Business context and reporting period
Collegium Pharmaceutical, Inc. filed this Form 10-K for the year ended December 31, 2019, with unaudited fourth-quarter results. The specialty pharmaceutical company sells Xtampza ER, an abuse-deterrent extended-release oxycodone product, and Nucynta ER and IR, tapentadol products. The Nucynta products were commercialized under an agreement with Assertio during 2019; Collegium acquired related assets on February 13, 2020, after the reporting period.
Financial performance and liquidity
Amounts are in millions of dollars unless otherwise noted. Annual figures are GAAP; Q4 figures are unaudited.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net product revenue | $296.7 | $280.4 | +5.8% |
| Cost of product revenue | $193.7 | $165.7 | +$28.0 |
| Gross profit / approximate gross margin | $103.0 / 34.7% | $114.7 / 40.9% | Lower |
| Research and development | $10.3 | $8.7 | +$1.6 |
| Selling, general and administrative | $116.4 | $126.8 | -$10.4 |
| Operating loss | -$23.7 | -$20.7 | Loss widened |
| Net loss | -$22.7 | -$39.1 | Loss narrowed |
| Net loss per diluted share | -$0.68 | -$1.19 | Improved |
| Cash provided by operating activities | $27.8 | $169.4 | -$141.6 |
Xtampza ER revenue rose to $105.0 million from $69.4 million, reflecting higher sales volume. Nucynta revenue declined to $191.7 million from $211.0 million as lower volume more than offset price increases. The approximate gross margin is calculated from net revenue less cost of product revenue.
For Q4 2019, revenue was $74.2 million versus $73.4 million in Q4 2018. Collegium recorded an operating loss of $2.4 million and net loss of $2.2 million, compared with operating income of $11.0 million and net income of $9.1 million in Q4 2018. Approximate gross margin was 33.8% in Q4 2019 versus 59.5% in Q4 2018.
At year-end, cash and cash equivalents were $170.0 million, working capital was $54.0 million, total assets were $306.3 million, and shareholders’ equity was $87.4 million. Term-loan debt was $11.5 million, with $10.1 million of operating lease liabilities. Operating cash flow remained positive, but fell substantially; management attributed the comparison principally to changes in Nucynta royalty accounting and cash-flow classification, as well as working-capital movements. The filing states cash and expected product cash inflows were expected to fund operations, debt service, and capital expenditures for the foreseeable future under the then-current plan.
Material changes, outlook and risks
- In November 2018, the Nucynta agreement’s guaranteed minimum royalties were eliminated and royalties became conditional on sales. In 2019, Nucynta royalties were recorded as incurred in cost of product revenue; 2018 included substantial amortization and non-cash interest associated with the original minimum-payment structure. This change also makes cash-flow comparisons less directly comparable.
- Annual SG&A declined, mainly due to lower sales, marketing and consulting costs after one-time Nucynta commercialization expenses in 2018, and lower compensation costs. R&D increased modestly. Management expected significant ongoing commercialization spending and did not provide specific numerical guidance.
- On February 13, 2020, Collegium completed the Nucynta asset acquisition for $375.0 million, subject to adjustments. It was financed in part by a $200.0 million secured term loan and $143.75 million of 2.625% convertible senior notes due 2026; the prior SVB loan was repaid in January 2020. The new term loan bears interest at LIBOR, subject to a 2.0% floor, plus 7.5%, and includes a $200.0 million annual net-sales covenant and other restrictive covenants. These transactions occurred after year-end and materially changed the company’s financing and debt profile.
- Key risks include opioid-related litigation and government investigations, patent disputes with Purdue and Teva, potential generic competition, regulatory and reimbursement changes, and dependence on a concentrated customer base. Three customers each represented at least 10% of 2019 revenue and together accounted for 95%. The company also depends on single suppliers for the active ingredients in its products and contract manufacturers; controlled-substance quotas may constrain supply.
- Collegium reported that it could not assess the likelihood or estimate the potential loss from the cited patent and opioid-related litigation. Several matters were stayed or in early stages; the company said it intended to defend them. It also disclosed post-marketing study requirements and the possibility of changes to opioid labeling or regulation.
- The company reported net losses in each year since inception and an accumulated deficit of $359.9 million at year-end. It had approximately $292.3 million of federal NOL carryforwards and $222.6 million of state NOL carryforwards, but maintained a full valuation allowance; some tax attributes may be limited under Section 382.
- The independent auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2019.
Most important facts for investors to verify
- Whether Xtampza growth can offset declining Nucynta sales and the lower reported gross margin.
- How the completed Nucynta acquisition performs relative to its $375.0 million purchase price, royalties, financing costs and debt covenants.
- Customer concentration, wholesaler purchasing patterns, and the adequacy and continuity of active-ingredient and finished-product supply.
- Developments and potential exposure in Purdue, Teva and opioid-related litigation and state investigations; the filing does not provide a clear estimate of potential losses.
- Whether opioid regulation, payer coverage, pricing pressure, or generic entry affects demand, product labels or net revenue.