COLLEGIUM PHARMACEUTICAL, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that involve risks uncertainties and assumptions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Quarterly Report on Form 10-Q, including those set forth under "Forward-looking Statements" and "Risk Factors", as revised and supplemented by those risks described from time to time in other reports which we file with theSEC . OVERVIEW
We are a specialty pharmaceutical company committed to being the leader in responsible pain management. Our first product, Xtampza ER, is an abuse-deterrent, extended-release, oral formulation of oxycodone. InApril 2016 , the FDA approved our NDA for Xtampza ER for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment and for which alternative treatment options are inadequate. InJune 2016 , we announced the commercial launch of Xtampza ER. Our product portfolio also includes Nucynta IR and Nucynta ER (collectively, the "Nucynta Products"). InDecember 2017 , we entered into a Commercialization Agreement (the "Nucynta Commercialization Agreement") with Assertio Therapeutics, Inc. ("Assertio"), pursuant to which we licensed the right to commercialize the Nucynta Products inthe United States . Nucynta ER is an extended-release formulation of tapentadol that is indicated for the management of pain severe enough to require daily, around-the-clock, long-term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy in adults, and for which alternate treatment options are inadequate. Nucynta IR is an immediate-release formulation of tapentadol that is indicated for the management of acute adult pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. We began shipping and recognizing product sales on the Nucynta Products onJanuary 9, 2018 and began marketing the Nucynta Products inFebruary 2018 . OnFebruary 6, 2020 , we entered into an Asset Purchase Agreement with Assertio (the "Nucynta Purchase Agreement"), pursuant to which the Company agreed to acquire from Assertio certain assets related to the Nucynta Products (the "Nucynta Acquisition"), including the rights to the license from Grünenthal GmbH ("Grünenthal"), for an aggregate purchase price of$375.0 million . OnFebruary 13, 2020 , we closed the Nucynta Acquisition in accordance with the Nucynta Purchase Agreement. Upon closing, the Nucynta Commercialization Agreement was terminated, with the exception of certain provisions thereof which survived pursuant to the terms of the Nucynta Purchase Agreement, and our royalty payment obligations to Assertio thereunder ceased. Following the closing, the Company will pay royalties directly to Grünenthal at a rate of 14% of net sales of the Nucynta Products. Outlook We expect to continue to incur significant commercialization expenses related to marketing, manufacturing, distribution, selling and reimbursement activities. We are promoting Xtampza ER to approximately 11,000 health care professionals who write approximately 65% of the branded extended-release oral opioid prescriptions inthe United States with a sales team of approximately 150 sales representatives and managers. We are promoting the Nucynta Products to the same health care professionals to whom we promote Xtampza ER, leveraging our existing sales organization.
Net income for the three months endedMarch 31, 2020 was$450,000 . In every annual reporting period since inception, we have incurred net losses. As ofMarch 31, 2020 , we had an accumulated deficit of$359.4 million . Substantially all of our prior net losses resulted from costs incurred in connection with selling, general and administrative costs associated with our operations and research and development programs. We have historically paid royalties to Assertio on all revenues from the sale of Nucynta Products based on certain net sales thresholds, which ceased upon closing of the Nucynta Acquisition. Our net income (loss) may fluctuate significantly from quarter to quarter and year to year. We believe that our cash and cash equivalents atMarch 31, 2020 , together with expected cash inflows from the commercialization of our products, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future. 32 Table of Contents InDecember 2019 , a novel strain of coronavirus began infecting people inChina ; since then, the disease caused by that virus, COVID-19, has sickened millions of people across the world and inMarch 2020 , theWorld Health organization declared COVID-19 a pandemic. The pandemic has severely impacted global economic activity, and many countries and many states inthe United States have reacted to the outbreak by instituting quarantines, mandating business and school closures and restricting travel. As of the date of the filing of this Quarterly Report on Form 10-Q, we expect the COVID-19 pandemic and actions taken to contain it to impact our revenue (due to fewer new patients beginning therapy with our products) and decrease certain operating expenses, including travel and regulatory expenses associated with post-marketing trials that are delayed for 2020. We believe that the disruptions caused by COVID-19 will be temporary, but there remains substantial uncertainty as to when such disruptions will cease (or ease).
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as "critical" because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates-which also would have been reasonable-could have been used, which would have resulted in different financial results. The critical accounting policies we identified in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 ("Annual Report"), relate to revenue recognition and impairment of intangible assets. Estimates include revenue recognition, including the estimates of product returns, units prescribed, discounts and allowances related to commercial sales of our products, estimates utilized in the valuation of inventory, estimates of useful lives with respect to intangible assets, accounting for stock-based compensation, contingencies, intangible assets, and tax valuation reserves. We base our estimates and assumptions on historical experience when available and on various factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. It is important that the discussion of our operating results that follows be read in conjunction with the critical accounting policies disclosed in our Annual Report. 33 Table of Contents RESULTS OF OPERATIONS (in thousands) Three months ended March 31, 2020 2019 (in thousands) Product revenues, net$ 76,511 $ 74,516 Cost of product revenues Cost of product revenues (excluding intangible asset amortization) 27,229
45,476
Intangible asset amortization 10,295
3,688
Total cost of products revenues 37,524
49,164
Gross profit 38,987 25,352
Operating expenses
Research and development 2,666 2,992Selling, general and administrative 31,260
32,352
Total operating expenses 33,926
35,344
Income (loss) from operations 5,061
(9,992)
Interest expense (4,823) (234)
Interest income 212 526
Net income (loss) $ 450 $ (9,700) Comparison of the three months ended
Product revenues, net were$76.5 million for the three months endedMarch 31, 2020 (the "2020 Quarter"), compared to$74.5 million for the three months endedMarch 31, 2019 (the "2019 Quarter"). The$2.0 million increase was related to an increase in revenue for Xtampza ER of$6.4 million , offset by a decrease in revenue for the Nucynta Products of$4.4 million . For the 2020 Quarter, Xtampza ER product revenues, net were$31.5 million , compared to$25.1 million for the 2019 Quarter. The increase in revenue for Xtampza ER was primarily related to an increase in sales volume due to increased demand and an increase in price. For the 2020 Quarter, Nucynta IR and ER product revenues, net were$28.0 million and$17.0 million , respectively, compared to$29.9 million and$19.5 million , respectively, for the 2019 Quarter. The decrease in revenue for the Nucynta Products was primarily related to lower sales volume, partially offset by an increase in price. Cost of product revenues was$27.2 million for the 2020 Quarter, compared to$45.5 million for the 2019 Quarter. The$18.3 million decrease was primarily related to a decrease in royalty expense for the Nucynta Products. In the 2019 Quarter, we recognized$32.1 million in sales-based royalty expense due to Assertio under the terms of the Nucynta Commercialization Agreement. Our sales-based royalty obligations to Assertio ceased upon closing of the Nucynta Acquisition onFebruary 13, 2020 . Prior to the closing, the Company recognized$14.2 million of non-cash royalty expense in the 2020 Quarter. Intangible asset amortization was$10.3 million for the 2020 Quarter, compared to$3.7 million for the 2019 Quarter. The$6.6 million increase was primarily related to the Nucynta Acquisition, in which$367.1 million of consideration was allocated to the existing intangible asset as incremental cost. The intangible asset is being amortized on a straight-line basis over its estimated useful life of approximately six years.
Research and development expenses were
Selling, general and administrative expenses were
? a decrease in audit, legal, and other professional fees of
a decrease in sales, marketing and consulting costs of
? to higher costs incurred in the 2019 Quarter to commercialize the Nucynta
Products;
? a decrease in trainings, conferences and meetings of
timing of events; offset by
34
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? an increase in product taxes and fees of
states recently enacting excise taxes on the sale of opioids; and
an increase in salaries, wages and benefits of
? stock-based compensation expense, wage increases and incentive compensation
expense. Interest expense was$4.8 million for the 2020 Quarter, compared to$234,000 in the 2019 Quarter. The increase was primarily due to$4.4 million of interest expense recognized in the 2020 Quarter associated with the term notes and convertible notes issues in connection with the Nucynta Acquisition.
Interest income was
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity Since inception, we have funded our operations primarily through the private placements of our preferred stock and convertible notes, public offerings of common stock, and commercial bank debt. As ofMarch 31, 2020 , we had$116.2 million in cash and cash equivalents. Although it is difficult to predict future liquidity requirements, we believe that our cash and cash equivalents atMarch 31, 2020 , together with expected cash inflows from the commercialization of our products, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future.
Borrowing Arrangements and Equity Offerings
The following transactions represent the material changes in borrowing arrangements and equity offerings that were previously disclosed in our most recent Annual Report.
Pharmakon Term Notes OnFebruary 6, 2020 , in connection with the execution of the Nucynta Purchase Agreement, we, together with our subsidiary,Collegium Securities Corporation , entered into the Loan Agreement with BioPharma Credit PLC, as collateral agent and lender; andBioPharma Credit Investments V (Master) LP , as lender. The Loan Agreement provides for a$200.0 million secured term loan (the "term notes"), the proceeds of which were used to finance a portion of the purchase price paid pursuant to the Nucynta Purchase Agreement. The term notes will mature on the calendar quarter end immediately following the 48-month anniversary of the closing of the Nucynta Acquisition, and is guaranteed by our material domestic subsidiaries and is also secured by substantially all of our material domestic assets. The term notes will bear interest at a rate based upon LIBOR (subject to a LIBOR floor of 2.0%), plus a margin of 7.5% per annum. We are required to repay the term notes by making equal quarterly payments. The Loan Agreement contains certain covenants and obligations of the parties, including, without limitation, covenants that require us to maintain$200.0 million in annual net sales and covenants that limit our ability to incur additional indebtedness or liens, make acquisitions or other investments or dispose of assets outside the ordinary course of business. Failure to comply with these covenants would constitute an event of default under the Loan Agreement, notwithstanding our ability to meet its debt service obligations. The Loan Agreement also includes various customary remedies for the lenders following an event of default, including the acceleration of repayment of outstanding amounts under the Loan Agreement and execution upon the collateral securing obligations under the Loan Agreement. 2026 Convertible Notes 35 Table of Contents OnFebruary 13, 2020 , in connection with the execution of the Nucynta Purchase Agreement, we issued 2.625% convertible senior notes due 2026 (the "convertible notes"), in the aggregate principal amount of$143.8 million , in a public offering registered under the Securities Act of 1933, as amended. The proceeds were used to finance a portion of the purchase price paid pursuant to the Nucynta Purchase Agreement. The convertible notes are senior, unsecured obligations and will accrue interest at a rate of 2.625% per annum, payable semi-annually in arrears onFebruary 15 andAugust 15 of each year, beginning onAugust 15, 2020 . The notes will mature onFebruary 15, 2026 , unless earlier repurchased, redeemed or converted. BeforeAugust 15, 2025 , noteholders will have the right to convert their notes only upon the occurrence of certain events. From and afterAugust 15, 2025 , noteholders may convert their notes at any time at their election until the close of business on the scheduled trading day immediately before the maturity date. We will settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The initial conversion rate is 34.2618 shares of common stock per$1,000 principal amount of notes, which represents an initial conversion price of approximately$29.19 per share of common stock. The conversion rate and conversion price will be subject to adjustment upon the occurrence of certain events.
Silicon Valley Bank Term Loan Facility
FromAugust 2012 untilJanuary 2020 , we maintained a term loan facility withSilicon Valley Bank , which was amended in connection with, and as a condition to, consummation of the transactions contemplated by the Nucynta Commercialization Agreement. Under the amended term loan, we had a term loan facility in an amount of$11.5 million , which replaced our previously existing term loan facility. The proceeds were used to finance certain payment obligations under the Nucynta Commercialization Agreement and to repay the balance of the previously existing term loan. InJanuary 2020 , in anticipation of consummation of the Nucynta Acquisition and related financing activities, we repaid all of our outstanding indebtedness under the amended term loan. 36 Table of Contents Cash Flows Three months endedMarch 31, 2020 2019
Net cash used in operating activities$ (6,669) $ (8,569) Net cash used in investing activities (367,647) (3,323) Net cash provided by financing activities 323,120 169
Net decrease in cash, cash equivalents and restricted cash
$ (11,723) Operating activities. Cash used in operating activities was$6.7 million in the three months endedMarch 31, 2020 (the "2020 Quarter"), compared to cash used in operating activities of$8.6 million in the three months endedMarch 31, 2019 (the "2019 Quarter"). The$1.9 million decrease in cash used in operating activities was primarily due to higher net income and non-cash adjustments related to the Nucynta Acquisition, which resulted in higher intangible asset amortization and higher non-cash interest expense from the term notes and convertible notes. These increases were partially offset by decreases in the working capital accounts.
Investing activities. Cash used in investing activities was$367.6 million in the 2020 Quarter, compared to cash used in investing activities of$3.3 million in the 2019 Quarter. The$364.3 million increase in cash used in investing activities was primarily related to the Nucynta Acquisition. The remaining change is primarily related to purchases of property, plant, and equipment primarily for the dedicated production suite at our contract manufacturing organization. Financing activities. Cash provided by financing activities was$323.1 million for the 2020 Quarter, compared to cash provided by financing activities of$169,000 in the 2019 Quarter. The$322.9 million increase in cash provided by financing activities was primarily related to net proceeds from the term notes of$192.4 million and issuance the convertible notes of$138.8 million issued in the 2020 Quarter. This increase was partially offset by the term loan repayment of$11.5 million . The remaining change is primarily related to changes in proceeds from the issuance of shares under our employee stock purchase plan and proceeds from exercises of stock options, offset by payments made for employee restricted stock tax withholdings. Funding Requirements We believe that our cash and cash equivalents atMarch 31, 2020 together with expected cash inflows from the commercialization of our products, will enable us to fund our operating expenses, debt service and capital expenditure requirements under our current business plan for the foreseeable future. However, we are subject to all the risks common to the commercialization and development of new pharmaceutical products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. Certain economic or strategic considerations may cause us to seek additional cash through private or public debt or equity offerings. Such funds may not be available when needed, or, we may not be able to obtain funding on favorable terms, or at all. The continued spread of COVID-19 has led to severe disruption and volatility in the global capital markets, which could increase our cost of capital and adversely affect our ability to access the capital markets. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our products. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing shareholders, increased fixed payment obligations and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects. Our forecast that our financial resources will be adequate to support our operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. The amount and timing of future funding requirements, both near- and long-term, will depend on many factors, including: 37 Table of Contents
? the generation of reasonable levels of revenue from products sales and the
impact of the COVID-19 pandemic on our business and results of operations;
? the cost of growing and maintaining sales, marketing and distribution
capabilities for our products;
the cost of patent infringement litigation, including our litigation with each
? of Purdue and Teva, relating to Xtampza ER and the Nucynta Products, which may
be expensive to defend;
? the cost of litigation related to opioid marketing and distribution practices;
? the timing and costs associated with manufacturing our products, for commercial
sale and clinical trials; and
? the effect of competing technological and market developments
If we cannot capitalize on our business opportunities because we lack sufficient
capital, our business, financial condition and results of operations could be
materially adversely affected.
ADDITIONAL INFORMATION
To supplement our financial results presented on a GAAP basis, we have included
information about non-GAAP adjusted income (loss). We use this non-GAAP
financial measure to understand, manage and evaluate the Company as we believe
it represents the performance of our core business. Because this non-GAAP
financial measure is an important internal measure for the Company, we believe
that the presentation of the non-GAAP financial measure provides analysts,
investors and lenders insight into management's view and assessment of the
Company's ongoing operating performance. In addition, we believe that the
presentation of this non-GAAP financial measure, when viewed with our results
under GAAP and the accompanying reconciliation, provides supplementary
information that may be useful to analysts, investors, lenders, and other third
parties in assessing the Company's performance and results from period to
period. We report this non-GAAP financial measure in order to portray the
results of our major operations prior to considering certain income statement
elements. This non-GAAP financial measure should be considered in addition to,
and not a substitute for, or superior to, net income or other financial measures
calculated in accordance with GAAP.
Non-GAAP adjusted income (loss) is not based on any standardized methodology
prescribed by GAAP and represents GAAP net income (loss) adjusted to exclude
stock-based compensation expense, amortization expense, non-cash interest
expense, and certain royalty costs recognized in connection with the Nucynta
Commercialization Agreement. Any non-GAAP financial measures used by us may be
calculated differently from, and therefore may not be comparable to, a non-GAAP
measure used by other companies.
Three months ended
March 31,
2020 2019
GAAP net income (loss) $ 450 $ (9,700) Non-GAAP adjustments: Stock-based compensation expense(1) 4,951 4,263 Intangible asset amortization(2) 10,295 3,688 Non-cash interest expense(3)
1,336 -
Nucynta royalty adjustment (4) 14,216 -
Total non-GAAP adjustments
(1) Represents stock-based compensation expense associated with our stock option, restricted stock unit and performance stock unit grants and our employee share purchase plan. (2) Represents amortization expense from the Nucynta Intangible Asset. (3) Represents non-cash interest expense recognized related to the accretion of debt discount and amortization of debt issuance costs. (4) Represents adjustment for royalty expense recognized in 2020 prior to the closing of the Nucynta Asset Purchase Agreement inFebruary 2020 . The royalty expense was included as a reduction to the base purchase price for the Nucynta Asset Purchase Agreement and, upon closing, the Company was discharged of any unpaid royalties due to Assertio. 38 Table of Contents CONTRACTUAL OBLIGATIONS With the exception of the Loan Agreement with Pharmakon and issuance of convertible notes previously discussed, there have been no material changes to the contractual obligations and commitments described under Management's Discussion and Analysis of Financial Condition and Results of Operations in
our most recent Annual Report.
OFF-BALANCE SHEET ARRANGEMENTS
We did not have during the periods presented any offbalance sheet arrangements,
as defined under
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