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. The filing reports unaudited results for the three and six months ended June 30, 2018, compared with the same periods in 2017.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Net revenues | $10.2 million | $8.7 million | $18.8 million | $18.3 million |
| Operating income (loss) | $(0.9) million | $(1.7) million | $(3.3) million | $(2.3) million |
| Net income (loss) | $(0.7) million | $(5.2) million | $(3.1) million | $(6.5) million |
| Loss per diluted share | $(0.05) | $(0.32) | $(0.20) | $(0.40) |
| Cash flow from operations | Not separately provided | Not separately provided | $1.0 million | $(1.1) million |
Q2 gross margin was approximately 85.0%, versus 80.7% in the prior-year quarter. Operating margin was approximately negative 8.6%, versus negative 19.4%, and net margin was approximately negative 7.3%, versus negative 59.7%. For the six-month period, gross margin was approximately 83.7%, operating margin was negative 17.7%, and net margin was negative 16.7%.
At June 30, 2018, cash and cash equivalents were $35.9 million, marketable securities were $14.8 million and total cash, cash equivalents and marketable securities were $50.7 million. Working capital was $49.8 million, with a current ratio of 4.0. The company had $12.0 million outstanding under its revolving credit facility, which carried an interest rate of approximately 3.8% and had an aggregate borrowing capacity of up to $20.0 million subject to conditions. Management reported no remaining availability under the initial $12.0 million line at June 30.
Cash and cash equivalents decreased by $9.5 million during the first six months, primarily because of a $10.0 million net investment in marketable securities and $0.6 million of additions to intangible assets. The company repurchased approximately $2.0 million of common stock and issued approximately $0.2 million of shares under its ATM program.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 17.3% to $10.2 million; six-month revenue increased 2.4% to $18.8 million.
- Q2 revenue growth was led by Vaprisol, up $1.4 million; Ethyol, up $0.7 million; Kristalose, up $0.3 million; and new Totect sales of $0.3 million. Vaprisol supply constraints were resolved in April 2018.
- Six-month revenue growth was led by Kristalose, up $1.2 million; Vaprisol, up $0.8 million; Caldolor, up $0.3 million; and Totect, contributing $0.7 million. These increases largely offset declines in Acetadote, Omeclamox-Pak and Ethyol.
- Acetadote revenue declined due to increased competition. Omeclamox-Pak revenue declined because of lower sales volumes and higher expired-product returns. Ethyol’s six-month decline reflected unusually high wholesaler inventory activity in the prior-year period.
- Research and development expense increased 68% for the six-month period to $3.3 million, reflecting greater clinical and manufacturing investment and higher FDA fees.
- The six-month operating loss worsened by approximately $1.0 million despite modest revenue growth, primarily because of higher research and development, general and administrative and amortization expenses.
- The improvement in six-month net loss was substantially affected by the absence of the approximately $4.2 million tax expense recorded in 2017, including non-cash valuation allowances.
- The company adopted ASC 606 revenue guidance on January 1, 2018 using the modified retrospective method. Management reported no material impact and no cumulative retained-earnings adjustment.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative revenue or earnings guidance. It stated that existing working capital, internally generated cash flows and the revolving credit facility are expected to be adequate to finance internal growth and capital expenditures for the foreseeable future.
- The FDA issued a complete response on August 2, 2018 regarding the next-generation Caldolor application, requesting additional quality and nonclinical information. Cumberland intends to meet with the FDA before responding.
- The company completed preparation of the RediTrex New Drug Application and planned to file it with the FDA after the reporting date.
- Enrollment was completed for the Portaban Phase II study; Vasculan and Boxaban Phase II enrollment continued.
- The planned acquisition of the Omeclamox-Pak assets from Gastro-Entero-Logic was pending closing and targeted for the third quarter. If completed, Cumberland would assume responsibility for the product’s FDA approval and packaging and would no longer owe certain royalties or manufacturing oversight fees.
- Totect benefited from an earlier national dexrazoxane shortage. Competing supplies subsequently became available, creating a risk to demand, although Totect remained the only U.S. dexrazoxane product approved for the extravasation indication.
- The Pinnacle credit agreement was amended on August 14, 2018. The company had achieved compliance with the original Funded Debt Ratio covenant using the agreement’s cure provision and reported compliance with the amended Tangible Capital Ratio covenant as of June 30.
- Management expects minimal income taxes through continued use of approximately $44 million of net operating loss carryforwards, assuming taxable income is achieved.
- Key risks include product competition, supply interruptions, regulatory approval delays, clinical-development uncertainty, reliance on third-party manufacturers and distributors, the need for additional capital, debt-covenant compliance, product returns and rebate estimates, and the company’s continuing operating losses.
Important Facts for Investors to Verify
- Confirm the FDA’s follow-up requirements and timetable for the next-generation Caldolor application.
- Monitor completion and financial terms of the Omeclamox-Pak asset acquisition.
- Assess whether Vaprisol supply normalization and Totect demand are sustainable.
- Review progress, enrollment and results for the Portaban, Vasculan and Boxaban Phase II programs and the RediTrex regulatory submission.
- Track operating cash generation, continued losses, research and development spending and the company’s ability to maintain positive operating cash flow.
- Verify available borrowing capacity, interest-rate exposure and compliance with the amended Pinnacle credit covenants.
- Evaluate the impact of Acetadote competition, Ethyol demand normalization and Omeclamox-Pak returns on future revenue.