Cumberland Pharmaceuticals Inc. — Fiscal 2017 Form 10-K 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 covers the fiscal year ended December 31, 2017, including fourth-quarter results. The company marketed seven FDA-approved products in the United States and maintained a pipeline of Phase II and pre-approval candidates.
Products launched or expanded during the year included Totect, introduced in July 2017 with promotional support beginning in September, and a full year of Ethyol commercialization. Cumberland had 84 full-time employees and relied on third parties for manufacturing, packaging, distribution and certain development activities.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net revenues | $41.2 million | $33.0 million | Up 24.6% |
| Cost of products sold | $7.4 million | $6.0 million | Up 23.7% |
| Gross margin | 82.1% | 82.0% | Essentially unchanged |
| Operating loss | $4.1 million | $1.4 million | Loss increased $2.6 million |
| Operating margin | (9.9%) | (4.3%) | Deteriorated |
| Net loss attributable to common shareholders | $8.0 million | $0.9 million | Loss increased $7.0 million |
| Basic and diluted loss per share | $0.50 loss | $0.06 loss | Deteriorated |
| Cash flow from operating activities | $0.6 million use | $0.6 million source | Declined $1.1 million |
Revenue growth was driven primarily by Ethyol revenue of $10.8 million and Totect revenue of $4.0 million, partially offset by a $4.4 million decline in Kristalose revenue. Selling and marketing expense increased $6.9 million to $21.5 million, largely because of higher royalties associated with Ethyol and Totect. Research and development expense rose 22.3% to $3.9 million, while general and administrative expense increased to $10.0 million.
The 2017 net loss included $4.2 million of income tax expense, principally from valuation allowances against deferred tax assets. The company recorded a full valuation allowance against its remaining deferred tax assets during the year. The tax expense was therefore a significant non-cash contributor to the reported loss.
Revenue by product
| Product | 2017 revenue | 2016 revenue | Change |
|---|---|---|---|
| Kristalose | $11.5 million | $15.9 million | Down $4.4 million |
| Ethyol | $10.8 million | $0.8 million | Up $10.0 million |
| Acetadote | $6.6 million | $7.2 million | Down $0.6 million |
| Totect | $4.0 million | — | New product |
| Caldolor | $4.2 million | $4.1 million | Up $0.05 million |
| Omeclamox-Pak | $1.8 million | $2.5 million | Down $0.8 million |
| Vaprisol | $1.6 million | $1.9 million | Down $0.3 million |
Acetadote revenue included $4.6 million from the Authorized Generic, compared with $4.8 million in 2016. Kristalose was affected by reduced volume and higher Medicaid rebates. Vaprisol sales were constrained by manufacturing and supply delays during the fourth quarter.
Liquidity, debt and balance sheet
| Metric at December 31 | 2017 | 2016 |
|---|---|---|
| Cash and cash equivalents | $45.4 million | $34.5 million |
| Marketable securities | $4.7 million | $15.6 million |
| Total liquidity | $50.1 million | $50.1 million |
| Working capital | $51.0 million | $50.8 million |
| Revolving credit borrowings | $9.8 million | $4.1 million |
| Available revolving credit | $2.2 million | $7.9 million |
| Total assets | $93.2 million | $93.4 million |
| Total equity | $63.9 million | $73.1 million |
Cash increased $10.9 million during 2017, despite a $0.6 million operating cash outflow, because of $9.5 million of investing cash inflows and $1.9 million of financing cash inflows. Investing cash flow primarily reflected net proceeds from marketable securities. Financing activity included $24.5 million of borrowings, $18.8 million of repayments and $3.7 million of share repurchases.
In July 2017, Cumberland entered into a new revolving credit agreement with Pinnacle Bank. The facility permits an initial borrowing capacity of up to $12.0 million, with potential expansion to $20.0 million, and expires July 31, 2020. Interest was based on LIBOR plus 1.75% to 2.75%, representing 3.3% at year-end. Borrowings are secured by substantially all company assets. Cumberland complied with its funded debt ratio covenant at year-end through the agreement's covenant cure provision.
Material changes versus the prior comparable period
- Revenue increased 24.6%, primarily from the first full year of Ethyol and the launch of Totect.
- Profitability worsened despite higher revenue because selling and marketing, research and development, and general and administrative expenses increased.
- The company shifted from a $0.6 million operating cash inflow in 2016 to a $0.6 million operating cash outflow in 2017.
- Cash and marketable securities remained approximately flat in aggregate, while the composition shifted substantially toward cash.
- Revolving debt increased from $4.1 million to $9.8 million and remaining availability declined from $7.9 million to $2.2 million.
- Kristalose revenue fell 27.9%, while Acetadote revenue declined amid generic competition and Vaprisol revenue was affected by supply constraints.
- The company repurchased 547,376 shares for approximately $3.7 million and had approximately $3.8 million remaining under its repurchase authorization at year-end.
- Cumberland contributed 50,000 shares, valued at approximately $0.4 million, to the newly formed Cumberland Pharma Foundation.
- The company filed a shelf registration for up to $100 million of securities; it became effective in January 2018, and no shares had been sold under it at December 31, 2017.
Guidance, outlook, commentary and unusual items
The filing does not provide numerical revenue, earnings or cash flow guidance. Management stated that it intended to maximize existing brands, selectively add complementary products, advance its clinical pipeline, expand international partnerships and manage expenses with financial discipline.
- Pipeline programs included Phase II candidates Hepatoren, Boxaban, Vasculan and Portaban, plus RediTrex injectable methotrexate awaiting U.S. approval submission.
- Boxaban enrollment advanced in a 76-patient Phase II efficacy study; Vasculan and Portaban Phase II enrollment also progressed.
- Management completed a Phase I study for a new hospital product candidate and began designing a Phase II study.
- The company planned to prepare the U.S. submission for the Nordic injectable methotrexate product during 2018.
- Totect benefited from a national dexrazoxane shortage, creating strong initial demand; future demand may be affected if competing supply returns.
- Vaprisol manufacturing delays reduced fourth-quarter 2017 sales and were expected to affect the first quarter of 2018.
- The January 2017 appellate decision upheld Cumberland's Acetadote patent against Mylan. In November 2017, Exela challenged multiple Acetadote patents, and Cumberland was evaluating its legal options.
- Income tax expense was unusually high because of valuation allowances. The company also adopted new share-based compensation accounting, recording a $1.1 million increase to retained earnings and recognizing previously unrecognized tax carryforwards.
Principal risks and contingencies
- Dependence on third-party manufacturers creates risks of shortages, quality failures, regulatory noncompliance and lost sales; the Vaprisol supply disruption illustrates this exposure.
- Generic competition may reduce sales of Acetadote and other branded products, while patent challenges could weaken exclusivity.
- Revenue is concentrated among large pharmaceutical wholesalers: three customers accounted for 72% of 2017 revenue.
- Product sales depend on reimbursement, formulary access, pricing, Medicaid rebates and government healthcare policy.
- The company relies on successful clinical development and FDA approval of pipeline products that may never be commercialized.
- Royalty obligations on Kristalose, Omeclamox-Pak, Ethyol and Totect vary with sales and are not fully included in fixed contractual obligation totals.
- Debt is secured by substantially all assets, bears variable interest and is subject to a financial covenant that required use of a cure provision at year-end.
- Intangible assets represented approximately 23% of total assets and could require impairment if product performance or market conditions deteriorate.
- Management identified risks involving product liability, regulatory compliance, intellectual property litigation, cybersecurity, customer concentration and dependence on key personnel.
Important facts for investors to verify
- Whether Ethyol and Totect demand remains strong after the initial launch and dexrazoxane shortage effects normalize.
- Whether Kristalose revenue stabilizes after the 2017 volume and Medicaid-rebate declines.
- Resolution and commercial impact of Exela's Acetadote patent challenge and the durability of Cumberland's patent protection.
- Restoration of reliable Vaprisol supply and the resulting effect on 2018 revenue.
- Progress, enrollment, results and financing requirements for the Phase II pipeline programs and the RediTrex FDA submission.
- Operating cash generation, debt reduction capacity and compliance with the funded debt ratio covenant.
- Customer concentration, wholesaler fees, rebates, returns and other sales-related accruals, which totaled $4.7 million at year-end.
- Whether the company ultimately uses the $100 million shelf registration or ATM facility, creating potential shareholder dilution.
- Audited financial statements and related notes, including the full valuation allowance against deferred tax assets and the terms of product royalty agreements.