Assertio Holdings, Inc. (ASRT) Q3 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentleman, and welcome to the Quarter Three 2020 Assertio Therapeutics Incorporated Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder this conference is being recorded. I would like to turn the conference over to your host today, Mr. Lee Roth. Sir, please go ahead.

Thank you. Good morning, and once again thank 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 our 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 in this call will be available for six months on the company's Web site. For the benefit of those who maybe 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 have not already received the earnings press release, you can find it on the Assertio Web site 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 has yet to really let off and for us as a company, between the completion and integration of 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 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 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 are 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 as 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 sales of SPRIX in the third quarter and going forward. Because of the hub model, we identified the issue and 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 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 patient’s 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 reverse. As I highlighted last quarter, our broader growth strategy focused on driving sustainable profitability and cash flow is based on three fundamental elements; commercial execution, prudent financial controls and business development. And I am pleased to report that we've 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 third quarter with surgeries still down roughly 15% according to IQVIA, our total revenue for the quarter was essentially flat compared to pro forma revenues from 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 25% increase in total Zipsor prescriptions for the 13 weeks ended October 2nd 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 two and 22.5% over the third quarter of last year. Despite this continued challenging environment, we were able to meaningfully grow Indocin sales over the last year and believe that we still have room to grow. These efforts and focus coupled with commercial team’s execution drove 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 FX in the third quarter of 2019. And perhaps more importantly, we've identified additional savings since the completion of the Zyla merger beyond the initial synergies we have 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 the 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, 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 incurred 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 discussions with the party as well as diligence. It was during this diligence process that we identified certain issues which may have [Indiscernible] 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 deals to drive value at Assertio. We remain committed to making the necessary investments to pursue compelling business development opportunities that will help us achieve our goal to 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 one or two 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 four, 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 face through the first nine months of the year have led us to expect the 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 result 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 2020. As was the case last quarter, our year-over-year comparisons are challenging due to many changes in our business. To provide context, we provided supplemental unaudited pro forma net product sales for the quarter and the first nine 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 are $33.7 million for the three 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 also integrating the Assertio and Zyla organizations and pulling the reps out of the field for training and in commercial level. We recorded a strong quarter for Indocin, which was the highest quarterly result recorded by Assertio or Zyla in the last two 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 prepare to exit commercialization of these products. The portfolio result was impacted by challenging quarters for Cambia and SPRIX. We're 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 three 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 adjustment 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 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 that 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 were able to combine the portfolios while only keeping half the overhead. Non-GAAP adjusted EBITDA for the quarter was just shy of $7 million and 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 and 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 three 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 from the [Technical Difficulty] 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 in accrued interest, leaving us with $85 million of third party debt and a cash balance of $34.7 million at September 30th. The decline in cash of $24.7 million from our June 30th balance of $59.4 million is primarily attributable to three nonrecurring items that totaled $20.4 million. Those items being the debt repayment, the delay in timing of expense reimbursements came from partners and the severance and restructuring payments made in the quarter. Now I’ll turn the call back over the Todd.

Thanks, Dan. So while we continue to face certain degree of challenges in 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're able to adapt and adjust quickly and efficiently. We're committed to capping in 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've 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.

Thank you [Operator Instructions]. You 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, the product revenue?

As we talked about, we're very happy with the growth and overall performance of the business. So SPRIX was impacted in September. We noticed it in September as well and then started taking action. We believe that the impacts from the PBM on our product that is the only labeled opioid alternative will last beyond third quarter. But we will be working actively to address this and working with PBM 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 I think you should think about it as us filing on 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?

It’s give or take about 20%, 15%, 20%. I don't know we want to give too much more detail, because at the end of the day as we run through the business, every prescription, every adjudication can act differently.

And would you expect that 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 -- it sounds like you go through an appeals process and just trying to get a sense of the timing of that.

I think we're going to be addressing this. I don't believe we're forecasting that this will change, or that it'll 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 copay and believe that these PBMs have missed the [Indiscernible] address 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.

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 -- 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 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?

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 will be just over $30.8 million.

Thank you for making my day a little easier. 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. 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?

Scott, I think a couple of things. So we stand by in the next year. We hope to do one to two 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 bases other than the one to two deals in some form fact over the next year. We open to looking at deals or partnerships that are best for the shareholders that are best to help us bring in under promoted clinically differentiated products. And we think we have the capability to do that and think our Q3 numbers and our ongoing commercial performance demonstrates that we're probably unique commercial partner in today's marketplace.

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.

We're still at 80 rep number territory, handful vacancies, but nothing more than you'd normally expect.

Thank you. We have the next question comes from the line of Sally Yanchus from Brookline Capital.

A question on, in the press release your SOLUMATRIX license. You’re terminating it or it was terminated? What's going on with that product?

So the SOLUMATRIX products were really two products, ZORVOLEX and VIVLODEX. We completed the Zyla’s transaction. We began, obviously, kind of in-depth evaluation of our portfolio and set to he profitability and all the resources required for each of these products. And based on that, we determined the strongest position both the external long term kind of revolve around the products we focused on and did include with SOLUMATRIX. And so we saw the best option forward for the business and for shareholders is to return those licenses.

So we should see no more sales from those products in your income statement going forward? Is that right?

There will probably be some small amounts of sales in the fourth quarter, but I wouldn't expect anything beyond that.

And then I believe you said, Dan, that the third quarter sales breakout of the individual products was available in the press release. I don't see it. Did you disclose the individual levels, where are the different products?

The pro forma results are in the press release. The individual product results will be in the 10-Q that will be published later today.

And then I just want to confirm. You paid down about $10 million in debt this quarter. So how much remaining debt do you have?

We paid $10 million of principal. So there's $85 million remaining as of September 30th. And then there was another $4.75 million that was just paid earlier this week.

The next question comes from the line of Kevin Kedra from G.research.

First you mentioned strategic transaction you guys were working on that just didn't quite come together. We did have that filing from Highbridge where they note that they’ve reached out on a business combination with what seems like the Currax or the old Pernix business. So can you confirm whether or not that's the specific transaction you were referencing?

Yeah, let me first be clear. We're obviously not going to comment on any of business development that’s active. The comment we made was to highlight a couple of things. One is that we did spend almost $1 million, about $900,000 on diligence on a deal that was actively in discussions earlier than that filling and we decided to walk away from a lot of rights reasons, even though it was a great target to look at. And we wanted to highlight a couple things just help understand what some of the initial costs came from but also emphasize our commitment to finding the right deal for shareholders.

You mentioned the SPRIX issue with the PBM. Are there any other material changes, the formulary access coming up in 2021 were kind of in the 2021 contracting season. So any visibility on any shifts we should expect for any of your key brands going into 2021?

We don't anticipate any. We think a couple things. One is usually are not starting to see any of those changes earlier. So September, October is when we would have expected to see these changes, we saw obviously in September. Going forward in 2021, we don't anticipate anything else changing and feel like we're in really good shape for our other products at this time.

As far as the margin guidance, I know you guys have kind of now reconfirmed that for the full year. But should we think about this as just kind of being a function of some of the near term dynamics with COVID, with the SPRIX? Or has there been any fundamental change about how you look at the business going forward from a margin and profitability standpoint?

No, I mean I think a couple of things. I think one is, fundamentally what we wanted to highlight was that COVID, obviously continued much more intensely and didn't let up in Q2 and then in Q3. So we never saw a second wave, because I don't think we ever moved out of the first wave. And so a lot of our thinking was that you see some of that abate we see kind of the recovery faster of outpatient surgeries, patient visits and clearly that's been continued to be dampened at a level maybe a little greater than we thought as we thought about Q2 to Q3. Secondly, I think the SPRIX action. SPRIX was one of our primary products that we're focused on. We believe it has a lot of value. We think it still has value. But the opportunity for upside is going to be limited when PBM takes that kind of action against it. So we made the pivot, I think, demonstrating the significant growth of 25% in Zipsor for the last 13 weeks, I think the 46% growth in Indocin, which is obviously a lead product for us. And then even most recently Cambia’s growth now in new Rx has been very encouraging. So we think fundamentally, the business is in good shape. We think, fundamentally, the businesses is the business we anticipated. We just felt with the uncertainty that better for us not to continue to try to play the game of putting out guidance and figure out can we get there and just run the business and maximize the value, and looking at how we continue to drive growth and find BD opportunities. And so that's really the mindset. And if you think about -- last thing I guess I’ll mention. As we put the deal together, we think we fully thought it was just the guidance. So just as we put the deal together and looked at the combination of the products on a pro forma basis what can be achieved and we thought that that was appropriate to provide at the deal and then realized all the uncertainty, we just felt like it's probably better to get clarity to our investors and to the market and then kind of step back from trying to set clear guidance until we have a better sense of where everything settles out and what the opportunities are for the going forward.

Final question from me. Dan mentioned some cash flow impacted by some of the late payments in the quarter. Is that something that's going to reverse in Q4? Is there a longer tail that resolve that?

The majority of it is already reversed. We just saw partner wait until October 1st to make a payment so September 30th. These are short-term issues.

Thank you. I am showing no further question at this time. I would now like to turn the conference back to Mr. Todd Smith for any closing remarks.

I want to thank everybody again for the time this morning, and I look forward to continuing the growth and success we've seen with our other promoted products as we go forward in this year and next year. And excited about the business opportunities we have and -- well, that’s what we got at this time. Thank you.

Thank you so much, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.