Collegium Pharmaceutical, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 8, 2019. Unaudited results are compared with Q1 2018 unless otherwise noted. Amounts are in millions except per-share data.
Business context
Collegium commercializes Xtampza ER, an abuse-deterrent extended-release oxycodone product, and the Nucynta ER and IR products under a U.S. commercialization agreement with Assertio. Its results depend substantially on product sales, opioid-market conditions, reimbursement, regulatory requirements, and third-party manufacturing and distribution.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net product revenue | $74.5 | $63.7 |
| Cost of product revenue | $49.2 | $43.1 |
| Gross profit and gross margin | $25.4; 34.0% | $20.6; 32.4% |
| Research and development | $3.0 | $2.3 |
| Selling, general and administrative | $32.4 | $31.6 |
| Operating loss and operating margin | $(10.0); (13.4%) | $(13.2); (20.7%) |
| Net loss | $(9.7) | $(18.7) |
| Loss per share, basic and diluted | $(0.29) | $(0.57) |
| Operating cash flow | $(8.6) | $29.7 |
| Investing cash flow | $(3.3) | $(19.1) |
| Financing cash flow | $0.2 | $(0.4) |
- Revenue grew 16.9%. Xtampza ER revenue was $25.1 million, up from $15.8 million; Nucynta revenue was $49.4 million, up from $48.0 million. Management attributed Xtampza growth to higher sales volume and Nucynta growth to higher price, partly offset by lower volume.
- Gross margin improved to 34.0%. Cost of product revenue increased partly because Nucynta royalties were recognized as incurred under the amended agreement, rather than through the prior-period accounting treatment.
- Interest expense fell to $0.2 million from $5.7 million, chiefly because the 2018 amount included non-cash interest associated with Nucynta minimum royalties that were later eliminated. Interest income rose to $0.5 million.
- Cash and cash equivalents were $134.9 million at March 31, down $11.7 million from year-end. Current assets were $233.8 million and current liabilities $188.9 million. The balance sheet included $152.3 million of accrued rebates, returns and discounts.
- Term-loan principal was $11.5 million, including $2.5 million current and $9.0 million noncurrent. The loan matures in December 2022 and is subject to a minimum liquidity ratio covenant of 1.5:1.0.
- The company reported a non-GAAP adjusted loss of $1.7 million versus $11.6 million. This measure excludes specified items, including stock compensation and Nucynta-related amortization; it is not a GAAP substitute.
Material changes and notable items
- Operating cash flow changed from $29.7 million provided to $8.6 million used. Management cited working-capital changes and the changed Nucynta royalty arrangement; royalty payments are now conditional on sales and classified as operating cash flows, unlike guaranteed minimum payments in 2018.
- Investing cash outflow declined year over year because Q1 2018 included an $18.8 million upfront Nucynta payment. Q1 2019 included $3.3 million of property and equipment purchases, primarily for a dedicated manufacturing suite.
- The November 2018 Nucynta agreement amendment removed guaranteed minimum royalties for 2019–2021 and replaced them with sales-based royalties. Assertio may terminate the agreement if sales fall below specified thresholds; Collegium cannot terminate before December 31, 2021. A warrant for 1,041,667 shares at $19.20 was issued to Assertio.
- Adoption of lease accounting in January 2019 added operating lease assets of $9.8 million and liabilities of $10.6 million, primarily related to facilities and an embedded manufacturing-space lease.
Outlook, risks and contingencies
- Management expects continued commercialization spending and continued net losses in the near term. It believes existing cash and expected product cash inflows will fund operating expenses, debt service and capital expenditures for the foreseeable future under its current plan; this is a forward-looking estimate, not a guarantee. No specific revenue or earnings guidance is provided.
- Key risks include whether the company can grow product sales, maintain reimbursement and market access, meet opioid-related regulatory and post-marketing obligations, obtain adequate controlled-substance supplies, and rely on contract manufacturers and a concentrated wholesale-distributor base. Three distributors accounted for 34%, 31% and 30% of product shipments, respectively.
- Patent disputes with Purdue concerning Xtampza ER continued; the company said it could not assess the likelihood of an unfavorable outcome or estimate potential loss. A Purdue suit concerning Nucynta was stayed pending a motion on patent exhaustion. Teva litigation over Xtampza-related patents was ongoing.
- Opioid-related lawsuits and investigations remain a material uncertainty. Several MDL cases no longer named Collegium after amended complaints, but the company remained a defendant in the City of Paterson case and in other state and local actions; it was also cooperating with investigations in Washington, New Hampshire and Massachusetts. Potential losses were not estimable from the filing.
Important facts for investors to verify
- Whether Xtampza ER growth and Nucynta pricing can sustain revenue while accounting for royalties, rebates and discounts.
- Cash burn, working-capital movements, the timing of debt repayments, and ongoing compliance with the 1.5:1.0 liquidity covenant.
- Actual Nucynta royalty expense and sales performance against the agreement’s termination thresholds.
- Developments in Purdue, Teva and opioid-related litigation and investigations, for which potential losses were not quantified.
- Manufacturing capacity, controlled-substance supply, distributor concentration, and the cost and completion of the dedicated manufacturing suite.