Cumberland Pharmaceuticals Inc. — Q1 2022 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. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The company operates as one specialty pharmaceutical segment and primarily serves U.S. customers.
On January 3, 2022, Cumberland acquired the U.S. rights and commercial responsibilities for Sancuso, an FDA-approved oncology supportive-care product. The company also markets Acetadote, Caldolor, Kristalose, Omeclamox-Pak, RediTrex, Vaprisol and Vibativ, and continues Phase II development of ifetroban.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenues | $11.2 million | $10.5 million | +$0.6 million |
| Gross profit | $9.0 million | $8.1 million | +$0.8 million |
| Gross margin | 80.2% | 77.1% | +3.1 percentage points |
| Operating loss | $1.3 million | $0.3 million | Loss increased $1.0 million |
| Operating margin | (11.6%) | (3.1%) | Down 8.5 percentage points |
| Net loss attributable to common shareholders | $1.4 million | Net income of $0.2 million | Unfavorable change of $1.6 million |
| Net loss per diluted share | $0.09 | Net income per diluted share of $0.01 | Unfavorable change of $0.10 |
| Net cash used in operating activities | $0.2 million | Net cash provided of $1.8 million | Unfavorable change of $1.9 million |
Revenue increased 6.1% year over year. Cost of products sold declined to $2.2 million from $2.4 million, producing an 80.2% gross margin. Selling and marketing expense rose 21.8% to $4.6 million, research and development expense rose 38.8% to $1.7 million, and amortization increased 36.3% to $1.6 million, primarily reflecting the Sancuso acquisition and related commercial activities.
Cash and cash equivalents were $17.3 million at March 31, 2022, compared with $27.0 million at December 31, 2021. Working capital was $20.8 million, down from $26.4 million, and the current ratio declined to 1.8 from 2.4. The company had $20.0 million outstanding under its revolving credit facility, compared with $15.0 million at year-end. The facility matures October 1, 2024, carried a 3.65% applicable interest rate at March 31, 2022, and was secured by substantially all company assets. Cumberland reported compliance with its amended Maximum Funded Debt Ratio covenant.
Total assets increased to $96.7 million from $84.5 million, primarily due to the Sancuso acquisition. Intangible assets increased to $34.5 million from $24.0 million, and goodwill increased to $1.9 million from $0.9 million. Total equity declined to $40.8 million from $42.6 million.
Material changes versus the prior comparable period
- Sancuso contributed $3.4 million of revenue and a reported $2.1 million contribution after product costs, royalties and operating expenses. The acquisition required a $13.5 million cash payment and increased debt and amortization.
- Kristalose revenue increased 31.8% to $3.9 million due primarily to higher wholesale shipments.
- Vibativ revenue declined 50.5% to $2.5 million, following unusually high prior-year purchases and packaging-related activity.
- Vaprisol revenue fell to negative $0.1 million from $1.1 million because of a product shortage while the company transitions to a new manufacturer and awaits FDA approval.
- Caldolor revenue declined 37.7% to $1.0 million, primarily because of lower international shipments and order timing.
- Omeclamox-Pak remained constrained by the financial difficulties and reorganization of its third-party packager; the company was out of commercial inventory.
- Cash used in investing activities was $13.5 million, almost entirely attributable to the Sancuso acquisition. Financing activities provided $3.9 million, including a $5.0 million net increase in revolving credit borrowings.
- The company repurchased 174,149 shares for approximately $0.6 million, leaving approximately $4.2 million authorized for future repurchases.
- Prior-year results included $0.5 million of income from discontinued Ethyol and Totect operations; no such income was recorded in Q1 2022.
Guidance, outlook, commentary, risks and unusual items
Management stated that existing cash, internally generated cash flows and the revolving credit facility are expected to be adequate to finance internal growth, business development initiatives and capital expenditures for the foreseeable future. No specific revenue or earnings guidance was provided.
Management expects minimal income tax payments during 2022 and beyond because of approximately $56.6 million of federal net operating loss carryforwards, including approximately $44.1 million arising from exercises of nonqualified stock options.
- COVID-19 continues to create risks involving hospital admissions, physician visits, clinical trial enrollment, supply interruptions, delays and unplanned expenses. The company cannot quantify the future impact.
- Third-party manufacturing and packaging dependencies remain material, particularly for Omeclamox-Pak and Vaprisol.
- The company is expanding Sancuso promotion, including a three-year U.S. co-promotion arrangement with Verity Pharmaceuticals that became effective April 19, 2022.
- Cumberland launched Vibativ in Puerto Rico and entered a license agreement covering Saudi Arabia and Jordan; an upfront payment from the latter agreement was recognized in revenue.
- Ifetroban Phase II studies have resumed after pandemic-related interruptions. Further development decisions depend on study results, and the company is preparing an FDA application for a potential interstitial lung disease program.
- Contingent consideration liabilities totaled approximately $10.3 million at March 31, 2022, including $6.4 million related to Vibativ and $3.9 million related to Sancuso. These obligations include royalties and potential milestone payments.
- The revolving facility uses LIBOR-based pricing, with a process expected to establish a replacement benchmark when LIBOR is discontinued.
- Existing leases include the corporate headquarters lease expiring in October 2022 and a new Broadwest headquarters lease expected to commence in late 2022 or upon occupancy or receipt of a certificate of occupancy.
Most important facts for investors to verify
- Whether Sancuso revenue and contribution can offset the increased selling, marketing, amortization and financing costs associated with the acquisition.
- The timing of FDA approval and commercial supply restoration for Vaprisol, and the resolution of the Omeclamox-Pak packaging disruption.
- Vibativ demand trends following the substantial year-over-year revenue decline and the effect of international licensing agreements.
- Cash burn, accounts receivable collection and continued reliance on the $20.0 million revolving credit facility.
- Compliance with debt covenants and the effect of rising or changing benchmark interest rates.
- The final purchase accounting valuation for Sancuso, including intangible assets, goodwill, milestone obligations and contingent consideration.
- Potential inventory obsolescence or discontinuance charges; cumulative net realizable value charges were approximately $0.6 million at March 31, 2022.
- Progress, results and regulatory implications of the ifetroban Phase II programs.
- COVID-19-related effects on supply chains, clinical trials, hospital utilization and product demand.