2023-06-13 17:09:28 ET
Summary
- Assertio was a troubled company at the turn of the decade, embroiled in opioid litigation and losing money.
- Under new management, the company has switched to a "non-personal" sales model, settled debt, and settled litigation.
- Sales in 2023 will likely be flat year-on-year, as some products age and lose patent protection - EBITDA will be positive, but net losses seem more likely than net profits.
- Assertio hopes to complete the acquisition of Spectrum and its approved neutropenia drug in Q3 - sales of ROLVEDON were >$15m in Q123.
- Management can complete a business turnaround and grow Assertio's valuation - perhaps double it in 3-5 years - but it is not guaranteed - some of the threats the company faces appear a little worrying.
Investment Overview - Assertio Then & Now
In March 2021, I published a note on Assertio Holdings ( ASRT ) for Seeking Alpha entitled "Bankruptcy, Sale Or Success - How Management Can Rapidly Deliver Triple-Digit Upside" .
In this note, I explained some of the history of the company, most notably how, under former name Depomed, management paid $1.5bn to acquire the opioid therapy Nucynta - at precisely the wrong time.
Nucynta - an approved oral form of the opioid analgesic Tapentadol - was purchased from Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson. The drug looked set to one day command blockbuster (>$1bn per annum) sales - prompting Horizon Therapeutics ( HZNP ) to bid $33 per share for Depomed, valuing the company at ~$3bn.
Instead Depomed became embroiled in the opioid scandal, investigated alongside the likes of Purdue for its role promoting opioids, and sold Nucynta in 2017, to Collegium Pharmaceuticals owing to its crippling levels of debt.
Two sets of management came and went (more detail in my March 2021 post) before current CEO Dan Peisert was appointed CEO, taking over a portfolio of non-opioid pain relief drugs generating >$100m per annum. One of the new CEO's first moves was to jettison a field sales force of >100, and switch to a digital only sales model.
Peisert seemed to realise that Assertio's portfolio essentially sold itself, allowing management to focus on easing the debt burden and broaden the product portfolio, and so it has proven to be - so far.
Although Assertio today may not generate the revenues of the business from 2014-2017, when top line revenues were $390m, $343m, $456m, and $381m, the business made a net loss of only $(1.3m) in FY21, and a net profit of $110m in FY22, versus a net loss of $(217m) in FY19, and net losses of $(103m), $(89m), and $(76m) in 2017, 2016 and 2015.
After a collapse in the share price from $30 in August 2018 (adjusted for a 1-4 reverse stock split which took place in May 2021), to less than $1 for long periods of 2021, and he threat of being delisted from the Nasdaq, shareholders that have stayed the course have begun to see their faith rewarded. Since my March 2021 note and BUY recommendation, the share price has risen 57%, and it is +100% across the past 12 months, and +39% so far this year.
Bankruptcy, Sale (of the business and product portfolio) or Success? You can certainly argue that downsizing has brought success, but can the latest incarnation of Assertio now begin to drive real growth?
Recent Results - Q1 '23 Earnings & Business Overview
Announcing Q1'23 earnings, Assertio was able to report net product sales of $41.8m, up 18% year-on-year, and non-GAAP adjusted EBITDA of $25.6m, up 7% year-on-year. On the more negative side, Assertio reported a GAAP net loss of $(3.5m), versus a net income of $9.1m in the prior year, whilst adjusted earnings per share fell from $0.38, to $0.29.
Assertio Q123 product sales (Q123 10Q submission)
As we can see above, the main driver of product sales is INDOCIN, a suppository and oral solution of the nonsteroidal anti-inflammatory drug ("NSAID") indomethacin indicated for rheumatoid arthritis ("RA"), ankylosing spondylitis, osteoarthritis, painful shoulder and gouty arthritis.
With sales of CAMBIA an NSAID indicated for migraine - and pain relief therapy Zipsor - declining in the face of generic competition, the onus is very much upon Indocin to keep delivering, along with newly launched Sympazan, a benzodiazepine indicated for the adjunctive treatment of seizures associated with Lennox-Gastaut Syndrome ("LGS").
The former's sales have been growing in part due to "a volume mix shift to more profitable channels", Chief Financial Officer ("CFO") Paul Schwichtenberg told analysts on the q1'23 earnings call, whilst the latter drug - whose license was acquired from Aquestive Therapeutics ( AQST ) for $9m in October last year - may have significant growth potential. Branded Clobazam (the underlying ingredient in Sympazan) tablets and an oral suspension apparently generated $594m and $255m of sales back in 2018.
Schwichtenberg also told analysts that the company was raising its FY23 guidance as follows:
Full year product net sales are expected to be $157 million to $167 million and adjusted EBITA is expected to be $90 million to $98 million.
On one hand, Assertio will do well to keep its annual revenues >$150m with almost no field sales associates and a switch to a "non-personal promotional" model, offsetting declines of former key products, whilst its focuses on ensuring debt is reduced - and the company share price did spike from ~$6, to ~$8 after Q1 results were released - but on the other, the growth story is hardly compelling, with top line revenue likely to be flat year-on-year, whilst non-GAAP EBITDA will marginally decline.
Paying Down Debt
The share price spike on earnings news did not last, and Assertio stock has fallen in value by 20% in the past month, but there seems to be no denying that the management team has been successful in reducing the company's legacy debt. CEO Peisert told analysts on the Q1'23 earnings call:
The execution of our strategy has had the most profound impact on our balance sheet to date. On March 31, we had $68.6 million of cash and $40 million of long term debt with a 2027 maturity. This is the first time we've been in a positive net cash position since March 2020.
For an even more dramatic comparison, in December of 2020, when Paul and I took over as CEO and CFO, we had $20.8 million of cash and $85 million of debt, maturing early 2024. In just a little over two years, we've flipped from net debt to net cash, a positive swing of almost $94 million. We extended our maturities by three-and-a-half years, reduced our cost of debt from 13% to 6.5% and achieved this, all while spending $60 million in cash to acquire two new assets with patents extending into the 2030s.
In other words, thanks to management's actions, we can probably eliminate the threat of bankruptcy from the investment picture in relation to Assertio. With that said, Assertio's position still looks somewhat uncomfortable. For example, as of Q1'23 current liabilities were reported as $94.5m, thanks primarily to "accrued rebates" of $52bn, and a "contingent consideration, current portion", totalling $24.5m.
The latter appears to be related to:
... contingent consideration payments for future royalties to an affiliate of CR Group L.P. based upon annual INDOCIN product net sales over $20.0 million at a 20% royalty through January 2029. (Source: 10Q)
The former is likely related to discounts that pharmaceutical companies offer to list prices for health insurers and patients. Whether these payments will impact the company going forward, given it does not have sufficient current cash to cover them, is unclear - my guess would be it is unlikely - but it underlines the fact that Assertio would be in a much better position if it can keep growing revenues. The key question may be - what new drugs can the company develop, or more likely acquire, that can be sold using the current digital only model?
Spectrum Deal & Other Developments
In April, Assertio announced that it would acquire all outstanding shares of Spectrum Pharmaceuticals in an all-stock and contingent value rights (“CVR”) transaction - according to a press release :
Under the terms of the agreement, at closing, Spectrum stockholders will receive a fixed exchange ratio of 0.1783 shares of Assertio common stock for each share of Spectrum common stock they own, implying an upfront value of $1.14 per Spectrum share (approximately $248 million) based on Assertio’s stock price on April 24, 2023 and an initial 65% premium to Spectrum’s closing price on such date. Additionally, Spectrum stockholders will receive one CVR per Spectrum share entitling them to receive up to an additional $0.20 per share in total (approximately $43 million), payable in cash or stock at Assertio's election, for $1.34 (approximately $291 million), a total potential premium of 94%.
In October last year, Spectrum won approval for ROLVEDON, an injectable therapy, in adult patients with non-myeloid malignancies receiving myelosuppressive anti-cancer drugs associated with clinically significant incidence of febrile neutropenia. This is a $2bn market, it has been estimated , and sales of ROLVEDON were strong in Q1'23, rising 54% quarter-on-quarter to reach $15.6m.
This looks like good business for Assertio, although the deal will not complete until Q3'23, according to CEO Peisert, who told analysts:
Our number one priority is a meticulously planned integration of Spectrum into Assertio after close to ensure the continued successful launch of ROLVEDON. The combination of these two companies increases the business development opportunities we can pursue and effectively commercialize.
It is additionally a deal that may suit Assertio's digital-first sales strategy, with Peisert adding that the oncology industry is more receptive to this channel after a COVID period in which face-to-face meetings were strongly discouraged.
If ROLVEDON is an asset capable of driving >$100m of revenues annually, then Assertio's other main priority may be protecting its other triple-digit-million selling asset, INDOCIN, from generic competition. INDOCIN has no patent protection in place, and its latest 10K Assertio notes that:
A 503B outsourcing facility (commonly referred to as a 503B compounder) recently began compounding 100 mg indomethacin suppositories in what we believe to be violation of certain provisions of the FDCA, including, among others, Section 505 approval requirements for new drugs and labeling requirements related to adequate directions for use.
This is a little complex but it seems that the outsourcer is essentially exploiting an FDA loophole that allows it to market and sell a version of INDOCIN, which could severely impact Assertio's sales. The burden for halting this "unlawful" compounder's activities may rest with Assertio, which may involve the courts, and therefore significant legal expenses.
Assertio still has opioid cases to answer - although management appears to have done a good job of settling legacy litigation and in the last quarters, has included a "legal contingency accrual of approximately $3.2 million" in its accounts. It is not too substantial a figure, but if it needed to grow to cover a legal fight with the 503-B outsourcer, with sales of INDOCIN also affected, it could be another obstacle to Assertio's growth.
Concluding Thoughts - Solid Progress, Strong Deal Making - Now For Growth
Assertio today is pretty much unrecognisable from the debt-ridden, opioid-peddling dumpster fire of three years ago, and for that management deserves great credit - but to declare the company completely derisked may be a little premature.
In this post I have highlighted a few concerns - a lack of growth, falling sales of older assets, threats to lead drug INDOCIN, some potential issues from a balance sheet perspective, and a remote-only approach to selling product that may not have been truly tested yet.
Since my March 2021 note, we can probably eliminate bankruptcy and a sale in the short-term, which leaves only success? With Assertio's current market cap being not much more than 2x forecast 2023 sales, and EBITDA strongly positive (even if net profits are not guaranteed), a risk-on investor may feel there is a "double-your-money" opportunity in play, especially as the Spectrum deal brings an asset to the table with revenue potential of >$100m per annum.
But it could also be the case that there is a "lose 50% of your investment" "opportunity" in play also, which is clearly less attractive. We might ask the question as to why Spectrum agreed to be taken over so soon after the approval of ROLVEDON - and whether this drug will "sell itself" as INDOCIN et al seem to be able to do without a field sales force.
Commercial sales of ROLVEDON are not guaranteed - Amgen's ( AMGN ) Neulasta is a competitor, for example, and Amgen is a >$100bn market cap juggernaut with an established presence in the market. It should also be noted the takeover is not complete yet.
Furthermore, has Assertio's debt problem genuinely been solved, or are there some gremlins haunting the balance sheet? And how significant is the threat to INDOCIN given it has no patent protection from generics.
In this post I may have played devil's advocate with Assertio's business a little too much - there is without doubt a significant risk reward opportunity in play here if ROLVEDON keeps growing sales at the current rate, whilst management's stewardship has been impressive to date.
My conclusion is more tentative simply because I believe the business turnaround remains ongoing, as opposed to complete, and some of the obstacles that may present themselves in the coming months and years could significantly damage the valuation. I am sticking with a "HOLD" recommendation for the time being.
For further details see:
Assertio: Close To Completing An Unlikely Turnaround