2023-06-20 01:55:13 ET
Summary
- Assertio is a late-stage pharmaceutical company that has shown significant growth and cost savings under new leadership, focusing on a low-cost, data-driven marketing model.
- The company's leading product, Indocin, has seen increased sales and a recent 5x market expansion not yet included in company guidance.
- Assertio ranks in the top 1% of stocks in both value and high-quality momentum.
- Assertio's potential merger with Spectrum will reduce product risk and provide additional potential upside.
Assertio (ASRT) is a late stage pharmaceutical company that landed in the top 1% of 43,000 companies ranked on high quality momentum and value. Momentum and value are two fundamental metrics of which have proven an historical ability to outperform and are based on our own human biases.
I typically pass on pharmaceutical companies due to their lumpy cash flows and inherent approval, legal, patent, and competitive risks that are difficult to evaluate but Assertio had a few unique qualities that I specifically look for in startups. That additional interest has resulted in this deal memo and the goal of providing enough information for you (and I) to make an informed decision on if Assertio deserves a spot in our portfolio.
Assertio
Assertio is a pharmaceutical company that acquires and licenses late stage and or approved medications across a plethora of therapeutic areas. In 2020 Assertio began to blaze a new trail when their now CEO Dan Peisert took the helm. He and his new leadership team implemented a fresh vision based on low-cost, data driven, digital, and non-personal marketing. They have since turned the company around leading to cost savings, revenue increases and multiple product acquisitions.
New Leadership with a Vision
Since 2020, Peisert has transformed Assertio from a pharma company saddled with high interest debt, a mountain of losses ($219M in 2019), and essentially left for dead. If you think I’m being harsh I give you the stock price below, displaying over a 95% decline.
Seeking Alpha
Peisert's vision took a few years to implement and with the help of his new team they cut their annual expenses from $200-300M/yr to ~$80M while increasing revenues from $108M to $162M.
The turnaround consisted of disrupting the old rep-based sales model and essentially cleaning the house of their sales force. This resulted in the significant reduction in costs mentioned above and surprisingly did not lead to a reduction in overall sales.
Acquisition Edge
If Assertio can sell a product without a rep-based sales force at a ? of the cost of their competitors and they are no longer tied to therapeutic rep based channels. This is the type of disruption I look for in startups and took notice of when I saw this stock with left-for-dead prices.
Assertio's marketing adjustment gave management an edge over their competition and a clear advantage in their acquisition and disposition process.
Assertio
Assertio is finally focusing on growth and its motto of restoring lives. Before Peisert, Assertio was more interested in whether they could restore their own life.
Product Portfolio (Revenue Sources and Potential Growth)
Assertio’s product portfolio currently consists of 7 and they are in the process of merging with an 8th.
INDOCIN - Primary Product with 5x Tailwind
Assertio’s leading product is INDOCIN, of which accounted for 54% of sales in 2022. INDOCIN is an off-patent, suppository, and oral solution used to treat arthritis and PEP (Post-ERCP pancreatitis). Peisert and team have been growing INDOCIN sales from $30M in 2019 to $81M in 2022 and I’m projecting $125M+ in 2023.
$1000's and INDOCIN’s revenue is adjusted for royalties paid on sales over $20M/yr. (HIT Capital)
In March, Assertio experienced a significant tailwind when the American Society for Gastrointestinal Endoscopy guidelines were adjusted on ERCPs. The previous guidelines included using INDOCIN (rectal NSAID) on the subset of high risk patients but the new guideline has the physicians administering INDOCIN on all ERCP patients, effectively increasing INDOCIN’s market size 5x ( 600,000 ERCP performed annually in the USA).
“ patients undergoing ERCP , the ASGE recommends periprocedural rectal NSAIDs be given to prevent PEP”
The Rest of Assertio’s Products
The next 6 products Assertio sells account for the remaining 46% of sales, was previously led by CAMBIA. CAMBIA just joined INDOCIN, and ZIPSOR as it came off patent January 1st. On the other hand Sympazan was acquired in October of 2022 and Otrexup at the end of 2021 and they have patent protection through 2031. The other two products, Oxaydo and Sprix, appear to be protected until 2025 and 2029 respectively.
are in 1000's and INDOCIN’s revenue is adjusted for royalties paid over $20M in annual sales. (HIT Capital)
Assertio’s 2023 revenue guidance on their current portfolio of 7 products is $157-$167M, a slight increase over 2022. This accounts for INDOCIN and Zipsor being off patent and CAMBIA having come off patent protection 1/1/2023. What I don’t believe it includes is INDOCIN’s market expansion described above and the merger under way with Spectrum Pharmaceuticals (SPPI) and their product ROLVEDON.
Since the merger hasn’t closed with Spectrum (and their product ROLVEDON) I’ll link to their part of my deal memo here once it has been approved by Seeking Alpha.
Assertio Spectrum merger
On the surface it appears Assertio is overpaying for Spectrum as Assertio agreed to pay a 65-94% premium and communicated they were planning on keeping Spectrum’s rep based sales force. I’ll share more on Spectrum and my overall opinion of the merger in my next post on Spectrum and ROLVEDON. I'm working on Spectrum's valuation now but in short it appears to be a good deal for both companies reducing each other's overall risk while sharing and increasing each other's upside.
Catalysts and Risks
The following points are a few catalysts and risks I’ve identified alongside the valuation to follow.
Catalysts
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INDOCEN sales expand from ASGE guidelines change (+5x TAM or $200-500M in annual sales)
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Data, Digital, and Rep light sales model proves itself over the current rep based model
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Assertio is granted 3 years of exclusivity with INDOCEN (ASRT is discussing IND feedback with FDA on the future clinical trial now).
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Management continues to add value as they have done for the past 3 years through acquisitions, cost reductions, and sales improvements.
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Assertio valuation re-rates to be more in line with their pharmaceutical brethren (currently at a 55% EV/EBITDA discount).
- Assertio's primary product risk decreases if Spectrum merger goes through and ROLVEDON is successful.
- Assertio is added to the Russell and gains from passive investors and additional exposure
Risks
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The merger falls through between Assertio and Spectrum and risks are increased through reliance on one primary drug, INDOCIN.
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Current or new legal issues arise or materialize. Assertio is involved in various lawsuits, claims, and investigations that could turn out to be costly. They are involved in a case related to their historical drug Glumetza and its associated antitrust actions, various opioid cases, and insurance litigation.
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INDOCIN comes under competitive pressures. Rectal Diclofenac, an alternative to rectal INDOCIN could be introduced domestically.
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Someone else could begin manufacturing INDOCIN. It appears INDOCIN is difficult to manufacture and Assertio has an exclusivity agreement with the manufacturer Cosette through July 9, 2028 that thus far has kept competition at bay. That said, Assertio has acknowledged a 503B compounder of which they believe to be in violation of the Food, Drug and Cosmetic Act selling indomethacin suppositories.
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Assertio could come under pressure for price gouging , more specifically on the price increases INDOCIN has experienced.
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Spectrum’s sales model using representatives and Assertio’s non personal sales model do not mesh. They become unfocused and bad at both after the merger.
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The merger is approved, the company is diluted, and Spectrum’s drug ROLVEDON is a flop.
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Management compensation is high and growing and the board may not align future compensation with shareholders long term interests.
Assertio 2022 10K
Valuation
I’ll share my valuations for Assertio as a standalone business and then adjust for the merger with Spectrum in an upcoming post. I used the financials below to develop my valuation metrics and I'll share the details because I made a few adjustments including but not limited to removing one-time expenses, reimbursements, adjusting for INDOCIN’s royalties, and I added in a 25% effective tax rate due to their headquarters being in Illinois.
HIT Capital
My high-risk valuation for Assertio comes out to a $0. This is due to the risk of losing INDOCIN and the possibility of not being able to cover their SG&A expenses thereafter. The low case for Assertio is them hitting their current guidance of $157-$167M in 2023. It’s the low and not the base case because it doesn’t include INDOCIN’s ERCP market expansion. The base case has Assertio holding SG&A at $65M and increases 2023 sales to $199M. The high case has revenue reaching $238M on the back of INDOCIN’s increased sales and gaining exclusivity in 2024. The low, base, and high case has their EV/EBITDA re-rating as they prove out INDOCIN’s future growth potential to an EV/EBITDA of 7, 9, and the current drug pharmaceutical company average of 12.34 for the high case.
The low, base and high case come out to a price increase over the next 1-2 years ranging from 21-335% and on the high risk side a full loss if they lose their INDOCIN monopoly.
HIT Capital HIT Capital
In conclusion
Assertio is not without risk and if invested in should be sized appropriately. That said it is currently fundamentally cheap, it has been growing, they are expected to continue growing, its new management is executing, their risk is lessening with each additional product, and their marketing + acquisition plan gives them an edge over their pharmaceutical peers. At this price and with their potential upcoming catalysts, Assertio has earned a spot in my portfolio.
For further details see:
Assertio: Cheap And Growing Disruptor Of Pharma's Antiquated Sales Model