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Affirmation (NASDAQ:ASRT), formerly Depomed, is a small specialty pharmaceutical company (market cap $119 million) with currently seven FDA-approved products. For the second quarter, the company beat both Street’s revenue and earnings per share (or EPS) estimates. On August 25, the company issued $70 million convertible senior notes due 2027 to redeem their first higher interest rate notes, but the market reacted negatively. However, the price-to-earnings ratio (or PE) is now much lower (better) compared to industry peers. These factors make ASRT a strong buy.

Product range:

INDOCIN accounted for 55% of Assertio’s revenue in 2021, while CAMBIA, Zipsor and SPRIX brought in 23%, 9% and 8% respectively. There is no patent protection for INDOCIN (indomethacin) oral suspension (average Medi-Span wholesale price of approximately $2,500 per 8 oz bottle) or suppositories (~$12,500 per box of 30), but so far there is no generic competition for these gout treatments. . For diclofenac products, generic versions of Zipsor (~$2,200 per bottle of 120) exist at around a 25% discount, while generic CAMBIA (~$1,000 per box of 9 packets) will be on the market next year. Otrexup ($825 per box of 4) competes with other brand name methotrexate products, including other injection and auto-injector products. OXAYDO is no longer manufactured and Assertio will sell through remaining inventory.

The three major national wholesale drug distributors – Cardinal Health (CAH), McKesson (MCK), and AmerisourceBergen (ABC) – account for approximately 85% of Assertio’s product sales revenue (see Table 1 and Figure 1), along with 95% of accounts receivable. SPRIX DIRECT is the exclusive source for brand name ketorolac nasal spray and the generic is very hard to find. Assertio receives royalties from Miravo Pharmaceuticals on net sales of CAMBIA in Canada. Other income consists of sales adjustments for previously divested products such as Gralise, Nucynta and Lazanda.

Table 1. Quarterly revenue (thousands of US dollars)

Q2 ’22

Q1 ’22

Q4 ’21

Q3 ’21

Q2 ’21

Q1 ’21

Q4 ’20

Q3 ’20

INDOCINE products

22,841

21,357

18,344

14,541

13,075

14,597

12,477

13,773

CAMBIE

6,183

5,473

7,344

5,038

6,128

6,462

6,847

7,449

Otrexup

2,616

3,078

PRICE

2,216

1,766

1,765

2,272

2,942

1,697

3,833

5,642

Others products

1,358

1,644

1,316

2,147

518

1,049

1,827

3,405

Zipsor

216

2,228

3,383

1,999

2,581

2,222

4,025

3,395

Total product sales, net

35,214

33,318

28,769

23,998

22,663

23,805

24,984

30,269

Stage royalties and revenues

451

992

1,187

416

542

434

361

299

Other income

-750

-9

-941

-413

378

806

602

Total revenue

35 131

36,538

33,330

25,472

25,373

26,839

30 176

34,565

Sales of Indocin, Cambia, Otrexup, Sprix and Zipsor

Net product sales (thousands of dollars) (Assertio)

Debt:

The senior convertible notes issued by Assertio were $70 million, which can offset the $59 million of 13% senior secured notes due 2024. The current notes pay 6.5% (or $4.55 million total interest per annum to purchasers) and converts to 244.2003 common shares per $1,000 principal amount at $4.09 per share. In the event of full conversion, 17,094,021 shares represent a dilution of approximately 26.5%. As a result, the market priced in by driving the stock price down 25% ($3.64 to $2.74) on August 23. Some of the price action could be attributed to some institutional buyers using convertible hedges. If a buyer of $1 million notes who would get $65,000 interest also sold 244,000 shares at $2.66, that $650,000 short position adjusts the cost base to $350,000, almost tripling the yield from 6.5% to 18.5%. Of course, if the stock rallies, the institution will have to close its short position.

Outlook:

Continues to be very heavy, because the company always leaves the most room for Indocin and CAMBIA. As Zipsor dwindled, Otrexup took its third place by revenue in the lineup. Normally, it takes a few months for an authorized generic to be available at national wholesalers, and another couple to land on health plan formularies, so it could be a year (Q2 2023) before the impact on CAMBIA does not become pronounced. So CAMBIA will still bring in $5 million per quarter and makes Assertio’s updated forecast of product net sales between $129 million and $137 million a conservative estimate, especially since they’ve already taken in $71 million. dollars in the first half.

CEO Daniel Peisert expects INDOCIN sales to be somewhat weaker in the third quarter before recovering in the fourth quarter. However, its Q3/Q2 sales ratio has always been positive in the 3 years since they took over; it looks like they are planning to sell fewer units to wholesalers. Scarcity usually precedes a price increase. Nonetheless, fiscal 2022 is expected to remain ahead of Street expectations of $135.86 million in sales.

Costs and expenses have been stable over the past 6 quarters and are expected to remain at the $25 million level for Q3 and Q4. With quarterly revenue likely to exceed $30 million, Assertio should have no trouble recording its sixth and seventh consecutive quarters of positive cash flow. If they somehow end up at the bottom of the forecast, they should still end 2022 with over $60 million in cash.

Evaluation:

According to SA, current P/E (FWD) (Friday’s last closing price of $2.51 divided by next year’s (FY1) GAAP EPS consensus estimate) is 4.94, compared to the much higher average of 14.68 for the Zacks Medical – Drugs Industry, which includes 197 specialty pharmaceutical and biopharmaceutical companies. Similarly, the P/E of the last twelve months (TTM) (last closing divided by the sum of the diluted EPS according to GAAP of the last 4 quarters) is 4.6. This means that ASRT is trading much lower based on the prices the market is willing to pay for companies in the same industry. The company’s PEG ratio (TTM) (P/E ratio divided by its growth rate over the last 12 months) is 0.47 against 1.60 for the Medical – Drugs industry. ASRT is therefore undervalued relative to its growth rate and investors pay less than a third for every unit of earnings growth compared to other players in the industry. At the very least, investors were comfortable with an 8x P/E before the ratings restructure, which was not a dilution event, so the decline in price (and P/E) was unjustified.

NES Therapeutic Partnership:

Due to the delays and uncertainties surrounding it, a 2018 deal with NES Therapeutic is not part of most people’s assessment of the company. Assertio purchased a secured convertible promissory note (NES note) for $3 million that pays 10% annual interest, with principal and accrued interest maturing on August 2, 2024. The NES note is convertible into an equity interest of 12% based on 1) the Food and Drug Administration’s (FDA) acceptance of the New Drug Application (NDA) for NES-001 (pleconaril); 2) initiation of any clinical trial required by the NES; or 3) an NES-qualified fundraising event. If the NDA is approved, Assertio also earns 12% of the resulting priority review voucher.

Pleconaril is the first of a new class of drugs called capsid inhibitors. These investigational drugs prevent viral attachment and binding to target host cell receptors, as well as the removal of the viral nucleic acid coat, which inhibits viral replication. In 2015, the National Institute of Allergy and Infectious Disease Collaborative Antiviral Study Group at the US National Institutes of Health released the results of the largest pleconaril trial to date. The randomized, double-blind, placebo-controlled trial evaluated a 7-day regimen of pleconaril versus placebo in 61 infants with suspected enterovirus (or EV) sepsis (hepatitis, coagulopathy, and/or myocarditis) with onset before 15 days of life (43 had confirmed EV infection). The primary endpoint was the percentage of patients with a positive viral culture from the oropharynx 5 days after starting study drug. Because both groups had 100% clear cultures at 5 days, the assay was officially a washout. However, in the intent-to-treat population, mortality was lower in the pleconaril group (23% versus 44% mortality; P=0.02). Patients with pleconaril also became culture negative faster than the placebo group (median 4 vs 7 days, P=0.08), and fewer subjects in the pleconaril group remained positive for the polymerase chain reaction (or PCR) of the oropharynx (23% versus 58%, P = 0.02). There are several other trials that may indicate the effectiveness of pleconaril against EVs, but they are smaller and older.

Risks and conclusion:

INDOCIN generics could appear at any time, although the fact that none could have been indicative of some difficulty in making suppositories, and there is probably little profit in opposing the liquid ibuprofen.

Longer term investors (>1 year) might consider CAMBIA’s loss of income. However, Assertio is sitting on a lot of money and says it is constantly on the lookout to acquire rights to profitable products.

As for NES-001, the FDA is unlikely to approve an NDA without a confirmatory trial, and Assertio had been waiting for NES hardware updates since Q1. They also posted a $1.9 million expected credit loss on the NES rating since the end of last year, which means a greater than 50:50 probability that the NES will default. Still, neonatal EV infections have a high mortality and there are no commercially available antiviral therapies, so there is hope for some priority review. However, even if Assertio’s investment is deteriorating, this does not detract from the bullish thesis according to which this title is strongly undervalued. Even the initial conversion price of $4.09 (and P/E of 8x) represents a 63% appreciation from last week’s closing price.

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