Collegium Pharmaceutical, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited consolidated financial statements; amounts below are in millions of dollars except per-share data. Collegium commercializes Xtampza ER and, beginning January 9, 2018, Nucynta ER and IR in the United States.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net product revenue | $63.7 | $2.2 |
| Cost of product revenue | $43.1 | $0.4 |
| Gross profit / reported gross margin | $20.6 / 32.4% | $1.8 / 82.9% |
| Research and development | $2.3 | $2.1 |
| Selling, general and administrative | $31.6 | $22.8 |
| Operating loss | $(13.2) | $(23.2) |
| Interest expense | $5.7 | — |
| Net loss / loss per share | $(18.7) / $(0.57) | $(23.1) / $(0.79) |
| Cash from (used in) operating activities | $29.7 | $(23.7) |
- Revenue comprised $48.0 million from Nucynta and $15.8 million from Xtampza. Nucynta revenue included $27.2 million from IR and $20.7 million from ER. Xtampza revenue increased $13.6 million year over year, primarily on higher sales volume.
- Reported gross margin was substantially affected by $29.5 million of Nucynta intangible-asset amortization included in cost of product revenue. The filing reports no separate adjusted or pre-amortization margin measure.
- Cash and cash equivalents were $128.2 million at March 31, versus $118.7 million at December 31, 2017; restricted cash was an additional $0.7 million. Current assets were $207.7 million and current liabilities $250.2 million, a $42.5 million working-capital deficit.
- Operating cash flow was positive despite the net loss, supported by non-cash amortization and interest and working-capital movements. Accounts receivable increased $56.1 million and accrued rebates, returns and discounts increased $54.0 million during the quarter.
- Investing cash outflow was $19.1 million, primarily the $18.8 million upfront cash payment for the Nucynta asset acquisition. Financing cash outflow was $0.4 million.
- At quarter-end, the company had $11.5 million of term-loan principal and $474.8 million carrying value of Nucynta minimum-royalty obligations, of which $131.1 million was current. Remaining undiscounted minimum royalty payments were $524.0 million through 2021.
Material changes and business developments
- The January 2018 Nucynta commercialization transaction materially changed the company’s scale and financial profile: it added $48.0 million of quarterly revenue, a large intangible asset and substantial royalty obligations. Commercial promotion began in February.
- Total revenue rose $61.6 million year over year, while net loss narrowed by $4.4 million. Higher selling and administrative expense reflected staffing and compensation, Nucynta commercialization, regulatory fees, sales training, insurance and professional fees.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method, with no material effect at adoption. Because prior periods were not restated, reported periods use different accounting guidance; the company estimated Q1 2017 revenue would have been $1.2 million higher under ASC 606.
- The company recorded $5.5 million of non-cash interest expense related to discount accretion on Nucynta minimum royalties; the remaining discount is recognized as interest over the obligation period.
Outlook, risks and contingencies
- Management expects continued losses and significant commercialization and development spending. It believes cash, together with expected product-sale inflows, will fund operating expenses, debt service and capital needs into 2020; this estimate depends on assumptions and may prove incorrect. No numerical sales or earnings guidance is provided.
- Nucynta requires minimum royalties of $135 million annually for the first four years, with 2018 prorated, regardless of commercialization success subject to specified agreement terms. Additional royalties apply above sales thresholds. Depomed may have termination rights if sales thresholds are not met. The company also disclosed prior Nucynta supply delays following Hurricanes Irma and Maria.
- The $11.5 million term loan bears interest at 0.75% above prime, requires a minimum 2.0-to-1.0 liquidity ratio, and matures in December 2022. The refinancing date was extended to August 1, 2018. Scheduled principal payments begin in 2019, subject to an EBITDA-based provision.
- Material litigation includes Purdue patent suits involving Xtampza and Nucynta, the company’s patent action against Teva concerning a proposed generic Xtampza product, and opioid-related lawsuits and government investigations. The company said it could not assess the likelihood of unfavorable outcomes or estimate potential losses; claimed damages were not quantified. The Teva action triggers a 30-month stay of FDA approval of Teva’s ANDA while litigation proceeds.
- Three wholesale distributors represented 32%, 25% and 24% of product shipments, respectively. The company identifies customer concentration, reimbursement and pricing pressure, opioid regulation and public scrutiny, generic competition, patent outcomes, product supply, and continued access to financing as significant risks.
- A new 10-year headquarters lease was signed in March, with initial annual base rent of $1.2 million; the lease term begins after tenant improvements are substantially complete. Management had not determined the commencement date.
- Management reported disclosure controls were effective as of March 31, 2018. No material market-risk changes or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether Nucynta sales and gross profit can support the substantial fixed minimum royalty commitments, and the agreement’s sales-based termination and supply-protection provisions.
- The composition and collectability of the sharp increase in receivables, and the adequacy of rebate, return and discount accrual estimates.
- Cash runway assumptions and compliance with the term-loan liquidity covenant, including the August 1, 2018 refinancing-date provision.
- Developments and potential financial exposure in Purdue, Teva and opioid-related litigation and investigations, for which loss estimates were not available.
- Whether supply, reimbursement, customer concentration and regulatory developments affect product availability, demand and net pricing.