Collegium Pharmaceutical, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results and subsequent events through March 7, 2018. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
Collegium is a specialty pharmaceutical company focused on pain management. Its principal marketed product in 2017 was Xtampza ER, an abuse-deterrent extended-release oxycodone product launched in June 2016. In December 2017, Collegium agreed to commercialize Depomed’s Nucynta ER and IR products; the transaction closed January 9, 2018, with commercial promotion beginning in February 2018. Collegium also has early-stage abuse-deterrent product candidates, including hydrocodone and oxymorphone.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net product revenue | $28.5 million | $1.7 million |
| Cost of product revenue | $2.6 million | $0.2 million |
| Research and development | $8.6 million | $14.9 million |
| Selling, general and administrative | $92.8 million | $80.6 million |
| Operating loss | $75.4 million | $94.1 million |
| Net loss | $74.9 million | $94.2 million |
| Net loss per share | $2.47 | $3.88 |
| Cash used in operating activities | $67.0 million | $75.1 million |
Product gross margin, calculated from reported revenue less cost of product revenue, was approximately 90.9% in 2017; interpret this cautiously because revenue recognition changed during the year and the company was at an early stage of commercialization. Fourth-quarter 2017 revenue was $10.8 million and net loss was $17.4 million, compared with revenue of $1.3 million and net loss of $27.6 million in fourth-quarter 2016.
At December 31, 2017, cash and cash equivalents were $118.7 million, working capital was $102.0 million, total assets were $135.6 million, and shareholders’ equity was $104.1 million. The balance sheet showed $1.5 million of current term-loan debt and no long-term term-loan balance. In January 2018, Collegium replaced its prior facility with an $11.5 million term loan, bearing interest at 0.75 percentage points above prime and due in December 2022; the facility requires a minimum 2.0-to-1.0 liquidity ratio. The company also arranged a $33.75 million standby letter of credit in connection with the Nucynta transaction.
Cash declined by $34.5 million during 2017. Financing provided $33.5 million, principally from $34.3 million net proceeds under an at-the-market stock offering; the company sold 3.13 million shares at an average gross price of $11.36. Management said year-end cash, together with expected product cash inflows, should fund operating expenses, debt service and capital expenditures into 2020, but emphasized uncertainty and possible additional financing needs.
Material changes and unusual items
- Revenue rose by $26.8 million year over year, reflecting increased Xtampza sales. The company attributed $18.6 million to increased sold-through units and $3.8 million to changing to sell-in accounting. It also recorded a one-time $4.4 million revenue increase in third-quarter 2017 for prior-period shipments as a result of that change.
- Research and development expense fell by $6.3 million, mainly because certain clinical trials were completed and launch-related costs declined. SG&A rose by $12.2 million, including higher personnel and litigation costs.
- Collegium recorded a $1.8 million impairment of the Onsolis license after deciding to terminate the agreement; its rights were to revert to BDSI in March 2018.
- Revenue deductions and allowances accrued at year-end were $15.8 million. Estimates of rebates, returns and discounts affect reported net revenue.
- The Nucynta agreement entails substantial minimum payments: a $10 million non-refundable license fee and $6.2 million for transferred inventory at closing, followed by minimum royalties of $135 million annually through 2021, subject to agreement terms. Additional sales-based royalties apply. This creates a significant cash-flow commitment relative to Collegium’s 2017 revenue.
Outlook, risks and contingencies
Management expected continued losses and higher commercialization spending while expanding sales, marketing, regulatory and development activities. It provided no specific revenue or earnings guidance. The stated cash runway into 2020 depends on expected Xtampza and Nucynta cash inflows and may not be achieved.
- Commercial and reimbursement risk: Revenue depends on market acceptance, pricing, payer coverage, reimbursement, and the ability to build sales. Three wholesale distributors accounted for 39%, 29% and 23% of 2017 revenue, respectively.
- Nucynta execution and supply: The minimum royalty obligation applies even if sales are weak, subject to contract provisions. Depomed reported supply delays for some Nucynta ER strengths following Hurricanes Irma and Maria; supply remains a risk.
- Litigation: Purdue’s consolidated Xtampza patent suits remained pending; the company could not estimate the likelihood or amount of potential loss. Purdue also sued Collegium over Nucynta in February 2018. Collegium sued Teva over its proposed generic Xtampza; the litigation invokes a 30-month stay of FDA approval of Teva’s ANDA. Outcomes and potential financial effects were not estimable in the filing.
- Regulatory and opioid-policy exposure: Products contain Schedule II controlled substances and are subject to DEA quotas, security and reporting rules, as well as FDA post-marketing requirements and opioid REMS. New prescription limits, enforcement actions or changes in abuse-deterrent labeling or policy could affect demand and commercialization.
- Manufacturing and development: Xtampza relies on a single contract manufacturer and a single active-ingredient supplier, although alternative sources were identified. Product candidates face clinical, regulatory, manufacturing and intellectual-property uncertainty.
- Other contingencies: Collegium received opioid-related subpoenas or civil investigative demands from Washington, New Hampshire and Massachusetts and said it was cooperating. It reported a $1.4 million gross balance of unrecognized tax benefits, including items related to an IRS examination and research-credit documentation.
Most important facts for investors to verify
- Whether Xtampza sales growth continues, and how much reported revenue reflects end-market demand versus the sell-in accounting change and revenue catch-up.
- Actual Nucynta sales, product availability, gross profit and cash payments under the minimum royalty and other royalty provisions.
- Cash burn, liquidity covenant compliance, and whether the company’s cash-runway estimate into 2020 remains achievable.
- Developments and potential financial exposure in the Purdue and Teva patent cases and the opioid-related investigations.
- Distributor concentration, payer access, rebate and return estimates, and the reliability of the single-source manufacturing and API supply chain.