Value Investors Club / COLLEGIUM PHARMACEUTICAL INC (COLL)

Description

Collegium Pharmaceuticals (COLL) is an attractive long opportunity. Collegium focuses on the research and development of opioid based pain management drugs. The Company’s recently approved drug XTAMPZA ER, a long-acting oxycodone, has potentially the best abuse deterrent properties, has the ability to claim substantial market share from the incumbent Oxycotin drug over the next few years. At current trading price of around $16.75, the stock is undervalued and could appreciate to mid-20s in the next 1-2 years on successful commercialization of the drug. Since the drug’s

commercial launch on June 20, 2016, the Company has made significant progress in commercializing the drug (despite the lack of marketing materials to promote the drug; marketing materials were approved by the FDA only a few weeks ago) and has received positive feedback from all-parties. Additionally, the Company is an attractive M&A target (top approved drug, stock undervalued, and high synergies from collaborating sales force which is currently the biggest expense for COLL) for larger players in the pain management space.

Brief Company Overview:

Collegium is a spec pharma company focused on drugs for pain management. It has two approved drugs i) XTAMPZA ER, a long-lasting oxycodone with abuse deterrent properties for chronic pain, and ii) Onsolis, a rapid-acting fentanyl film for treatment of breakthrough cancer pain. Company has another 4 drugs in the pipeline which are in preclinical to Phase1/2 stages. Below is the status of its different drugs in the pipeline:

Pain Management Industry Overview:

Opioids prescription drugs are widely used as the standard drugs for pain management (both acute and chronic) and is one of the top prescribed drugs in the US. In 2015, around 213mm retail prescriptions were written in the US alone. A few familiar opioids include morphine, oxycodone (Oxycotin brand name), and Fentanyl (the drug that Prince OD on). The prescription of opioid based drugs has escalated in the last two decades which has been accompanied by the abuse of these drugs that has resulted in the increase of OD related deaths. In 2014, according to CDC, there were around 19k deaths in the US related to prescription opioids, which was more than the 10.5k deaths due to heroin OD related deaths. Additionally, about 2.5mm Americans suffer from opioid substance abuse disorder according to SAMSHA. The rapid increase in the prescription drug opioid abuse has been covered widely in the media for the last few years, which has increased awareness among the patients, prescriptions doctors, and regulatory agencies – resulting in number of prescriptions been reduced since 2012.

Opiods are considered to be “controlled substances” by the Drug Enforcement Agency (DEA). Drugs that have the potential for dependency and abuse are classified into 5 scheduled categories with Schedule I being drugs that have no medical use and have high risk of abuse (e.g. heroin) to Schedule V being drugs with low abuse potential from limited quantities. Most opioid based drugs are now classified as Schedule II (drugs with high potential for abuse) after the DEA recently moved these drugs from Schedule III (moderate to low potential for abuse) to control the abuse problem. The classification has a huge impact on drug prescription rate by doctors.

The total market for opioids was about $21.7mm in 2015 according to Symphony Health Solutions. Total retail prescriptions (TRx’s) were 213mm in 2015 down from the peak of 250mm in 2012. Though the number of prescriptions have fallen since 2012, the dollar sales has steadily increased with the increase in drug prices. Opioids fall under 3 main groups based on the duration of dosing: i) Immediate Release (IR) opioids that are dosed every 4-6 hours and are primarily used in treatment of acute pain, ii) Extended Release (ER) that are dosed every 12-24 hours for chronic pain, and iii) Transmucosal Immediate Release Fentanly (TIRF) that are used to provide rapid pain relief for the treatment of breakthrough cancer pain (BTC). IR opioids make up 90% of the prescriptions opioid drugs; ER makes up about 10% of

the prescriptions but 30% or $7bn in dollar sales. The market is filled with generic drugs (about 83% of the total opioids) but that is mainly because 98% of the IR opioids are generics. Among ER opioids, 28% of the drugs are branded but more than 50% of the sales are generated from the branded drugs.

Opioid drug abuse and Abuse Deterrent Opioids (ABO):

The most common method to abusing the drugs other than taking multiple pills would include i) physical manipulation – chewing, crushing, or grinding pills that can lead to higher rate of absorption, ii) Extraction/dose-dumping, and iii) non- oral administration – drug is delivered through alternative sources for rapid absorption such as snorting, smoking, or intravenous injection.

FDA over the last few years has taken a number of steps to fight the abuse of these drugs. FDA has been promoting drug manufacturers to develop abuse-deterrent opioids (ADO) and has been reviewing most cases on a priority basis for expediting the approvals.

ADO are developed such that they are not easily manipulated by the users. The typically properties of ADO’s include i) Hard to crush – hard shell or coating that makes it difficult to crush, ii) agonist/antagonist – these drugs contain opioid antagonist that are released upon tampering that negate the effect of the opioid, iii) Irritants – irritants are released upon tampering, and iv) Prodrugs – drugs that active only when they are in the digestive tract.

ADOs market was about $2.6bn in 2015, 37% of total ER sales (or 75% of the branded ER sales) and 4.1mmTRx’s (21% of total ER TRx’s) according to Symphony Health Solutions. With only 21% of the current prescriptions been ADOs, the market has substantial room to grow (at least another $1bn as the entire branded drugs are ADO prescribed). Oxycotin (manufactured by Purdue Pharma) currently dominates this market. XTAMPZA would be mainly competing for this market share.

XTAMPZA – properties and competitive advantages of the drug:

XTAMPZA was approved by the FDA in April 2016 and the drug was launched in the market on June 20, 2016. Collegium uses its DETERx technology to develop the drug that mixes the active ingredient with other substances to form microcapsules. Each capsule is made of these microcapsules making further crushing difficult. Capsules contain microspheres formulated with inactive ingredients intended to make the formulation more difficult to manipulate for misuse and abuse. You could read more about the technology on the Company’s website here http://www.collegiumpharma.com/technology/overview

The following studies were conducted by the FDA during the Phase 3 trials:

1) Vitro (Lab) Testing: Vitro physical and chemical manipulation studies were performed to evaluate the success of different methods of defeating the extended-release formulation. Results suggested that the capsules are less susceptible to the effects of grinding, crushing, and extraction using a variety of tools and solvents. The capsule also resisted attempts to extract and pass into needles through suspending the microcapsules in water.

2) Pharmacokinetic Studies (PK testing): PK profile of the manipulated capsule (Crushing, chewing, etc) that was administrated separately through oral and intranasal was studied and compared with IR Oxycodone. PK profile studies measure the blood levels of the drug over time for Higher Maximum concentration (Cmax) and shorter time to peak concentration (Tmax). Below Table 3 and Table 4 show the results of the studies. The results were amazing with XTAMPZA showing bioequivalence between manipulated and intact formulations, and the manipulated drug actually showed lower Cmax and higher Tmax compared to the intact drug, implying lower risk of abuse. While XTAMPZA was significantly better than the Oxycodone comparator used for testing, no other approved ADO drugs have shown these kind of results in clinical studies.

3) Clinical Abuse Potential testing: Oral and nasal abuse trials are conducted for Drug-liking and Take-drug Again tests. Studies are randomized, double-blind, placebo controlled where recreational abusers determine how much they like/dislike a drug. For oral administration, FDA reported that while the Drug Liking score was lower than IR Oxycodone, the results of the Take Drug Again tests were small and not statistically significant. Table 5 and Table 6 show the results of the oral and intranasal studies.

In summary, FDA stated that XTAMPZA has Intranasal and IV deterrent routes of abuse but did not clear it for oral given drug did not provide statistical significant results in the Take Drug Again tests. You could read more about the tests from the Label here http://www.accessdata.fda.gov/drugsatfda_docs/label/2016/208090s000lbl.pdf

To date, 7 drugs have been approved by the FDA as ADOs. Below table shows the timing and the properties of the drugs.

More details on the timing of FDA activities on addressing opioid abuse and drug approvals can be found here http://www.fda.gov/Drugs/DrugSafety/InformationbyDrugClass/ucm338566.htm

In its briefing document to the FDA Advisory Committee (Adcom), the Company conducted two PK studies to compare the drug to its direct competitor Oxycontin ER (as mentioned above, Oxycontin dominates the ADO market with over 95% market share). Below charts shows the results of the two studies. The first chart compares Oxycontin (intact and crushed) with Crushed IR Oxycodone – Crushed Oxycontin and Crushed Oxycodone behave exactly the same implying limited abuse deterrent properties. Study 2 compared Intact and Crushed XTAMPZA with Crushed IR Oxycodone. The test showed that PK profile of the crushed XTAMPZA was similar to intact XTAMPZA. While FDA included the results from study 2 (XTAMPZA vs. Oxycodone), they did not include the results from study 1 (Oxycontin vs. Oxycodone) on the label and asked the Company to conduct more confirmatory studies. In May 2016, the Company reported results from the second head-to-head study that again showed similar results.

Drug marketing is a highly regulated space and all marketing labels have to be approved by the FDA. Currently, FDA has not provide Collegium the approval to use the data of the two studies for commercialization purposes. Having these studies been available on its label would give XTAMPZA a boost in commercializing the drug. The Company recently submitted a sNDA to the FDA to have the results made available for promotional materials and is expected to hear back from the FDA in April 2017.

Developments since launching the product in June 2016:

The Company has made significant progress since launching the product. On the last earnings call, the Company mentioned that the following developments with respect to commercializing the drug (by improving broadened payer coverage, pharmacy availability, customer contracting, and increasing physician prescriber base of the product) in Q3:

- After much delay, the Company recently (Oct 2016) received approval from the FDA on its promotional materials. The company was not able to promote the drug due to the lack of marketing materials approved until a few weeks ago to market the drug. The marketing materials still do not have the results of the Study 1 and Study 2 (mentioned above)which would be critical in convincing the customer

- At the end of Q3, XTAMPZA had 17mm contracted lives covered from 0 lives at the end of Q2. Company will have 60mm contracted lives in Q1 2017 from contracts already signed so far. Keys wins in Q3 include:

o United Health: Effective Nov 1, United Health (15.6mm commercial lives) mentioned that XTAMPZA is their preferred ER drug; Oxycontin will remain in the drugs available until Jan 2017.

o Cigna (6.4mm commercial lives): Approved Oct 1^st but after Jan 1, 2017, will become one of three preferred products.

o Approved by one large PBM with 10.5mm commercial lives and currently in negotiations with top PBM for contracting the drug.

o Available at approx. 1,500 pharmacies from 40 at end of Q2.

- Collegium is the only approved drug that can be sprinkled over soft-food or be delivered through feeding tube making the drug an attractive option for hospitals and long-term care facilities. The Company is currently making significant progress with hospitals. Approx. 12,000 hospitals purchase about $300mm ER opioids and top 500 hospitals purchase about 60% of the opioids. Reaching out to hospitals provide synergies, since the portion of the patients leave the hospitals to stay at long-term care centers were they are likely to continue to be on opioid pain management treatment.

- Strong sales force in action. Company currently has a sales force of 142 reps; 118 focused on approx. 11k outpatient prescribers that account for 55% of the retail prescription for branded ER opoids; remaining 14 reps are focused on hospitals and long-term care facilities.

Valuation:

Sell side analyst consensus estimate (6 analyst) for 2019 (3years from launch) is for approx. $155mm ($109 - $207mm range). Peak annual sales expectation is around $350 – 500mm. Peers with similar launched products trade around 5-6x sales and around 1.5x peak sales numbers. Company currently has about $170mm of cash on hand ($5.75 cash per share) and so is well capitalized to market the drug without additional dilution. Based on these multiples, Collegium should easily trade over $25.00. Additionally, the company is an attractive acquisition target for a larger company with a pain portfolio. Acquisition will have high synergies ($50mm+ per year) since the Company’s biggest expense currently is its sales reps and the acquirer can use its existing sales force to a major extent to market the product. Additionally, the Company has over $100mm of NOLs which the acquirer could potentially utilize.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

positive quarterly sales numbers; approval of marketing materials with ability to market Study 1 and 2 results

M&A announcement

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			2016	2017
Price:	16.75	EPS	0	0
Shares Out. (in M):	29	P/E	0	0
Market Cap (in $M):	480	P/FCF	0	0
Net Debt (in $M):	5	EBIT	0	0
TEV (in $M):	319	TEV/EBIT	0	0