest rate environment.
The $64.8M in cash and equivalents wipe this almost out. There are 48.3M shares outstanding, 57.38M on a fully diluted basis (including the conversion of the 2027 notes), from the 10-Q:
ASRT 10-Q
We're not sure where that 7.246M figure comes from, the $70M 2027 notes have a conversion price of $4.09 suggesting 17.11M shares when fully converted into shares.
However, management has just announced it is offering to redeem the notes to some of the holders, given that the company apparently met the redemption conditions. Apparently, $30M of these 2027 notes are exchanged for $10.5M in cash and the rest in shares from company PR :
These transactions reduce our overall debt by $30.0 million, or 42.9%, while consuming only $10.5 million in cash. In addition, the transactions will save the Company $2.0 million in annual interest payments, reduce the potential dilution from the exchanged convertible notes by 4.6%, and will be accretive to our diluted EPS by $0.02 in 2023.
We have to admit we're struggling to understand that the reduction of the potential dilution is just 4.6% with a $10.5M cash redemption (which is 15.9% of the outstanding debt, a little less if you add the required interest but way more than 4.6%), but that's what the PR says.
Before this redemption, the market cap is $356.5M (at $5.30 per share) and an EV of $291.6M and the $30M redemption doesn't really change that a whole lot:
- 16.34M shares from converting the 2027 notes (that's 770K less)
- $10.5M less cash, that is, $54.3M in cash
The market cap becomes 66.48M shares at $5.30 or $352.3M, a tad lower while EV becomes $312.1M
On a guided FY22 revenue of $154.5M that's a low 2x EV/S. Analysts expect no revenue growth in FY23, which is a little surprising, given the recent update which contains yet another increase in guidance (albeit for FY22).
Management also increased the guidance for non-GAAP EPS to a whopping $1.18-$1.19, which makes the shares crazy cheap, trading on less than 5x earnings.
Conclusion
There is plenty to like:
- The company has executed an epic turnaround, debt has melted away.
- The company stumbled upon a highly profitable digital-only business model, squeezing profits out of ordinary drugs and generating substantial amounts of cash flow.
- They can repeat this by acquiring new drugs, and they are doing just that.
However:
- Growth last year, while very impressive, depended mostly on increasing the price of their biggest-selling drug by far, INDOCIN. We're not sure how repeatable this is.
- The newly acquired drugs Sympazan and Otrexup are much smaller in terms of sales and while sales of Sympazan are growing, Otrexup is under payer pressure.
- Cambia and Zipsor losing exclusivity and sales are set to decline, even if these are already minor.
- There was no news about opioid lawsuits but they still have exposure here from their time selling Nucynta, it's very difficult to assess this risk.
For further details see:
Assertio: A Truly Impressive Turnaround Story