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EGLT: Debt Refinancing With Benefits

12/22/2017
By John Vandermosten, CFA

NASDAQ:EGLT

Principal Amount of 5.5% Convertible Notes Reduced

On December 20, 2017 Egalet Corporation (NASDAQ:EGLT) announced that it had refinanced $36.4 million of its $61.0 million face value 5.5% convertible notes for $23.9 million of new 6.5% convertible notes.  The new notes add an additional three and a half years to maturity and reduce interest payments by about $450 thousand per year despite the 100 basis point higher interest rate.   

The new convertible notes are due December 31, 2024 and are convertible into approximately 750 shares per $1,000 face value, which is equivalent to a conversion price of $1.33.  Currently, Egalet does not have sufficient shares authorized to satisfy a full conversion of the new securities and has created 3.5 million warrants (exercisable at $0.01) as a temporary measure until additional shares are authorized.  If the convertible bonds are exercised prior to authorization of new shares, the warrants will be issued to satisfy the conversion.  Through the exchange, Egalet was able to lower the face value of the debt and lower its net interest expense by reducing the effective conversion price.

Egalet offered the exchange to all of the 5.5% convertible bondholders, however, only a portion took advantage of it.  As the units move closer to maturity, we anticipate that Egalet will try to eliminate more of these units coming due in 2020 through exchange at a favorable time or paydown if sufficient cash is available at the time.

The exchange will have an immediate benefit on cash flow by reducing cash interest payments from $13.8 million per year to $13.3 million.  The extended maturity is another benefit which will lighten the pressure on the need to refinance in coming years and allow for revenue and cash flow improvement supportive of better future financing terms.  

Tentative Approval for Arymo

In addition to the positive news regarding lower cash interest payments, Egalet also received tentative approval from the FDA regarding the addition of an intranasal abuse-deterrent claim to the label for Arymo.  This will allow the company to update the label after October 2, 2018 and will help generate sales to organizations that require the official label to match their product requirements.  Egalet was required to wait until the expiration of exclusivity for Daiichi Sankyo’s MorphaBond.  However, the FDA did allow Egalet to share the results of abuse deterrent studies that provided evidence of efficacy for intra-nasal abuse deterrence with payors and providers.  

MorphaBond was initially approved in October 2015, however, the drug sponsors did not start marketing the drug until recently.  No official date of launch was given, but Egalet has seen evidence of their salesforce discussing the benefits of MorphaBond with payors and providers in recent months.  Since penetration of ADFs is estimated to be in the low single digits, competitors in the market actively engaging with payors and providers is considered helpful to all ADF manufacturers.  MorphaBond’s salesforce is helping spread the message on the benefits of ADFs, making it easier to argue the case for using this class of pain relief.  In the words of company management, a rising tide will lift all boats.

Commission Report Submitted to President


On November 1st, 2017, the President’s Commission on Combating Drug Addiction and the Opioid Crisis submitted its report. The commission called for more funding for enforcement and treatment, additional data sharing between government agencies, and a multi-media campaign highlighting the dangers of drugs and addiction among other recommendations.  The report also included a mention of abuse deterrent formulations, highlighting the FDA’s support of the class, but did not make any specific recommendations regarding their use.  We did not expect the report to explicitly recommend the use of ADFs as it had made no mention of them in previous discussions, however, ADF support from federal and state legislatures and agencies are helpful factors in supporting increased penetration of ADFs in the effort to combat opioid addiction.

Summary

The debt conversion and tentative approval will help improve cash flows and the marketing argument for Arymo respectively.  Both of these events are supportive of our favorable thesis on Egalet.  We continue to believe the low level of ADF penetration and the compelling argument that ADFs can reduce diversion and prevent addiction combined with an education campaign by multiple companies are supportive of our growth estimates.

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