Collegium Pharmaceutical, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited figures below are in USD millions except per-share data.
Business context and reporting period
Collegium commercializes Xtampza ER, an abuse-deterrent oxycodone product, and began selling Nucynta ER and IR under a commercialization agreement with Depomed on January 9, 2018. Nucynta promotion began in February. The addition of Nucynta materially expanded reported revenue, costs, and royalty obligations.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net product revenue | $73.1 | $3.6 | $136.8 | $5.7 |
| Cost of product revenue | $46.8 | $0.6 | $89.9 | $0.9 |
| Gross profit / margin | $26.2 / 35.9% | $3.0 / 83.8% | $46.9 / 34.3% | $4.8 / 83.5% |
| Research and development | $2.2 | $2.2 | $4.5 | $4.3 |
| Selling, general and administrative | $31.3 | $22.1 | $62.9 | $44.9 |
| Operating loss | $(7.3) | $(21.3) | $(20.5) | $(44.4) |
| Net loss | $(13.1) | $(21.1) | $(31.7) | $(44.2) |
| Loss per share, diluted | $(0.40) | $(0.72) | $(0.96) | $(1.50) |
Q2 net revenue comprised Nucynta IR $34.2 million, Nucynta ER $20.8 million, and Xtampza $18.1 million. For the first half, Nucynta IR was $61.4 million, Nucynta ER $41.5 million, and Xtampza $33.9 million.
- Cash flow: First-half operating cash flow was $85.3 million, versus cash used of $41.2 million in 2017. Investing used $19.9 million, including $18.9 million paid for the Nucynta asset acquisition; financing used $50.5 million, including $64.5 million of royalty payments.
- Cash and liquidity: Cash and cash equivalents were $133.7 million at June 30, up from $118.7 million at year-end. Current assets were $216.3 million and current liabilities $264.7 million, implying negative working capital of about $48.4 million.
- Debt and obligations: The balance sheet included an $11.5 million term loan and $429.3 million carrying value of Nucynta minimum royalty obligations, of which $114.8 million was current. Remaining undiscounted minimum royalties were $472.5 million through 2021.
- Other: Accumulated deficit was $329.8 million. No income tax expense or benefit was recorded; the company maintained a full valuation allowance on deferred tax assets.
Material changes versus the prior comparable period
- Revenue increased substantially following the Nucynta launch; Xtampza revenue also grew, which management attributed primarily to higher sales volume and demand.
- Reported gross margin fell sharply because Q2 and first-half cost of product revenue included Nucynta intangible-asset amortization of $32.4 million and $61.9 million, respectively. The acquired intangible asset is amortized over an estimated four-year useful life.
- SG&A rose by $9.2 million in Q2 and $18.0 million in the first half, driven by expanded commercial activity, staffing and compensation, professional fees, regulatory costs, and other expenses.
- Interest expense was $6.2 million in Q2 and $11.9 million in the first half, primarily reflecting non-cash accretion on the Nucynta minimum royalty obligation.
- Management’s non-GAAP adjusted loss was $4.9 million for Q2 and $16.6 million for the first half, compared with $19.2 million and $40.4 million, respectively, in 2017. This measure excludes specified costs, including Nucynta amortization and interest, and subtracts minimum royalties due; it is not a substitute for GAAP results.
Outlook, commentary, risks and unusual items
- Management expected cash on hand and product-commercialization inflows to fund operating expenses, debt service, and capital spending for the foreseeable future, but expected continued losses and significant commercialization expenses. No numerical revenue or earnings guidance was provided.
- The Nucynta agreement requires minimum annual royalties of $135 million through 2021, with 2018 prorated. These payments are due irrespective of the level of commercial success, subject to agreement terms. Depomed may also have termination rights if specified sales thresholds are not met.
- The term-loan disclosure states the company was required to refinance the $11.5 million New Term Loan by August 31, 2018. The loan also requires a minimum 2.0-to-1.0 liquidity ratio. Investors should check subsequent filings for the refinancing outcome and covenant status.
- Material litigation includes Purdue patent suits concerning Xtampza and Nucynta, a Teva challenge to Xtampza patents, and opioid marketing and distribution lawsuits and government investigations. The company said it could not estimate the likelihood or range of loss in these matters.
- Key risks include opioid-related regulation, litigation and public scrutiny; generic competition and patent outcomes; reimbursement and market acceptance; reliance on third-party manufacturers and a single active-ingredient supplier; and concentration among three wholesale distributors, which accounted for 37%, 32%, and 25% of product shipments in the first half.
- The company entered a ten-year headquarters lease with initial annual base rent of $1.2 million and expected possession in Q3 2018. It also reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the term loan was refinanced by the disclosed August 31, 2018 deadline and whether the liquidity covenant was satisfied.
- Whether Nucynta sales and gross profit can support the substantial minimum royalty commitments, and how supply availability affects sales.
- Subsequent developments, potential exposure, and legal costs in the Purdue, Teva, and opioid-related proceedings.
- The sustainability and quality of operating cash flow, given material working-capital movements and accrued rebates, returns, and discounts.
- Revenue growth, distributor concentration, and any later changes to product reimbursement, prescribing, or regulatory conditions.