Shirley Kuhlmann – General Counsel Joe Ciaffoni – Chief Executive Officer Scott Dreyer – Chief Commercial Officer Paul Brannelly – Chief Financial Officer.

David Amsellem – Piper Jaffray Brandon Folkes – Cantor Fitzgerald Ken Trbovich – Janney Serge Belanger – Needham & Company David Steinberg – Jefferies Tim Lugo – William Blair Kevin Kedra – Gabelli.

Good day, ladies and gentlemen, and welcome to the Q2 2018 Collegium Pharmaceutical, Inc. Earnings Conference Call. At this time, all participants are in a listen-only model. [Operator Instructions]. I would now like to turn the call over to Shirley Kuhlmann, General Counsel. Please go ahead..

Thank you. Welcome to the Collegium Pharmaceutical Second Quarter 2018 Earnings Conference Call. This is Shirley Kuhlmann, General Counsel of Collegium. I’m joined today by Joe Ciaffoni, our Chief Executive Officer; Scott Dreyer, our Chief Commercial Officer; and Paul Brannelly, our Chief Financial Officer.

Before we begin today’s call, we want to remind participants that any forward-looking statements made today are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

You are cautioned that such forward-looking statements involve risks and uncertainties, including, and without limitation, the risks that we may not be able to successfully commercialize Xtampza ER and the Nucynta franchise, and that we will incur significant expense and may not prevail in current or future patent infringement litigation or other litigation pertaining to our products and product candidates.

These risks and other risks of the company are detailed in the company’s periodic reports filed with the SEC. Our earnings release and this call will include discussion of certain non-GAAP information. You can find our earnings release including relevant non-GAAP reconciliations on our corporate website at collegiumpharma.com.

Our future results may differ materially from our current expectations discussed today. And with that, I will now turn the call over to Collegium’s CEO, Joe Ciaffoni..

number one, accelerating Xtampza ER; number two, maximizing the potential of the Nucynta franchise; number three, evolving the organization to support our mission to be the leader in responsible pain management; and number four, developing a long-term strategy.

On a final note, and as I reflect on my first month as CEO of Collegium, I want to take a moment to recognize and thank my colleagues for the effort that they put forth every day and for their commitment to making a positive difference in the lives of people suffering from pain and our communities.

I will now hand the call over to Scott to provide a commercial update..

accelerating Xtampza ER and maximizing the potential of the Nucynta franchise. We have conviction that operational execution and stability, quality message delivery, managed care pull through and push through and driving brand awareness through non-personal multichannel marketing activities will drive our portfolio performance.

As it pertains to Xtampza ER, our payer teams are working hard to secure the next wave of exclusive ER oxycodone wins, which will take effect on January 1 of 2019. We’re encouraged by the progress that is being made as we strive to put these next catalysts for accelerated growth into place.

We’re committed to finishing 2018 strong and to taking the necessary actions to ensure a fast start in 2019. I look forward to updating you on our progress. I’ll now turn the call over to Paul to discuss our second quarter financial results..

Great, thanks, Scott. Good afternoon, everyone. As Joe stated, we recorded net product revenue of $73.1 million in the second quarter, compared to $63.7 million in the first quarter. For the second quarter, net product revenue was $18.1 million for Xtampza ER and $55 million for the Nucynta franchise.

In anticipation of the increased demand from exclusive ER oxycodone formulary wins, many new pharmacies began stocking Xtampza ER in the first quarter of 2018, resulting in prescription growth exceeding net revenue growth in the second quarter of 2018.

Nucynta revenue benefited from our first full quarter of booking revenue as well as our price increase taken in February. The gross-to-net discount of our combined portfolio was 52% in the second quarter of 2018, down from 55% in the first quarter of 2018.

Gross-to-net discounts improved across the portfolio poised more dramatic with Nucynta, partially driven by one-time items. For the remainder of 2018, we expect the gross-to-net discount to remain around 55% on a portfolio basis.

On a product basis, we expect the gross-to-net discount for Xtampza ER to be approximately 60% and the Nucynta franchise to be closer to 52%.

For the second quarter of 2018, our net loss was $13.1 million compared to $21.1 million for the second quarter of 2017, resulting in a net loss per share of $0.40 and $0.72 for the 2018 and 2017 quarters respectively.

The 2018 net loss includes non-cash expenses, including stock-based compensation of $3.5 million and the non-cash interest charge of $5.9 million associated with the accounting for the Nucynta deal. In order to supplement our GAAP financial statements, we included non-GAAP adjusted loss in our earnings press release and 10-Q.

We believe that the non-GAAP adjusted loss provides investors insight into management’s view of the company’s core operating performance.

After adjusting for stock-based compensation and non-cash Nucynta deal related expenses, but adding back the actual Nucynta royalties owed, our non-GAAP adjusted loss was $4.9 million for the second quarter of 2018, which is an improvement from $11.6 million in the first quarter.

As of June 30, our cash balance was $133.7 million, in the increase of $15 million from December 31st, and $5.5 million from March 31st. Based on our current operating plans, we believe that we will finish the year with at least $135 million in cash. I will now turn the call back over to Joe..

Thanks, Paul. And we will now open it up for questions..

[Operator Instructions]. Our first question is from David Amsellem with Piper Jaffray. Your line is now open..

Thanks.

Just a couple, so just on the gross-to-net on Xtampza, can you just elaborate on what is driving it higher? Is it just a function of mix? Or is it something else that we should be thinking about in terms of the 50%? I’m just trying to get a better understanding of what changed between what you talked about maybe late last year or early this year and where we are now.

And then secondly, switching gears to Nucynta.

So though the volumes look stable, I guess the question here is what’s going to be needed to grow it? Is it going to be rethinking the contracts that you inherited, renegotiating them? Is it greater promotional effort? Or increasing headcount? I mean what do you think is – are going to be the key drivers of moving prescriptions higher? Thanks..

David, this is Joe. Thanks for your questions. I’ll make one comment on gross-to-net and then hand it to Paul to get into some of the mechanics associated with it.

One of the primary drivers is what we’re seeing in the first half of the year is a higher percentage of our prescriptions and that’s a reflection of the strong pull-through that we’ve had within the exclusive ER oxycodone formulary positions coming through. So right now, about 60% of Xtampza ER prescriptions are flowing through those accounts.

We anticipate that over time and as we get scale, but it will be lumpy, because we also expect to be adding additional exclusive opportunities, that to come down a bit and spill into both the contracted non-exclusive books of business and even the non-contracted plans.

And Paul?.

Yes. And just to get into a little bit more detail there, the gross to net is really driven by rebates and – but it has come down from where it was in Q1 to Q2 for both Xtampza and Nucynta. What we talked about on our year-end call as well as our Q1 call was on a portfolio basis being 55%.

So we’re trying to be a little bit more specific with our guidance going forward about where we think Xtampza will be from a gross-to-net and the Nucynta franchise separately because they are a little bit different..

Great.

And Scott, on Nucynta?.

Yes. Thanks for the question, David. So, when we look at Nucynta first and foremost, coming out of the supply in the first quarter and as well as our first full quarter of promotion, we’re encouraged by seeing early signs of stabilization and specifically that Nucynta ER grew 1%.

As we entered the second half of the year, our focus continues to be on stabilization of the franchise, of course with the aspiration to grow the brand.

And when we look at our market research, we look at our interactions in this full first full quarter with customers, what we see is that the product, the Nucynta franchise is highly differentiated, it has a unique positioning in the minds of physicians and 50% of our targeted customers intend to prescribe more.

So that would be the basis of how we think about the opportunity going forward for Nucynta..

And if I might sneak in a follow up here, just going back to Xtampza.

So with the assumption that you’re going to continue to execute on exclusive contracts, is it fair to say that as you do so, the gross-to-net might creep even higher in 2019?.

Yes. So, as we do more expensive contracts, as the business grows, there’s opportunities for other things to come down, specifically like distribution fees, co-pay cards and things like that. So I think it’s fair to assume that rebates if we do more exclusive contracts won’t go down certainly in any meaningful way but there’s other triggers there.

And one other one that I should have mentioned was the allowance for potential returns is typically higher when you’re earlier in the launch. We’re booking in at about 5.5%, 5.4% now. And you look at mature brands, they have much lower allowances for potential returns.

So when you add that all up, I don’t think you have to think of increasing the gross to net discount over time because there is offsetting factors..

Got it, okay. Thank you..

Thanks, David..

Our next question is from Brandon Folkes with Cantor Fitzgerald. Your line is now open..

Hi, thanks for taking my questions. Continuing along the lines of question net price per RX spend.

Outside of the exclusive contracts, if I look at your competitors in the market, could you in particular, given that they’ve been away from with sales and marketing expense, are you seeing any dynamic from them, where they are willing to pass through higher rebates in order to maintain share in the market? And how do you feel about sort of being net price going into 2019 on Xtampza?.

So Brandon, I’ll give you a perspective of the competitor and let Paul reinforce our view for gross-to-net price for 2019. When you look at the marketplace, I always want to ground people, we’ve never viewed this market as competitive but we look at it as a complex market because of all of the factors around the opioid space.

The products that are in the marketplace for the most part are either at the end of their life cycle so they’re doing traditional late-in-life-cycle management.

So we don’t anticipate as they’re trying to maintain as much of their profit as they can, them being aggressive or doing something radical from a payer perspective because I don’t think we view that as typical end of life cycle management. We also, when we look at Xtampza, we don’t view our competitive set broadly.

We look at it specifically as the Xtampza acts, for lack of a better way to say it is, right on OxyContin and the ER oxycodone space and we’ve not seen anything from that perspective that would suggest as they’ve stepped out of the market that they’re being more aggressive but certainly as a market leader, those contracts are still in place and that’s what we’re competing against in that space.

And Paul, on the gross-to-net?.

Yes. I think just from pricing overall, what we’ve seen in this space, what we’ve done is a 9.9% annual price increase since 2017. And we think that sort of normal high single digits has been sort of the history in this space. And with us as well as competitor products.

So I don’t have any insight into next year how that will develop but that’s how it’s played out for the last few years..

Okay, great. And then maybe just one follow-up on the $135 million cash guidance you gave.

How much of the accrual to Depomed is included or do you envision on year end in that $135 million?.

So, Depomed has spoken a lot more about the – our lockbox mechanism than we have on calls. So just to fill in the blanks for people who don’t follow Depomed, we sweep cash to them on a daily basis over the course of a quarter.

So there is an accrual related to Q1 that was paid during the second quarter but it should fund during each quarter, we should pay the minimum royalty in that quarter. That was the case in the second quarter and hopefully will be the case in the third and fourth quarter as well.

Okay, great. Thank you..

Our next question is from Ken Trbovich with Janney. Your line is now open..

Thanks. Got a couple of quick ones. Congratulations on the quarter.

I guess one of the pleasant surprises was gross margins and I wasn’t certain if there is any guidance you can perhaps give us there? Just given the fact that we know Depomed signed a license with Grunenthal essentially showing them some sort of minimum royalties based on a range of sales, has me wondering whether or not that means that we’re actually seeing better gross margins on Nucynta for Collegium than perhaps what Depomed would’ve recognized on its own in the past?.

So, Ken, I’ll pass that to Paul to answer that question..

Yes. Hi, Ken. Yes. So, our agreement with Depomed does have a ceiling for true COGS, not the royalty component but what we pay them, reimburse them, for the cost of goods as well as the royalty to Grunenthal it caps it at 25%, we’ve been at about 23% both in the first and second quarters.

And so that will fluctuate some but we expect it to remain right around that range..

Okay.

And then just given the cash guidance and obviously, the tremendous progress you folks have shown from a cash burn perspective, first quarter going to second quarter, is it too early to expect it that you might hit cash flow break-even before the end of the year? Is that what was inclusive in that cash guidance? Or was that really a goal that we should be looking forward for 2019?.

Yes. So we’re not giving any specific break-even guidance but we added the cash guidance for year-end of $135 million. And also state in our 10-Q that we believe that our current cash together with expected inflows from sale of our products will fund the company’s ongoing operations for the foreseeable future.

On the last conference call in May, that same statement said we need cash through well into 2020. So, we updated that to foreseeable future. So that’s what we’re prepared to say right now..

Okay. And then last question, obviously, you guys have had a lot of great success with Xtampza.

I guess this is any point of growth that isn’t perhaps as strong as we’ve seen throughout the rest of the franchises on the institutional side, can you give us a sense as to how these preferred contracts play if at all when we start talking about hospitals and nursing homes?.

Yes, Ken. Thanks for that question. And the way – what we’re seeing with Xtampza and our portfolio is these are not traditional hospital products if we go off of the first part of your question. The retail more or less drives the performance that we see in the hospital.

So we’ve seen significant growth within the institution coinciding with the strengthening of the formulary positions those ER – exclusive ER oxycodone opportunities. So as we’ve seen the rise in retail, that’s been the driver of what it is that we think we’re seeing in terms of the growth in the institution..

It makes sense. I appreciate it. Thanks so much..

Thank you..

Our next question is from Serge Belanger with Needham & Company. Your line is now open..

Hi, good afternoon. A couple of questions from me; first on Xtampza prescription growth, we’ve kind of seen a growth deceleration over July. Just wanted to get additional color on that, whether it’s a seasonal summer lull.

I know there is key holiday week within that period but any additional color on what kind of growth we should expect for the rest of the quarter?.

Sure. So, Serge, this is Joe. I’ll take that one. I think the first thing I would do is take a step back. As we came into 2018, we were focused on and believed that we would be able to accelerate Xtampza ER with the primary catalyst in the first half of the year being the exclusive ER oxycodone formulary positions.

As you know, we grew 72% in the first quarter followed that up with a strong 23% growth in the second quarter. As we’re looking at the weeklies, the past several weeks, we’ve seen flatness within them. That is not our expectation and I’m not going to either try to rationalize or put an excuse around that.

The bigger picture is fundamentally the fundamentals of this market are unchanged, it’s a big market, it’s a big ER oxycodone market. We have a differentiated product. We have broad overall access. We have runway within the exclusive ER oxycodone formulary positions.

We believe the investments that we’ve made and continue to make in non-personal promotion will drive awareness of the product in the back half of 2018.

So our expectation, the difference will be in the back half, the primary driver is going to be the excellence in our commercial execution and our ability to deliver quality messages, educate around Xtampza ER, pull through those opportunities and our expectation is that we’ll continue to grow the brand, albeit at a different rate than what we saw in the first half of the year through the remainder of 2018 while at the same time, we’re very confident that we’ll be securing those additional catalysts in terms of new wins that will take effect primarily on January 1st of 2019..

Great. Just a follow-up on the additional formulary wins. Independence Blue Cross put out a press release yesterday adding Xtampza October 1st and putting additional restrictions on OxyContin.

Just wanted to – if you can comment on that just to get an idea of the size of the opportunity at Independence?.

Sure. I’ll hand that one over to Scott..

Sure. Thanks for the question, Serge. Yes. So that win is an example of one of the off-cycle opportunities that we were able to take advantage of. And if you look at Independence Blue Cross, it’s about 1 million lives, it’s a really important plan in the State of Pennsylvania and specifically in southeast Pennsylvania.

And so we look at as a great off-cycle opportunity to continue to grow the brand..

One last one for Joe. You talked about the long-term strategy of the company.

Does that include additional business development activity and portfolio expansion?.

Yes. So Serge, that’s a great question. Right now, what I would comment on as we’ve recently kicked off that work in conjunction with the board. The focus of it is really in three areas. One, really getting alignment on what a five-year trajectory looks like for the organization from a financial perspective.

Importantly also, if you look at where we’re at, we’ve launched Xtampza, we have a bit of momentum in the marketplace but with a lot of work and opportunity to continue to grow it. We’ve expanded the portfolio with Nucynta.

So we think it’s the right time to look at that five-year financial trajectory, step back, look at what are the skills and capabilities that we’ve built, what are the areas in which we want to bolster and where we feel we can differentiate or perhaps are differentiated as a company.

And then the third piece to your question directly, we’re mapping out the entire pain landscape and I would reinforce our mission statement where we say we aspire to be a leader in responsible pain management. We don’t say opioid.

Today, we have – what we feel is a best-in-class abuse-deterrence formulation with Xtampza and a differentiated atypical opioid in tapentadol. But as we look out on the horizon, we want to be open and map out the entire pain landscape. So we’ll see how that evolves through the fall and towards the end of the year..

Okay. Thanks for the details and congrats on a progress..

Thank you, sir..

Our next question is from David Steinberg from Jefferies. Your line is now open..

Hi guys, good afternoon. A couple of questions, just wanted to follow up on the last question.

I know you talked about some of the tactics you want to use given the slowing in the last four, five, six weeks of Xtampza scripts but can you cite any particular reasons why the scripts have been relatively flat? I assume that seasonality would not be one of them.

And then, related to that, do you think your sales force is right sized for the current opportunity? Or do you think you might need to beef it up? And then finally, do you think you need more managed care wins to accelerate the curve? Or do you have a long way to go in some of your accounts?.

Yes. So, David, thanks for the question. With regards to the prescriptions as I said, there was nothing that happened at the end of June relative to what we’ve seen in the past few weeks that has fundamentally changed.

The managed care exclusive wins that fueled the exponential growth in the first half of the year in particular in commercial, we were very efficient and effective in pulling them through to leadership positions, but we think the fundamentals are unchanged and at this point, it’s really about us executing around the things we identified for the remainder of the year.

When you look at the size of our organization and you hear us talk about operational stability, I would emphasize we have a motivated team, we’re 100% of capacity and the team continues to get better. We always, each year, as part of our planning, we’ll look at the size of the field force.

We’re pretty comfortable with where we’re at in terms of coverage. We cover 90% of the Xtampza prescriptions, 80% of Nucynta ERs, 70% of the IR and 60% of the branded ER market.

That being said in our planning we’re open-minded and we’ll look at that but what we will be balancing is there would have to be, what we believe, would be a significant upside to making any changes because we think one of our strengths is the continuity of coverage of those customers.

And as it pertains to managed care wins, I would just say that we are absolutely working and believe that the next catalyst for growth is really, at, this point, will be driven by the additional wins that we achieve to take effect in January of 2019..

Okay, thanks..

Our next question is from Tim Lugo with William Blair. Your line is now open..

Thanks for the question. Regarding Nucynta, how do you view the profitability of that franchise and the royalty threshold you have in place? If you might make deal assigned the sales band of between $233 million and $258 million, was viewed as relatively easy to reach but now you seem to be annualizing under that.

Is there – it sounds like coming out of the strategic review, there is a renewed focus on the franchise.

Can you just update us on that – on those bands and your – the profitability of the franchise?.

Yes. So Tim, maybe I’ll take a stab at it and then give Paul an opportunity to comment.

The first thing I would say is from our perspective, the achieved of the band beyond $233 million, I don’t think we would have categorized as easy and the fundamental of the deal as we talked about it, it was one that was not predicated on growth but there were tiered royalties that have incented growth.

So we’re confident as I’ve said in my prepared remarks that will achieve the basic fundamentals that we set out to achieve even with the pressure associated with the supply outage in terms of it being accretive this year, generating cash flow and contributing to the acceleration, to profitability and from a perspective of the franchise, we have been focused on it from the day we got it to the best that we could trying to first stabilize it and now we’re in that Phase 2 where we’re driving learnings to get to a position of when we get to the back half of the year or into 2019 what are the things that we could implement that we think might put the franchise in a better position..

pricing, promotional effort, rebates and all other contracting. So we have a lot of influence on the profitability of the product as well as obviously, control promotional efforts..

Okay.

And as we’re looking out, should we expect, obviously, pricing to be an area that you may address? Or is there something on the label that you think you could update and drive growth? Is there – what are some of these levers that are kind of most likely to be pulled?.

Yes, so Tim, this is Joe. We don’t comment on price but certainly that’s a lever that can be pulled. In Phase 2 derived learnings we’re doing a deep assessment from a contracting perspective, trying to understand in Phase 1 transition and stabilize, we just transitioned all of the contracts that were in place around Nucynta.

We’re deep into trying to find the winning formula like we have with Xtampza as it pertains to the payer space, so contracting, if you look at things like co-pay assistance, all of that is in play, our medical and scientific teams are digging through and trying to make a determination of what data gaps there may be, and what’s scientifically feasible, what would be the time to be able to do whether it’s data generation or all the way through to a label enhancement.

That’s the work we’re doing now and trying to hone in on. When we get to Phase 3, that’s where we’ll have those answers and a clearer view of what it is that we think are the things that could potentially drive this franchise as we move forward..

Fair enough. And maybe one last question on Xtampza. You mentioned that several contracts will probably drive growth starting in January I believe. So we’ve seen obviously some flattening of the weekly scripts over the past few weeks.

Is that just something we should expect for the summer months and then maybe even through Q4 until some of the new contracts kick in next year?.

Yes. So Tim, what I would say and this is Joe, we do not expect and our expectation is not flatness, nor do we believe [indiscernible] is an excuse or to rationalize the flatness being seasonality.

If you look at the big picture of Xtampza ER, one, we have additional runway within the exclusive ER oxycodone wins we’ve achieved, in particular in Medicare Part D. So as you know, we have Optum D, Humana D and we added Cigna-HealthSpring D on April 1.

What we’re seeing in the marketplace, that plays out in a slower, more protracted conversion, where in commercial, we clearly see the bolus in the first three to four months.

One of the things that’s important to understand about Medicare Part D, not only do we think that’s something that can be a driver for the remainder of this year, that’s another opportunity in January and Optum D and Humana D are by far the biggest opportunities of the wins we have where they can then implement their controls a second times.

So we’re really encouraged about the payer space overall. We have 90% paid rates in commercial over 80% and Part D, which means that we can also pull through the product in non-exclusive accounts. And we also think there’s opportunity to push through more effectively where we’re non-contracted.

But with the muscles we need to flex the back half of the year are around execution because you don’t get the bolus that we saw in the first quarter with all of them hitting at one time..

Understood. Thanks for the question..

Thank you, Tim..

Our next question is from Kevin Kedra with Gabelli. Your line is now open..

Hi, thanks for taking the questions. First, just wanted to get a bit more clarity on that year-end cash guidance that you gave.

Just want to make sure there’s not going to be any kind of moving pieces on the balance sheet of working capital that are part of that? Is that really just an operationally driven year-end cash target? And then secondly on the strategic review, just wondering how the DETERx platform plays into that, whether there additional opportunities that you see with that platform beyond Xtampza? And then finally, if you could just speak to whether you’re seeing any benefits from the cross promotional activities of having Xtampza and Nucynta now in-house for about half year? I remember when the deal was announced, there was a discussion that maybe you see benefit with Xtampza doctors moving into this Nucynta and vice versa.

So how is that coming along?.

Good. So thanks, Kevin Good. So thanks, Kevin. I’ll take strategic review, Paul will address the cash guidance and Scott, cross- promotional effort. So from the perspective of the strategic review, part of that will be looking at organically what it is if anything that we choose to do with the DETERx platform.

As we’ve communicated in past calls, we’ve kind of slowed or deprioritized some of the programs with regards to DETERx, hydrocodone and a couple of the others but that’s certainly part of the assessment that we’ll go through..

Yes. And Kevin, on the cash question, it is operationally driven. So it’s not just changing in working capital accounts..

Yes, and Kevin, question related to cross promotion, absolutely, when you look at have a target universe of 11,000, there is a high overlap in the Xtampza prescribers and Nucynta prescribers and the opportunity.

And what we see is bringing new products in gives us relevance in the office and provides greater access to some physicians we may not have had before Nucynta and vice versa. So absolutely, it brings a little more relevance and impact for us as we’re entering physicians’ offices..

Great. Thanks..

And I’m showing no further questions. I will now like to turn the conference to Joe Ciaffoni for any further remarks..

Once again, thank you for joining us this afternoon. We’re encouraged by our accomplishments in the first half of 2018 and optimistic about what we will achieve in the remainder of the year. We are committed to our mission of becoming the leader in responsible pain management and we look forward to updating you on our progress. Have a great evening..

Ladies and gentlemen, thank you for participating in today’s conference. You may now disconnect. Everyone, have a great day..