Q3 2023 Assertio Holdings Inc Earnings Call
Good morning, and welcome to the a studio Holdings, Inc. Third quarter 2023 financial results Conference call.
All participants will be in listen only mode.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
I would now like to turn the conference over to you Mark Kratz from Darrow Associates Investor Relations for studio. Please go ahead.
Okay.
Good afternoon, and thank you all for joining us today to discuss third quarter 2023 financials.
These release covering our earnings for this period is now available on the Investor page of our website at Investor day, the 30th TX Dot Com I would encourage you to review the release and tables in conjunction with today's discussion.
With me today are Dan Houser, President and CEO, Ajay Patel, Chief Accounting Officer, and now Chief Financial Officer.
Certain Burke previously, our CFO and our senior Vice President and a new role oversea market access pricing trade distribution and other commercial activities.
Dan will open our remarks and provide an overview of the business. The pollen AJ will review our financials. After that we'll open the call for your questions.
During the call management will make projections and forward looking statements regarding our future performance.
Such forward looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in this morning. This afternoon's press release as well.
The 30th filings with the SEC.
These and other restaurant fully described in the risk factors section and other sections of our annual report on Form 10-K.
Our actual results may differ materially from those projected in forward looking statements and I'm sorry, you asked specifically disclaims any intent or obligation to update these forward looking statements except as required by law.
I will now turn the call over to Dan.
Thank you Matt.
Welcome to everyone joining us this afternoon.
I am not pleased by our results in the third quarter.
We did not meet the expectations, nor the goals, we set for our business.
And these results.
These aren't the results that we know you as shareholders have come to expect from us.
While disappointing this quarter I've been reminded that business transformations rarely go smoothly and they're not linear.
We put ourselves on a path to build a stronger business. So that we can weather. These challenges and this is one we will work our way through.
Even though the reported sales for all of them are significantly below our internal expectations in the quarter when viewed with the launch of a generic competitor for <unk> the rationale for the merger and our commitment to diversification are evident.
In addition, the robot on team brings enhanced competencies in market access and field reimbursement support that are part of our broader strategic vision for the future.
We also continue to leverage our nonperson.
Well Shneur model, which to date has been instrumental in our turnaround, allowing us a significant expansion of operating margins and improved operating cash flows.
I've listened to many of our peers earnings calls for.
For this and prior quarters, many of whom are struggling with their operating models as it relates to achieving profitability and positive operating cash flows.
This is where our Sergio clearly has set itself apart.
Despite the disappointing top line results this quarter and the onetime costs associated with the completion of the spectra merger.
We still reported positive income on a non-GAAP adjusted EBITDA and EPS basis and positive operating cash flows.
In addition, our balance sheet and liquidity position are the strongest it has been since I joined the company.
We're now in the greatest sustainable net cash position the company has experienced in the last six years.
That isn't due for just under four years the rate we're paying is only six 5% and we have no covenants on our debt.
This is a remarkably important as we look to continuous erdos transformation.
In addition to stabilizing our base business, especially Anderson and putting our long duration assets enrollment on <unk> and Otrexup our path to growth.
We need to acquire additional assets to continue to diversify our business and find other avenues for longer term growth.
The business environment for acquiring assets is as strong as I've seen it in my career and we're well positioned from both a balance sheet and platform perspective to take advantage of this environment.
Today, we're also announcing some changes to our management team that will help us both for the short and long term.
Paul Schwichtenberg will be handing over the CFO duties to Ajay Patel, our current Chief Accounting Officer, and Paul we're taking on a new role in the organization with direct oversight for market access pricing trade and distribution.
In addition on an interim basis, while we're recruiting for a new team leader Paul will oversee the oncology commercial team.
This will allow for us to have more direct management input into the key areas that affect our gross to net and cash flows.
And are critical to the operations of our business going forward.
We will also be adding a few other key roles to the organization. So that we can effectively manage the volume of external growth opportunities available to us.
While not taking our focus off the day to day operations of the business as we increase our business development efforts.
Both Paul and AAJ have been critical to our success to date I am confident there'll be catalyst for future success as well in their new and expanded roles.
Before I hand, the call over to Paul I will walk through some of what we saw in the business this quarter.
We will not be providing guidance.
Guidance today, However, we will try to provide some general commentary on how were internally projecting the business to give you some context as you refine your own forecasts and models.
With respect to industry.
We're only three months in the generic launch in this market is not yet stable.
The decline in sales experienced in the quarter is primarily attributed to volume losses to both the generic.
And a compounded version of the product.
Relative to what we initially assumed for just a single Anda competitor the market has been more competitive on pricing.
Which we believe has been driven by the compound or the Fda's recent decision.
To add indomethacin to the category, one list, which effectively means the FDA will not pursue regulatory action against the compound or while it's on that list.
We're pursuing all available remedies to have this promote this product removed from the market.
We've built an erosion of analog.
Made up of more than 20 recent generic introductions for non retail products and weighted them based on a variety of factors such as dosage form number of competitors at market formation and the price of the drug.
There's a good deal of variability amongst each of these individual erosion curves and.
And there is also no situation just like ours for example, no suppository.
With this competitor at this price and there isn't any good reliable data for erosion versus an illegal compounded product.
This remains very fluid, but those analog curves do show that the brand can retain between one third to one half the market volume.
Moving out to year two after competitive entry.
We believe this remains an attractive market for Sergio.
With respect to roll that out our understanding of the dynamics at play here is still evolving.
And no matter the answer about what is in the rearview mirror. We are single mindedly focused on maximizing long term value for this brand.
As many of you are aware the sales pattern for the drug has been very backend weighted towards the end of the quarter. After asps are published leading to lower than typical visibility in quarterly performance.
This quarter was not much different than the two quarters, we own the product for the two months that we own the product.
We reported $7 1 million in revenue and for the full third quarter $8 million of roll down was sold.
The shift in reimbursement to the permanent J code in April does not appear to have benefited the manned as much as was anticipated both for existing and new customers.
This demand trend was masked by changes in underlying inventory largely at the end customer level that in aggregate was approximately three months at the end of Q1, which grew to four months at the end of Q2 and now at the end of Q3, we calculate to be less than two months of demand.
Customers had been offered short term incentives, which allowed them to hold as much inventory.
Sergio did not offer most of these incentives in Q3 and does not intend to continue offering them to customers.
This may have a further impact on Q4 volumes the extent to which is not known or estimable at this time.
Well this is a competitive and dynamic market. It is still very attractive and we're committed to maximizing robot arm potential.
And in addition to removing those short term incentives that can negatively affect asp's working capital and cash flows.
We're rethinking customer targeting and broadening the customer base. In addition, we are evaluating our strategy with respect to payer coverage.
Beyond the commercial strategy and tactics.
<unk> cycled development of roll it out.
<unk>.
He is also being entertained Ramadan has a differentiated molecule. It's the first novel product entered a long acting DCF space in over 20 years. So it is not a biosimilar.
It also may have utility in different dosing algorithms and chemotherapeutic regimens it hasnt been studied and yet.
One example is same day dosing.
We have elected to continue enrolling into the expansion phase of the ongoing open label Phase one same day dosing trial and have moved the management of the trial to a CRO.
We've already noticed an acceleration in the enrollment rate based upon some of the changes we've made.
At the pace enrollment had been moving the data would not have been available until late 2025 early 'twenty six.
We're looking to materially improve upon those timelines and once we get a better estimate of the recruiting cadence, we'll be able to communicate those timelines to shareholders.
I'll now turn the call over to Paul.
Thank you Dan This afternoon I will review the financial highlights from <unk> third quarter of 2023 for.
For full details please refer to the tables and.
In financial statements in our earnings release and 10-Q.
Net product sales were $35 1 million for the third quarter of 2023 compared to net product sales of $34 3 million in the prior year quarter, and $40 1 million last quarter.
The increase in net sales versus the prior year quarter is primarily driven by the additions of <unk> and <unk>.
Which was mostly offset by declines in indecision in Colombia, following their respective generic entrants.
Innocent family net sales in the third quarter decreased by 18% from the prior year quarter, primarily due to the generic entrants in the quarter.
<unk> net product sales were $7 1 million for the two months following the acquisition of spectrum.
Our initial assessment indicates that there were several dynamics that impacted the third quarter.
The early launch benefited from favorable reimbursement.
Our expectations for demand increase from a permanent J code effective April one which have not been achieved.
And there were high levels of inventory in the channel at the end of the second quarter.
Net ASP in the third quarter was down 14% versus the prior year quarter due to short term incentives that were offered to customers were no longer offering these incentives and as a result expect that the net ASP will stabilize or improve in the fourth quarter.
<unk> net sales for the third quarter were $2 8 million versus $3 million in the prior year quarter, reflecting unfavorable channel mix, partially offset by higher volume.
<unk> net sales of $2 1 million in the third quarter reflected a four 2% increase in prescription volume and lower channel inventories at the end of the quarter.
Overall portfolio net sales were up 3% versus the prior year quarter. Despite the <unk> loss of exclusivity in January and in this in in August.
Gross margin as a percentage of product net sales was 80% in the third quarter versus 88% in the prior year quarter.
Inventory step up amortization for roll down was $1 8 million, which contributed a 500 basis point decrease with the balance of the change primarily reflecting changes in sales mix due to declines in in this in Colombia.
SG&A expenses were $21 million in the third quarter compared to $16 8 million last quarter and $11 9 million in the prior year quarter.
Adjusted SG&A was $16 2 million in the third quarter compared to $10 $9 million in the last quarter and $9 3 million in the prior year quarter.
The increase in adjusted SG&A versus the prior year quarter is primarily due to additional operating expenses from the spansion merger and prior <unk> and <unk> acquisitions.
We are continually evaluating our operating expenses to ensure that we have optimal support for each of our products.
We have seen synergy.
<unk> and spectrum businesses and believe that we can operate with less than the $55 million of incremental operating expenses previously communicated.
Additionally, as we've done in the past, we continue to look for opportunities to.
The reduced spending in light of revenue changes, while ensuring that we have the infrastructure in place to support the entire portfolio along with future business development opportunities.
Adjusted EBITDA for the third quarter was $12 9 million compared to $24 8 million last quarter, and 21 4 million in the prior year quarter the.
The year over year decrease was primarily driven by higher operating expenses from.
From the additions of Ramadan and symposium.
At this point I will hand, the call over to AJ Patel, our chief accounting officer, and newly appointed Chief Financial Officer, who will discuss net income which was impacted by specific onetime accounting adjustments recorded during the quarter along with cash flows in the third quarter balance sheet.
Thanks, Paul.
First acknowledge my appreciation to Paul for all his contributions to <unk> during his tenure as CFO.
I look forward to our continuing partnership.
Moving along in the P&L results, our third quarter was impacted by several noncash items.
First there was a $238 8 million impairment charge to intangible assets.
This was triggered by a decline in our stock price during the quarter, which led to our market cap being less than our book value under GAAP. This impairment trigger requires us to assess the fair value of our assets using both an income and market approach.
We utilize the various estimates and assumptions, including forecasted cash flows and market comps.
This resulted in an impairment charge to intangible assets at a consolidated level, which was then allocated across the individual product rights.
Second there was a $17 5 million benefit in the quarter from change in fair value of our contingent liabilities compared to a loss of $3 9 million in the prior year quarter the.
The magnitude of the benefit in the quarter was primarily driven by revaluation of the investment contingent liability due to generic entry.
Finally income tax expense of $57 million in the quarter was impacted by a $43 million charge for a valuation allowance against deferred tax assets based on an assessment of the realize ability.
Our total cost in the third quarter also included $3 million in restructuring charges related to our reorganization plan of our workforce and resources following the acquisition of spectrum.
Inclusive of these items there was a GAAP net loss of $279 5 million in the third quarter.
Compared to net income of $4 2 million in the prior year quarter.
The adjusted EPS was one <unk> in the third quarter versus <unk> 19 in the last quarter and 22 in the prior year quarter.
<unk> in the third quarter was impacted by the 38 million shares issued in connection with the acquisition of spectrum.
Cash generated from operating activities.
In the third quarter was $2 6 million versus $18 6 million in the last quarter and $10 million in the prior year quarter.
The third quarter operating cash flows were impacted by transaction cost and immediate working capital needs from spectrum acquisition.
Cash balance at the end of the third quarter was $76 9 million, reflecting a $6 7 million increase from the last quarter.
Our outstanding convertible debt balance at the end of the third quarter was $40 million and does not mature until September 2027.
And now I will turn the call back over to Matt.
Thank you Dan Paul at this time, we have completed our prepared remarks, and we'll use the balance of our allotted call time to take questions starting with our sell side analyst community.
Operator can you. Please provide the instructions for Q&A from our listeners to take the first question.
Thank you if you would like to ask a question. Please press Star then the number one on your telephone keypad to get into the question queue again that is star then the number one ask.
Question.
And your first question comes from the line of Thomas Flaten with Lake Street.
Please go ahead.
Hey, good afternoon, guys I appreciate you taking the questions I was curious if maybe we could drill down into some a little bit I know there was some some inventory adjustment going on at the wholesalers and even if you just look sequentially from the second quarter of this year. There was obviously about a $10 million drop off is there a wave of maybe breaking out how much the inventory adjustment accounted.
For there that I would maybe classes kind of a onetime event versus the impact from the generic and the compound or.
I don't think we have a good answer in terms of dollars, but there was a.
And the impact.
You can expect that they want to make shelf space available for.
Another product in the marketplace.
There is the same level of demand that was there, but I don't think we have a.
Good number in terms of the dollar sales impact no we don't have.
Thomas we don't have a breakout of the.
The specific inventory adjustment that Dan just referenced.
The situation is that with the generic and trend our volume is coming down it's really all tied to the generic entrant in our volume.
Primarily as a result of that the wholesale is take the inventory levels down, but we view it as all kind of driven by the generic entrant and lower volumes.
Got it and then.
Do you have a sense of.
And I know the data is a bit hard to come by given that some of your data is blocked but do you have a sense of market shares compounded generic versus yourselves kind of against that erosion curve that you talked about are we are ahead of the curve or behind the curve so to speak from an erosion perspective.
The answer to that is is.
Okay.
Long, but to try and.
Summit.
The.
The way, we are estimating what the the compound or might have taken.
Is to just assume a flat or slightly increasing overall market.
And then.
Add up what the prescription data reporting services tell us is the new market.
And the Delta is what we assume the compound or has taken so I would say relative to the analog I explained.
We were.
We are tracking slightly below it but within statistical control of it the biggest impact that we've seen in the marketplace was was that the pricing and that really is.
Two competitive market instead of a one competitor market as we had originally assumed.
Got it and then just one final one and I'll jump back in the queue.
The short term incentives that were offered to the Ramadan customers could you maybe explain that a little bit more than where they offered by you or by spectrum prior to the closing of the deal.
So.
The.
The incentives were offered by spectrum.
For the <unk>.
Largely for the second quarter.
Hi, there.
There was a variety of them, but the.
One that I can explain that in general terms is that roughly half of the gross sales reported in the second quarter by spectrum.
Were collected by our studio until the first week in November.
And there were prompt payment terms offered on those sales.
That is a practice that we will not be continuing.
Okay.
Got it I appreciate it I'll jump back in the queue. Thanks.
Great. Thank you. Your next question comes from the line of Jim Sidoti Kim. Please go ahead.
Hi, good afternoon.
And I know, there's a lot of moving pieces going on and you're not prepared for any kind of formal guidance, but you had previously given us an idea of where you think robot onward would go over the next couple of years.
Do you have any sense now on.
Now three months later, where you think those numbers are.
No we're not in a position to give any kind of point estimates on on what it's going to be.
And we fully appreciate that investors want to know this not only just for <unk>, but for our overall business and we'd like to be in.
Our position to communicate that but I think as we said in our prepared remarks with some of the puts and takes around demand.
Demand the removal of these incentives with that also might mean for asps.
That.
It's in flux right now and we need to get a good handle on things before we communicate eight point estimate to investors going forward.
Long and short of it is though we are absolutely committed to maximizing the long term potential of this brand.
Alright.
Can you comment have you changed any of your thoughts regarding the direct sales force and your plans for that and also the R&D investment to expand the market for <unk> are you still going full speed ahead with those those two <unk>.
<unk>.
So any changes that we've made to the commercial team have already taken effect.
Nothing else is anticipated at this time.
And R&D as we said.
Theres two active trials right now there is one in same day dosing that I described in my prepared remarks and Theres another pediatric.
Post approval commitment that we're enrolling in as well.
These are the two trials for roll it on that are underway, but as I as I said there is there are other things outside of what the product is already been studied in.
That are in additional dosing.
As well as other chemotherapeutic regimens that we are exploring.
The product hasn't been studied in yet.
Alright, and then the last one for me is how active are you right now outworking for additional deals.
Are you focused on resolving some of the issues were.
With spectrum or does this actually.
Incentivize you to go out and find additional products.
Well there is.
<unk> focus is that the business has one is making sure that we have.
We got the business on a stable footing.
And the other is making sure that we can we can.
Additional assets into the business the combination of.
So what we saw here in the third quarter with respect to roll it on as well as what we knew was coming with the <unk> and generic <unk> was launched in August.
It always has.
Cause us to accelerate our business development efforts.
So that's part of the reason why we're announcing this change here with Paul and AJ in their roles.
And we're bringing on some additional resources to help us manage the overall studio based business that will.
Give us additional heads.
Valuate more.
<unk> opportunities.
The big message you should take away there is.
There are a lot of opportunities in front of us and we.
We want to make sure that we can.
Choose the best ones of the bunch and get them completed is there. The <unk> is in a very good position to capitalize on those opportunities.
Alright that was it for me thank you.
Thank you and just as a reminder, if you would like to ask a question. Please press star and the number one on your telephone keypad.
Your next question comes from the line of Scott Henry with Roth Capital.
Go ahead.
Thank you good afternoon, where to start.
I guess on <unk>.
I feel like you've given us a lot of information.
The only thing that would be curious is if you look at kind of the last.
Months.
Last two or three weeks do you have a sense of where the product is annualizing sort of in real time.
Okay.
Scott.
We will be at a better position to answer that at a later time right now we're not going to be giving any type of guidance. We wanted to frame it up with some general commentary about how we're looking at things in evaluating this but that is the best that we can.
We can do at this time.
Okay.
Just come at it a little different and I do think you gave us some good information to open the call.
About where typically.
We would see a curve like this happen.
Kind of steepness.
If we're going from point a to point B do you think it's going to happen relatively quick.
Or is that slope more gradual.
Yes.
Trying to get any.
Any sort of color on it.
Okay.
That is I think the $20 million of question and where the Crystal ball is murky Scott. So that is the number one thing that makes these analogs diverse is is the steepness of that curve.
All seem to have a little bit more consistency once you get out.
And it's not an asymptote when it's still at a third to half the business, but when you get out towards the later months that they get more predictable. So it's the steepness of the curve in the beginning that is is that the main variable.
Okay.
Okay.
Thank you and then I mean, nothing more to ask on Anderson.
Uh huh.
<unk> Don.
It's hard to Miss the irony of all this.
The generic to Endo Shannon do you get a full channel.
I think he got the better deal still.
The question is.
When we think about the third quarter is $7 1 million as what you sold but there is a reduction in the channel do you have a sense of what the demand was for in Q3.
Should we add another month to that number just trying to get a sense.
On an apples to apples basis, where we should.
Think about that Q3 number.
I think thats a good question and we're still working through that ourselves. We tried to give you guys enough.
Based on what we know today.
How the months on hand is kind of.
Changed as well as Paul gave you commentary on how the Asps changed.
The hard part for Us is.
Thanks.
Change your I guess <unk>.
Removing all of those factors and getting at what is the true underlying demand and how much could those factors change in the future.
Still so.
We're still looking through that ourselves here in the short run.
But the take home messages.
That we've already made.
Concrete steps to improve the product in the short term.
And set it up for a better long term.
Do you think.
This is just us, saying very little but do you think.
Q4 should be higher than Q3.
That would be our goal, but there are both pluses and minuses on both the volume and pricing side that we have to get through and like I said the visibility on this product I would like to be able to give you what.
Tober was relative to the July.
But that will not help much.
This comes down to what's going to happen in those last couple of weeks.
Right now we don't have good visibility into that so I don't want to provide forward looking guidance on that.
And maybe just another way to ask a similar question.
It seems like you had the accountant accountants working over time doing write downs restructurings.
Where did you evaluate ramadan for impairment or did you not not enough information at this point just trying to get a sense if you view.
These short term issues as potential for long term impairment or maybe it's just too early to even think about that.
Yes, Scott this is AJ I can take that so our impairment.
Evaluation was done at an entity wide level. So all of our product rights groups, where our value weighted with impairment and as I stated in my comments the impairment charge was taken at the consolidated level and then allocate it to each of the product rights.
Okay, and then if I recall, you did not allocate any to Ramadan correct.
No there will be an allocation to roll with that.
Okay.
Thank you and then.
Dan.
You know a tougher question to I don't know how you want to answer it if at all but.
Without giving guidance.
Aspirational Lee would you look for EBIT.
<unk>.
For this 12 nine could be a.
A lower point or baseline or.
Would it be get worse, just trying to think about that because we should have ramadan getting better we should have the other products getting better and.
And there'll be some hits there, but a lot of that has been taken just any way you could think about this kind of baseline EBITDA.
Yes, Scott.
It's not a question I can answer at this time.
Okay fair enough.
I do appreciate.
<unk> why you are asking and.
Really wish I could give you that visibility I just.
And at this time.
That's why we ask them.
I guess otrexup and <unk>.
Were down in Q3, they were pretty strong in Q2.
Is it fair to say that the trend is somewhere in between there I mean do you still expect those to be growing products, just some timing here.
Yes, I think the trend is somewhere in between the two corridors as.
As we mentioned as I mentioned in my script simply <unk> prescription volume continues to increase it was impacted a little bit by changes in wholesaler inventory levels and Otrexup is still kind of.
Tracking along at kind of in between the two quarter level as you mentioned.
Okay, great. Thank you for taking the questions.
Thanks Scott.
Thank you and your final question comes from the line of Thomas Flaten with Lake Street.
Thomas Please go ahead.
Hey, guys I guess I didn't ask it explicitly but are you guys being forced into situations, where you price matching the lower prices with with your interest in accounts or how how exactly is the pricing in the market impact us kind of an account by account level.
That's a good question, it's not account by account, it's more like at the wholesaler level. If your competitors are at a far lower price then, they're obviously going to take the business straight from you.
Thats, what youre going to see like.
Symphony <unk> type basis.
That's more what we see at the wholesaler.
Got it on the account by account basis.
Or if they were if anyone's doing any GPO contracting or things like that.
You can have some individual negotiations, but we've been through.
<unk> been pretty strong on any individual account in terms of retaining demand.
But the.
That is where you are seeing I think the greatest impact of why we think it is from the compound or is the overall price in the market is lower.
But although all of the things that we hear about where the generic is being priced isn't as low as what we're hearing in the market clearing prices.
And do you have an update for us from the 5% off of WAC, which is I believe where whereas I just started where are we at now in the market approximately.
The lowest.
From a trade show the lowest.
Blake screenshot or handout that we've seen is 9% off we've heard we've heard of other things in the market that were slightly less than that.
But we think that.
That is what.
And then general ballpark of where the generic is the other numbers that we're hearing we think are all coming from the compounded product.
Got it I appreciate you taking the follow up.
Great well. Thank you so much we have no further questions in the queue. So we're going to go ahead and close our Q&A session. At this time I would now like to turn the conference back over to you, Dan <unk>, President and Chief Executive Officer for closing remarks.
Thank you.
This last quarter and it's still true today, we are a far stronger company than we were a few years ago and I believe we are well positioned to come through this even stronger and create value for all stakeholders.
All a J and I speak for the collective 70 employees of <unk>.
We are not here just for a quarter or two we're here for the long term committed to building what we all think can be a special company and over the long term and attractive investment for our shareholders. Thank you.
Have a good night.
Thank you ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Okay.
Yes.
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Yes.