- After years of losses and declining revenues, new management was brought in a year ago.
- Assertio looks almost entirely different than two years ago.
- It is now a cash flow machine, with three recent guidance raises, though with a number of risks.
- The new Assertio only became visible with third quarter 2021 earnings, as prior quarters had massive noise from restructurings.
As some of my readers know, I specialize in turnarounds. Good ones can be hard to find, and in a normal year I only find two to four. Stock prices can really jump when sentiment goes from negative to neutral or neutral to positive. When sentiment goes from negative to positive it can be explosive. I believe that is what is happening with Assertio (NASDAQ:ASRT). Assertio was a stock left for dead after a disastrous acquisition of opioid NUCYNTA in 2015. This acquisition was unwound in 2017. The company today is much smaller, and unrecognizable from just two years ago. However, it is also generating strong cash flow and appears to be growing revenues.
For more background detail please see the last SA article dated March 16, 2021 on Assertio by Edmund Ingham. Much has changed since that article and I have condensed his background plus many updates below.
Assertio, formerly known as DepoMed, is a pharmaceutical company that provides medicines in the areas of pain, inflammation, arthritis and migraine. Its stock traded for over $100 at one point in 2015. Today it trades around $2 due to a disastrous acquisition. In 2015 the company acquired opioid treatment NUCYNTA from Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson, for $1.05 billion. This was after lawsuits had started regarding opioid marketing practices. This also left DepoMed with a huge negative tangible net worth and massive debt. What followed was a series of transactions by DepoMed to unwind the NUCYNTA transaction.
Operating results since 2017 for Assertio fka DepoMed are shown below.
In 2017 DepoMed sold its license for NUCYNTA to Collegium Pharmaceutical (COLL) in exchange for a $10 million upfront payment, a minimum of $135 million in royalties per annum for a period of four years, and a double-digit percentage royalty on net sales exceeding $235 million, plus ongoing double-digit royalties after the expiration of the initial 4-year agreement.
In February of 2021, Assertio sold those remaining cash flows in NUCYNTA for $375 million. It also sold its anticonvulsant medication Gralise to Alvogen for $130 million. These two transactions allowed it to pay off the remaining $162.5 million of its $575 million of senior secured notes issued in 2015, and payoff its $265 million 2021 notes and 2024 notes.
In May, 2020, Assertio acquired Zyla Life Sciences with each outstanding share of Zyla common stock converted into 2.5 shares of Assertio Holdings. This brought in the INDOCIN and SPRIX medications.
But Assertio wasn’t done. Prior management left and in December 2020, CFO Daniel Peisert was promoted to CEO. He completely changed over management. During 2021, Assertio implemented a massive cost restructuring program to eliminate $45 million in expenses. This was on top of two prior large cost reduction programs. It also reduced its staff from 134 to 27, letting go its entire salesforce. Assertio now sells primarily online. The stock jumped over $4 after the plan was announced, from under $1.50. As a result, operating expenses have declined by 72% over the four quarters ending in the third quarter of 2021. This restructuring is now complete and the company is actually adding a few jobs.
Wiping out the salesforce was a very risky move as most pharmas employ large expensive workforces, and Assertio’s drugs are in highly competitive fields. Yet sales appear to be going up. Perhaps doctors are tired of constant sales pitches. Other pharma companies are also starting to back away from large salesforces, though Assertio’s move went well beyond. Assertio’s most recent presentation claims 55% of health system owned physician practices have now banned pharma sales people. Assertio has not stopped promoting their medications they just do it in a different, much less expensive way. The new way is through mail, email, medical portals, ads, telesales and webinars.
On December 15, 2021, the company made two announcements. The first was that it is acquiring rheumatoid arthritis medication Otrexup for $44 million. Revenues are $15.5 million but EBITDA was not disclosed. However, they expect it to be accretive with a gross margin of over 70%. The second announcement was the revenue guidance for the year was raised by $5 million. Keep in mind three quarters were already done so that means the fourth quarter revenue guidance was raised 23%! The stock shot up from $1.36 to $2.30 in the week following the announcement. I believe the most important piece was the guidance raise for reasons I will get into.
The company changed its name to Assertio. It is now almost entirely different than it was two years ago. Manufacturing is outsourced and no R&D is currently being undertaken. Two of the four outside directors are former Abbott senior executives. Another is a former CFO of Barr Pharmaceuticals and the fourth was the former CEO of Corium International.
Here is what Assertio sells today showing revenues by medication.
CAMBIA, Zipsor and SPRIX have been rapidly declining, though the largest line INDOCIN is growing. In fact, I believe this explains why ASRT stock has been trading in the low $1’s until very recently. The market believed it to be a melting ice cube. However, three subsequent guidance raises indicate some of the new marketing efforts are starting to payoff.
INDOCIN is their largest line and is steadily growing despite no patent protection. Assertio is trying to expand its uses. CAMBIA has patent protection until 2023. Recent guidance indicates sales have stabilized. Zipsor is going off patent next quarter and is no longer being promoted. SPRIX is an opioid alternative. Its declining revenues are due to less insurers reimbursing. However, Assertio is optimistic it can reverse the slide as payers realize it is an opioid alternative. In addition to the above, in December, 2021, Assertio acquired Otrexup, a rheumatoid arthritis medication with $15.5 million in annual sales. Assertio believes Otrexup was undermarketed and has a plan to get it prescribed by more physicians. Otrexup came with excess inventory, so sales won’t start getting recognized until February.
Revenue and EBITDA guidance for 2021 (a calendar year) has been revised upward three times in the past five months as shown below.
Management originally guided for $85 to 93 million in revenues at the beginning of the year. On November 15th, this was revised up to $103 million. One month later, on December 15th, 2021 revenues were revised up another $5 million to $108 million. That is a 19% increase for the fourth quarter in just over a month. EBITDA for 2021 was also guided up from $34 to $40 million at the beginning of the year to $48+ million currently. That understates the current run rate. Adjusted EBITDA was $15.8 million in the third quarter indicating it is now over $60 million annualized. The company is not seasonal. At an investor presentation on January 19, 2022, CEO Peisart mentioned that the revenue guidance raise was due to improvements across the board of its product portfolio, especially INDOCIN.
Recent Operating Results
Operating results over the last two quarters and guidance for the fourth quarter of 2021 is shown below.
Note that net income is significantly understated by a large amount of amortization. The adjusted EPS shown above adds back amortization. Operating results in the second quarter were much worse than normal due to the cost cutting program and severance costs.
The third quarter was the first relatively clean quarter showing what Assertio now looks like. It is a cash flow machine. Net income plus amortization was $10.9 million and adjusted EBITDA was $15.8 million. Operating expenses were reduced from $23.0 million in 3Q 2020, the first full quarter after the Zyla merger to $8.7 million in 3Q 2021.
Leverage is moderately high. Debt totaled $75.5 million on September 30, 2021. However, a $4.8 million principal payment was made on November 1, lowering debt to $70.7 million. Cash was $58.7 million on September 30, 2021. Net debt was only $17.8 million on that date. Tangible net worth was negative $82.3 million on September 30, 2021. A lot of the liabilities are unusual things like accrued rebates $43.8 million, and contingent consideration (from acquisitions) $38 million.
1. Back on offense - Now that the balance sheet and operating results have been significantly improved, the company can play offense. They can pay a dividend, buyback shares or acquire existing medications.
2. Otrexup – In December 2021 Assertio announced an acquisition of a rheumatoid arthritis medication called Otrexup for $44 million. Payments are $19 million paid December 15, 2021, $16 million to be paid in May 31, 2022 and $10 million on December 15, 2022. This product has patent protection until 2031. It currently has $15.5 million in annual revenues with a gross margin in the low 70% level. The company has the cash on hand to buy this without incurring debt. This acquisition is expected to be accretive starting in February as there is an inventory overhang that needs to be worked through first.
3. More acquisitions - Assertio is actively looking for more acquisitions. In fact, at the January 19, 2022 Sidoti presentation they mentioned there are more candidates now than in quite a while. They have the balance sheet to do more but will need to refinance their debt first. Management wants sufficient acquisitions to add $50 million in gross profit by 2024. That would be about 50% growth from current gross profit. Existing medications and those they are looking for need to be those whose molecules are well known to physicians so they don’t need a direct sales team.
4. Lower interest expense - Assertio is paying a double digit interest expense rate on its debt, a legacy of its checkered past. Interest expense the first nine months of 2021 cost $7.8 million. Now that they are profitable, they should be able to reduce that expense considerably with a refinance. At a more market rate of interest of 4%, interest expense would decline by 70% and save about $0.18 per share annually. It usually takes two or three quarters to prove sustainable profits to lenders so this should be a second or third quarter of 2022 event.
5. Infant Sepsis - Assertio owns a convertible note from NES Therapeutics which is in clinical trials for a treatment for Infant Sepsis. They expect to file for FDA approval next quarter. If approved, the note would convert to a 12% ownership.
6. Tax loss carryforwards - As of December 31, 2020, Assertio had $126.5 million of deferred tax assets, most of which can be used to offset future profits. The net number on the balance sheet is $22.6 million after valuation allowances that may get reversed if strong profits continue. It will be years before significant income taxes are paid. This also makes acquisitions more affordable as they can usually make more from them than the sellers. It also adds value to Assertio to an acquirer.
7. Lawsuit settlements - In 2021, Assertio settled two of its three major lawsuits. A shareholder lawsuit was settled for $1.2 million with insurance paying $0.8. A lawsuit regarding former product Glumetza, was settled for $7 million, with $3.85 million subject to court approval.
Assertio owned an Opioid called NUCYNTA from 2015 to 2017 then it was sold to Collegium Pharmaceutical. It is party to 200 lawsuits, with another 80 settled or dismissed. NUCYNTA only had a 1-2% market share and Assertio is named in a small subset of Opioid cases, primarily as a footnote. Management has stated it did no marketing of NUCYNTA while owned, which is where the lawsuits were focused. On December 28, 2021 Collegium Pharmaceutical, Inc., the buyer of NUCYNTA from Assertio, announced the execution of a settlement framework to resolve all 27 pending opioid-related lawsuits brought against the company by cities, counties, and other subdivisions in the United States. The settlement framework provides for the company to pay an amount not to exceed $2,750,000. Opioid liability remains a big risk, but the Collegium settlement indicates it appears manageable.
Sales have been declining. However, revenues have been guided significantly higher three times in the past five months. I am not ready to call Assertio a growth company, but things look promising.
The company eliminated its sales force in 2021. As such one would expect sales to decline. However, counterintuitively, management has raised sales guidance three times now in the past five months. The existing medications do not need much explanation to physicians. Assertio makes a big point that doctors are tired of pharma salespeople and prefer their online ordering.
Assertio has a concentration in one product, INDOCIN. It represented 56% of total sales in the first nine months of 2021. This should decline some with the Otrexup acquisition. Future acquisitions should also help. However, INDOCIN is currently their largest grower so it will likely remain a large percentage.
There is little patent protection in the portfolio other than with Otrexup. INDOCIN and SPRIX have had no protection for some time but have a manufacturing difficulty barrier to entry. The CAMBIA patents run out 2023, and Zipsor’s patents next quarter.
Assertio has cut out all R&D. They now hope to grow by acquiring existing approved medications. Most pharmas are at least partially valued on the promise of their R&D pipeline.
CEO Peisert only owns 92,030 shares. At around $2 a share that is not much skin in the game. CFO Schwicktenberg only owns 23,530 shares. It is likely the window to buy shares has not been open much if at all last year with the two legal settlements, huge restructuring, and the recent acquisition. It wouldn’t be open now as we are between quarter end and the earnings report. Most of executive management has come on in the past year.
Assertio is priced like a melting ice cube, but what if sales have stabilized or are even rising? The three recent revenue guidance raises make that a real possibility. Meanwhile, it is a cash flow machine. Net income plus amortization was $10.9 million last quarter, and that was after some non-recurring expenses. The market has not caught on to the massive changes in this company.
Adjusted EPS after adding back amortization was $0.24 last quarter. There is still some noise in that number. This is before adding back another $1.2 million in non-recurring expenses. However, that may be offset by a higher other revenue number than normal last quarter. Even though revenues are expected to increase in the fourth quarter, I’ll go with $0.24 EPS for now. Annualized that is $0.96.
Finding comparables is a bit difficult as many similar companies are much larger, have much higher leverage and have an R&D program.
The comparables shown above are smaller pharmas with low or moderate leverage like Assertio. Unlike Assertio, each has an R&D program of about average size and revenue growth. There is probably significant additional value in their R&D pipeline. Assertio needs to be discounted for that. Pacira, like Assertio focuses on pain medications. Based on the above, I believe Assertio should trade at about half the PE ratio of its peers, mainly due to a lack of R&D and lower growth. Half the peer level would be a PE ratio of 10. That indicates a price target of $9.60. However, there is the opioid risk that needs to be accounted for. I am cutting my price target by a third for the opioid liability, which I believe is quite conservative based on the Collegium settlement. That puts my one year price target at $6.40. The stock closed at $2.15 on January 19, 2022, so I am essentially expecting it to triple in price over the next year.
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of ASRT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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