Assertio Holdings, Inc.

Thank you for joining. Your conference will begin momentarily. We thank you for your patience and please stand by. Your conference will begin shortly. Thank you. Thank you. Welcome to the first quarter 2021 financial results of Sergio Holdings, Inc. Earnings Conference Call. My name is Hilda and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star and then 1 using your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Max Nemers, Head, Investor Relations and Administration. Mr. Nemers, you may begin.

Thank you. Good afternoon, and thank you all for joining us today to discuss Assertio's first quarter 2021 financial results. The news release covering our earnings for this period is now available on the investor page of our website at investor.assertiotx.com. I would encourage you to review the release as it's important to today's discussion. With me today are Dan Pizer, President and Chief Executive Officer, and Paul Schwichtenberg, Senior Vice President and Chief Financial Officer. Dan will open the remarks and provide an overview of the business, followed by Paul, who will review our financials. After that, we will open the call for your questions. During this call, management will make projections and other 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 afternoon's press release, as well as the Servio's filings with the SEC. These and other risks are more fully described in the risk factor section and other sections of our annual report on Form 10-K. Our actual results may differ. materially from these projected in the forward-looking statements, and a servio specifically disclaims any intent or obligation to update these forward-looking statements except as required by law. With that, I will now turn the call over to Dan. Dan?

Thank you, Max, and thank you everyone for joining us this afternoon. We're approaching the one-year anniversary of the Xyla acquisition, and with the changes we've made to our business at the start of this year, We're now seeing the benefits from the combination of Asserdio and Xylo. Diversification of the top-line revenue and healthy adjusted EBITDA margins. Last quarter, I laid out my goals and priorities for Asserdio. As a reminder, our priorities for 2021 are as follows. Build a strong and committed team with a culture of teamwork, inclusion, and results. Delivering our 45 million of restructuring synergies. Ensuring the company generates strong operating cash flow. ensuring our debt never becomes a constraint in running the business, mitigate our legacy legal uncertainties, and develop a sustainable business model that reflects a changing environment. Since the beginning of this year, we've made tremendous progress towards each of these priorities. We're continuing to strengthen our team, and our new head of commercial will start later this month. He will help us continue to build out our new commercial platform. We're also starting to make plans to open our offices soon and return to working in person. We, like others, have found a way to be productive with remote work during the pandemic. It is important that we continue to ensure our employees and their families are safe, but we're excited to get back to seeing everyone in person and the benefits that it can bring. In regard to the second priority of our synergies, as we said last quarter, we ultimately expect to realize $45 million in annual cost savings to relative to our run rate from the second half of 2020. As you can see from our results this quarter, we're well on our way to achieving that goal. We have and will continue to accelerate some investments towards our priorities as a result of our improved liquidity, but we are still confident that we can achieve this goal. We've already paid the majority of the restructuring costs in Q4 2020 and Q1 2021. Excluding the cash paid for restructuring, We were operating cash flow positive this quarter. Due to the timing of some large or regular payments, such as our debt and royalty payments, we do not expect to be cash flow positive every quarter. As such, we're managing our cash flows on an annual basis. As for our fourth priority, we believe that our debt is no longer a constraint to our business. The capital that we raised in the first quarter has eliminated any concerns about meeting the only maintenance government on our debt, which relates to minimum liquidity. And as you'll see from our balance sheet, we're now in a positive working capital position. This additional liquidity has enhanced our outlook on business development. In the few months since the equity raise, we've been evaluating multiple opportunities that we would not have been able to pursue before. Additional benefits are that we've been able to accelerate investments in , our novel commercial model, and also towards our fifth priority of mitigating legacy legal liabilities. We continue to solely chip away at the legacy legal situations and have devoted additional resources towards driving the cases to conclusion. As we announced early in the quarter, we settled our insurance litigation. We have also recently reached settlements in the follow-on candy of paragraph four litigation. Putting these situations behind us allows us to focus our time and attention towards some of the larger opportunities and spend more time executing on our business. One change I see is that we are no longer excluding the opioid-related legal costs from our adjusted EBITDA and are showing what historical results were if we treated them the same. We started excluding these costs when we completed the commercialization agreement with Collegium in 2018 because the lawsuits were associated with the company's historical commercialization of opioids. While this is still the case, our new management focus is towards increased transparency around around and management of operating cash flow and mitigating these legal uncertainties. We understand how important it is to our shareholders to reduce these costs and limit the liabilities through these situations. Because there is an impact in operating cash flow from these costs, we feel it is more appropriate to reflect them in our operating results. We continue to believe that building out and improving upon our commercial platform is critical to a sustainable business model. So we've also accelerated some investments in our commercial infrastructure. I'm excited about one of those investments which we just announced the other day. We're expanding into the growing area of telemedicine by partnering with the leading migraine telemedicine platform, COVE. This new alliance will allow us to develop new skills and target patients directly in our digital marketing efforts, and build out a cash pay offer which is a new segment for Aservio. In addition, beginning this month, we restarted limited in-person promotion for Zip Store in approximately five territories. We are doing this through a partnership with another company who have detailed a product for us within their existing call universe, primarily consisting of orthopedic practices. Our results this quarter were encouraging. The first quarter is typically the most seasonally affected quarter, and this year our entire industry is also facing a difficult year-over-year comparison. Q1 of 2020 actually benefited from the pandemic as early refills and a greater mix of 90-day prescriptions pulled forward some demand as patients anticipated staying home to avoid COVID. Despite that dynamic and a significant shift in our promotional efforts to non-personal visual, all of our products saw year-over-year net revenue growth, except for Spirx and Zipsor. The decline in SPRX was expected following the formulary loss from major PBM in September of last year. However, the impact is greater than we had initially assumed, coming in approximately 70% below the prior year quarter. Zip search performance, while declining net revenue, still had positive volume growth. Cambia was up 3% year-over-year, which is a very encouraging result. Induson was up 23% over the prior year, and I believe it may have been the best quarter ever for this product. Induson's strength this quarter and our additional liquidity have allowed us to accelerate investments in the product. One of those investments will accuse a decline in net revenues next quarter, as we have purposely reduced channel inventories for the product in April by approximately 10 days. Ultimately, we believe this will increase our profitability, as this is part of a multi-step process to increase demand and protect the product. The 1Q 2021 results, specifically for its performance and its action taken in addition, have been factored into the guidance we've provided today for four-year sales of $85 to $92 million. The 1Q results were very encouraging. But we believe they still do not fully reflect the impacts of our change in promotional model and may have benefited from the limited in-person rep promotion we did have in the fourth quarter. That said, we have reason for optimism with new leadership coming in and the continued investments we're making in the model. In addition to product net sales guidance, we're also providing four-year adjusted unit debt guidance of $34 to $40 million. As we progress through the remainder of the year, our efforts will concentrate on our priorities concerning our cash flows, legal risk mitigation, and building a sustainable model including investment in our commercial structure. As a management team, we will focus our new term efforts on identifying and evaluating acquisition candidates that we can incorporate into our platform to further diversify our top line, help us grow the company, and extend our runway from a revenue lifecycle perspective. Paul and I have some ambitious goals as it relates to BD. The core amongst them is to acquire a product or products that could generate at least $50 million in gross profit by 2024. We will continue to be creative with our approach to the structure and type of transaction, such as acquisition, licensing, commercialization agreements, or strategic investments. Now I'll turn the call over to Paul to walk through the results. Thank you, Dan. This afternoon I will review the financial highlights from our first quarter of 2021. As was the case in the last few quarters, our year-over-year comparisons are challenging due to the many changes in our business. For clarity, any references to pro forma results represent product sales as if the Xyla merger had been completed on January 1, 2020. Net product sales were $26.4 million for the three months ended March 31, 2021, compared to pro forma net product sales of $28.3 million in the prior year quarter and $30.1 million last quarter. As Dan noted in his comments, the first quarter has historically been the most seasonally affected quarter due to patient co-pay and deductible resets on January 1st. Inducing net sales reflect the highest quarterly result in at least the past two years, and 23% growth over the prior year quarter, which did reflect some volume decline due to COVID. Combined Cambia and ZipSor net sales were slightly ahead of the prior year quarter. SPRIX volume continues to be impacted by prior year commercial coverage change and COVID, resulting in a 70% decline versus the prior quarter. Despite the lower strict performance, the portfolio net sales were only down 6% versus Q1 2020 net sales, excluding revenue adjustments from divested products, due to the positive performance of the other brands. Please refer to our 10-Q for specific product level net sales information. Cost of sales in the first quarter of 2021 were $4 million versus $1.4 million in the first quarter of 2020. The increase is primarily due to Zyla-related product cost of sales upon the Zyla merger on May 20, 2020, offset by lower cost of sales due to the released divestiture in the first quarter of 2020. The three months ended March 31, 2020 in cost of sales, including $200,000 of amortization of inventory step-up related to Zyla-acquired inventory sold. Our non-GAAP adjusted operating expenses in the first quarter were $7.3 million. This amount includes the benefit from the $5 million insurance settlement received in February and opioid legal expenses of $1.2 million incurred during the quarter. Starting in Q1 2021, opioid legal expenses, which have previously been excluded from non-GAAP operating expenses over the last several quarters, will now be included in non-GAAP operating expenses and non-GAAP EBITDA. As was mentioned on our prior quarter earnings call, a primary focus for the company is to manage operating cash flow and proactively work to mitigate legal uncertainties. We believe that this reporting change on opioid legal costs aligns with the current priorities of the business. Excluding the insurance settlement, non-GAAP operating expenses were $12.3 million, for the quarter compared to $18.69 in the first quarter of 2020 and $20.39 in the prior quarter. Both prior year quarter amounts have been recast to include opioid legal expenses for comparability. The results for the quarter include some pre-restructuring carryover expenses and we expect to see further expense reductions for the remainder of 2021. As I stated last quarter, because of the Q4 2020 restructuring, We expect in 2021 to achieve operating expense savings off the annualized second half 2020 operating expense run rate, including opioid legal costs. For clarity, our pre-destructuring operating expense run rate, including opioid legal costs for the second half of 2020 was 43.7 million, which translates to an annual operating expense run rate of approximately 87.4 million. In 2021, we expect to achieve 40 million of savings off this past run rate, and ultimately $45 million in annual savings beginning in 2022. Non-GAAP adjusted EBITDA for the quarter was $15.7 million compared to $2.9 million in the prior year quarter and $8.2 million in the fourth quarter of 2020 on a comparative basis adjusted for opioid legal expenses. The improvement is reflective of both the realization of the cost reductions and the impact of the insurance settlement of $5 million. Excluding the impact of the insurance settlement, the EBITDA margin was 41% of net sales for the quarter. Net income for the first quarter was $4.5 million compared to the prior year's first quarter net income of $41.2 million and a loss of $24.4 million in the prior quarter. The comparison to the prior quarters was especially challenging given all the changes to the business. However, the largest change drivers from Q1 2020 to Q1 2021 are the net gain on asset sales partially offset by loss on debt extinguishment and transaction costs that occurred in Q1 2020 and the substantially lower operating expenses in Q1 2021. The change drivers versus Q4 of 2020 are lower operating expenses, the $5 million benefit from the insurance settlement, and the restructuring costs that were reflected in Q4 2020. The first quarter of 2021 net income also included $1.1 million of restructuring costs. On March 31st, 2021, our senior secured debt balance was $80.3 million, which will not mature until Q1 of 2024. On May 3rd, the company paid scheduled interest and principal of $10 million, leaving a third-party debt balance of $75.5 million as of today. And as we stated last quarter, we've improved our ability to achieve better terms and costs if we were to refinance our remaining debt over the next 12 to 18 months. Ending cash on March 31st, 2021 was $61 million. The change in cash of $40.2 million from our December 31st, 2020 balance of $20.8 million is primarily attributable to the cash proceeds from the registered direct offerings and the insurance settlement, partially offset by restructuring payments paid in the quarter. With the additional cash raised in the first quarter, our balance sheet reflects a positive working capital position versus a working capital deficit we've been in previously. As we stated last quarter, with the $45.3 million in cash raised from the registered direct offerings, we will be seeking to accelerate potential investments in 2021. Lastly, our annual guidance for 2021 is as follows. Product net sales of 85 to 92 million. Adjusted fee data, including opioid legal expenses, of 34 to 40 million. Here are a few key highlights related to this guidance. The product net sales of 85 to 92 million reflects the following factors. The impact of the lower SPRX volume due to the 2020 commercial coverage change in COVID to the remainder of 2021. Second, a channel inventory adjustment in Q2 for Indusim. related to a change in distribution strategy that will drive increased profitability in the future. Third, uncertainty related to COVID and our new promotional strategy. And fourth, as part of this guidance, we have now forecasted any future revenue adjustments for divested products. As I mentioned earlier, we're still on track to realize $45 million of annual cost savings and expect to deliver $40 million of cost savings in 2021 versus its reported second half 2021 rate. Cost savings in 2021 are expected to exceed the estimated revenue decline, resulting in significantly improved EBITDA margins and cash flows. We are still seeking to minimize or cap potential legal liabilities. Any potential future settlements are not reflected in this guidance. Overall, we're pleased with the first quarter results. The portfolio net sales have remained stable despite the challenging environment due to COVID and payer access. After the restructuring in the fourth quarter of 2020, we have quickly seen the impact of lower operating expenses in Q1 2021. Looking ahead, we will continue to focus on further reducing expenses, cash flow optimization, exploring opportunities to reduce cost of capital, and execution of our digital promotional strategies. And now I will turn the call back over to Max.

Thank you, Paul. Can we open up the call for QA, please?

Thank you. If you'd like to ask a question, please press star and then 1 using your touchstone phone. If you wish to be removed from the question queue, please press the pound sign or hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star and then 1 using your touchstone phone. We have a question from Scott Henry from Roth Capital.

Hi, and good afternoon. Just a couple questions. I guess first on the revenue line, for 2Q, just doing the simple math, if you reduce inventory by 10 days, should we think about, you know, I guess about one-ninth of the revenues for the quarter will be pulled out of Q2. And is that Indosyn only?

Yeah, it would be in this and only. And it's, yeah, I would think about that as two weeks, a full two weeks.

Okay. Thank you. That's helpful. And then, so factoring that in, and if I look at, you know, what you did this quarter plus your guidance for the rest of the year, there's still a couple products that are going to, you know, come down from first quarter levels. One I would expect to be that other category. Anything else? I mean, do you think SPRX is kind of nearing a base or does that have some more downside? Or perhaps Indosyn, maybe it's not going to be sustained at these levels, you know, absent inventory adjustments. Just trying to get a sense of how you think the levers are moving going forward for 2021. Okay.

Yeah, I think you're absolutely right, Scott. That other category, we've been winding down solumatrix. There's just a little bit of inventory left to bleed out. So that's essentially planned to be zero for the rest of the year. Spricks, we are expecting that it will be this level in the future. The change we're making in InDesign is a distribution change, and that should be just a one-quarter phenomenon.

Okay, so perhaps the difference after that other is just normal contraction as there's less marketing there. Shifting gears, did the insurance settlement, when was that taken again and where was that line item? I heard it briefly, but I couldn't locate it in the release.

The insurance settlement was received in February, and the way it was reflected in the financials was on the SG&A line as a benefit, so it's a reduction of our SG&A expenses.

And that was approximately $5 million? $5 million, yes. Okay, so your kind of organic SG&A would have been closer to $12.7 million, and I guess would you expect that to be declining still?

yes, we'd expect that to continue to decline over the next couple of quarters.

Okay, great. And then I guess the final question, given your relatively low multiple of EBITDA as far as the valuation of the company, would that motivate you as you're looking for product acquisitions to be more likely to use debt and or cash to acquire as opposed to your stock currency, you probably don't want to use that at this point in time, but I just want to get your thoughts.

Yeah, I think you're right, Scott. The ideal situation on a BD transaction is also the ability to refinance the existing debt. So that's something that we've been exploring, and if the transaction is large enough where it needs additional debt instead of just cashing off the balance sheet, then it could be ideal for that situation.

Okay, great. Oh, and one final question, just to get a sense of, going forward, do you expect to really just be giving a reported EPS number, and then you'll do an adjusted EBITDA? Is that how we should think about it, or will you be doing an adjusted EPS? It sounds like it'll just be reported, and then you'll break things down when you get to the EBITDA level.

That's correct, Scott. That's correct. Okay.

Okay. All right, great. Thank you for taking the questions.

Thank you, Scott.

Okay.

Thank you.

Since we don't have any more questions in the queue, so at this point in time, I will turn the call back over to Dan for closing comments.

We're pleased with the progress we made in just a few short months. Rest assured that we're just getting started. We've worked through the majority of the restructuring, have a talented team in place, and are focused on continuing the momentum we've created to fully execute against our six priorities. Our results could not have been possible without the great work of our team, and I want to thank them for their work and know that they share my enthusiasm for the future of our company. The best is yet to come for Assertio. We remain committed to creating value for all of our stakeholders and look forward to updating you on our progress. towards our priorities in future quarters. Thank you for joining us this afternoon and have a great evening.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.