Summary
- Collegium unfortunately had to cut the 2020 guidance in a small way alongside first quarter earnings report.
- Despite this shortfall, I still peg adjusted earnings around $3 per share, resulting in very low multiples amidst moderate leverage and solid growth.
- The valuation looks to cheap and too good to ignore, although I fear the same cheapness.
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Collegium Pharmaceuticals (COLL) has been a stock which intrigued me for quite a while, although I lack conviction on the thesis and a cautious bullish thesis has not played out exactly as planned yet.
In February of this year, when COVID-19 was not yet in the spotlights, I concluded that 2020 could become a great year. My optimism was based on greater Xtampza patient population, a decent outlook for the year and what appears to be a savvy deal, as I concluded to stick to a long position, as I am reiterating that stance now, albeit with some reservations.
The Past Thesis
I have been watching Collegium closely since the company obtained FDA approval for Xtampza in 2016, marking the start of a two decade long period in which the drug can be commercialized. I was compelled to the pain release mechanism of the drug, as Collegium claims that it cannot be manipulated the same way which happens with other drugs, hence overdosing becomes impossible or at least very hard to do. This is very important as the other solution, that of administrating multiple doses a day is not very practical. The so-called extended release pain mechanism market was dominated by OxyContin which of course has come under a great deal of scrutiny.
Debut sales of Xtampza came in at just $1.7 million in 2016, but that is not very indicative of course. Revenues rose to $24 million in 2017 and $69.4 million in 2018, with the run rate coming in around $74 million by year's end. This is still somewhat disappointing given that the target market is so large and the product is supposed to be superior, certainly with FDA labeling approved to promote anti-abuse qualities of the drug.
The thesis changed entirely as the company made a move late 2017 reaching a deal with Depomed to commercialize Nucynta tablets in the US, driven by potential marketing synergies for the pain release market. Sales of Nucynta ran at $200 million at the time, far larger than Xtampza, as Collegium agreed to a ten million upfront payment and minimum royalty payment of $135 million in the four years following closure.
Early 2019 the company guided for Xtampza sales at a midpoint of $100 million and Nucynta sales at $205 million, with the latter down fractionally compared to 2018, as this roadmap allowed for break-even results. Despite all these developments the company continued to be a small cap firm shares have basically traded back and forth in a $10-$25 trading range since 2016, with shares doubling from $10 to the low twenties late 2019 on the back of some existing news. This was the news that Xtampza would become the next extended-release mechanism for another 35 million patients from January 2020 onward.
