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

Welcome to the First Quarter 2021 Financial Results Assertio Holdings, Inc. Earnings Conference Call. My name is Hilda, and I will be your operator for today. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Max Nemmers, Head, Investor Relations and Administration. Mr. Nemmers, you may begin.

Thank you. Good afternoon, and thank you all for joining us today to discuss Assertio's first quarter 2021 financial results. 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 that it's important to today's discussion. With me today are Dan Peisert, President and Chief Executive Officer; and Paul Schwichtenberg, Senior Vice President and Chief Financial Officer. Dan will open the remarks and provide an overview of the business, followed by Paul, who will review our financials. After that, we will 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 this afternoon'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 these 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. With that, I will now turn the call over to Dan. Dan?

Thank you, Max, and thank you, everyone, for joining us this afternoon. We're approaching the 1-year anniversary of the Zyla acquisition, and with the changes we've made to our business at the start of this year, we're now seeing the benefits from the combined -- from combination of Assertio and Zyla, the diversification of the top line revenue and healthy adjusted EBITDA margins. Last quarter, they I laid out my goals and priorities for Assertio, as a reminder, our priorities for 2021 are as follows. We have a strong and committed team with a culture of teamwork, inclusion and results, delivering on our $45 million of restructuring synergies, ensuring the company generate strong operating cash flow, ensuring our debt never becomes a constraint in running the business, mitigate our legacy legal uncertainties and develop a sustainable business model that reflects a changing environment. Since the beginning of this year, we made tremendous progress towards each of these priorities. We'll continue to strengthen our team and hired a new Head of Commercial that will start earlier this month. He will help us continue to build out our new commercial platform. We're also starting to make plans to open our offices soon and return to working in person. We, like others, could find a way to be productive with remote work during the pandemic. It is important that we continue to ensure our employees and their families are safe, but we're excited to get back and see everyone in person and the benefits that it can bring. In regard to the second priority of our synergies, as we said last quarter, we ultimately expect to realize $45 million in annual cost savings, relative to our run rate from the second half of 2020. As you can see from our results this quarter, we're well on our way to achieving that goal. We have and will continue to accelerate some investments towards our priorities as a result of our improved liquidity, but we are still confident that we can achieve this goal. We've already paid the majority of the restructuring cost in Q4 2020 and Q1 2021. Excluding the cash paid for restructuring, we were operating cash flow positive this quarter. Due to timing of some larger legal payments, such as our debt and royalty payments, we do not expect to be cash flow positive every quarter. As such, we're managing our cash flows on an annual basis. As for our fourth priority, we believe that our debt is no longer constrained to our business. The capital that we released in the first quarter has eliminated any concerns about needing loan maintenance covenant on our debt, which relates to minimum liquidity. And as is seen from our balance sheet, we're now in positive working capital position. This additional liquidity has enhanced our outlook on business development. In a few months since the equity raise, we've been evaluating multiple opportunities that we would not have been able to pursue before. Additional benefits are that we've been able to accelerate investments needed in the business, our novel commercial model and also towards our fifth priority of mitigating the legacy liabilities. We continue to slowly chip away at the legacy legal situations, and we've devoted additional resources towards driving the cases to conclusion. As we announced earlier in the quarter, we settled our insurance litigation. We have also recently reached settlements in a follow-on CAMBIA Paragraph IV litigation. Putting these situations behind us allows us to focus our time and attention toward some of the larger opportunities and then spend more time executing on the business. One change to me is that we're no longer excluding the opioid-related legal costs from our adjusted EBITDA and are showing what historical results were if we have treated them the same. We've started excluding these costs when we concluded the commercialization agreement with Collegium in 2018 because the lawsuits were associated with the company's historical commercialization of opioids. While there is still a case, our new management focus is to increase transparency around and management of operating cash flow and mitigating these legal uncertainties. We understand how important it is to our shareholders to reduce these costs and limit the liabilities from these situations. Because there is an impact on operating cash flow from these costs, we feel it is more appropriate to reflect them in our operating results. We continue to believe that building out and improving upon our commercial platform is critical to a sustainable business model, so we've also accelerated some investments in our commercial infrastructure. I'm excited about one of those investments, which we just announced the other day. We're expanding into the growing area of telemedicine by partnering with the leading migraine telemedicine platform Cove. This new alliance will allow us to develop new skills in targeted patients directly through our digital marketing efforts and provide a cash pay offerings into the new segment for Assertio. In addition, beginning this month, we've restarted limited in-person promotion for ZIPSOR in approximately 5 territories. The agreement to do a partnership with another company who will do the products for us within their existing call universe, primarily consistent of orthopedic practices. Our results this quarter were encouraging. The first quarter is typically the most seasonally effective quarter, and this year, our entire industry is also facing a difficult year-over-year comparison. Q1 2020 actually benefited from the pandemic, as the refills in a greater mix of 90-day prescriptions pulled forward some demand, as patients anticipate staying home to avoid COVID. Despite that dynamic and a significant shift in our promotional efforts to nonpersonal visual, all of our products saw year-over-year net revenue growth, except for SPRIX and ZIPSOR. The decline in SPRIX was expected, following the formulary loss from major PBM in September of last year. However, the impact is greater than we would have initially seen coming at approximately 70% over the prior year quarter. ZIPSOR's performance, while declining net revenue, still had positive volume growth. CAMBIA was up 3% year-over-year, which is a very encouraging result. INDOCIN was up 23% over the prior year, and that may have been the best quarter ever for this product. INDOCIN's strength this quarter and our additional liquidity have allowed us to accelerate investments in the product. One of those investments will continue to decline in net revenues next quarter as we have purposely reduced channel inventories for the product in April by approximately 10 days. Ultimately, we believe it will increase our profitability as this is a part of a multistep process to increase demand and protect the product. The 1Q 2021 results, specifically SPRIX's performance, manufacturing taken in INDOCIN, have been factored into the guidance we provided today for full year sales of $85 million to $92 million. Our 1Q results were very encouraging, but we believe they still do not fully reflect the impacts of our change in promotional model, and we have benefited from a limited in-person rep promotion we did have in the fourth quarter. That said, we have reason for optimism in the leadership coming in and the continued investments we're making in the model. In addition to product net sales guidance, we're also providing full year adjusted EBITDA guidance of $34 million to $40 million. As we provide stability into the year, our efforts will concentrate on our priorities considering our cash flows. We need to do risk mitigation and building a sustainable model, including investment in our commercial structure. As a management team, we will focus on near-term efforts in identifying and evaluating acquisition candidates that we can incorporate into our platform to further diverse our top line, help us grow the company and extend our runway from a revenue life cycle perspective. Although I have some ambitious goals as it relates to BD, the core amongst them is to acquire a product or products that could generate at least $50 million in gross profit by 2024. We will continue to be creative with our approach to the structure and type of transaction, such as acquisitions, licensing, commercialization agreements or strategic investment. Now I'll turn the call over to Paul who will walk through the results.

Thank you, Dan. This afternoon, I will review the financial highlights from our first quarter of 2021. As is the case in the last few quarters, our year-over-year comparisons are challenging due to the many changes in our business. For clarity, any references to pro forma results represent product sales as if the Zyla merger had been completed on January 1, 2020. Net product sales were $26.4 million for the 3 months ended March 31, 2021, compared to pro forma net product sales of $28.3 million in the prior year quarter and $30.1 million last quarter. As Dan noted in his comments, the first quarter has historically been the most seasonally effective quarter due to patient copay and deductible resets on January 1. INDOCIN net sales reflect the highest quarterly result in at least the past 2 years and 23% growth over the prior year quarter, which did reflect some volume decline due to COVID. Combined CAMBIA and ZIPSOR net sales were slightly ahead of the prior year quarter. SPRIX volume continues to be impacted by prior year commercial coverage change and COVID, resulting in a 7% decline versus the prior quarter. Despite the lower SPRIX performance, the portfolio net sales were only down 6% versus Q1 2020 net sales, excluding revenue adjustments from divested products due to the positive performance of the other brands. Please refer to our 10-Q for specific product net level sales information. Cost of sales in the first quarter of 2021 were $4 million versus $1.4 million in the first quarter of 2020. The increase was primarily due to Zyla-related product cost of sales upon the Zyla merger on May 20, 2020, offset by lower cost of sales due to the Gralise divestiture in the first quarter of 2020. The 3 month ended March 31, 2021, cost of sales included $200,000 of amortization of inventory step-up related to Zyla acquired inventory sold. Our non-GAAP adjusted operating expenses in the first quarter were $7.3 million. This amount includes the benefit from the $5 million insurance settlement received in February and an opioid legal expenses of $1.2 million incurred during the quarter. Starting in Q1 2021, opioid legal expenses, which have previously been excluded for non-GAAP operating expenses over the last several quarters, will now be included in non-GAAP operating expenses and non-GAAP EBITDA. As is mentioned on our prior quarter earnings call, our primary focus for the company is to manage operating cash flow and proactively work to mitigate legal uncertainties. We believe that this reporting change on opioid legal costs aligns with the current priorities of the business. Excluding the insurance settlement, non-GAAP operating expenses were $12.3 million for the quarter compared to $18.6 million in the first quarter of 2020 and $20.3 million in the prior quarter. Both prior year quarter amounts have recast into opioid legal expenses for comparability. The results for the quarter include some pre-restructuring carryover expenses, and we expect to see further expense reductions through the remainder of 2021. As we stated last quarter, because of the Q4 2020 restructuring, we expect in 2021 to achieve operating expense savings off the annualized second half 2020 operating expense run rate, including opioid legal costs. For clarity, our pre-restructuring operating expense run rate include opioid legal costs for the second half of 2020 was $43.7 million, which translates to an annual operating expense run rate of approximately $87.4 million. In 2021, we expect to achieve $40 million of savings off this past run rate and ultimately $45 million in annual savings beginning in 2022. Non-GAAP adjusted EBITDA for the quarter was $15.7 million compared to $2.9 million in the prior year quarter and $8.2 million in the fourth quarter of 2020 on a comparative basis adjusted for opioid legal expenses. The improvement is reflective of both the realization of the cost reductions and the impact of the insurance settlement of $5 million. Excluding the impact of the insurance settlement, the EBITDA margin was 21% of net sales for the quarter. Net income for the first quarter was $4.5 million compared to the prior year's first quarter net income of $41.2 million and a loss of $24.4 million in the prior quarter. The comparison to the prior quarter was especially challenging and tie all the changes to the business. However, the largest change drivers in Q1 2020 to Q1 2021 are the net gain on asset sales, partially offset by loss on debt extinguishment and transaction cost that occurred in Q1 2020, and the substantially lower operating expenses in Q1 2021. The change drivers versus Q4 of 2020 are lower operating expenses, the $5 million benefit from the insurance settlement and the restructuring costs that were reflected in Q4 2020. The first quarter 2021 net income also included $1.1 million of restructuring costs. On March 31, 2021, our senior secured debt balance was $80.3 million, which will not mature until Q1 2024. On May 3, the company's scheduled interest and principal of technical -- the company paid scheduled interest and principal of $10 million, leading to third-party debt balance of $75.5 million as of today. And as we stated last quarter, we have improved our ability to achieve better terms and costs if we had refinanced our remaining debt over the next 12 to 18 months. Ending cash on March 31, 2021, was $61 million. The change in cash of $40.2 million from our December 31, 2020, balance of $20.8 million is primarily attributable to the cash proceeds from the registered direct offerings and the insurance settlement, partially offset by restructuring payments paid in the quarter. With the additional cash raised in the first quarter, our balance sheet reflects a positive working capital position versus the working capital deficit we've been in previously. As we stated last quarter, with the $45.3 million in cash raised from the registered direct offerings, we will be seeking to accelerate potential investments in 2021. Lastly, our annual guidance for 2021 is as follows: product net sales of $85 million to $92 million; adjusted EBITDA, including opioid legal expenses of $34 million to $40 million. Here are a few key highlights related to this guidance. The product net sales of $85 million to $92 million reflects the following factors. The impact of the lower SPRIX volume due to the 2020 commercial public exchange in cohort through the remainder of 2021. Second, a channel inventory adjustment in Q2 for INDOCIN related to a change in distribution strategy that will drive increased profitability in the future. Third, uncertainty related to COVID and our new promotional strategy. And fourth, as part of this guidance, we have not forecasted any future revenue adjustments for divested products. As I mentioned earlier, we're still on track to realize $45 million of annual cost savings and expect to deliver $40 million of cost savings in 2021 versus reported second half 2021 rate. Cost savings in 2021 are expected to exceed the estimated revenue decline, resulting in significantly improved EBITDA margins and cash flows. We are still seeking to minimize our cap potential legal liabilities. Any potential future settlements are not reflected in this guidance. Overall, we're pleased with the first quarter results. The portfolio net sales have remained stable, despite the challenging environment due to COVID and payer access. After the restructuring in the fourth quarter of 2020, we will quickly see the impact of lower operating expenses in Q1 2021. Looking ahead, we will continue to focus on further reducing expenses, cash flow optimization, exploring opportunities to reduce cost of capital and execution of our digital promotional strategies. And now I will turn the call back over to Max.

Thank you, Paul. Can we open up the call to Q&A, please?

[Operator Instructions] We have a question from Scott Henry from ROTH Capital.

Just a couple of questions. I guess, first, on the revenue line. For 2Q, just doing the simple math, if you reduce inventory by 10 days, should we think about -- I guess, about 1/9 of the revenues for the quarter will be pulled out of Q2? And is that INDOCIN only?

Yes. It would be INDOCIN only. And it's -- yes. I would think about that as 2 weeks, a full 2 weeks.

Okay. That's helpful. And then so factoring that in, and if I look at what you did this quarter, plus your guidance for the rest of the year, there's still a couple of products that are going to come down from first quarter levels. One, I would expect to be that other category. Anything else? I mean, do you think SPRIX is kind of nearing a base? Or does that have some more downside or perhaps INDOCIN, maybe it's not going to be sustained at these levels, absent inventory adjustments? Just trying to get a sense of how you think the levers are moving going forward for 2021.

Yes. I think you're absolutely right, Scott. That other category, we've been winding down SOLUMATRIX. There's just a little bit of inventory left to be out, so that's essentially planned to be 0 for the rest of the year. SPRIX, we are expecting that it will be this level in the future.

And I expect the change we're making in INDOCIN is a distribution change, and that should be just a one quarter phenomenon.

Okay. So perhaps the difference after that other is just normal contraction. There's less marketing there. Shifting gears, did -- the insurance settlement, when was that taken again? And where was that line item? I heard it briefly, but I couldn't locate it in the release.

The insurance settlement was received in February, and the way it was reflected in the financials was on the SG&A line as a benefit. So it's a reduction of our SG&A expenses.

And that was approximately $5 million.

$5 million, yes.

Okay. So your kind of organic SG&A would have been closer to $12.7 million. And I guess, would you expect that to be declining still?

Yes. We'd expect that to continue to decline in the next couple of quarters.

Okay. Great. And then I guess, the final question. You've given your relatively low multiple of EBITDA as far as the valuation of the company. Would that motivate you as you're looking for product acquisitions to be more likely to use debt and/or cash to acquire as opposed to your stock currency? You probably don't want to use that at this point in time, but I just want to get your thoughts.

Yes. I think you're right, Scott. The ideal situation on the BD transaction is also the ability to refinance the existing debt, so that's something that we've been exploring. And if the transaction is large enough for any additional debt, and so just cash up the balance sheet, then it could be ideal for that situation.

Okay. Great. And one final question. Just to get a sense of going forward, do you expect to really just be giving a reported EPS number and then you'll do an adjusted EBITDA? Is that how we should think about it? Or will you still be -- will you be doing an adjusted EPS? It sounds like it will just be reported and then you'll break things down when you get to the EBITDA level.

That's correct. Scott. That's correct.

As we don't have any more questions in the queue, so at this point in time, I will turn the call back over to Dan for closing comments.

We're pleased with the progress we made in just a few short months. Rest assured that we're just getting started. We will work through the majority of the restructuring by the talented team in place and are focused on continuing the momentum we have created to fully execute against our 6 priorities. Our results could not have been possible without the great work of our team, and I want to thank them for their work and know that they share my enthusiasm for the future of our company. The best is yet to come for Assertio. We remain committed to creating value for all of our stakeholders, and look forward to updating you on our progress towards our priorities in future quarters. Thank you for joining us this afternoon, and have a great evening.

Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.