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, gastroenterology and oncology supportive care. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net revenue | $10.4 million | $8.5 million | $33.9 million | $27.2 million |
| Operating income (loss) | $(1.8) million | $(1.8) million | $(2.6) million | $(5.1) million |
| Net income (loss) | $(2.0) million | $(1.7) million | $(2.6) million | $(4.8) million |
| Net loss per diluted share | $(0.13) | $(0.11) | $(0.17) | $(0.30) |
| Net cash from operating activities | — | — | $2.2 million | $(0.6) million |
Q3 gross margin was approximately 81.5%, compared with 82.8% in the prior-year quarter. Nine-month gross margin was approximately 82.5%, compared with 83.4% in the prior-year period. Operating margins were approximately negative 17.8% and negative 21.3% for Q3 2019 and Q3 2018, respectively, and negative 7.8% and negative 18.8% for the respective nine-month periods.
- Q3 revenue increased 22%, primarily from $1.5 million of Vibativ revenue and higher Ethyol and Vaprisol revenue.
- Nine-month revenue increased 24%, including $6.2 million of Vibativ revenue and approximately $0.4 million of international license payments and $0.9 million of CET grant revenue.
- Nine-month selling and marketing expense increased 9% to $15.8 million, while research and development expense declined to $4.0 million from $4.6 million.
- Nine-month amortization expense increased $1.1 million to $3.1 million, primarily due to product rights and other intangible assets associated with Vibativ.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $27.0 million at September 30, 2019, compared with $27.9 million at December 31, 2018.
- Marketable securities declined to $2.3 million from $8.3 million, leaving total cash, cash equivalents and marketable securities of $29.2 million versus $36.2 million at year-end.
- Working capital was $28.3 million, with a current ratio of 2.3.
- The company had $20.0 million outstanding under its revolving credit facility. The facility bears interest at LIBOR plus 1.75% to 2.75%, or approximately 4.78% at September 30, 2019, and is collateralized by substantially all assets. The filing reports no remaining availability.
- Nine-month financing cash use was $3.6 million, including $2.6 million of common-stock repurchases and $0.9 million of contingent-consideration payments.
- The company generated $2.2 million of operating cash flow, aided by a $2.2 million inventory reduction and noncash depreciation, amortization and stock compensation.
- The credit agreement was extended through July 31, 2021. The company was compliant with its tangible capital ratio covenant at September 30, 2019 through use of the agreement’s covenant-cure provision.
Material changes, outlook and unusual items
- Vibativ, acquired in November 2018, contributed $6.2 million of nine-month revenue. The acquisition included $25.0 million of cash payments, $9.2 million of fair-valued contingent consideration and up to a 20% future-sales royalty.
- Cumberland agreed to return U.S. commercialization rights for Ethyol and Totect to Clinigen in late December 2019 and expects to receive $5.0 million over two years. Ethyol and Totect generated $8.8 million of combined nine-month 2019 revenue.
- The FDA extended the RediTrex review deadline to early December 2019 after requesting additional review time. The filing does not provide an approval outcome.
- Cumberland planned a full-scale launch of its next-generation Caldolor product in early 2020. An FDA submission seeking multiple Caldolor labeling claims was not accepted for review, and the company was evaluating a response.
- Ifetroban Phase II studies continued in systemic sclerosis, aspirin-exacerbated respiratory disease and Duchenne muscular dystrophy. The company received slightly more than $1 million in FDA Orphan Drug Grant funding for the DMD study.
- Talicia, a competing H. pylori product, received FDA approval in November 2019 and was expected to launch in early 2020, creating a competitive risk for Omeclamox-Pak.
- The company adopted the new lease standard in 2019, recording a $3.0 million operating lease right-of-use asset and $3.2 million of lease liabilities at September 30, 2019.
- Management stated that existing working capital, operating cash flows and the credit facility were expected to support internal growth, business development and capital expenditures for the foreseeable future. No quantified revenue or earnings guidance was provided.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Vibativ revenue growth and integration can offset the planned loss of Ethyol and Totect rights.
- The timing and outcome of the RediTrex FDA review and the regulatory path for the Caldolor labeling amendments.
- Compliance with the revolving-credit covenants, particularly given reliance on the covenant-cure provision and the absence of reported remaining availability.
- The sustainability of positive operating cash flow after inventory reductions and other working-capital benefits.
- Potential inventory obsolescence and product-return exposure; cumulative inventory reserves were approximately $0.5 million at September 30, 2019 versus $0.1 million at year-end 2018.
- The commercial impact of new competition for Omeclamox-Pak and performance trends for declining products such as Acetadote, Vaprisol and Totect.