Investing in opioid manufacturers is an endeavor few investors wish to partake in. Between 2011 and 2017, more than 40,000 Americans died each year due to opioid overdose, which has become a full-blown public health crisis. Over 2,500 lawsuits across all 50 states  have been brought against manufacturers for drastically understating the risks of addiction associated with their painkiller products in their marketing efforts, with potentially hundreds of billions of dollars at play in the event of settlements.

Meanwhile, approximately 50 million Americans experience chronic pain each year and may require prescription opioids. Currently, there are simply no other options available for fast and effective pain relief for the condition. One company, however, has developed an abuse-deterrent opioid that is rapidly replacing prescriptions of traditional oxycodone. For risk-savvy biotech investors, investing in Collegium Pharmaceutical (COLL -0.31%) may present the next brave venture. 



A lower-risk formulation

The lower-risk painkiller manufactured by the company is Xtampza ER, which are Extended-Release (ER) tablets of oxycodone containing multiple inactive compounds that help make the drug difficult to abuse. Xtampza was approved by the Food and Drug Administration in 2016. According to a paper published in Mercy Family Practice SC, the abuse-deterrent mechanisms are  "microspheres [which] resist effects of crushing and chewing; melted or dissolved contents of capsules are difficult to inject".  In phase 3 clinical trials, there were no little to no differences between maximum concentrations of the drug in patients' bloodstream whether they were taken intact or crushed. This is not the case for regular oxycodone, as crushing the tablet makes the compound easier for the body to absorb, and hence resulting in higher likelihood of abuse. 

The improvement may seem small, but that's enough to convince health insurers nationwide to switch en masse to the new product. Currently, 40% of Americans enduring chronic pain are prescribed Xtampza instead of regular ER oxycodone. This is a staggering growth from just 12% market share in December 2018. In terms of both breadth and strength of market access, Xtampza ER has surpassed OxyContin, a highly addictive oxycodone pill. 

The company is guiding for sales of Xtampza to hit at least $150 million this year. Meanwhile, the company also markets the Nucynta opioid franchise, which is estimated to generate up to $175 million in sales. Combined, the company may reach over $300 million in revenues this year, and generate over $130 million in non-GAAP net income. Since Collegium currently trades at a market cap of $670 million, this represents an incredibly cheap valuation of five times forward earnings. 

Is there a catch?

In short, Collegium is trading at a discount because investors are concerned about potential settlements from nationwide opioid litigation. On a deeper dive, this does not pose as large of a risk as investors may initially believe. While large-cap opioid manufacturers such as Purdue PharmaEndo Pharmaceuticals (ENDP), Mallinckrodt (MNK) and Teva Pharmaceutical Industries (TEVA 1.05%) are named in nearly every single case, Collegium is named as a defendant in only 26 out of 2,600 lawsuits currently pending against opioid manufacturers and distributors. This is because the company did not possess significant exposure to opioid products until it began marketing Nucynta in 2017. 

What about debt?

Recently, Collegium purchased full rights of Assertio Therapeutics' Nucynta for $375 million in cash. To fund this operation, Collegium raised $200 million in debt and $143.75 million in convertible debt for a grand total of $343.75 million in new liabilities.  Although this may seem a lot, keep in mind Collegium has over $170 million cash on hand, and no debt to begin with in the first place. After these adjustments, the net debt position of the company stands at a mere $173 million, which is more than manageable considering it is guiding for profits of $130 million this year.  

Should investors buy now?

In short, Collegium is trading at attractive valuations, has little debt, is barely named in any opioid lawsuits, has never been found guilty of misleading practices when marketing its products, and is rapidly gaining market share in the oxycodone market with Xtampza XR. Both value and growth investors looking for exposure in the healthcare sector should consider adding this stock to their portfolio, provided they have a medium-to-high level of risk tolerance. After all, it's wise to start by taking a small stake in the business because indiscriminate selling from the effects of broad opioid litigation remains a significant short-term risk on the horizon.