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Assertio Therapeutics, Inc (NASDAQ:ASRT)
Q4 2018 Earnings Conference Call
March 6, 2019 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Assertio Therapeutics Q4 2018 earnings conference call. [Operator instructions] As a reminder, today's conference will be recorded. It is now my pleasure to turn the conference over to your host, John Thomas, senior vice president of investor relations and corporate communications. Please go ahead, sir.

John Thomas -- Senior Vice President of Investor Relations and Corporate Communications

Thank you, Hailey. Good afternoon, and welcome to our investor conference call to discuss Assertio's fourth-quarter and full-year 2018 financial results announced this afternoon. The news release and investor presentation covering our earnings for this period are now available on the investor page of our website at assertiotx.com. I'd encourage you to review the presentation slides as they're complementary to today's discussion.

With me today are Arthur Higgins, president and chief executive officer; and Dan Peisert, our senior vice president and chief financial officer. I'd like to remind you that matters discussed on this call contain forward-looking statements that involve risks and uncertainties, including those related to the commercialization of Gralise, CAMBIA and Zipsor; our collaborative arrangements, including with Collegium Pharmaceutical; the company's financial outlook for 2019; regulatory development plans, including those for long-acting cosyntropin; our loan agreements, including our senior secured debt facility; expectations regarding potential business and investment opportunities; and other statements that are not historical facts. Actual results may differ materially from results predicted and recorded results should not be considered an indication of future performance. These and other risks are more fully described in the Risk Factors section and other sections of our quarterly reports on Form 10-Q and our annual report on Form 10-K.

Assertio disclaims any obligation to update or revise any forward-looking statements made on this call as a result of new information or future developments. Assertio's policy is to only provide financial guidance for the current fiscal year and to provide updates or reconfirm its guidance only by issuing a news release or filing updated guidance with the SEC in a publicly accessible document. References to current cash and cash equivalents are based on balances as of December 31, 2018. All guidance, including that related to the company's expected neurology franchise net sales, earnings and non-GAAP adjusted EBITDA, are as of today.

The non-GAAP financial measures Assertio uses are not based on any standardized methodology prescribed by GAAP and may be calculated differently from and, therefore, may not be comparable to non-GAAP measures used by other companies. With that, I will turn the call over to Arthur. Arthur?

Arthur Higgins -- President and Chief Executive Officer

Thank you, John. Good afternoon, and welcome, everyone. I'm pleased to report that we finished 2018 with strong performance that met or exceeded our current guidance. We delivered full-year adjusted EBITDA of $155 million, which exceeded our original target at the beginning of the year and hit the top end of our current guidance range of $145 million to $155 million.

In addition, we reported neurology franchise annual net sales of $110 million, which also hit the top end of our current guidance range of $105 million to $110 million. We also made tremendous progress overall in advancing our three-pillar strategy of maintain, grow and build. Let me walk you through some of the major milestones we achieved in 2018 within each of our pillars. I will begin with our maintain pillar.

Last fall, we amended and strengthened our partnership agreement with Collegium such that it no longer allows for termination prior to the end of 2021. In general, this agreement provides greater certainty of NUCYNTA income, and importantly, by removing the early termination overhang, makes the arrangement more valuable for us in terms of underwriting of our secured debt. Both companies are committed and confident that Collegium can first stabilize and then grow the NUCYNTA franchise. Our amended agreement underscores that commitment and better serves both companies.

Collegium has also provided full-year 2019 NUCYNTA franchise sales guidance of $200 million to $210 million, which is consistent with our goal to stabilize the franchise, and this is the range that we have also used for our planning purposes. Turning to our grow pillar. Our first objective was to stabilize the neurology franchise and then return it to sustainable growth. In 2018, we were able to show a stabilization quarter over quarter in our total neurology franchise revenues and prescriptions.

But we know we can do better and our goal for 2019 is to return the franchise to low to mid single-digit growth. In recent months, we began the comprehensive rollout of new commercial initiatives across all three of our neurology assets. These new efforts include the following. We introduced concise, consistent and compelling new messaging for all three medicines that we believe will resonate more effectively with prescribers.

We transitioned to a new contract sales force, moving from a traditional CSO people service to a more performance-based model. We increased our call activity on high prescribers across all three bands, resulting in increased focus and increased calls on our most productive prescribers, and we initiated a new patient-promise program designed to put patients first. This program has three key elements. The patient co-pay is now more affordable and more cost-competitive with generics.

It is easy for physicians and patients to participate and it ensures more patients get the prescriptions as written. The overarching theme of this new effort is low hassle for both patients and prescriber offices. We want to ensure that more of the prescriptions written by physicians reach patients' hands and that they do so at the lowest-possible out-of-pocket cost. Early feedback on this new program has been very positive.

We believe this program is going to drive increased prescriptions by allowing us to compete more prospectively with both branded and generics. It's worth noting there's a lot of growth runway left with our neurology assets, and we plan to maximize our efforts to generate consistent, sustainable growth. Unlike many other companies of our size, we have extended patent exclusivity with each of our medicines. Gralise has exclusivity out to 2024, Zipsor out to 2022 and CAMBIA out to 2023, with the potential to extend that to 2026 with our new patient-friendly, ready-to-drink line extension that's moving through development.

So if you step back, you can see the vast majority of our total neurology franchise sales are protected until 2024. Moving now to our build pillar. We're extremely pleased to have achieved our goal in December of filing, along with our partner West, an NDA for our long-acting synthetic cosyntropin. The FDA officially notified us that our 505(b)(2) application for a diagnostic indication was accepted for filing with a PDUFA date of October 19 of this year.

If approved, we'll have the opportunity to launch a much-needed lower-cost, synthetic, long-acting cosyntropin alternative into the U.S. market later this year or early 2020. We believe in our strategy with good reason. We've conducted advisory boards with healthcare providers and payers to gauge the level of interest and acceptance and we learned that they are generally aware that synthetic long-acting cosyntropin is sold by Mallinckrodt outside of the U.S.

and has similar indications to Achtar Gel sold in U.S. Their feedback leads us to believe that payers and physicians will be open to the use of our synthetic product regardless of its label, providing it is priced appropriately. Importantly, we don't need all payers or physicians on board to have a successful new product launch. In fact, even with modest adoption of our synthetic product, we'll be adding a highly attractive new asset to our Assertio portfolio, and one that will be the first in the build-out of our future orphan/specialty business.

Another significant achievement in 2018 was our ability to secure $97 million of nondilutive capital through agreements realized with Collegium, PDL BioPharma, Ironwood and Purdue. This is an impressive amount of cash for a company of our size. This cash, along with our free cash flow, means that by April of this year, we will have reduced our secured debt to $202 million, down from $475 million that was present when I joined the company in early 2017. As a result, by April, our secured debt-to-EBITDA ratio based on the midpoint of our 2019 guidance will be approximately 1.6, and our total debt-to-EBITDA ratio will be approximately 4.5.

As a result of this new financial strength, we were able to modify a secured debt agreement in late December, replacing the previous fixed-adjusted EBITDA covenant with a trailing 12-month debt to adjusted EBITDA ratio that declines over time. This amendment means we have more flexibility to invest in our core business and future BD transactions. And equally importantly, it means we can be more patient in any restructuring of our secured or convertible debt. With the positive momentum we created in 2018, we are confident 2019 will prove to be another pivotal year in our transformation, as we drive our three-pillar strategy forward and tackle new company goals.

Among our goals for the new year, I want to outline three major ones that we are squarely focused on. First, we're committed to achieving our new financial guidance goals, including growing our neurology franchise net sales in the low to mid-single digits. And we're also committed to delivering adjusted EBITDA of between $115 million to $125 million. Second, we look forward to the potential approval of our long-acting synthetic cosyntropin in the fourth quarter and prepare for a market launch in late 2019 or early 2020.

Cosyntropin represents the foundation of our new orphan specialty business and offers a low-cost alternative in a market dominated by one high-cost, animal-derived product that generates annual sales of more than $1 billion. Third, we expect to add one or two new in-licensing assets, with a strong bias toward an accretive late-stage or on-market asset that complement our existing neurology portfolio. So as we met that goal in 2018. The fact that we continue to see attractive assets that have the potential to meet our strict investment criteria gives us great confidence we were fortunate this year.

In summary, we're very pleased with our progress in 2018 but firmly believe 2019 will bring us even closer to our goal of a totally transformed company, with sustainable growth and a promising pipeline. With that, I'll turn the call over to Dan, who will provide more details on our performance in the fourth quarter and the full year. He will also discuss the accounting for our amended Collegium agreement and our 2019 neurology franchise and adjusted EBITDA guidance. Dan?

Dan Peisert -- Senior Vice President and Chief Financial Officer

Thank you, Arthur. My comments this afternoon will focus primarily on our non-GAAP results, unless otherwise noted. Our adjusted EBITDA for the fourth quarter and full year was $41 million and $155.3 million, respectively, coming in at the high end of our guidance range of $145 million to $155 million. Our adjusted EBITDA results were driven both by expense management as well as strong top-line results.

Our operating expenses for the full year came in at the low end of our guidance range for both SG&A as well as R&D, demonstrating that our restructuring efforts have yielded the results we intended. Our neurology revenues for the fourth quarter and full year were $29 million and $110.3 million, respectively, also coming in at the top end of our guidance range of $105 million to $110 million. Gralise generated sales of $14.8 million in the fourth quarter. While still declining year over year, this is now the second consecutive quarter with positive sequential growth in both volumes and net revenues, demonstrating we have stabilized the brand in 2019. We recorded an all-time quarterly high in net sales for CAMBIA of $10.9 million in the fourth quarter.

We've been able to grow both volumes and net revenues each of the last three quarters so that net revenues for the year of $35.8 million were up 13.3% over 2017. Zipsor generated sales of $3.2 million in the fourth quarter. Operationally, the product was in line with our expectations, with continued sequential growth in volumes. However, we did have a large accrual adjustment to reflect a higher rate of returns than were anticipated in the fourth quarter.

This impacted the quarterly performance for the brand and the franchise. Our growth pillar is showing evidence of positive momentum. Absent the accrual adjustment for Zipsor, we would have seen annual year-over-year growth in both Cambia and Zipsor for 2018. The GAAP revenues recognized under the commercialization agreement with Collegium were $13 million in the fourth quarter relative to the $34.1 million non-GAAP revenue and a $33.8 million in cash collected under the agreement during the quarter.

The reason for the difference was due to the accounting treatment for the contract modification upon the date of the amendment, which was November 8. We concluded that the fixed consideration received under the new contract is $157 million relative to the $553.2 million in the original contract. This amount is made up of the following: $132 million of cash received in 2018 under the license, $10 million of cash received upfront as a one-time service fee, $6.2 million received as payment for inventory and $8.8 million of value assigned to the warrants received as part of the amendment. As of November 8, we'd already recognized the $159.4 million of revenue year to date under the commercialization agreement, which was greater than the $157 million just described.

Thus, any income received from Collegium after this date was used to reduce the contract asset of the balance sheet, leaving $2.4 million as a contract asset as of December 31 to be amortized over the remaining three years. $159.4 million is what we've recorded as our year-to-date GAAP revenue from the agreement and is netted against the $3.7 million royalty payable to Grünenthal that was recorded in our third quarter in accordance with our minimum royalty agreement. Going forward, the quarterly GAAP revenue we recognize under the commercialization agreement will better match both the cash we receive and the variable royalty calculated in accordance with our agreement based upon Collegium's net revenues from NUCYNTA. We are pleased with how we finished 2018 and believe it sets the stage for 2019.

As Arthur mentioned in his remarks, our guidance for 2019 is that we will deliver low to mid single-digit growth for our neurology franchise and adjusted EBITDA between $115 million to $125 million. As is typically the case for us and most pharmaceutical companies, we expect that our first quarter neurology revenues will be the lowest of the four quarters this year. In addition, to the normal seasonality in our business, we also expect that we will see a slowing in the growth of CAMBIA due to some formulary changes that took place in January of this year. In 2018, we recorded 47% of our full-year revenues in the first half.

For 2019, we anticipate it won't be materially different but are expecting 46% of the full year in the first half. As Arthur also mentioned, we based our guidance on the NUCYNTA guidance provided by Collegium of $200 million to $210 million for 2019. We expect they would have a similar seasonal pattern, and as a result of the royalty structure, we will see a strong second and third quarter royalty, with the fourth quarter being the lightest quarter as that will be when we're in the 14% loyalty tier. I will also point out that given the NUCYNTA sales range they have guided to, we'll have very little dollar exposure to fluctuations within the range as it's entirely within the 14% tier.

However, if they show upside, our results will benefit as we enter the 58% royalty tier between $210 million and $233 million. As to the gating of our 2019 operating expenses, our fourth-quarter 2018 operating expenses included $4.6 million of expense reimbursement from West related to costs we incurred to prepare the NDA filing of cosyntropin that became West's responsibility under the contract. Our reported fourth-quarter non-GAAP expenses of roughly $22 million, adjusted for this $4.6 million, reflect a better run rate cost structure for our business. Adding to this run rate will be the cost to roll out the new commercial initiatives that Arthur mentioned, which will largely be incurred in the first quarter and our cost to prepare for the cosyntropin launch.

That concludes the financial discussion. And I'll now turn the call back over to John.

John Thomas -- Senior Vice President of Investor Relations and Corporate Communications

Thanks, Dan. And Hailey, we will now take Q&A, please. 

Questions and Answers:

Operator

Absolutely. [Operator instructions] Our first question comes from Scott Henry of Roth Capital. Your line is now open.

Scott Henry -- ROTH Capital Partners -- Analyst

Thank you and good afternoon. Just a couple of questions. You've given EBITDA guidance for 2019. My question is, have you factored any cosyntropin revenues into that guidance, or as well, any expenses? How should we think about what your expectations are for that product in 2019, if at all? I know it's got a late PDUFA date.

Dan Peisert -- Senior Vice President and Chief Financial Officer

Scott, we did not factor in any revenues in 2019, but we did factor in some initial costs to prepare for the launch for the product.

Scott Henry -- ROTH Capital Partners -- Analyst

OK. Will you have to add any reps for that launch?

Dan Peisert -- Senior Vice President and Chief Financial Officer

There'll be no reps that will be promoting that product, but we anticipate that we'll have to add an MSL or a handful of MSLs.

Scott Henry -- ROTH Capital Partners -- Analyst

OK, that's helpful. And then, I guess, when I think about that neurology franchise, I -- we expect -- it sounds like CAMBIA is going to kind of neutralize in 2019. That being said, is -- should we still expect that to be -- CAMBIA to be a growth driver in 2019 or relative to 2018 revenues?

Arthur Higgins -- President and Chief Executive Officer

Scott, this is Arthur. Yes, we would still expect CAMBIA to be a contributor to our growth in 2019.

Scott Henry -- ROTH Capital Partners -- Analyst

OK. And then with Gralise, I mean, how do we think about that? Is it really, I mean, moderating the volume declines and then offsetting that with price? Perhaps that's just more neutral? Just trying to get a sense of what you're trying to do with that franchise going forward.

Arthur Higgins -- President and Chief Executive Officer

Yes, I mean, I would say of the three products that will contribute to growth, I think, Gralise will contribute the least. But we still expect to see growth with Gralise in 2019, but mainly coming from price.

Scott Henry -- ROTH Capital Partners -- Analyst

OK. And I guess, the final question, just trying to get your sense of the outlook for in-licensing opportunities. I mean, are you deep along in discussions, if you're handicapping that? Is it a target? Or do you feel like you're pretty far along as far as bringing in a couple more revenue drivers?

Arthur Higgins -- President and Chief Executive Officer

Scott, as I mentioned, we were very disappointed that we did not meet that goal last year. It was one of the few goals that we missed. And this is an organization that likes to deliver on its commitments. So as we speak, we have got several actionable targets that we're in discussion with.

But as you're aware, there can be no promises on BD, but we would be extremely disappointed if we do not complete at least one late-stage or on-market asset that would complement our neurology franchise, and I would think also one late-stage product that would complement our specialty business. So we're cautiously optimistic. But in this world, until the contract's signed, no promises.

Scott Henry -- ROTH Capital Partners -- Analyst

OK, great. I appreciate that color and thank you for taking the questions.

Arthur Higgins -- President and Chief Executive Officer

Thanks, Scott.

John Thomas -- Senior Vice President of Investor Relations and Corporate Communications

Yeah. Thanks, Scott. Hailey, we'll go to the next question, please?

Operator

Absolutely. Our next question comes from Randall Stanicky of RBC Capital Markets. Your line is open.

Dan Busby -- RBC Capital Markets -- Analyst

Hey. This is Dan Busby on for Randall. Just one big-picture question for me. Hey, guys.

On business development, as you build out your neurology and specialty businesses, do you envision maintaining those as two largely stand-alone businesses? And then a follow-on to that would be, does that open the door to a potential split of those two businesses at some point in time if it was value-creating?

Arthur Higgins -- President and Chief Executive Officer

Dan, certainly, we see both those businesses being separate. We haven't considered a split. I mean, our first goal is to obviously develop an attractive orphan/specialty business. And if at some point, there's greater shareholder value from looking at that differently, I can tell you that this is a group that's very open to whatever is required to drive sustainable value.

Dan Busby -- RBC Capital Markets -- Analyst

OK. And then just to be clear, are you prioritizing -- it sounds like you're looking at a whole lot of assets. Are you prioritizing on neurology asset on the BD front at this point?

Arthur Higgins -- President and Chief Executive Officer

Yes. Dan, our first priority is to get an accretive asset for neurology.

Dan Busby -- RBC Capital Markets -- Analyst

Understood. Thank you.

John Thomas -- Senior Vice President of Investor Relations and Corporate Communications

OK. Thanks, Dan. Hailey, go to the next caller.

Operator

OK. Our next question is from Irina Koffler of Mizuho. Your line is open.

Irina Koffler -- Mizuho Securities -- Analyst

Hi. Thanks for taking the question. Can you update us on any reimbursement discussions you're having with payers on cosyntropin? And also, how quickly can this product ramp? What do you see as the key hurdles to adoption?

Arthur Higgins -- President and Chief Executive Officer

Irina, first of all, we continue to have very constructive discussions with payers. We're not going to discuss ramping until we get closer to launch. But as I mentioned in my remarks, even a modest level of penetration would represent a very significant asset. And some of the numbers out there that we can derive from the number of physicians who say they're interested, even if we took a discount to that, I think, you're talking about an asset that would be transformational from Assertio's perspective.

Irina Koffler -- Mizuho Securities -- Analyst

OK. I have a follow-up. The Purdue bankruptcy, I was just wondering if you guys can comment on what its implications are for other parties in the case.

Arthur Higgins -- President and Chief Executive Officer

First of all, I mean, that's only speculation, and we're not going to comment on speculation. So I -- Irina, I'd like to call them, but I really -- we don't have any insight into that. And it is only speculation at the moment.

Irina Koffler -- Mizuho Securities -- Analyst

OK. And just one last one. Can you provide an update on the NUCYNTA appeal?

Arthur Higgins -- President and Chief Executive Officer

Yes, we're still waiting for -- hearing back from the appeal, and we're expecting that any day now.

Irina Koffler -- Mizuho Securities -- Analyst

OK, thank you.

John Thomas -- Senior Vice President of Investor Relations and Corporate Communications

Thanks. OK. Hailey, we're ready for the next question.

Operator

Absolutely. [Operator instructions] Our next question comes from David Amsellem of Piper Jaffray. Your line is now open.

David Amsellem -- Piper Jaffray -- Analyst

Thanks. Just had a couple of questions on cosyntropin. So I guess, number one is since it looks like this is going to be an off-label type of commercial strategy, do you have a sense of what is a realistic share that you could take from Achtar? How should we think about that? And what are your targets, if you're willing to share that? And then secondly, any color on where you're looking to price the product, I guess, on a list basis relative to that of Achtar? Thanks.

Arthur Higgins -- President and Chief Executive Officer

Very good questions, but you'll be -- you'll not be surprised that for competitive reasons, you're going to get very, very big answers. I think, the first price point I'd like to just make sure that everyone is clear, we will not be promoting this product off-label. However, again, we'll remind everybody that physicians can prescribe medicines regardless of the label. We will be focused on payers.

We've identified that 27 payers represent over 75% of Achtar's business. We can mandate step edits or formulary restrictions regardless of the indication the product has, and that's the dialogue that we're having with payers. As to projections, all, again, I would say is that even if we got a modest volume share and went with, what I would call, a competitive pricing discount, this would be substantial asset for Assertio.

David Amsellem -- Piper Jaffray -- Analyst

OK. Well, thought I'd give it a shot. Thanks.

Arthur Higgins -- President and Chief Executive Officer

It was well worth a try.

John Thomas -- Senior Vice President of Investor Relations and Corporate Communications

Anything else, David?

David Amsellem -- Piper Jaffray -- Analyst

And I'm going to keep trying, how about that?

Arthur Higgins -- President and Chief Executive Officer

Yeah. And you know what? If you keep triangulating, David, one of these days I'll let slip. So you need to keep asking.

David Amsellem -- Piper Jaffray -- Analyst

All right. Thanks.

Arthur Higgins -- President and Chief Executive Officer

Thank you very much.

John Thomas -- Senior Vice President of Investor Relations and Corporate Communications

Thanks, David. Hailey, are we -- any other questions?

Operator

There are no further questions at this time. And Mr. Thomas, you can proceed with your closing comments.

John Thomas -- Senior Vice President of Investor Relations and Corporate Communications

OK. I want to thank everyone for joining us this afternoon. A replay of the webcast and conference call will be available shortly and for the next 30 days. Dial 1 (855) 859-2056 and use the passcode 3784827.

If you have any follow-up questions, please contact us. As a reminder, our earnings-related materials are posted to the Investor Relations website of Assertio. I think, Arthur wants to give one last closing statement.

Arthur Higgins -- President and Chief Executive Officer

Yeah, just wanted to again thank everybody who participated in today's call and for the questions. I hope all the listeners can agree that the many actions we have taken over the last year have reshaped Assertio into a faster, leaner and more entrepreneurial company, a company on the rise and a company committed to getting value for our shareholders. Thanks, again, for your participation today.

John Thomas -- Senior Vice President of Investor Relations and Corporate Communications

Thanks, everyone, and please contact us if you have any follow-ups. Have a good evening.

Operator

[Operator signoff]

Duration: 34 minutes

Call Participants:

John Thomas -- Senior Vice President of Investor Relations and Corporate Communications

Arthur Higgins -- President and Chief Executive Officer

Dan Peisert -- Senior Vice President and Chief Financial Officer

Scott Henry -- ROTH Capital Partners -- Analyst

Dan Busby -- RBC Capital Markets -- Analyst

Irina Koffler -- Mizuho Securities -- Analyst

David Amsellem -- Piper Jaffray -- Analyst

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