What happened

Shares of Collegium Pharmaceutical (NASDAQ:COLL) jumped more than 20% today after the company announced an agreement to purchase the U.S. rights to the Nucynta franchise from Assertio Therapeutics for $375 million. The opioid franchise includes Nucynta extended-release and immediate-release products. 

The transaction essentially buys out the royalty stream Collegium Pharmaceutical currently pays to Assertio Therapeutics on sales of Nucynta products. Collegium Pharmaceutical said the deal will improve annual EBITDA and operating cash flows by more than $100 million. The transaction will not improve annual revenue, however, due to the structure of the royalty agreement.

As of 12:19 p.m. EST, the pharma stock had settled to a 19.2% gain.

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So what

Why won't the deal lead to an increase in annual revenue? 

Under the Nucynta commercialization agreement with Assertio Therapeutics, Collegium Pharmaceutical was required to pay a 65% royalty on annual net product revenue of up to $180 million through 2021. That royalty tier drops down to 58% beginning in 2022. Collegium Pharmaceutical reported net product revenue, then accounted for royalty payments in the cost of product revenue line of the income statement. 

For example, Collegium Pharmaceutical expects full-year 2020 Nucynta franchise revenue of $170 million to $180 million. Therefore, acquiring the full U.S. rights to the two products will save up to $117 million in royalty payments this year alone. Those savings will trickle down the income statement as gross profit. Considering the company reported an operating loss of $21 million in the first nine months of 2019, the transaction should easily be enough to make the business profitable in 2020, even after accounting for increased interest payments related to the debt raised to fund the deal. 

Now what

Collegium Pharmaceutical appears to be turning the corner financially. Considering the company will raise $325 million in debt to complete the transaction with Assertio Therapeutics and should save at least $100 million in royalty expenses per year, there's the potential to realize a very short payback period on the transaction. Therefore even if Nucynta sales face headwinds due to the negative sentiment surrounding opioid pain treatments, this deal should pay off for the company and investors.

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