Assertio Holdings, Inc. (ASRT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the quarter 3 2020 Assertio Therapeutics, Inc. Earnings Conference Call. [Operator Instructions] Afterwards, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Lee Roth. Sir, please go ahead.

Thank you, Mel. Good morning. And once again, thank you all for joining us today to discuss our third quarter 2020 financial results. This is Lee Roth from Burns McClellan. And on the call with me today are Todd Smith, President, CEO and Director; Dan Peisert, Chief Financial Officer; and Dr. Mark Strobeck, Chief Operating Officer. Todd will give the highlights for our third quarter performance and provide an overview of commercial activities, followed by Dan, who will review our financial results. Todd will then provide some closing remarks, and we'll open up 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 this morning's press release as well as Assertio's filings with the SEC. Investors, potential investors and other listeners are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Our actual results may differ materially from those projected in the forward-looking statements, and Assertio specifically disclaims any intent or obligation to update these forward-looking statements, except as required by law. In addition, for the full prescribing information, boxed warnings and medication guides of Assertio's marketed products, please visit our Products page on www.assertiotx.com. The archived webcast of this call will be available for 6 months on the company's website. For the benefit of those who may be listening to the replay or the archived webcast, this call was held and recorded on Friday, November 6, 2020. In a sense, Assertio may have made announcements related to the topics discussed. So please refer to the company's most recent press releases and SEC filings. If you've not already received the earnings press release, you can find it on the Assertio website under the Investors tab. With that, it's my pleasure to turn the call over to Todd Smith. Todd?

Thanks, Lee. Good morning, everyone. 2020 has been an extremely eventful year so far, both at the macro level, with an unprecedented election and the COVID-19 pandemic, which is yet to really let off, and for us as a company between the completion and integration of the Zyla merger, the transition to a new commercial model and a number of other significant changes. During the third quarter, we faced continued operational headwinds related to the pandemic. Despite these challenges, we're extremely proud of all that we've accomplished during the last several months and believe that we are well-positioned for growth and profitability once the effects of COVID have abated. In the third quarter, we achieved pro forma net sales of $33.7 million, which represents a 21.4% growth over the second quarter. We also achieved non-GAAP adjusted EBITDA of $6.9 million. Our third quarter results reflect the rapidly changing environment in which we're operating, and our commercial team's responsiveness to these changes as our net product sales were basically flat compared to the third quarter of last year, but up nicely 21.4% from Q2 of this year. During the third quarter, we completed the conversion to our hub-centric commercial model. This model has made us more agile and given us greater control over the business. Importantly, it has enabled us to quickly adapt to changing market dynamics and other external factors to maximize the benefit of positive trends while minimizing the effects of negative developments. One of the most telling metrics that demonstrates this is the initial change in average net sales per prescription, which increased across each of our products. Further evidence of the effectiveness of our new model can be seen in the formulary action taken by a large PBM in September, which negatively impacted the sales of SPRIX in the third quarter and going forward. Because of the hub model, we identified the issue and we were able to quickly assess and adjust our approach to pivot efforts and resources to our other products. We didn't miss a step in this process. We shifted seamlessly, and we're able to minimize the disruption on the business beyond SPRIX. We believe that this PBM decision is decidedly not in the best interest of patients as it essentially takes away the only labeled opioid alternative for treatment of acute pain. While COVID-19 is clearly the most significant and urgent matter affecting healthcare, it is crucial that we not overlook the severity of the nation's opioid crisis. We are concerned that the PBM actions, which are effectively taking viable therapeutic alternatives from patients' choice, which is in direct opposition to our industry's efforts to come back the opioid epidemic, and we will do everything in our power to have this decision reversed. As I highlighted last quarter, our broader growth strategy focused on driving sustainable profitability and cash flow is based on 3 fundamental elements: commercial execution, prudent financial controls and business development. And I am pleased to report that we have made progress on each of these initiatives in Q3. We remain committed to adjusting our commercial approach as needed to most effectively support Assertio's continued profitable growth. While elective procedures and patient volumes continue to face challenges in the third quarter, with surgery still down roughly 15% according to IQVIA, our total revenue for the quarter was essentially flat compared to pro forma revenues for the third quarter of 2019. We believe this is a testament to the dedication of our commercial organization and maneuverability afforded us by the transition to our hub model. While our SPRIX business was impacted by the PBM action I discussed, we saw a 25% increase in total Zipsor prescriptions for the 13 weeks ended October 2 compared to the 13-week period prior, which we believe will support sales growth as we move forward. I'm also particularly excited by INDOCIN, which grew 46% over quarter 2 and 22.5% over the third quarter of last year. Despite this continued challenging environment, we were able to meaningfully grow INDOCIN sales over last year and believe that we still have room to grow. These efforts and focus, coupled with the commercial team's execution, drove the Q3 over Q2 growth of 21.4%. Looking at financial controls, we are on track to realize the full benefit of our $40 million synergy targets and continue managing the business with a laser focus on optimizing our path to profitability. Total operating expenses were down significantly compared to pro forma OpEx in the third quarter of 2019. And perhaps more importantly, we have identified additional savings since the completion of the Zyla merger beyond the initial synergies we had identified. We believe these additional savings could take the longer-term operating expenses benefit beyond the $40 million per year that we originally forecasted, and we're already on track to realize. In addition to prudent expense controls, we prepaid $10 million of our outstanding debt in the third quarter. We plan to continue taking steps to strengthen our balance sheet and stabilizing our overall financial position. The final element of our strategy is growth through strategic business development. While our third quarter OpEx was down significantly year-over-year, we did incur some expenses related to a potential transaction that didn't materialize. This would have been a significant transaction for us, and we were deep in the discussions with the other parties as well as independent diligence. It was during this diligence process that we identified certain issues, which made it prudent to terminate the negotiations. I am proud of the team's discipline and believe this demonstrates our focus on finding a deal, but, more importantly, finding the right deal to drive the value with Assertio. We remain committed to making the necessary investments to pursue compelling business development opportunities that will help us achieve our goals of profitability and positive cash flows enable us to create value for Assertio shareholders. We continue to actively seek BD opportunities involving complementary products and remain committed to meeting our objective of 1 or 2 transactions over the next year. We are actively pursuing BD opportunities, but are taking a disciplined approach to the process. We are focused on making the right deal that will enhance our portfolio, strengthen our commercial team's capabilities and drive incremental value for our shareholders. Before I turn the call over to Dan to discuss the third quarter results in greater detail, I'd like to provide a brief update on our outlook for the remainder of 2020. As a result of COVID, our industry continues to face significant near-term uncertainty. Our third quarter results were relatively strong, and we have seen continued strength through the first several weeks of quarter 4, including continued growth in INDOCIN and Zipsor as well as 7% net prescription growth in new starts for CAMBIA, our biggest product by volume. While we believe that this trend will continue, the cumulative effect of challenges we faced through the first 9 months of the year have led us to expect a decline of approximately 5% in full year 2020 revenues compared to pro forma revenues for full year 2019. We are unable to reaffirm EBITDA margin guidance at this time. In spite of this, we believe the Q3 growth, the transition to the new hub commercial model and proven execution of our commercial team resulted in a profitable growth of our key products other than SPRIX. This is encouraging as it relates to the realization of our strategy and our future growth potential from acquiring new products. We further believe we are doing what is necessary to manage through this period while continuing to focus on the future health of our business. As the COVID impact stabilizes, we will be positioned for growth and profitability. Now Dan will review our financial performance for the third quarter.

Thanks, Todd. This morning, I'll review the financial highlights from our third quarter of 2020. As was the case last quarter, our year-over-year comparisons are challenging due to the many changes in our business. To provide context, we've provided supplemental, unaudited pro forma net product sales for the quarter and the first 9 months of this year in our press release. For clarity, any references to pro forma results are reflective of our product divestitures and the Zyla merger. Pro forma net product sales were $33.7 million for the 3 months ended September 30, 2020, compared to the pro forma net product sales of $33.7 million in the prior year quarter and $27.7 million last quarter. While this result was below our internal expectations for the reasons Todd articulated, the result demonstrates our ability to execute not only in the face of COVID, but we're also integrating the Assertio and Zyla organizations and pulling the reps out of the field for training on the new commercial model. We recorded a strong quarter for INDOCIN, which was the highest quarterly result reported by Assertio or Zyla in the last 2 years. Zipsor also showed growth this quarter over the prior year quarter. The results also reflect better-than-expected sales from the SOLUMATRIX brands as we're prepared to exit commercialization of these products. The portfolio result was impacted by challenging quarters for CAMBIA and SPRIX. We are seeing encouraging prescription trends for CAMBIA in recent weeks. However, the very recent commercial coverage change for SPRIX will impact our ability to achieve our previous fourth quarter and full year growth objectives. Reported cost of sales was $6.5 million for the 3 months ended September 30, 2020. The increase over the prior year was influenced by the addition of the Zyla product portfolio and the inventory step-up expense associated with the fair value adjustments as part of the merger. Our adjusted gross profit margin for the quarter was 82% versus 86% last quarter. Decrease reflected a greater combination from sales of lower-margin products, particularly in the SOLUMATRIX brands. Our non-GAAP adjusted operating expenses, inclusive of R&D and SG&A, in the third quarter were $21.9 million compared to $22.3 million in the prior year period. The results for the quarter also reflect approximately $900,000 of expenses related to a terminated business development transaction, which Todd described. The result shows exactly what we intended as a result of the merger with Zyla. Both companies have very similar duplicative operating structures, and we're able to combine the portfolios while only keeping half the overhead. Non-GAAP adjusted EBITDA for the quarter was just shy of $7 million, an EBITDA margin of 20.2% and compared with $31,000 in the second quarter this year. The improvement is reflective of both the realization of the synergies and the improvement in sales quarter-over-quarter. Given our revised revenue outlook and the unpredictable impact of the pandemic on our near-term financial performance, we're no longer able to reconfirm our EBITDA margin guidance for 2020. We can confirm, though, that our focus remains on profitability and improving our balance sheet. Net loss for the 3 months ended September 30, 2020, was $10.6 million in comparison to the prior year's gain of $3.3 million. This comparison is especially challenging given all the changes to the business. However, the single, largest drivers of the gain recorded in the prior year in the extinguishment of the convertible notes, offset by the far higher interest expense the business previously incurred. During the quarter, the company prepaid $10.3 million of our senior secured debt and accrued interest, leaving us with $85 million of third-party debt and a cash balance of $34.7 million at September 30. The decline in cash of $24.7 million from our June 30 balance of $59.4 million is primarily attributable to 3 nonrecurring items that totaled $20.4 million, those items being the debt repayment, the delayed timing of expense reimbursements due from partners and the severance and restructuring payments made in the quarter. Now I'll turn the call back over to Todd.

Thanks, Dan. So while we continue to face a certain degree of challenges in the third quarter, we made substantial progress on our strategic and operational initiatives and have taken steps to further position Assertio for long-term success. The macro environment continues to change, but thanks to our business model, we are able to adapt and adjust quickly and efficiently. We are committed to tapping into the full potential for our products and realizing additional operational savings from the merger of Assertio and Zyla. With our strong quarter-over-quarter performance, the additional cost savings we have identified and the continued initiatives to pay down our debt, we believe we have a solid base on which to continue building. We remain confident in the strength of our commercial organization and believe that our strategy and financial foundations are sound. We look forward to the opportunities that lie ahead. So thank you, everyone, for joining us this morning, and we'll now have the operator open up the call for questions.

[Operator Instructions] We'll have the first question from the line of Scott Henry from ROTH Capital.

I guess, I want to start with SPRIX. When did the PBM change take place? So I can get a sense of, did it impact Q3? Will it impact all of Q4? And can you give us a sense of what percent of the product you would attribute to that PBM or the product revenue?

Yes. Scott, thanks for the question. So as we talked about, we're very happy with the growth and the overall performance of the business, but SPRIX was impacted in September. We noticed it in September as well and then started taking action. We believe that the impact of the PBM on a product that is the only labeled opioid alternative, will last beyond third quarter, and -- but we will be working actively to address this and working with PBMs to make sure there's better awareness of this opioid alternative and the opportunity for them to support patients that need this, Especially in the face of the opioid crisis. So, yes, I think you should think about it as us finding out in September, and then this will be in place on an ongoing basis until we can make any change to negotiations.

And what percent of SPRIX went through that PBM approximately?

Give and take, about 20%, 15%, 20%. I don't know if we want to get too much more detail because at the end of the day, as we run through the business, every prescription, every adjudication can act differently.

Okay. That's helpful. And would you expect to have clarification in the fourth quarter of this year?

When you say clarification, Scott, what do you mean by that?

I guess, resolution of the situation, whether it will be -- it sounds like you go through an appeals process, and just trying to get a sense of the timing of that.

Yes. No, that's a great question, Scott. I think we're going to be addressing this. I don't believe we're forecasting that this will change or that -- change anytime soon, but we are committed to addressing it and working through it and think it's an important issue, not only, obviously, for us from a business standpoint, but we believe we've been committed to patients, making sure that they have the lowest out-of-pocket co-pay. And I believe that these PBMs have missed the mark by addressing -- doing something like this to a product that's a clear alternative. So we're going to actively work on it, but I would think of it as an ongoing basis at this point.

Okay. And then I don't know if you -- I mean, I can do the math on my own, but it would be easier if you did it for me. When you're saying down 5% in 2020 from pro forma 2019, but it's kind of tricky to figure out what you're using as a 2019 number, given that there's only one quarter left in 2020, what is your Q4 revenue guidance approximately? Just to make sure I'm on the same page.

Yes, Scott, we're not doing any further guidance on -- especially regarding all the uncertainty. But if you take 5% down, the math on...

The math, just over $30.8 million.

Perfect. And then from a business development standpoint, obviously, these things just take time, but, I guess, the question I would have, I'm trying to think of how to phrase it is, would you be surprised if you didn't acquire another product by second quarter of '21? Just trying to get a sense of the urgency behind adding products to the platform.

Yes. No, Scott, I think a couple of things. So we stand by in the next year, we hope to do 1 to 2 deals. We're open and actively engaged. It's an absolute top priority for us. I don't know that I want to commit to anything on a time basis other than the 1 to 2 deals in some form of fashion over next year. We are open to looking at deals or partnerships that are best for the shareholders, that are best to help us bring in underpromoted, clinically differentiated products. And we think we have the capability to do that. We think our Q3 numbers and our ongoing commercial performance demonstrates that we're probably a unique commercial partner in today's marketplace.

Fair enough. And final question. Sales reps, are they about where they were pre COVID-19? Or have you had any kind of changes? I know a lot of reps are bouncing around right now.

Yes, yes. No, we're still at the 80-rep number territories, handful of vacancies, but nothing more than you'd normally expect.

The next question comes from the line of Sally Yanchus from Brookline Capital.