Collegium Pharmaceutical, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The unaudited results include BDSI only from its March 22 acquisition date. Financial amounts are in U.S. dollars; tables and figures are in millions unless otherwise noted.
Business context and reporting period
Collegium commercializes Xtampza ER and Nucynta ER/IR. On March 22, it acquired BioDelivery Sciences International (BDSI), adding Belbuca, Symproic and Elyxyb. Management said the acquisition is intended to diversify the portfolio and generate operating synergies. BDSI contributed $3.6 million of revenue after closing; its post-acquisition earnings were not separately distinguishable.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net product revenue | $83.8 | $87.7 |
| Gross profit | $48.5 | $55.6 |
| Operating expenses | $58.5 | $34.4 |
| Operating income (loss) | ($10.0) | $21.2 |
| Net income (loss) | ($13.1) | $15.7 |
| Diluted earnings (loss) per share | ($0.39) | $0.41 |
| Operating cash flow | ($25.3) | $20.6 |
| Adjusted EBITDA (non-GAAP) | $43.5 | $45.3 |
- Gross margin was approximately 57.9%, compared with 63.4% in Q1 2021, based on reported revenue and gross profit.
- Cash and cash equivalents were $106.7 million at quarter-end, down from $186.4 million at December 31, 2021. Cash, cash equivalents and restricted cash totaled $109.2 million.
- Current assets were $363.6 million and current liabilities $373.6 million. Inventory rose to $80.1 million from $17.4 million, primarily reflecting the BDSI acquisition.
- Term-loan principal was $650 million, bearing 8.7% interest at March 31; $100 million of amortization is due in the first year. The loan is secured by substantially all company and material domestic-subsidiary assets and matures four years after closing. Convertible notes had $143.8 million principal and a $140.2 million carrying value, bear 2.625% interest and mature in 2026.
- Investing cash outflow was $572.2 million, primarily the BDSI acquisition net of cash acquired. Financing provided $517.8 million, mainly from the new term loan. Cash declined by $79.7 million during the quarter.
Material changes versus the prior comparable period
- Revenue fell $4.0 million. Xtampza ER revenue declined $3.9 million and Nucynta revenue declined $3.6 million; $3.6 million from the newly acquired BDSI products partly offset these decreases.
- Management attributed legacy-product revenue declines primarily to lower Xtampza volume and higher return provisions and gross-to-net deductions, including rebates.
- Operating expenses increased $24.1 million, mainly because of $27.2 million in BDSI acquisition-related expenses, including transaction costs, severance and directors’ and officers’ insurance. Lower salaries and benefits partly offset the increase.
- Amortization expense increased $2.1 million following the acquisition. The acquired inventory fair-value step-up added $0.6 million to cost of product revenue in the quarter.
- The March acquisition was funded in part through a $650 million secured term loan; the prior term notes were repaid. The balance sheet added $445 million of acquired intangible assets and $131.5 million of goodwill, based on a preliminary purchase-price allocation.
Outlook, commentary, risks and contingencies
- Management stated that cash and expected product cash inflows should fund operating expenses, debt service and capital spending for at least one year from issuance of the financial statements. This is a forward-looking estimate, not a guarantee.
- Management expects integration synergies to appear in the remainder of 2022 and acquisition-related expenses to decrease significantly, while noting additional consulting, contract-termination and integration costs are expected. It also expects the acquired inventory step-up to affect results until the inventory is sold, no later than one year after acquisition. No specific revenue or earnings guidance is provided.
- Management said COVID-19-related disruption remained a potential headwind: pain-patient office visits were still below pre-pandemic levels, which it believed could reduce new patient starts.
- The loan agreement includes restrictive covenants, scheduled principal repayments and prepayment premiums; a change of control triggers mandatory repayment. The company warned that covenant breaches could accelerate debt repayment and expose collateral to enforcement.
- Product-return processing disruptions and disputes with wholesalers remain a source of uncertainty. The filing says the company denied a significant portion of unprocessed claims, collected only part of the amounts short-paid and intends to pursue the remainder. Accrued product-return provisions were $75.0 million at March 31; management reported no material estimate adjustments in the quarter.
- Three wholesale distributors accounted for 34%, 33% and 30% of product shipments, respectively, underscoring customer concentration. The company also cited sole- or limited-source suppliers for key active ingredients and manufacturing dependencies.
- Material legal matters include patent disputes involving Xtampza ER, Nucynta and acquired BDSI products. The company said it could not assess the likelihood or estimate potential losses for several pending cases. The Alvogen BELBUCA patent judgment was appealed; separate BELBUCA generic litigation remained ongoing.
- The company reported that it paid up to $2.75 million under a settlement framework covering 27 opioid-related cases. It also agreed to pay the Massachusetts Attorney General $185,000, including investigation costs, in exchange for closure of that investigation and a release of related claims. Other state investigations were ongoing.
- Management concluded disclosure controls were effective as of March 31, 2022, but excluded BDSI from the assessment under the permitted newly acquired-company relief while integration and control evaluation proceed.
Most important facts for investors to verify
- Whether BDSI integration delivers the anticipated synergies and revenue growth, and how much additional integration expense is incurred.
- Whether legacy-product sales stabilize and return, rebate and chargeback estimates—and collections of disputed wholesaler short-pays—prove accurate.
- Whether cash generation supports the substantial secured debt burden, scheduled amortization and restrictive loan covenants.
- Developments and potential financial exposure in the patent, opioid-related and BDSI-related litigation and investigations.
- Whether acquisition accounting valuations, including the $445 million of intangibles and $131.5 million of goodwill, change when the purchase-price allocation is finalized.