Collegium Pharmaceutical, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Financial statement amounts below are in millions of dollars unless stated otherwise. The company commercializes Xtampza ER and, since January 2018, Nucynta ER and IR.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net product revenue | $70.2 | $12.0 | $207.0 | $17.7 |
| Cost of product revenue | $46.0 | $0.6 | $136.0 | $1.5 |
| Operating loss | $(11.2) | $(13.4) | $(31.7) | $(57.9) |
| Net loss | $(16.5) | $(13.3) | $(48.2) | $(57.5) |
| Basic and diluted loss per share | $(0.50) | $(0.45) | $(1.46) | $(1.95) |
| Operating cash flow | Not separately provided for the quarter | $127.1 | $(53.7) |
Revenue mix: Q3 revenue comprised $53.1 million from Nucynta and $17.0 million from Xtampza. Nine-month revenue included $156.0 million from Nucynta and $50.9 million from Xtampza. Xtampza’s increase reflected higher sales volume.
Margins and costs: Calculated gross margin was approximately 34% for both Q3 and the nine-month period. Cost of product revenue included Nucynta intangible-asset amortization of $32.4 million in Q3 and $94.3 million year to date; this noncash charge materially affects reported gross profit. Selling, general and administrative expense was $33.4 million in Q3 and $96.3 million year to date; research and development expense was $1.9 million and $6.4 million, respectively.
Cash, liquidity and obligations: Cash and cash equivalents were $139.8 million at September 30, 2018, up from $118.7 million at year-end 2017. Current assets were $219.0 million and current liabilities $280.2 million, implying a current ratio of approximately 0.78. Current liabilities included $130.5 million of accrued rebates, returns and discounts and $116.3 million of current asset-acquisition obligations. Nucynta asset-acquisition obligations totaled $401.2 million at carrying value, including current and long-term portions. Term-loan debt was $11.5 million, with scheduled repayments beginning in 2019 and final maturity in December 2022.
Nine-month operating cash flow of $127.1 million was supported by noncash Nucynta amortization and interest, as well as working-capital movements, notably a $92.0 million increase in accrued rebates, returns and discounts. Investing cash outflow was $22.6 million, including $18.9 million paid for the Nucynta asset acquisition; financing cash outflow was $83.5 million, including $98.3 million of minimum royalty payments. The operating cash flow figure therefore should not be read as a simple indicator of recurring cash generation.
Material changes versus prior period
- Nucynta commercialization drove most of the revenue increase: nine-month net revenue rose to $207.0 million from $17.7 million.
- Nine-month net loss narrowed to $48.2 million from $57.5 million, while Q3 net loss increased to $16.5 million from $13.3 million. Q3 included $5.9 million of interest expense, primarily tied to the Nucynta minimum-royalty obligation; there was no interest expense in the comparable 2017 quarter.
- Nine-month selling, general and administrative expense increased $28.6 million, mainly from higher personnel, sales and marketing, regulatory, professional-services and insurance costs associated with commercial operations and Nucynta.
- The company adopted ASC 606 in January 2018; management reported no material impact. Prior periods were not restated.
Outlook, significant developments and risks
Management expects continued losses in the near term and significant commercialization, manufacturing, distribution, reimbursement, regulatory and development spending. It believes cash on hand and anticipated product cash inflows can fund operations, debt service and capital expenditures for the foreseeable future, but cautions that actual requirements may differ and additional financing may be needed.
Subsequent Nucynta agreement change: In November 2018, the company amended its Assertio agreement. From January 1, 2019, the $135 million guaranteed minimum annual royalties are eliminated and royalties become sales-contingent under a tiered structure. Additional royalties of up to 4.9% may apply in specified sales ranges. Assertio may terminate if sales fall below specified thresholds; the company cannot terminate before December 31, 2021, and certain later termination may require a $5 million fee. The company also issued Assertio a warrant for 1,041,667 shares at $19.20 per share, expiring in November 2022.
Debt covenant update: A November 2018 SVB agreement changed the minimum liquidity-ratio covenant from 2.0:1 to 1.5:1 and otherwise did not change borrowings, interest rates or repayment terms.
Legal and operating risks: The filing describes ongoing patent disputes involving Purdue over Xtampza and Nucynta, Teva litigation concerning a proposed generic Xtampza product, and multiple opioid-marketing and distribution lawsuits and government inquiries. The company states it cannot estimate the likelihood or range of potential losses in these matters. Other notable risks include controlled-substance regulation and supply quotas, dependence on limited suppliers and wholesalers, reimbursement and market acceptance, product liability, and opioid-related regulatory and reputational pressures.
There is no specific numerical revenue or earnings guidance in the filing. The company reported effective disclosure controls as of September 30, 2018. It expected to cease being an emerging growth company at year-end 2018, increasing future reporting and compliance requirements.
Investor verification checklist
- Track Nucynta and Xtampza sales, net pricing, rebates and returns, particularly the large accrued rebate and discount balance.
- Assess cash conversion and liquidity, separating noncash amortization and interest from working-capital effects and royalty cash payments.
- Review the economics and termination provisions of the November 2018 Assertio amendment, including sales-based royalties, supplemental royalties and the warrant dilution.
- Monitor the Purdue, Teva and opioid-related proceedings, as potential losses were not estimable in the filing.
- Confirm compliance with the revised SVB liquidity covenant and the timing and impact of lease accounting adoption in 2019.