2023-03-28 12:31:24 ET
Summary
- Assertio Holdings, Inc. has impressive growth rates and an attractive valuation.
- The company's involvement with an opioid in the past may explain the low valuation.
- Assertio Holdings has a low forward P/E ratio of 11.48x and a trailing twelve-month P/E ratio of under 3x.
- The company has been aggressively hiking the price of Indocin, a drug that treats arthritis.
- The CEO plans to acquire other drugs and believes it is possible to acquire $32 million of gross profit before the end of the year.
Assertio Holdings, Inc. (ASRT) has quickly become a company to watch. There has been a recent string of buy recommendations issued by Seeking Alpha authors, and the stock is doing quite well.
The adulation isn't entirely undeserved, because the company shows impressive growth rates while trading at an attractive valuation. The growth rate appears to be explained by the company building a digital distribution platform. The company's involvement with an opioid in the past appears to explain the low valuation.
However, I'm not sure that's the whole story, and I can't get entirely comfortable with Assertio even though it looks very attractive based on the available fundamentals and data.
ASRT's forward Price-to-Earnings (P/E) ratio stands at 11.48x, while ASRT's trailing twelve-month ((TTM)) P/E ratio currently stands at under 3x. In addition to P/E ratios, it is also useful to consider ASRT's Price-to-Sales (P/S) ratio, which currently stands at ~1.8x.
These are low multiples for a profitable pharmaceutical. In fact, according to Seeking Alpha's data, that's 65% below the sector average forward P/E. Its growth rate is meanwhile well ahead of the sector average.
The key problem appears to be that the company has been aggressively hiking the price of Indocin. According to Axion :
In 2008, a box of 30 anti-inflammatory rectal suppositories that treats arthritis, called Indocin, had a price tag of $198. As of Oct. 1, the price of that same box was 52 times higher, totaling $10,350.
There is growing pressure on pharmaceutical companies to reduce drug prices, and any future pricing restrictions or changes in reimbursement policies could negatively impact ASRT's revenues and profitability. Moreover, the controversy surrounding pharmaceutical companies' price-hiding practices may lead to increased scrutiny and potential legal issues for ASRT.
It appears as if Indocin is quite vulnerable because: 1) it is already generic. To my understanding, the aggressive hiking of prices was mostly done on drugs nearing the end of their patented life. From the recent 10-K :
There are no patents covering the INDOCIN products (which accounted for 64% of our revenue in 2022), which means that a generic drug company could introduce a generic for these drugs at any time. In addition, we are aware of other drug companies that have had interactions with regulatory agencies including FDA relating to indomethacin, which could indicate the development of one or more INDOCIN product generics or other formulations of indomethacin.
2) Two-thirds of the company's revenue is currently derived from Indocin:
The company sees potential for Indocin in a market that's much larger than the patient population it is currently confined to. As per the last earnings call :
We don't have a reliable source for how many ERCPs are performed annually in the US, but from simple Internet searches, the most recent articles provide an estimate of 500,000 to 600,000. This implies INDOCIN use is somewhere in the 25% to 31% neighborhood, which is consistent with what our market research indicated the high-risk segment represented or 22%. This guideline change has the potential to open up a new market that is three times larger than the current. The guidance we're providing for net product sales and adjusted EBITDA does not assume any incremental benefit from this change.
The CEO is definitely planning to acquire other drugs:
With respect to business development, we're extremely busy right now. I had a recent conversation with a healthcare banker who said, I have never seen so many assets available for sale at one point in the last six to seven years. I've been doing this since 2008 and I agree with that sentiment.
It's a tremendous time to be a buyer in this marketplace and have the balance sheet and cash flow that can support acquisitions. The opportunities that are available are diverse. Single products, both small and March, both early and late life cycle, to multiproduct portfolios and entire companies.
If a company is willing to walk the ledge with regard to pricing, assets quickly become much more valuable as cash flow can grow tremendously. The CEO believes it is possible to acquire $32 million of gross profit before the end of the year, which would be quite stunning given the ~$300 million market cap, although the balance sheet is admittedly strong and allowed some leverage.
To summarize, I feel conflicted about Assertio Holdings, Inc. On the basis of current and anticipated near-term growth and profitability, this is an amazing investment. However, I would expect an expensive generic to very quickly attract competition (as disclosed in the 10-K) and aggressive price hiking, which tends to be met with resistance by government and/or insurance companies at some point. It's a strategy that is likely to become harder and harder as the company grows and acquires additional assets.
If I were to get involved with Assertio Holdings, Inc. here, I would consider buying deep out-of-the-money puts to protect a position or to get involved through call options or by buying bullish call spreads. These types of positions would allow me to benefit from the upside, but not get killed if the rug were pulled from under the business model. Until I have more certainty, I'm sticking to a hold with Assertio Holdings, Inc.
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