Business Context and Reporting Period
Cumberland Pharmaceuticals Inc. is a specialty pharmaceutical company focused on acquiring, developing, and commercializing branded prescription products for hospital acute care and gastroenterology markets. Its portfolio includes Acetadote, Caldolor, Kristalose, Omeclamox-Pak, Vaprisol, and, beginning in 2016, U.S. rights to Ethyol. The unaudited Form 10-Q covers the three and six months ended June 30, 2016, with comparisons to the corresponding 2015 periods.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 | ||
|---|---|---|---|---|
| 2016 | 2015 | 2016 | 2015 | |
| Net revenues | $7.4 million | $8.9 million | $15.2 million | $17.6 million |
| Operating income (loss) | $(0.1) million | $0.7 million | $(0.6) million | $0.7 million |
| Net income (loss) attributable to common shareholders | $(48 thousand) | $406 thousand | $(301 thousand) | $452 thousand |
| Basic EPS | $— | $0.02 | $(0.02) | $0.03 |
- Revenue declined 16.8% in the second quarter and 13.9% year to date. Gross margin was approximately 84.4% in the quarter and 84.3% year to date, versus approximately 86.1% and 86.4%, respectively, in the comparable 2015 periods.
- Quarterly and year-to-date net margins attributable to common shareholders were approximately negative 0.6% and negative 2.0%, respectively.
- Six-month selling and marketing expense was approximately $7.0 million, research and development expense was $1.4 million, general and administrative expense was $4.0 million, and amortization expense was $1.1 million.
- Cash used in operating activities was $544 thousand for the six months ended June 30, 2016, compared with $4.1 million of operating cash flow in 2015. The decline reflected the net loss and a $4.1 million reduction in accounts payable and other current liabilities.
- Investing cash outflow was $1.1 million, including $1.1 million of additions to intangible assets. Financing cash outflow was $724 thousand, including $1.7 million of share repurchases and $1.8 million of net borrowings.
- Cash and cash equivalents were $35.8 million at June 30, 2016, compared with $38.2 million at December 31, 2015. Marketable securities were $14.6 million, producing total cash, cash equivalents, and marketable securities of $50.4 million.
- Working capital was $55.1 million and the current ratio was 7.2 at June 30, 2016. The company reported $3.5 million outstanding under its revolving credit facility, with $8.5 million of stated availability.
- Total liabilities were $13.5 million and total equity was $74.4 million at June 30, 2016. The revolving facility is secured by substantially all company assets and bears interest based on LIBOR plus a spread; the rate was 1.5% at quarter-end.
Material Changes Versus the Prior Comparable Period
- Acetadote revenue decreased $0.9 million in the second quarter and $0.6 million year to date. Management attributed the decline primarily to lower branded product volume, generic competition, and an unusually strong prior-year quarter following resolution of a temporary product shortage.
- Kristalose revenue decreased $0.5 million in the quarter and $1.0 million year to date, primarily because of lower sales volume, partly offset by improved pricing and lower managed-care rebates.
- Vaprisol revenue decreased $0.7 million year to date, and Omeclamox-Pak revenue decreased $0.3 million, both primarily due to lower sales volume.
- Caldolor revenue increased 37.4% in the second quarter and 3.0% year to date, supported by international sales and higher domestic volume. Management expects annual growth but cautions that quarterly results may fluctuate with wholesaler and hospital purchasing patterns.
- Research and development expense declined $1.3 million year to date, largely because 2015 included a $1.2 million FDA submission fee related to the Caldolor pediatric indication.
- Operating results deteriorated from profit to loss despite lower total expenses, primarily because the revenue decline exceeded the reduction in expenses. Product cost as a percentage of revenue increased because of sales mix.
- The company repurchased approximately 366,740 shares for $1.7 million during the first six months of 2016 and issued approximately 217,775 restricted shares to employees and directors.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No formal quantitative revenue or earnings guidance is provided. Management expects to expand existing brands, launch Ethyol in the United States during the third quarter of 2016, pursue product acquisitions and international partnerships, and advance its Phase II pipeline programs.
- Ethyol was acquired through an agreement with Clinigen without an upfront payment. Cumberland is responsible for U.S. marketing, promotion, and distribution and will pay tiered royalties based on net sales.
- The company reported positive Phase II safety and efficacy signals for Hepatoren in certain Type II patients and favorable safety and tolerability results for Boxaban, but further development and data analysis remain pending.
- On July 29, 2016, after the reporting date, the revolving credit agreement was amended to extend its expiration to June 30, 2018 and provide a waiver for a June 30, 2016 financial covenant. The company stated that it was in compliance with all covenants after the amendment.
- Acetadote patent litigation remains material. Cumberland prevailed against Mylan in district court regarding the 445 patent, and Mylan appealed. An arbitration award also enjoins Mylan and affiliates from selling certain acetylcysteine injectable products until April 30, 2018. Generic competition remains a significant revenue risk.
- Cumberland received U.S. Patent No. 9,327,028 for Acetadote in May 2016, listed in the FDA Orange Book and scheduled to expire in July 2031. The company cautions that patent protection may not prevent competing products.
- Inventory included approximately $2.8 million of cumulative obsolescence and discontinuance reserves, primarily related to Caldolor. Existing Caldolor inventory had FDA-extended expiration dates through early 2017, and new seven-year shelf-life vials were expected in the third quarter of 2016.
- The company reported approximately $43.0 million of unrecognized net operating loss carryforwards from the exercise of nonqualified stock options and expects these to significantly offset future income tax obligations, resulting in minimal cash taxes in 2016.
- The June 30, 2016 covenant waiver, reliance on product exclusivity, generic competition, product demand, inventory expiration, acquisition execution, regulatory approvals, and the need for continued access to capital are key investor risks.
Important Facts for Investors to Verify
- Whether Acetadote revenue continues to decline as generic competition develops and whether patent litigation or the Mylan appeal changes market protection.
- Whether the Ethyol launch generates material revenue and whether associated royalties and launch spending affect margins.
- Whether Cumberland returns to positive operating cash flow after the $544 thousand operating cash outflow in the first half of 2016.
- The terms, ongoing covenant compliance, collateral requirements, and borrowing capacity of the amended revolving credit facility.
- The recoverability and expiration profile of Caldolor inventory and the adequacy of the approximately $2.8 million obsolescence reserve.
- Progress, funding requirements, and regulatory outcomes for the Hepatoren, Boxaban, and Vasculan Phase II programs.
- The impact of new managed-care agreements, product pricing, wholesaler purchasing patterns, and international sales on future revenue volatility.