Assertio - Q2 2023

Transcript

Operator (participant)

Good morning, welcome to the Assertio Holdings, Inc. Q2 2023 financial results conference call. All participants will be listening-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd like to turn the conference over to Matt Cripps from Darrow Associates, Investor Relations for Assertio. Please go ahead.

Matt Cripps (Managing Director)

Good afternoon, thank you everyone for joining us today to discuss Assertio's Q2 2023 financials. The news release covering our earnings for this period is now available on the investor page of our website at investor.assertiotx.com. I would encourage you to review the release and tables in conjunction with today's discussion. With me today are Dan Pisano, President and CEO, Paul Schwichtenberg, Senior Vice President and CFO, and Tom Riga, outgoing CEO of Spectrum Pharmaceuticals, for which we closed the acquisition of earlier this week. Dan will open remarks and provide an overview of the business. Tom will provide additional comments on Spectrum's Rolvedon progress, and Paul will review our financials. After that, we'll open the call for your questions. During this call, management will make projections and other forward-looking statements regarding our future performance.

Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in today's press release, as well as Assertio's filings with the SEC. These and other risks are more fully described in the Risk Factors section and other sections of our Annual Report on Form 10-K. Our actual results may differ materially from those projected in the forward-looking statements, and Assertio specifically disclaims any intent or obligation to update those forward-looking statements except as required by law. With that, I will now turn the call over to Dan.

Dan Pisano (President and CEO)

Thank you, Matt. Good afternoon, everyone, and welcome to our new shareholders and employees from Spectrum Pharmaceuticals. The acquisition of Spectrum marks a significant turning point for Assertio, providing immediate diversification of revenues, a sustainable near-term growth driver, and long-term patent protection. The asset, the commercial infrastructure, and sales model are also aligned with our vision of where we can effectively operate in this competitive pharmaceutical landscape. Our intelligent contracting and market access are the foundation of the go-to-market model. I'm extremely proud of what we have accomplished here at Assertio. In an internal employee memo following the shareholder meeting results, I reflected on our situation only three and a half years ago, where Assertio had just divested two assets to pay off its debt and was left with an extremely concentrated portfolio of just Cambia and Zipsor.

Today, those two assets together represent only 7% of our Q2 net product sales and only 4.6% if you include Rolvedon sales. In that time, we've acquired two businesses and two additional assets and paid off $195 million of debt. Our financial discipline, and specifically our focus on cash flows, is what has contributed to this success to date. Now, with a healthier balance sheet and a growth asset, that discipline will still be there to help foster this company towards sustainable growth. We've proven we can manage through the ups and downs of loss of exclusivity, and we've built and now acquired a first-class commercial team from Spectrum that can only enhance our capabilities to grow assets and scale. Now, I'd like to turn the call over to Tom Riga to talk about Spectrum's Q2 and why we are confident in its growth trajectory. Tom?

Tom Riga (CEO)

Thanks, Dan, and good afternoon, everybody. The launch trajectory of Rolvedon continues to be extremely positive, and that momentum has continued in the Q2 of 2023. Net sales for the Q2 were $21 million, versus $15.6 in Q1, an increase of 34%. This is the third consecutive quarter of exceptional performance, and it is a credit to the execution of our experienced team, ensuring Rolvedon continues to be clearly differentiated as the first novel product to enter the long-acting G-CSF space in over 20 years that is not a biosimilar. This is a highly competitive market, and our people are proving to be one of the most valuable assets during this launch. Beyond the strong Q2 revenue number, we made important progress on customer growth in terms of breadth, meaning the absolute number of customers using Rolvedon, and depth, meaning same-store sales.

Targeted accounts purchasing Rolvedon increased 50% over Q1 2023 to about 300 in total. Additionally, we are seeing increased depth within accounts as customers become more comfortable with Rolvedon's unique J-code and streamlined reimbursement process. Through Q1, customer demand was primarily driven by the largest community oncology GPO, which represents approximately 50% of the segment's business. In the Q2, we initiated sales with the second-largest GPO that represents approximately 40% of the community oncology business. This was very helpful in the Q2, but more importantly, is a growth opportunity going forward. Our focused launch strategy is hitting its stride and has played out largely as expected. The combined company, as it moves forward, there is additional opportunity to drive breadth and depth across the market.

At this point, Rolvedon has approximately 2% market share of the overall long-acting G-CSF market, which underscores the tremendous opportunity ahead. That said, we have been candid throughout that this marketplace is highly competitive, and every share point gained requires market knowledge, a thoughtful and pointed strategy, and exceptional execution. As Spectrum transitions to be a part of Assertio and take the next steps in Rolvedon's growth trajectory, every one of our employees should take great pride in the excellent Rolvedon performance to date. As I sign off and turn the reins over to Dan, I must say, I am extremely confident in the team he has acquired, and have come to have respect for his leadership and the capabilities at Assertio. With that, I'll turn the call back over to Dan.

Dan Pisano (President and CEO)

Thank you, Tom. I share your enthusiasm for the future of Rolvedon. Today, we're not able to provide guidance as we initially intended. We just learned a few hours ago, the FDA has approved a generic indomethacin suppository. When we issue guidance, we like to have as much information at our disposal as possible. Now we believe it prudent to withdraw our outlook until we know more information. Today, all we know is a single competitor was approved and they received CGT status, which means no other generics can be approved for 180 days. We are not aware of their launch timing. What I can offer is that Assertio is not afraid of this, nor are we hiding from this. It has been well known that indomethacin had no intellectual property nor exclusivity protecting it. Generic entry risk was always in the background.

We have been preparing for it and we are ready to defend it. One example of how we can defend is evident in our financials this year. As many of you know, we lost exclusivity for Cambia in January of this year, and 3 competitive generics entered the market in addition to 1 authorized generic. Normally, in these situations, the brands do not do well in the first 6-9 months following LOE. However, year to date, we've retained 36% of the prior year volumes and 34% of the prior year revenues, which is an outstanding result when many of the analogs in a competitive market like this would suggest retention rates near 10% of volume and between 0%-10% of revenue because of a reduction in customer inventory.

This is all due to the outstanding execution of our commercial team, preparation for the LOE, and the early identification that patient refills were still being covered by commercial insurers, and quickly utilizing the resources in our hub and our patient support programs to encourage a high refill rate. An example of our market access programs and strategy at work. We're confident that we can do something similar with INDOCIN, and in this case, we only have a single competitor, and the analogs are far better than with four, as was the case with Cambia. Paul will provide more details in his prepared remarks. I want to comment on a few things as they relate to Assertio's core business and also the Q2 performance.

When we acquired Zyla, one of the products that came with the acquisition was a former Egalet product called Oxaydo, which is an abuse-deterrent opioid. While a small contributor, this product carries strong margins and cash flows because we put no marketing or sales support behind it. Relative to its financial impact for this product from an operations viewpoint, it's been a challenge in both supply and DEA quota. We've made the decision to stop sales of this product and have notified the FDA we will discontinue Oxaydo. As a result, the company is officially out of the opioid business. This decision will have a drag on our second half results, and for reference, we reported $1.7 million in Oxaydo sales in the second half of last year.

I think this is an important decision for us as we mark this new turning point in our history. I'm very excited to announce that in the Q2, we've made notable progress in the opioid litigation, where we were dismissed from a significant minority of our NAS cases, or what is commonly referred to as the baby opioid cases. Now, in aggregate, we've been dismissed from just shy of 40% of all of the opioid cases that have been filed against the company without paying a penny. I think this speaks volumes about the company's potential liability and that our patience and defense strategy is being rewarded.

Sympazan continues the trends I discussed last quarter, achieving new monthly and quarterly TRx count demand peaks as measured by Symphony Health, as well as a mix shift towards the higher strengths, resulting in higher average selling price. Our quarterly net revenues grew 5% sequentially. Our first half of 2023 net revenues are just over $5.1 million for the product, which represents 7.1% growth over the prior year period reported by Aquestive. We're off to a good start so far and are starting to develop our longer-term strategic plans for the product and have reasons for optimism about its potential. We're starting to get back on track with Otrexup as we recover from the supply challenges we experienced last year. Our volumes are up 18% year-over-year and in the lowest single digits over last quarter.

Our net revenues are up 37% year-over-year and 27% sequentially as we focused on profitable volumes. A direct contrast to our primary competitor, who continues to report declining net revenues and ASPs as they keep bidding contract prices downward to maintain market share. This is just one small example of what I describe as our business strategy overall, where smart, disciplined contracting and market access are the building blocks of everything we do and then allocate our sales and marketing dollars efficiently. Our efforts now shift to the integration of Spectrum and ensuring the continued launch trajectory of Rolvedon. I will now turn the call over to Paul.

Paul Schwichtenberg (SVP and CFO)

Thank you, Dan. This afternoon, I will review the financial highlights from Assertio's Q2 of 2023. My comments on the Q2, except where otherwise noted, will be on Assertio's standalone business, excluding Spectrum. For full details, please refer to the tables and financial statements in our earnings release and 10-Q. Net product sales were $40.1 million for the Q2 of 2023, compared to net product sales of $35.4 million in the prior year quarter and $41.8 million last quarter. The increase in net sales versus the prior year quarter is primarily driven by INDOCIN and the addition of Sympazan, which more than offset the expected decline in Cambia. INDOCIN family net sales in the Q2 increased by 23% over the prior year, primarily due to a volume mix shift to more profitable channels.

Otrexup and Sympazan combined net sales for the Q2 were $6.2 million, reflecting 17% sequential growth over the prior quarter due to strong volume and favorable channel mix for both products. Overall, portfolio net sales were up 13% versus the prior year quarter, despite the Cambia loss of exclusivity on January 1. Gross margin as a percentage of product net sales was 88.1% in the Q2 versus 87.2% in the prior year quarter. The increase in margin is due to a shift in product sales mix to INDOCIN, which carries a higher gross margin. Adjusted selling general administrative expenses in the Q2 were $11.4 million, compared to $11.9 million last quarter, and $8.6 million in the prior year quarter, which included a net benefit of $2 million from an insurance settlement.

The increase versus the prior year quarter is primarily due to additional costs for both Sympazan and Otrexup, along with personnel costs due to new headcount additions. Adjusted EBITDA for the Q2 was $24.8 million, compared to $25.6 million last quarter and $22.9 million in the prior year quarter. The year-over-year increase was driven by $4.7 million of additional product Net sales and the SG&A spend exchanges previously mentioned. Adjusted EBITDA margin, reflected as a percentage of total revenue, and the Q2 was 60.4% versus 65.2% in the prior year quarter. The Q2 non-GAAP adjusted earnings per share was $0.19 versus $0.29 in the prior quarter and $0.28 in the prior year quarter.

Again, please note that earnings per share is now calculated using diluted shares, including the if converted impact of the convertible notes, as is required under GAAP. There were 70.1 million total diluted shares in the Q2, including the fully weighted additional diluted share impact of 9.8 million shares. The Spectrum merger will add approximately 38 million shares. Net income for the Q2 was $8.5 million, compared to a net loss of $3.5 million last quarter and $7.8 million in the prior year quarter. The Q2 net income was impacted by $3.4 million in transaction costs associated with the acquisition of Spectrum Pharmaceuticals.

Net cash provided by operating activities as reported in the company's statement of cash flows for the Q2, was $18.6 million versus $22.7 million last quarter and $14.4 million in the prior year quarter. The year-over-year increase in operating cash flow is due to increased net sales, partially offset by higher operating expenses versus the prior year. Ending cash on June 30, 2023, was $70.2 million, reflecting a $1.6 million increase versus the prior quarter. On June 30, 2023, our long-term debt balance was $38.2 million, reflecting the $40 million convertible debt balance, less unamortized debt issuance cost. We did not take on any additional debt from the acquisition of Spectrum. Looking ahead, please note that the Q3 results will be impacted by purchase accounting, transaction costs, and restructuring costs related to the Spectrum acquisition on July thirty-first. Now I'll turn the call back over to Matt.

Matt Cripps (Managing Director)

Thank you, Paul, Tom, and Dan. At this time, we've completed our prepared remarks and we'll use the balance of our allotted time to take questions from our sell-side analyst community. Operator, can you please provide the instructions for Q&A from our listeners and launch the first question?

Operator (participant)

At this time, I would like to remind everyone in order to ask a question, press star, then the number on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Thomas Flaten at Lake Street Capital Markets. Thomas, please go ahead.

Thomas Flaten (Senior Research Analyst)

Hey, good afternoon. Thanks for taking the questions. Dan, given the uncertainty around INDOCIN now, I was wondering if you could comment a little bit on the, the Spectrum staff that's coming over. Did you have any vacancies in the field? How's kind of morale, any kind of qualitative or quantitative, for that matter, thoughts you could give us on the team that's coming over, given that Rolvedon now has become even more important, at least in the near term here?

Paul Schwichtenberg (SVP and CFO)

Yeah, I'll, I'll provide some initial comments, then Tom, I'll open it up to you too. I've gotten to know a lot of this team. We're, we're taking over the whole entire team intact as is. There, as far as I'm aware, there aren't any. There's no vacancies. There's one position that will be filled, it's a new position that will be filled in mid-August. It's, I'm sure the news today will be a little bit of a morale boost or bump as it will be across the entire company. That shouldn't dissuade anyone from the success that they're having, with the launch of Rolvedon. As, as Tom said, the people here are the most valuable assets in the company, and that doesn't apply just to Spectrum, it applies to Assertio too. The people are even more valuable now than they were yesterday. We are going to put even more emphasis behind this launch, and it is just as important to this company as it was before. Tom, any other comments about the commercial team?

Tom Riga (CEO)

No, I think you said it, Thomas. First, performance speaks for itself, but outside of that, this is a rock-solid group of people that know what they're doing. They're professionals, they're resilient, and they play to win. I expect that will continue. It really starts with leadership, and I think Dan is adopting an exceptional leadership team, and I think they will thrive.

Thomas Flaten (Senior Research Analyst)

Then, Dan, any, any thoughts on Rolvedon for 2023, the calendar year? I know that sits kind of adjacent to the, to the legacy business, but I think if any, any thoughts you can share on expectations for that? I, I, I know you're not providing guidance for the whole business, but maybe that product as a standalone.

Dan Pisano (President and CEO)

I don't- Thomas, we have a, there's a point estimate that Assertio put in the S4, and I would tell you that, I don't think our opinion of, of the launch has, has changed too terribly much from that estimate that we put out in the S4. Other than to say that it has been tracking slightly better than our original expectations.

Thomas Flaten (Senior Research Analyst)

Got it. Then one final one, if I might. Given the INDOCIN news, any preliminary thoughts on how you might proceed with the planned study in moderate ERCP patients, moderate risk?

Dan Pisano (President and CEO)

Yeah, that's a very, very good question, and I think appropriate, and it's something that we're evaluating. We had been evaluating options as it regards to a regulatory strategy anyway. I think with the news today, I'll be upfront, the lifecycle management option that we had was a different dosage strength of this product that is more convenient for an ERCP procedure. I think with this news today, what we might be looking to do is find a way to accelerate that to market. There are some backup options that we had before that did not bring an exclusivity option with them, and those might be something that we start to accelerate. That's obviously something we as a management team have to discuss and align with our board before we make a decision.

Thomas Flaten (Senior Research Analyst)

Excellent. I appreciate you guys taking the questions. Thank you.

Operator (participant)

Your next question comes from Mayank Mantani with B. Riley. Mayank, please go ahead.

Brandon Carney (Senior Research Associate)

Hi, this is Brandon Carney on for Mayank. Thanks for taking our questions, and congratulations on closing the Spectrum acquisition. As you said, the Rolvedon performance seems to be tracking ahead of plan. Just wanted to see if you could comment on the sort of long-term cash flow you anticipate on a standalone basis, recognizing there is a balanced mix of commercial and digital spend you intend to have. You know, what's the incremental OpEx we should expect, which is important in light of the uncertainty with the top line being pulled?

Dan Pisano (President and CEO)

Yeah, Paul and I will have to, we-- yet another reason why we pulled guidance was what is gonna be the operating expense on the base business. The-- What we anticipate bringing over now, we had originally assumed $60 million of operating expenses for, from Spectrum in, in our... when we announced the deal. Now, as we're through most of the integration work and planning process, we're now anticipating that that's gonna be $55 million of incremental operating expenses to, to operate that asset on our platform. The, the big question that's still open now is what is the base of Assertio operating expenses? I, I can't give you a, a, a go-forward, but I, I know it's gonna be incremental $55 million of Rolvedon.

Brandon Carney (Senior Research Associate)

Sure. Okay. Maybe just following up on the question about integrating the two teams there. You know, I know that you're sticking with the Spectrum's game plan and the commercial team, then layering in the Assertio digital platform on top. Maybe you just get some more color on how that integration is going?

Dan Pisano (President and CEO)

We're I would tell you that the planning was, I would say, flawless. They, they did an amazing job in coordinating together to plan this integration. The When it came to the commercial side, because we are pulling over the entire team and we're not trying to disrupt anything, it, it's little things like: how long do we get to keep our Spectrum email address? If we want to launch new marketing materials, which, which promotional review committee do we go to? It's, it's not massive disruption, it's minor disruption. The commercial changes shouldn't be large, and the overlay of the digital does not have to happen right away. That is gonna be probably more towards late this quarter. The planning part of that is gonna happen as, as we speak, and then later this quarter, early next quarter is when that will actually start taking place. There, there's plenty of activity, as Tom said, that he, he just opened up a new GPO. There's, there's plenty of growth avenues open for that team right now before we start throwing more at them.

Brandon Carney (Senior Research Associate)

Okay. Yeah, sure. Maybe just one quick follow-up. You know, I think you mentioned in the past, you know, that, I guess we're gonna expect those synergies from the digital platform being layered on top of, later in, in 3 Q, you said. Just wondering if you could comment on what kind of synergy we're looking at. I think previously mentioned opening up new geographies for Rolvedon. I'm wondering if there's anything additional to that.

Dan Pisano (President and CEO)

Just to... What I think might be correct, something you said, I wouldn't look at the digital platform as a synergy. Maybe a revenue synergy, but not an operating expense synergy. We're, we're not gonna be using that, the digital platform as a way to reduce the, the current Spectrum. It's gonna be add on to it and enhance it and, and hopefully go, go to areas or geographies, as you said, that they're currently not able to go to. That is what our current vision of this is, and, and to be able to possibly accelerate the launch in that, in that manner.

Brandon Carney (Senior Research Associate)

Okay. Thanks for the color and thanks for taking the questions.

Dan Pisano (President and CEO)

Appreciate it.

Operator (participant)

Our next question comes from Hamed Khorsand with the BWS Financial. Hamed, please go ahead.

Hamed Khorsand (Founder and Principal)

Hi. First off, just wanted to see, how closely were you aware this was happening, and what are your expectations of your competitor would be able to manufacture, this generic and be successful in launching in the U.S.?

Dan Pisano (President and CEO)

I would say we were not aware of this at all. This came as a complete shock and surprise. The last we had heard of this potential competitor, they were working on a 100-milligram dose, and we had thought that they were done. We were not aware that they were at the FDA. The fact that they had competitive generic therapy approval tells you it was an accelerated approval, so it was relatively quick. This came as a complete surprise to us.

Hamed Khorsand (Founder and Principal)

What preparations are you making as far as just being able to retain market share or, you know, close to the market share, just given the, a potential generic coming in?

Dan Pisano (President and CEO)

We've been making preparations for that ever since I took over as CEO. For the last 3 years, we've been making preparations for this. I'd rather not tell you on an open conference call what they are. I appreciate that you'd like to know what they are, but I don't want Zydus, who is likely listening, to be aware of what they are.

Hamed Khorsand (Founder and Principal)

Fair enough. I, I guess the other question I had was, given the ASGE guideline changes, have you seen the market expand? Where are you seeing the demand, if any?

Dan Pisano (President and CEO)

We hadn't, we hadn't seen it, so one of the things that we were gonna talk about was some of the market research that we had been doing and, and some of the other awareness campaigns that we had launched. There was a, the, the continuing medical education program that we had funded just launched on July 26th, and we had something like 1,000 viewers of it on day one, so we were pretty excited about that. Some of the market research that we had done in the quarter, we surveyed a bunch of physicians, and we had ... What was it, Paul? Like, was it 90% were unaware of the ASGE changes? That, that led us to believe that there was some good opportunity for awareness. We believe that there is some good opportunity, awareness, and reasons to be hopeful, but that, that whole section of the prepared remarks was removed today.

Hamed Khorsand (Founder and Principal)

Okay. Appreciate it. Thank you.

Operator (participant)

Our next question comes from Jim Sidoti with Sidoti & Company. Jim, please go ahead.

Jim Sidoti (Medical Devices Analyst)

Afternoon. Thanks for taking the question. The $55 million of operating expenses that's coming on, can you break that out? Is that primarily SG&A? Can you just break out what's SG&A, what's R&D, and if there's other components?

Dan Pisano (President and CEO)

Yeah, sure, Jim, I can give you a breakdown of that. Breaking down the $55 million, about $40 million is gonna be sales and marketing. That's all the team that we brought over, as Dan mentioned. About $12 million is G&A, including a variety of functions, QA, manufacturing, other back office, and about $3 million is R&D.

Jim Sidoti (Medical Devices Analyst)

Okay. You know, as you said earlier, you've been through this before with Cambia within the next few weeks, or how long do you think it'll take?

Dan Pisano (President and CEO)

Look, in terms of timing, Cambia was a known LOE event. We had their Paragraph Four settlement. We knew everyone was coming January first of this year. We have been preparing, so basically running war games here internally as if it was coming tomorrow. While I tell you this was a surprise in terms of timing, the team is ready and ready to go and responding as we speak.

Jim Sidoti (Medical Devices Analyst)

Thank you.

Operator (participant)

Our next question comes from Scott Henry, from Roth Capital. Scott, please go ahead.

Scott Henry (Head of Healthcare Research)

Thank you. Good afternoon, potential generics. How do you think the distribution channel will impact this when we compare it to see the potential competition relative to other more.

Dan Pisano (President and CEO)

I, I'll try and answer it with the best I can, Scott. The analogs that we look at, I mean, there's multiple ways that you can look at an analog in a generic erosion, one of which is one entrant versus four, as in the case of Cambia. It certainly erodes far faster in one versus four, or in four versus one. The other way is it's not just it's far faster than it does in a hospital, and that tends to be because of the retail pharmacy's profit motivation to switch. What we've seen is that the brand retains a far greater share, and the pricing tends to be better. That, that is what, you know, one, one of the things that gives us some optimism in this particular situation is we have one competitor, it's the hospital setting. It's a difficult to manufacture dosage form, which we've been talking about for years, so supply may not be 100% readily available. There are a, a number of factors that would say that this particular situation would lend itself to one where the brand could maintain a, a decent share of this, this market going forward.

Scott Henry (Head of Healthcare Research)

Okay, great. Thank you for that color. One other question, and I, I again apologize if it's repetitive. The Rolvedon revenues in the quarter, $21 million, was that, you know, a, a relatively clean quarter in terms of stocking? I mean, is it fair to say that, you know, based on two Q, was it a, a roughly $85 million run rate already, or, or was there any, you know, give or take in the quarter? Thank you.

Dan Pisano (President and CEO)

From what I've seen, it's a pretty clean quarter. Good quarter for demand. They were able to turn on a new account, as Tom said. It's off to the races from here on.

Scott Henry (Head of Healthcare Research)

Okay, great. good to see that launching well. All right, thank you for taking the questions. I'll follow up later.

Dan Pisano (President and CEO)

Thank you.

Operator (participant)

Thank you. There are currently no-

Dan Pisano (President and CEO)

To come through this even stronger and create value for all shareholders. In addition, we've just made a large step in mitigating our legacy legal uncertainties. Thank you, and have a good evening.

Operator (participant)

This concludes today's call. You may now disconnect.