Cumberland Pharmaceuticals Inc. — Form 10-Q Summary
Business Context and Reporting Period
Cumberland Pharmaceuticals is a specialty pharmaceutical company focused on acquiring, developing and commercializing branded prescription products in hospital acute care, oncology, gastroenterology and rheumatology. The portfolio includes eight FDA-approved products, including the newly acquired Sancuso, and the company is developing ifetroban in Phase II clinical programs.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The company had 14,464,127 common shares outstanding as of November 7, 2022.
Financial Performance and Position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net revenues | $11.4 million | $8.1 million | $32.9 million | $27.7 million |
| Operating income (loss) | $(0.3) million | $(1.6) million | $(3.4) million | $(3.3) million |
| Net income (loss) attributable to common shareholders | $(0.4) million | $(1.1) million | $(3.1) million | $0.3 million |
| EPS attributable to common shareholders | $(0.03) | $(0.07) | $(0.21) | $0.02 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $4.8 million | $4.4 million |
- Q3 revenue increased 41.4%; nine-month revenue increased 18.9%, principally due to Sancuso revenue following the January 2022 acquisition.
- Q3 gross margin was approximately 80.5%, compared with 83.5% in the prior-year quarter. Nine-month gross margin was approximately 80.3%, compared with 80.2% in the prior-year period.
- Q3 operating margin improved to approximately negative 2.5% from negative 19.4%. The nine-month operating margin was approximately negative 10.4%, compared with negative 12.0%.
- Q3 selling and marketing expense increased to $4.1 million, and nine-month expense increased to $13.3 million, largely due to Sancuso promotional activity, royalty costs and the new oncology sales division.
- Nine-month research and development expense increased to $5.3 million from $4.1 million, reflecting continued clinical programs, including ifetroban.
- Amortization increased to $1.5 million in Q3 and $4.6 million for the nine months, primarily due to the Sancuso acquisition.
- Cash and cash equivalents were $19.5 million at September 30, 2022, down from $27.0 million at December 31, 2021. Working capital was $23.9 million, with a current ratio of 1.9.
- Accounts receivable increased to $15.2 million from $6.9 million at year-end, primarily reflecting Sancuso sales. Current and non-current inventories totaled $18.1 million, including $7.5 million classified as non-current.
- Total assets were $90.8 million and total equity was $38.5 million at September 30, 2022.
Cash Flow, Debt and Liquidity
- Nine-month operating cash flow was $4.8 million. Investing cash flow was negative $13.0 million, primarily due to the $13.5 million cash acquisition payment for Sancuso.
- Financing activities provided $0.7 million, including $2.7 million of net additional revolving-credit borrowings, partly offset by share repurchases and royalty payments.
- Borrowings under the revolving credit facility were $17.7 million at September 30, 2022, compared with $15.0 million at December 31, 2021. The facility matures October 1, 2024, and is collateralized by substantially all company assets.
- The applicable borrowing rate was 5.25% at September 30, 2022, based on LIBOR and the applicable spread. The company had approximately $2.3 million of remaining availability.
- The company was in compliance with its funded-debt-ratio covenant at quarter-end. The September 29, 2022 amendment changed the covenant calculation to deduct unrestricted cash above $8.5 million from funded debt.
- Management believes cash, operating cash flow and available credit will be adequate to finance operations, growth initiatives and capital expenditures for the foreseeable future; however, liquidity has declined and remaining revolver capacity is limited.
Material Changes Versus the Prior Comparable Period
- Sancuso generated $4.0 million of Q3 revenue and $10.8 million of nine-month revenue. Management reported a nine-month Sancuso contribution of $6.8 million after product costs, royalties and operating expenses.
- Vibativ revenue declined to $6.0 million for the nine months from $8.8 million, although Q3 revenue was broadly stable year over year.
- Kristalose, Caldolor, Acetadote and Vaprisol revenues declined year to date. Vaprisol revenue was negative $0.3 million for the nine months because the company was out of commercial inventory.
- Omeclamox-Pak had no meaningful commercial sales because its third-party packager suspended operations amid financial difficulties and reorganization.
- RediTrex revenue improved, but under the July 2022 amendment Nordic may assume U.S. commercialization after March 31, 2023. Nordic will return 180,000 shares, refund a $1.0 million milestone payment and provide a $1.0 million credit note; Cumberland expects a royalty on future Nordic sales.
- Net loss from continuing operations widened to $3.2 million for the nine months from $1.2 million, primarily because the 2021 period included a $2.2 million gain from PPP loan forgiveness, while 2022 included higher interest expense and operating costs. The 2022 period included a $0.6 million gain on insurance proceeds.
- Product-rights intangible assets increased to $29.0 million and goodwill increased to $1.9 million, principally reflecting the Sancuso acquisition.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance was provided. Management stated that it expects to continue paying minimal income taxes because of approximately $56.6 million of federal net operating loss carryforwards.
- Management expects to expand Sancuso through its oncology sales force and a three-year co-promotion agreement with Verity Pharmaceuticals, while continuing to pursue acquisitions, international partnerships and development of ifetroban.
- Vaprisol supply remains dependent on a new manufacturing facility resolving FDA Form 483 and warning-letter issues and obtaining FDA approval. Management plans to provide interim compounded supply while awaiting approval.
- Omeclamox-Pak supply remains suspended pending the packager’s reorganization or an alternative packaging solution.
- COVID-19 effects, supply-chain interruptions, hospital and physician-visit volumes, inflation, rising interest rates, the Russia-Ukraine conflict and employee-related cost increases may adversely affect results.
- The company relies on third parties to manufacture and distribute products and is exposed to product returns, rebates, chargebacks, inventory obsolescence, regulatory approvals and clinical-development risks.
- A balance-sheet adjustment identified after preliminary earnings increased accounts receivable by $0.15 million, reduced property and equipment by $0.8 million and reduced current liabilities by $0.65 million. It did not affect net loss.
- The Nashville headquarters lease expired in October 2022, and the company received a certificate of occupancy for its new Broadwest headquarters on October 25, 2022.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2022, and reported no material change in internal control over financial reporting during the quarter.
Key Facts for Investors to Verify
- Whether Sancuso revenue and contribution remain sufficient to offset declining sales of Vibativ, Vaprisol, Kristalose and other legacy products.
- The timing and outcome of FDA remediation and approval for the Vaprisol manufacturing facility.
- The timing of restored Omeclamox-Pak supply and the financial impact of continued product unavailability.
- Nordic’s planned assumption of RediTrex commercialization after March 31, 2023, including the share cancellation, refunds, credit note and future royalty economics.
- Available liquidity after the $13.5 million Sancuso acquisition, including the $19.5 million cash balance, $17.7 million revolver borrowings and approximately $2.3 million of unused capacity.
- Compliance with the amended funded-debt-ratio covenant as operating results and interest rates change.
- The final purchase-price allocation and contingent consideration valuation for Sancuso, which remained subject to completion at the filing date.
- Progress, funding requirements and clinical results for the ifetroban Phase II programs.