• Collegium claims it is a “responsible” opioid company, but we have surfaced evidence from the company’s own published studies that paint a clear case of aggressive and suspect marketing practices
  • We believe Collegium is exploiting the painkiller epidemic, and pushing an expensive me-too drug that lacks clinical differentiation and is backed by shoddy science.
  • Xtampza ER (extended-release) was recently added to Express Scripts’ excluded medication list starting July 1, 2020, suggesting the Xtampza growth story is about to break (Express Scripts is #2 national Pharmacy Benefits Manager (“PBM”)
  • Express Scripts’ decision to exclude Xtampza ER is a significant dent in the COLL bull case, representing a massive vote of no-confidence in the clinical differentiation of Xtampza ER
  • Xtampza has relied on rebate-fueled prescription growth that appears to have run its course – we expect 2H20 scripts to see a massive negative momentum shift
  • Enormous and growing accrued rebates will blow a massive hole in an already weak balance sheet
  • Recent Nucynta deal appears to be attempt to temporarily boost non-cash EBITDA
  • Investors and Street estimates appear to be ignoring Express Scripts change as well as risk of a generic oxycodone ER entering the market in 2023, which we believe would cause Xtampza revenues to fall off a cliff
  • ~$3.75 target price (~80% downside)

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Executive Summary

We are short Collegium, which we view as a near “one trick pony” pharmaceutical company in the pain management space. Collegium markets itself as a leader in “responsible pain management”. Readers who follow the painkiller epidemic are familiar with the explosion of “better for you” pain management treatments over the past several years that were supposed to help pain patients transition to less addictive/dangerous forms of painkillers. Collegium has attempted to capitalize on this trend. We view the company as little more than a collection of two secularly challenged drugs with limited clinical differentiation, all dressed up under the guise of creative accounting and rebate schemes that have temporarily masked a business in severe distress. Furthermore, we expect imminent erosion in the company’s top-line as we have surfaced evidence (included herein) that shows that the company’s growth engine (Xtampza) was recently added to Express Scripts’ national formulary exclusion list.

Collegium is a small cap Wall Street darling, with the usual cast of conflicted healthcare investment banks promoting the stock in anticipation of potential banking fees given the company’s acquisitive history and need to plug a balance sheet / P&L hole. As it exists today, Collegium consists of two drug franchises – Nucynta ($192 million of 2019 revenues) and Xtampza ($105 million of 2019 revenues).

We see 80% downside in Collegium stock over the next few months ($3.75 target price).

Background: Nucynta

In 2017, Collegium first entered into a licensing agreement with Assertio (former Depomed) for Nucynta. The licensing agreement quickly turned into a disaster, after Nucynta manufacturing operations were disrupted as a result of Hurricanes Irma and Maria. Nucynta failed to stabilize after these natural disasters, with revenues falling from $211 million in 2018 to a projected $175 million in 2020. Despite Nucynta’s top-line erosion, in early 2020 Collegium acquired the full commercial rights to Nucynta from Assertio for $375 million. The acquisition effectively released Collegium from future royalty payment obligations. Given that Collegium already had licensing rights to Nucynta prior to this transaction, we believe that this deal represented little more than an attempt to temporarily boost EBITDA by utilizing balance sheet capacity to avoid flowing future royalty obligations through the P&L.

Nucynta has been in decline ever since Collegium first inked its Nucynta agreement in 2017/18. In 1Q20, Nucynta sales fell 9% year-over-year, suggesting that the business shows no signs of stabilizing.

We see the recent COLL / Nucynta transaction as little more than a form of financial engineering – financial engineering that notably resulted in one-time $50,000 cash bonus payouts to both the CFO and GC of Collegium.

Background: Xtampza ER (extended-release)

Xtampza ER is Collegium’s “growth story” (sales +26% y/y in most recently reported quarter 1Q20) component and will be the focus of this report.

Collegium claims Xtampza ER is an “abuse-deterrent, extended-release, oral formulation of oxycodone”. Our research suggests that Collegium is in fact exploiting the painkiller epidemic, and is pushing an expensive me-too drug that lacks clinical differentiation and is backed by shoddy science.

Xtampza is an Inferior Product with a Weak Clinical Profile

Collegium describes Xtampza ER as a clinically differentiated extended-release oxycodone. Medical professionals we have spoken with describe Xtampza as having lower efficacy than other extended-release oxycodone products and a worse side effect profile, particularly with GI-related tolerability issues, including nausea. According to experts we consulted with, the bioavailability of Xtampza is influenced by food and fat content. Patients must take Xtampza with food or risk not receiving a proper dose. Xtampza’s FDA-approved label – excerpts below retrieved from the FDA website – even expressly indicates that Xtampza must be taken with food and that it is “not bioequivalent to other oxycodone extended-release products”.

Source: FDA Website

Also keep in mind that the primary marketing halo surrounding Xtampza is that the drug is less likely to be abused than other extended-release oxycodone products. In fact, this claim is the entire basis of the marketing strategy surrounding Xtampza.

We therefore believe the market needs to spend more time looking at the studies that Collegium relies upon to make its case for Xtampza having a lower potential for abuse.

In studies that Collegium provides on its website relating to abuse potential, Collegium indicates that its Xtampza test group relied on fasted test subjects. This study is therefore a) patently inconsistent with Xtampza’s label, b) should be viewed with extreme skepticism.

Source: Xtampza website

We see Collegium’s very clearly off-label study as completely invaliding the company’s assertion that Xtampza is less prone to abuse than extended-release oxycodone given that the company’s study relies on an Xtampza group that was fasted, in clear conflict with the product’s FDA labeling.

But there is one even bigger issue with this study. It turns out that Collegium ran its Xtampza study against Oxycodone IR (immediate-release) which is a completely nonsensical comparison group given that Xtampza ER is a competitor to Oxycodone ER (extended-release). Why would Collegium run a study that compares its Oxycodone ER competitor to an IR formulation?

Source: Xtampza ER Website

We can only assume that the suspect study was put together because on its face it makes Xtampza ER look superior to Oxycodone. In reality, the studies that Collegium shows on its Xtampza ER website are more or less worthless as they a) utilize an Xtampza ER group that is fasted (when the drug label clearly requires highly specific and calibrated food intake), and b) should be compared against Oxycodone ER but is instead compared against Oxycodone IR with no explanation for why this was done.

The off-label study is just one of the many significant red flags that point to a culture of compliance problems at Collegium. We surfaced a lawsuit from 2017 in which a former employee alleged that Collegium markets Xtampza as “tamper-proof” when the drug is in fact not tamper-proof:

Source: Case 1:17-cv-11406, Massachusetts District Court

Later in the same suit, the plaintiff made additional troubling claims regarding Collegium marketing practices:

Source: Case 1:17-cv-11406, Massachusetts District Court

We also found an FDA warning letter from 2018 that specifically called out Collegium marketing tactics:

Source: 2018 FDA Warning Letter

While Collegium paints itself as the “responsible pain management” company to Wall Street banks and investors, we believe Collegium’s pattern of behavior demonstrates an intent to mislead doctors and patients regarding the risk profile and safety of an addictive and dangerous substance, oxycodone.

Data compiled by the FDA shows that the most common method and route of abuse and misuse of oxycodone is by orally ingesting the substance. Xtampza ER provides zero deterrence to this method (it is an oral drug) and, since Collegium’s “drug liking” study administered Xtampza in an “off-label” fashion, we find Collegium’s claims particularly dubious. Collegium’s misleading safety and abuse-potential claims are all too familiar and uncomfortably similar to Purdue’s OxyContin marketing playbook.

Finally, we note that Xtampza is absolutely not “tamper-proof”. While we think it would be imprudent and unethical for us to share internet postings describing how to tamper with Xtampza pills, medical professionals have pointed us to internet forums where posters have shared simple ways to defeat Xtampza’s DETERx technology. These internet postings are consistent with the claims we surfaced in the aforementioned Massachusetts lawsuit.

Abuse-Deterrent Formulations Are Not Cost Effective…Yet Collegium Has Pushed Massive Price Hikes

We have already established that Collegium’s own study of Xtampza (which serves as the foundation for the entire marketing strategy) relies on a flawed test group that is clearly off-label. One of the other key tenets of the Xtampza bull case is that the abuse-deterrent opiates are cost effective for the system (reduce healthcare costs).

Based on credible studies we have seen, there also appears to be little pharmacoeconomic evidence to suggest that abuse-deterrent formulations such as Xtampza reduce costs for the healthcare system.

Source: ICER website

In light of the ICER study above, the fact that Collegium has driven through massive price hikes for a drug with a suspect clinical profile should give any reasonable investor pause:

Source: PriceRx, Sell-Side Reports

Xtampza is Reliant on PBM Relationships and One Major PBM Has Turned Its Back on Xtampza

Despite clear questions around its clinical profile and limited-to-no evidence of “systemic savings” from Xtampza, script growth has been strong in recent quarters (and is the foundation of the bull case). On this front, we see an extremely near-term catalyst that will shift the momentum for Xtampza script growth.

Our conversations with expert consultants suggest that Collegium has driven Xtampza commercial volume only by playing a “channel rebate game” – namely, offering large rebates to PBMs and payers in order to gain preferred or exclusive formulary position. These large rebates provide PBMs and other payers with significant incentive to push Xtampza over alternative pain solutions. For the uninitiated, the rebate system is effectively a glorified kick back payment to PBMs, where drug companies offer cash incentives payments to PBMs in exchange for the PBM putting their drugs on a “preferred list”.

We think this PBM channel rebate game dynamic has had a significant material impact on recent Xtampza script volumes. Doctors we spoke with indicated that they do not write Xtampza because of its clinical profile or abuse-deterrent potential, but primarily because insurance companies force them to write Xtampza scripts.

Due to this contracting strategy, the substantial majority of Xtampza volume growth has come from “forced switching” – doctors being forced to shift their patients off other pain treatments and onto Xtampza.

The historical Rx data shows that the substantial majority of Xtampza volume growth comes early in the start of the calendar year, as new plans that have signed contracts with Collegium force patients to switch from OxyContin or other previously preferred products. You can see this dynamic in 2018 and 2019 below, with a major ramp in scripts over the course of the first calendar quarter, followed by a relative flattening of the new script curve following the first quarter ramp (2019 below is even more pronounced than 2018).

Source: Iqvia Data from Sell Side Report

In 1Q20, the PBM ramp dynamic that is observed in prior year prescription volumes appears to show signs of petering out. Below, we provide up to date script data that shows that 2Q20’s script ramp relative to 1Q20 shows signs of Xtampza volumes are clearly losing steam:

Source: Iqvia data from sell side

The data above should trouble any bull. We believe that the YTD2020 performance of Xtampza scripts points to the “forced switching” dynamic having run its course. Qualitative evidence supports this thesis.

First, Collegium originally forecasted approximately 50-60% revenue growth in 2020 for Xtampza due to its formulary win with CVS Caremark. However, due to the limited market potential, prescription volume did not materialize as expected and Collegium reduced its forecast when it reported 1Q results (which one can see very clearly in the chart above).

Second, bulls should be very concerned about a recent development with Express Scripts, the second largest PBM in the country.

Very recently, Express Scripts added Xtampza to its “Excluded Medications” list – in other words, drugs that will be excluded from Express Scripts national formulary. This is a devastating blow to Collegium, particularly because the growth strategy for Xtampza has revolved around providing enormous rebates to PBMs such as Express Scripts to attempt to induce sales growth. This is perhaps the clearest evidence that Collegium’s go-to-market strategy has run its course, and suggests that the business momentum could implode starting in 2H20.

Source: Express Scripts

And how important is Express Scripts? For context, Express Scripts is the second largest PBM by market share based on market analysis below (and pro forma for Cigna, has now grown its market share):

Source: DrugChannels.net

Accrued Rebates Threaten to Blow Hole in Already Weak Balance Sheet

As mentioned previously, we view the February Nucynta deal as an act of desperation from Collegium. The company spent an enormous sum of upfront money on a declining asset in Nucynta, all in what we view as an effort to temporarily boost reported EBITDA through a “swap” transaction – a swap of balance sheet capacity in exchange for avoiding ongoing royalty expense payments.

As a result of this transaction, Collegium took on significant new debt (almost $350 million in the form of a straight debt instrument and a convertible debt instrument). But a closer look at Collegium’s balance sheet presents a company that is facing significant financial stress beyond the new Nucynta debt:

We urge readers to take a closer look at Collegium’s “accrued rebates” balances. As we mentioned earlier in this report, Collegium has relied heavily on offering PBMs significant rebates (e.g. cash coupons or kick-backs) to push Xtampza. We believe that the rebate game ran its course starting in 1Q20 based on script data. Furthermore, we expect that 2H20 will see an ugly trend shift for Xtampza script volumes given the shift in Express Scripts formulary position.

It is therefore troubling that rebate days outstanding – a measure of whether Collegium has paid out its rebate obligations to PBMs and other payers – has been exploding in recent periods.

Source: COLL 10-K and our analysis (calculated relative to revenues)

Considered in the context of YTD script data, Express Scripts development, and high levels of debt on Collegium’s balance sheet, it appears clear that there are problems ahead for Collegium.

The accrual of rebates has been a large contributor to Collegium’s cash flow generation. As mentioned, Collegium offers large rebates to PBMs and payers to drive Xtampza volumes. Per our analysis and research, Xtampza gross-to-net discounts have increased from the low- to mid-50% range in 2018 to 63% in 1Q20. By accruing the rebates and discounts owed to the channel, Collegium has essentially been capitalizing a portion of this gross-to-net discount on its balance sheet.

Similar to a company building up payables on its balance sheet that convert into positive operating cash flow, Collegium’s increasing accruals of rebates and discounts have resulted in operating cash flow contribution of $106 million in 2018, approximately $13 million in 2019, and $14 million in 1Q20.

Given that these accruals represent such substantial portions of Collegium’s reported operating cash flows, we believe investors are misinterpreting the quality and durability of Collegium’s cash generation and investors are ignoring the risks of this strategy. We anticipate that as Xtampza volume begins to decline, which could happen much sooner than investors anticipate, these accruals are likely to begin to reverse, creating a large and unexpected headwind to operating cash flow. Given our outlook for script volumes, we view these accruals as effectively being a form of debt on Collegium’s balance sheet as they will transition from being a source of cash to a use of cash in coming periods.

Xtampza Durability Risk Is Being Ignored by Wall Street

Wall Street is ignoring a major risk: Xtampza durability.

Management has subtly highlighted this risk, warning investors on more than one occasion, but then quickly focusing on Xtampza’s “clinical differentiation,” which management suggests will be its saving grace, in addition to highlighting what we believe is meaningless intellectual property (“IP”).

The sell-side commentary around Xtampza’s patent estate focuses on reasons that it would be difficult for a generic filer to replicate Xtampza. The problem these analysts are ignoring is that a generic version of OxyContin ER could enter the market as soon as 2023. Xtampza and OxyContin ER are both extended-release formulations of oxycodone and both have abuse-deterrent labeling. In the eyes of pain specialists we have spoken with, Xtampza is actually worse than OxyContin, given its reduced efficacy due to food-effect and its GI-related tolerability issues. We do not see how payers and PBMs would differentiate between inexpensive generic versions of OxyContin versus much more expensive Xtampza. Therefore, we see the 2023 patent cliff as a legitimate existential risk to Xtampza.

Collegium management knows Xtampza revenues are at risk of precipitous decline if an OxyContin ER generic is introduced and knows it needs to acquire additional assets that could plug the looming P&L hole. Perversely, this is in part why Collegium is such a current Wall Street darling – banks know fees are on the horizon and we believe that the sell side is aggressively trying to court Collegium management with bullish notes and lofty price targets.

We think Xtampza is much closer to peak sales than the Street is forecasting and investors anticipate. Current Xtampza 2020 consensus sales of $134.5 million would represent 28% growth from 2019. Current consensus then forecasts Xtampza growth to accelerate to 33% growth in 2021.

Even after winning new contracts with the largest PBM (CVS Caremark) in 1Q20, Xtampza saw revenue deceleration. Starting July 1, 2020, Xtampza will be moved to the “excluded medications” list for the Express Scripts national formulary, a major headwind. We are therefore hard pressed to see how Xtampza revenue growth could reasonably accelerate in 2021 (or even perhaps grow revenues at all). We believe there is significant downside to consensus estimates in 2021 and beyond which will start to flow through numbers starting with a material negative revenue revision in 2H20.

Xtampza Growth Beyond Forced-Switching Is Limited, Further Reducing Market Opportunity

Following the growth driven by rebate-fueled PBM positioning, the second most significant driver of Xtampza volume growth has come from immediate-release (IR) to extended-release (ER) formulation conversions.

From the Xtampza label:

Source: FDA Website

The Xtampza label essentially reserves Xtampza as a “second line” product only to be used after patients pass through immediate-release formulations.

Even more importantly, CDC guidance is clear that physicians must first start with immediate-release (IR) formulations and at the lowest possible dosage prior to shifting patients to extended-release formulations:

Source: CDC

From our conversations with experts and review of CDC guidance, we understand that public policy has specifically been designed to reduce opioid use and prescription guidance has been designed to restrict opioid prescribing. The “funnel” of potential new patients to opioid prescriptions has greatly reduced the growth opportunity for Xtampza. This will be a material headwind to the company’s growth going forward, making Xtampza peak revenue potential even further reliant on the rebate-fueled contracting strategy that appears to be encountering challenges.

Valuation Estimate (Our Analysis)

Assuming Express Scripts represents ~30% of Xtampza revenues, and assuming a 2x revenue multiple (which admittedly feels generous given the backdrop here but is in-line with the current trading multiple), we believe that shares of COLL will trade to ~$3.75/sh by the end of the year as investors come to understand that the Xtampza growth story is broken and the high leverage levels have boxed in Collegium’s strategic options.

Conclusion

Collegium represents much of what we believe is wrong with the healthcare system. Not only does Collegium appear to us as the “new Purdue,” using marketing tactics that are disturbingly familiar and promoting abuse-potential drug data based on shoddy science, but Collegium represents the non-innovative, patent-abusing, price-hiking drug company that America is fed up with.

Xtampza adds no value to the marketplace. Oxycodone ER was already available to patients. Collegium introduced its reformulated version to obtain branded pharma status, giving it a license to sell an expensive, undifferentiated product to plans and patients, hiking prices every year and using warped channel incentives of rebates and discounts to extract wealth for its executives and shareholders at the expense of patients and the healthcare system.