2023-06-15 08:05:25 ET
Summary
- Assertio Holdings, a pharmaceutical company, has demonstrated solid financials and growth potential, with a focus on reducing debt levels and increasing cash generation through strategic acquisitions.
- The company's liquidity position has improved over the past few years, with increasing current and cash ratios indicating a well-managed leverage condition.
- Despite potential risks such as increasing competition from generics and supply chain vulnerabilities, Assertio's strong financial structures and progress make it a suitable buy-rated stock.
Introduction
Assertio Holdings ( ASRT ) is a pharmaceutical company that operates on a non-personal promotional model. Their commercial portfolio comprises various branded products that primarily focus on three categories: neurology, rheumatology, and pain and inflammation. The company has leveraged its portfolio by combining existing products, acquisitions, and patents for additional approved products. Assertio generates most of its revenue from product sales in the United States, but it recently entered into a collaboration and license agreement with Tribute Pharmaceuticals Canada LTD to market CAMBIA in Canada. Despite being a small cap company, Assertio has solid business and financial strategies that position it for future growth and success.
Financials and business strategies
One of Assertio management's key strengths lies in their ability to identify and execute acquisitions, mergers, and licensing agreements. Their strong financial position has enabled them to expand their product offerings across the U.S., Canada, and Italy. In response to the COVID-19 pandemic in 2020, the management team shifted their focus from in-person sales to digital sales strategies and invested in developing their digital sales platforms. As a result, they successfully transitioned to a non-personal promotion model using omnichannel marketing and digital selling approaches. This allowed them to quickly scale their resources and meet the growing demands of their portfolios.
Approximately two years ago, when Dan Peisert took over as CEO, his primary focus was on improving Assertio's balance sheet, diversifying their portfolio, and creating growth opportunities. Upon analyzing the company's cash and capital structures, it became evident that Assertio has solid financials with sustainable growth potential for the coming years. It is worth noting that Assertio's main products include INDOCIN, Otrexup, Sympazan, Sprix, and CAMBIA. In the first quarter of 2023 , Assertio experienced a net product sales growth of 18%, reaching $41.8 million compared to $33.5 million in the same quarter of 2022. Additionally, their Adjusted EBITDA and operating cash flows increased to $25.6 million and approximately $23 million respectively. This growth was mainly due to INDOCIN and the first quarter sales of Sympazan after its acquisition.
It is important to note that in January 2023, the exclusivity of CAMBIA and ZIPSOR expired. As a result, the sales of these products decreased by approximately $5 million due to the approval of generic versions. However, the growth in INDOCIN and the addition of Sympazan more than offset these losses, resulting in a net increase in product sales compared to the previous year's quarter.
As depicted in Figure 1, the management of Assertio was able to successfully transform their business model and recover from the downturn of 2020. Notably, their cash balance increased from a $21 million in 2020 to $38.8 million in 2021, and then approximately doubled to $68.6 million at the end of 2022. What stands out about Assertio's financials is their focus on reducing debt levels and increasing cash generation through strategic acquisitions. In fact, during the recent quarter, the company exchanged $30 million of convertible debt for a cash and stock exchange transaction, resulting in a total debt level drop from approximately $76 million in 2021 to $38.6 million at the end of 2022. Overall, this reduction in debt level will save them $2.0 million from interest exchange payments. They also, generated a negative net debt level of around $(30) million for the first time in recent years. When all was said and done, Asserio's well amount of equity, which jumped by 144% to over $250 million in 2022 as compared to $102 million at the end of 2021, would provide opportunities for both equity and debt financing in the future.
Figure 1 - ASRT's capital structure (in millions)
During the previous quarter, Assertio announced its plan to acquire Spectrum Pharmaceutical in an all-stock and contingent value rights transaction. The acquisition is expected to be completed in the third quarter of 2023 and will diversify Assertio's net product sales. The acquisition of Spectrum's main asset, ROLVEDON, is expected to increase operating cash flow by 2024. Assertio's cash structure has significantly improved over the past few years and after the end of the COVID-19 outbreak. Their operating cash flow increased to over $78 million in 2022 from $5.5 million at the end of 2021. However, their operating expenses have also increased due to higher costs associated with acquisitions and agreements, including $2.4 million for the pending acquisition of Spectrum a few months ago. Despite this, higher operating cash flow has translated into higher free cash flow of $51 million at the end of 2022 compared to outflow free cash flows during 2020 and 2021 (see Figure 2).
Figure 2 - ASRT's cash structure (in millions)
After seeing how effectively Assertio's management has reduced its debt levels in recent years, it is clear that the company has a well-managed leverage condition. To gain a better understanding of the company's ability to handle future liquidity risks, I conducted an analysis of their current and cash ratios. The results of this analysis paint a positive picture for Assertio, as both ratios have improved over the past few years. Specifically, the current ratio increased significantly from 0.77x in 2021 to 1.46x at the end of 2022 due to an increase in current assets and a decrease in liabilities. Similarly, the cash ratio improved from 0.4x in 2021 to 0.96x in 2022. Overall, Assertio's liquidity position has shown a consistent upward trend over the past few years (see Figure 3).
Figure 3 - ASRT's liquidity ratios
Stock Valuation
Assertio's EV/EBITDA ratio for the trailing twelve months is 5.77x, and their net debt level during this period was approximately $(11) million. Additionally, the company has raised its Adjusted EBITDA guidance to $90-$98 million by the end of 2023. Using this guidance range and the outstanding shares of 55.7 million, the stock's intrinsic value is estimated to be approximately $9 up to around next year (see Figure 4).
Figure 4 - ASRT financial metrics
Risks
Despite Assertio's promising financials and favorable liquidity and leverage conditions, the company is not immune to risks that must be taken into account. One such risk is the increasing competition faced by CAMBIA and Zipsor from generics, which could have a negative impact on their sales. Additionally, the approval of generic versions of other products, such as INDOCIN, could lead to a decline in sales for these products in the future. Furthermore, Assertio relies on just one qualified supplier for each product, which leaves the company vulnerable to supply chain disruptions that could adversely affect their commercial success. Finally, it should be noted that ASRT stock's price has historically been volatile.
Conclusion
Apart from the potential risks associated with the company, its strong financial structures in terms of cash and capital indicate that it has successfully improved its balance sheets by significantly reducing debt levels. Moreover, despite being a small-cap company, Assertio has made significant progress in improving its liquidity position over the past few years. Therefore, I believe that a buy rating would be appropriate for ASRT stock.
As always, I welcome your opinions on this analysis.
For further details see:
Assertio Holdings: Promising Small Cap With Strong Financials And Strategic Plans