Collegium Pharmaceutical, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Collegium is a specialty pharmaceutical company focused on pain management. Its marketed products were Xtampza ER, an abuse-deterrent extended-release oxycodone product, and Nucynta ER and Nucynta IR, tapentadol products commercialized under a sublicense from Assertio. Collegium began selling Nucynta in January 2018 and promoting it in February 2018.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net product revenue | $280.4 | $28.5 |
| Cost of product revenue | $165.7 | $2.6 |
| Gross profit and margin | $114.7; 40.9% | $25.9; 91.0% |
| Research and development | $8.7 | $8.6 |
| Selling, general and administrative | $126.8 | $92.8 |
| Operating income (loss) | $(20.7) | $(75.4) |
| Net income (loss) | $(39.1) | $(74.9) |
| Net loss per share | $(1.19) | $(2.47) |
| Cash and cash equivalents at year-end | $146.6 | $118.7 |
| Working capital | $48.4 | $102.0 |
| Term loan payable at year-end | $11.5 | $1.5 |
FY 2018 revenue comprised $69.4 million from Xtampza ER and $211.0 million from Nucynta. Xtampza revenue rose $40.9 million year over year, primarily on higher sales volume. Annual gross profit includes $109.8 million of Nucynta intangible-asset amortization. Annual operating margin was approximately negative 7.4%; net margin was approximately negative 14.0%.
Fourth-quarter 2018 revenue was $73.4 million, versus $10.8 million in Q4 2017. Collegium reported Q4 operating income of $11.0 million and net income of $9.1 million, compared with Q4 2017 operating and net losses of $17.6 million and $17.4 million. Q4 2018 gross margin was approximately 59.5%, operating margin 15.0%, and net margin 12.4%. The quarter benefited from lower Nucynta amortization and noncash interest after the royalty-agreement amendment; it should not be taken alone as evidence of recurring profitability.
Cash from operations was $169.4 million in 2018, compared with $67.0 million used in 2017. Management attributed the increase substantially to noncash Nucynta amortization and interest adjustments and working-capital movements, including a $106.6 million increase in accrued rebates, returns and discounts, partly offset by a $68.2 million increase in accounts receivable. Investing activities used $24.4 million, including $18.9 million paid at Nucynta closing and $5.5 million of property and equipment purchases. Financing activities used $117.2 million, including $132.0 million of 2018 minimum royalty payments. Cash increased by $27.8 million during the year.
Current assets were $237.5 million and current liabilities $189.1 million at year-end. Accrued rebates, returns and discounts were $144.8 million. The $11.5 million SVB term loan bears interest at 0.75% above prime; principal payments were scheduled to begin in July 2019, subject to an EBITDA-based deferral provision, with maturity in December 2022. The amended loan agreement requires a minimum liquidity ratio of 1.5 to 1.0.
Material changes versus prior periods
- Revenue increased by $251.9 million, primarily because Collegium commercialized Nucynta for most of 2018, alongside growth in Xtampza sales.
- Cost of product revenue rose by $163.1 million, principally due to Nucynta intangible amortization and higher sales volume. SG&A rose by $34.0 million, including higher personnel, sales and marketing, regulatory, professional-fee and insurance costs.
- Net loss narrowed by $35.7 million year over year, but the company remained unprofitable for the full year and reported an accumulated deficit of $337.2 million.
- In November 2018, the Nucynta agreement amendment eliminated guaranteed minimum annual royalties after 2018 in favor of sales-conditional royalties. Collegium paid $132.0 million for 2018; future royalties are expected to be operating cash outflows and cost of product revenue. The amendment also reduced the Nucynta intangible asset and its related obligation.
- Collegium adopted ASC 606 in 2018; the filing says adoption had no material financial-statement impact. In 2017, the company had changed to sell-in revenue recognition and recorded a one-time $4.4 million revenue increase.
Outlook, risks and unusual items
- Management expects substantial commercialization expenses to continue and anticipates net losses in the near term. It believes year-end cash and expected product cash inflows can fund operating expenses, debt service and capital expenditures for the foreseeable future; no specific revenue, earnings or product-sales guidance is provided.
- Nucynta royalties are conditional on sales beginning in 2019, but the contract includes high royalty rates and sales-based termination provisions. The filing estimates Nucynta intangible amortization of about $14.8 million annually in 2019–2021.
- Customer concentration is significant: three customers represented 36%, 31% and 27% of 2018 revenue, and 54%, 26% and 16% of year-end accounts receivable. Collegium relies on limited suppliers and contract manufacturers for key product inputs and supply.
- Patent litigation with Purdue concerning Xtampza remained ongoing; Purdue also sued over Nucynta, and a company motion seeking dismissal was under advisement. Collegium sued Teva over its proposed generic Xtampza; litigation provides a 30-month stay on FDA approval of Teva’s ANDA. The company said it could not estimate potential losses for these cases.
- Collegium faced opioid-related lawsuits and state investigative demands. It disputed the allegations, was cooperating with investigations in Washington, New Hampshire and Massachusetts, and could not estimate potential losses. It was dismissed without prejudice from one Arkansas case in January 2019.
- Other material risks include opioid prescribing restrictions and regulatory changes, reimbursement and pricing pressure, generic competition, DEA quotas and controlled-substance compliance, product-liability exposure, and the possibility that abuse-deterrent claims or product labels change.
- Auditors gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2018. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Nucynta and Xtampza sales volumes and net revenue growth support the company’s cost base, given continued annual losses.
- The cash-flow composition and timing of rebate, return and discount payments, and the collectability and concentration of accounts receivable.
- The actual Nucynta royalty burden under the amended agreement, including sales thresholds, termination rights and post-2021 terms.
- Developments and potential financial or commercial effects of the Purdue, Teva and opioid-related legal matters.
- Supply continuity, DEA quota availability, and progress and cost of the dedicated Xtampza manufacturing suite.
- Compliance with the SVB liquidity covenant and the company’s funding needs if operating cash generation weakens.