Collegium Pharmaceuticals (NASDAQ:COLL) has been a stock which intrigued me for quite a while, although I lack conviction on the thesis and a cautious bullish thesis has not played out exactly as planned yet.
In February of this year, when COVID-19 was not yet in the spotlights, I concluded that 2020 could become a great year. My optimism was based on greater Xtampza patient population, a decent outlook for the year and what appears to be a savvy deal, as I concluded to stick to a long position, as I am reiterating that stance now, albeit with some reservations.
The Past Thesis
I have been watching Collegium closely since the company obtained FDA approval for Xtampza in 2016, marking the start of a two decade long period in which the drug can be commercialized. I was compelled to the pain release mechanism of the drug, as Collegium claims that it cannot be manipulated the same way which happens with other drugs, hence overdosing becomes impossible or at least very hard to do. This is very important as the other solution, that of administrating multiple doses a day is not very practical. The so-called extended release pain mechanism market was dominated by OxyContin which of course has come under a great deal of scrutiny.
Debut sales of Xtampza came in at just $1.7 million in 2016, but that is not very indicative of course. Revenues rose to $24 million in 2017 and $69.4 million in 2018, with the run rate coming in around $74 million by year's end. This is still somewhat disappointing given that the target market is so large and the product is supposed to be superior, certainly with FDA labeling approved to promote anti-abuse qualities of the drug.
The thesis changed entirely as the company made a move late 2017 reaching a deal with Depomed to commercialize Nucynta tablets in the US, driven by potential marketing synergies for the pain release market. Sales of Nucynta ran at $200 million at the time, far larger than Xtampza, as Collegium agreed to a ten million upfront payment and minimum royalty payment of $135 million in the four years following closure.
Early 2019 the company guided for Xtampza sales at a midpoint of $100 million and Nucynta sales at $205 million, with the latter down fractionally compared to 2018, as this roadmap allowed for break-even results. Despite all these developments the company continued to be a small cap firm shares have basically traded back and forth in a $10-$25 trading range since 2016, with shares doubling from $10 to the low twenties late 2019 on the back of some existing news. This was the news that Xtampza would become the next extended-release mechanism for another 35 million patients from January 2020 onward.
When releasing third quarter results of 2019 in the autumn, the company guided already for Xtampza sales of $155 million in 2020 (up roughly 50%) and believed it could limit the fall in Nucynta sales to $175 million, as this created a roadmap for small real earnings in 2020. With optimism thriving, investors had to digest another big move in February 2020 as the company acquired the Nucynta rights from Assertio for $375 million in cash, yet that eliminated (mandatory) royalty payments as well. Shares moved 25% higher to $25 on the back of this deal, representing a $170 million increase in the value of the firm on the back of the deal, marking a clear vote of confidence.
While little information was provided at the time, I noted that net cash of $150 million would result in pro-forma net debt position of around $200 million, yet with an incremental $100 million in EBITDA seen and the company already turning profitable, that is no major issue. The net debt and 33 million shares trading at $25 in February supported a billion enterprise value, yet that was on the back of $100 million in EBITDA from Nucynta and $150 million in growing Xtampza sales.
Base on those observations I concluded to hold a long position, but decided to not actively add on that position.
What Happened?
Between February and today shares have seen some violent moves, yet have fallen to $17 at this moment of writing. Late February the company reported its 2019 results, yet that was basically reiterating the initial sales guidance provided, other than that adjusted earnings were seen at $125-$140 million for the year.
The real interesting numbers were released in May as the first quarter results show greater insight in the results of the acquisition of the rights of Nucynta. Xtampza sales came in at $31.5 million, up 25% on an annual basis and 15% on a sequential basis following wider coverage as Nucynta reported small declines to $45.0 million in quarterly sales. For the year the company cut the full year Xtampza sales outlook by $20 million to $135 million and maintained Nucynta sales at $175 million. A $10 million reduction in the operating expense base to $125 million resulted in a flattish adjusted earnings guidance at a midpoint of $130 million, as net debt had fallen to $170 million already.
The net impact on the bottom line is that royalty payments come down, but this is exchanged for by amortization charges on the goodwill paid in connection to the transaction. Nonetheless, operating earnings of $5 million reveal real road to profits, although still eaten by interest expenses at this point in time, although this will rapidly come down following deleveraging.
Adjusted earnings came in at $31.5 million, largely adjusted for by an impairment charge (which is fair) and royalty adjustment. After backing out stock-based compensation expenses of $5 million, realistic earnings of $26 million work down to earnings of $0.75 per share with 35 million shares outstanding. This annualized works down to $3 per share, translating into very low earnings multiples.
What Now?
Trading at $17 and change with leverage down a lot and earnings running at $3 per share on an adjusted basis at this point in time, the situation sounds almost too good to be true. While of course there are concerns related to the industry at large and claims, I am somewhat cautious as there are some doubts aired on this platform as well on the superiority of Xtampza vs. competing products. This mostly seems to stem from the ways studies have been set up, as this thesis has attracted short-sellers as well.
Not having expert knowledge to carefully study the reports, I find it hard to verify this, yet it is concerning nonetheless and claims like this always make me doubt my conviction on the shares, or at least prevent me from buying shares in size at this point in time, something which I would have done otherwise in this situation. Such earnings power and guidance that net debt will fall to $70 million by year's end is quite comforting, although I would love if management would or could address the concerns related to the studies.
Concluding thought: I am maintaining a current long position and while I would love to add to my position at these levels given the current earnigns power and potential of Xtampza if it really is as good as promised. At the same time, I find it very difficult to add to the position given the uncertainty caused by short-sellers, simply as this could result in a binary negative outcome, as market pricing suggests that certainly investors are taking these concerns seriously.
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