2023-05-02 10:18:49 ET
Summary
- Assertio Holdings stock has fallen 8.15% since my updated bullish thesis in March 2023, while the S&P 500 Index has gained 4.95% over the same period.
- The SPPI deal is expected to give Assertio access to Rolvedon and be accretive to adjusted EPS and operating cash flow in FY2024.
- The positive impact of the SPPI deal on Assertio Holdings' earnings estimates does not appear to be reflected in the current consensus numbers.
- I expect a favorable re-rating of Assertio Holdings' stock following the release of its fiscal 2023 first quarter results, which are expected to be released in a week.
- I reiterate my previous "Buy" rating on ASRT stock.
Intro & Thesis
Since my updated bullish thesis on Assertio Holdings Inc. ( ASRT ) in March 2023, the stock has fallen 8.15%, while the market represented by the S&P 500 Index ( SPX ) has gained 4.95% over the same period:
Seeking Alpha, my previous article on ASRT
Given the size of the company and its colossal growth in recent months, which has outstripped the momentum of the broader market many times over, I think such a share price action is quite natural, which can only please the early shareholders.
My new thesis is essentially the same as the previous ones - ASRT is still a very interesting idea for a medium-term investment, as it has become even cheaper recently and therefore has quite a comfortable growth potential going forward.
Why Do I Think So?
First off, a few words on what Assertio Holdings Inc. is about. According to the company's 10-K , Assertio Holdings is a pharmaceutical company that operates with a non-personal promotional approach and has a market cap value of more than $306 million [at the time of this writing]. Their products are tailored to meet the unique needs of patients; the primary sales focus is on nonsteroidal anti-inflammatory drugs [NSAIDs], which include the following varieties:
Assertio Holdings operates in a single segment and earns most of its revenue from product sales in the United States. The majority of net product sales are through 3 major national wholesale distributors: McKesson Corp. ( MCK ), AmerisourceBergen ( ABC ), and Cardinal Health ( CAH ). The company relies on third-party manufacturers for its products, and each drug is produced in a separate facility. Since the publication of my last article, ASRT has not had time to report on Q1 FY2023 - it is scheduled for publication on May 9, 2023. Therefore, I will briefly describe the FY2022 results - for a more detailed analysis of the company's financial position, see my previous article.
Assertio experienced a 42% YoY increase in net product sales, reaching $155.1 million in FY2022. INDOCIN family net sales rose by $15.9 million in Q4, mainly due to a shift in volume mix to more profitable channels and a return to normal customer inventory levels, the management explained during the Q4 earnings call . The gross margin as a percentage of product net sales was 87.9% for the year, reflecting an increase from 85.5% in 2021, due to lower costs from product mix and improved margins on INDOCIN [64.7% of total sales as of FY2022]. The adjusted EBITDA for 2022 was $101.6 million, up 108% YoY, primarily driven by higher net product sales, improved gross margins, and lower SG&A expenses. Adjusted SG&A expenses for the year were $38.5 million, a decrease from $48.1 million in 2021, primarily due to cost savings from the non-personal commercial platform and one-time legal reserves and settlements.
The company generated $78.6 million in cash flow from operations, increased by $73.1 million versus the prior year, and managed to increase account receivable collections, reduce debt service, and effectively manage working capital throughout the year. The convertible debt refinancing eliminated debt principal payments, resulting in a $4.8 million cash flow benefit in the 4th quarter. The long-term debt balance was $66 million as of December 31, 2022, and the company exchanged $30 million in aggregate principal amount of exchange notes for a combination of cash and shares of its common stock, reducing the overall debt by 43%, saving $2 million in annual interest payments, and being accretive to 2023 diluted EPS by $0.02.
In my opinion, the main reason ASRT fell more than 8% amid the general market growth is the news that was not yet available when I published my last article - the acquisition of Spectrum Pharmaceuticals ( SPPI ), which was announced at the end of April 2023:
According to Seeking Alpha News, under the terms of the deal, each Spectrum shareholder will receive 0.1783 shares of Assertio common stock and one CVR, which will entitle them to receive up to an additional $0.20 per share in total. The acquisition will give Assertio access to Spectrum's drug Rolvedon, which reduces the incidence of infection in patients with febrile neutropenia. Following the merger, Assertio stockholders will own approximately 65% of the combined company, and Spectrum stockholders will own around 35%. The transaction has been approved by both companies' boards and is expected to be accretive to adjusted EPS and operating cash flow in FY2024 [expected to close in Q3 2023] - what we still do not see based on EPS forecasts for FY2024:
Personally, I like the company's approach to how it tries to diversify away from just 1-2 drugs [the lion's share of sales]. In the long term, the addition of a new product should reduce the company's operational risk and expand its revenue base in the medium term. Management gave FY2023 guidance of $155 million in net sales [$37 in Q1] and $89 million in adjusted EBITDA, based on the mid-ranges:
Lastly, our annual guidance for 2023 is as follows. Full year product net sales are expected to be $150 million to $160 million , and adjusted EBITDA is expected to be $85 million to $93 million. Since we are more than 60 days into the first quarter, we have good insight into the start of the year. Based on sales to-date, we anticipate product net sales in the first quarter to be $36 million to $38 million , reflecting typical seasonality due to patient co-pay and deductible resets on January 1 and the loss of Cambia exclusivity.
This guidance does not include the effect of the potential acquisition of new portfolio assets as well as the potential benefit from the recently updated ASGE guidelines.
Source: ASRT's Earnings Call, emphasis added by the author
However, as we can see from the CEO's note, these forecast data do not include the potential acquisition impact - if the deal with SPPI closes in Q3 2023, then revenue is likely to be significantly higher than management's outlook. Today, consensus revenue forecasts look too low at $157.22 million for the full year 2023, which is only 1.4% above the old forecast.
It's quite difficult to calculate what EPS number the company will report in Q1 FY2023, but I suggest conducting an experiment based on indirect signs. I have written before that the company received a huge tax benefit in Q4, the impact of which on the resulting EPS number eclipsed all Wall Street expectations and allowed ASRT to beat the consensus estimate by >132%. In Q1 FY2023, Assertio is most likely to return to the traditional effective tax rate of 10-12%, based on the Q&A session during the earnings call [Q4 2022]. Then it is logical to assume that net income should be around the same levels of net sales as before (+/-):
Management's revenue guidance for Q1 2023 is at $37 million [ mid-range]. If we use the number of shares outstanding at the end of December 2022, we get:
Revenue forecast * profit margin / # sh. outstanding
$37M * 0.25 / 67.1 = $0.1379 (per share)
Source: Author's calculations
That's about 6% more than now priced in - so ASRT has every chance of beating the consensus estimate again; we'll find out in just a week.
In my opinion, the current analyst forecasts fully take into account the risks of no further tax benefits in ASRT stock. For fiscal 2023, EPS is forecasted to decline 74.25% year-over-year, bringing ASRT's forwarding price-to-earnings ratio to 11x:
Even if such a pessimistic consensus is right - 11x of earnings is more than 2 times less than the sector median of ~26x:
However, one of the few reasons why ASRT is no longer one of the top-rated stocks here on Seeking Alpha is because of the Growth factor showing an "F" grade - if we look at what exactly caused SA's system to give such a low score, we see only 1 metric [FCFF YoY growth] that ruins the whole picture. Even the long-term (3-5 years ahead) EPS growth of 10% is in line with the sector:
Based on the foregoing, I reiterate my previous Buy rating.
Risks Factors
It's important to consider the potential risks involved with investing in Assertio Holdings stock. As I mentioned last time, one significant factor is the presence of generic competition for Cambia and Zipsor, as well as a 503B compounder for INDOCIN suppositories, which negatively impacts the business. Furthermore, the approval of generics for other products, including non-patent-protected INDOCIN products, could also harm the company.
Additionally, the pharmaceutical industry as a whole faces numerous risks, such as regulatory changes and non-compliance risks, off-label drug use promotion liability, healthcare reform impacts, intellectual property risks, and the possibility of significant damage awards from litigation settlements. It's important to keep these factors in mind when considering investing in Assertio Holdings or any pharmaceutical company.
From a technical analysis perspective, ASRT also looks like a stock that is actively losing its momentum at the moment. It bounces off the resistance zone after the news about the SPPI acquisition:
A Quick Takeaway
Despite all these risks, Assertio Holdings' stock still looks quite attractive at the current price level, given the company's cheap valuation and modest priced-in earnings projections. The SPPI deal should give Assertio access to Rolvedon and is expected to be accretive to adjusted EPS and operating cash flow in FY2024 - it's not yet priced in as far as I see from the consensus earnings estimates. I expect a positive re-rating after the publication of the results for the 1st quarter of fiscal 2023 in a week, so I leave my "Buy" rating unchanged this time.
Thank you for reading!
For further details see:
Assertio Holdings Stock Is Still A Cheap Buy