CUMBERLAND PHARMACEUTICALS INC annual report, FY2013

Cumberland Pharmaceuticals Inc. — FY2013 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 and gastroenterology. The filing covers the fiscal year ended December 31, 2013, with comparative annual data for 2012 and 2011 and unaudited quarterly information for 2013.

The portfolio included marketed products Acetadote, Caldolor, Kristalose and, beginning in late 2013, Omeclamox-Pak. Hepatoren, an ifetroban injection for hepatorenal syndrome, remained in Phase II development. The company had 96 full-time employees and approximately 60 sales representatives and managers at year-end.

Financial results and key metrics

Metric	2013	2012	Change
Net revenues	$32.0 million	$48.9 million	Down $16.8 million, approximately 34%
Net product revenues	$31.1 million	$47.9 million	Down approximately 35%
Operating income (loss)	$(3.8) million	$8.8 million	Declined $12.6 million
Net income (loss) attributable to common shareholders	$(2.1) million	$5.8 million	Declined $7.9 million
Basic and diluted EPS	$(0.11)	$0.30	Down $0.41
Cash flow from operations	$0.7 million	$7.1 million	Down $6.4 million

Product revenue consisted of Acetadote of $18.8 million, Kristalose of $9.1 million, Omeclamox-Pak of $1.0 million and Caldolor of $2.1 million. Acetadote revenue included $9.2 million from the authorized generic supplied to Perrigo. Other revenue was $0.9 million, including international licensing payments, grants and rental income.

Cost of products sold increased to 17.0% of net revenues from 10.3% in 2012, partly due to product mix and $0.9 million of inventory write-downs. Selling and marketing expense declined to $14.4 million from $20.3 million, while research and development expense increased to $5.6 million from $5.1 million. General and administrative expense was $9.5 million, compared with $9.1 million, and amortization was $0.9 million, compared with $0.5 million.

At December 31, 2013, cash and cash equivalents were $40.9 million and marketable securities were $14.0 million, for total cash, cash equivalents and marketable securities of $54.9 million. Working capital was $61.1 million and the current ratio was 9.1. Total assets were $87.6 million and total equity was $79.3 million.

The company had no outstanding borrowings under its $10.0 million revolving credit facility at year-end. Total long-term debt and other long-term obligations, including the current portion, were $0.9 million. The credit facility carried an interest rate of 2.17% at year-end, was collateralized by substantially all assets and was scheduled to expire December 31, 2014. In March 2014, the company amended the facility and stated that it was then in compliance with all covenants.

Material changes versus the prior comparable period

Revenue declined primarily because Acetadote branded product revenue fell $18.7 million as a result of generic competition. The authorized generic contributed $9.2 million in 2013 versus $0.3 million in 2012.
Caldolor revenue increased $1.1 million, supported by higher volume and greater penetration of hospitals already stocking the product.
Omeclamox-Pak generated approximately $1.0 million of 2013 revenue after the company entered into its agreement with Pernix effective October 2013. Cumberland began broader promotion and distribution in early 2014.
Net loss and operating loss replaced 2012 profitability. Quarterly operating results deteriorated through the year: 2013 operating income was $1.3 million in the first quarter, followed by losses of $1.1 million, $1.5 million and $2.5 million in the second, third and fourth quarters, respectively.
Operating cash flow fell to $0.7 million from $7.1 million. Cash uses included $7.5 million of intangible-asset investment, including a $4.0 million upfront payment for Omeclamox-Pak, $4.8 million of share repurchases and repayment of $4.4 million under the revolving credit facility.
Intangible assets increased to $15.5 million from $9.5 million, reflecting product rights and approximately $2.1 million of capitalized patent costs.
The company repurchased 1.0 million shares for $4.8 million during 2013, including 179,554 shares in the fourth quarter. Approximately $5.6 million remained available under the repurchase authorization at year-end.

Guidance, outlook, commentary and unusual items

The filing does not provide formal revenue or earnings guidance. Management described its strategy as increasing Caldolor utilization, maintaining and protecting Acetadote market share, integrating Omeclamox-Pak, expanding international partnerships, acquiring complementary products and developing early-stage candidates through majority-owned Cumberland Emerging Technologies.

Hepatoren enrollment progressed in a planned 64-patient Phase II dose-escalation study. Approval and commercialization remain uncertain.
An Acetadote study was terminated in 2013 because of inadequate enrollment. The company’s supplemental application for use in non-acetaminophen acute liver failure remained unresolved after an FDA Complete Response Letter.
A Kristalose pilot study enrolled 40 patients and was pending a final report to the FDA.
Acetadote patent litigation remained material. Litigation with Mylan was pending, while the company’s suits against Sagent and InnoPharma were dismissed in 2013. The company continued to face generic competition and additional Paragraph IV challenges.
Acetadote received updated FDA labeling in June 2013. New patents were issued or allowed in February 2014, including a patent scheduled to expire in 2032, but future enforceability and commercial benefit are uncertain.
Inventory included significant Caldolor exposure; approximately $3.5 million of inventory was reserved for potential obsolescence or discontinuance at year-end. The FDA approved an extension of Caldolor 800 mg vial shelf life from five to six years in January 2014.
Manufacturing is outsourced. Key Acetadote and Caldolor supply arrangements were scheduled to expire or transition in 2014, creating execution and supply-continuity risk.
On February 28, 2014, the company acquired certain rights and assets related to Vaprisol from Astellas for a $2.0 million upfront payment, with a potential additional $2.0 million milestone tied to first-year sales.
Contractual obligations totaled approximately $4.0 million, consisting mainly of operating leases, estimated credit-facility interest and minimum manufacturing purchase obligations. Additional Kristalose payments vary with sales and were excluded from the stated total.

Principal risks and contingencies

Revenue concentration in Acetadote and exposure to generic competition, pricing pressure and loss of patent protection.
Reliance on third-party manufacturers, including single-source or limited-source arrangements for products and active ingredients.
Regulatory approval, clinical enrollment, safety and commercialization risks for Hepatoren and potential label expansions.
Dependence on wholesalers, Cardinal Health for U.S. distribution, hospital formulary decisions and third-party reimbursement.
Potential inventory obsolescence, product returns, rebates, chargebacks and other revenue-estimate adjustments.
Patent litigation and the possibility that Acetadote patents could be invalidated, narrowed or found not to be infringed.
Customer concentration: four customers represented 89% of gross revenue in 2013, and 85.3% of accounts receivable at year-end was attributable to those customers.
The company has never paid dividends and does not expect to pay them in the foreseeable future.

Important facts for investors to verify

Whether Acetadote branded revenue continues to decline and whether authorized-generic economics offset the loss of branded sales.
The sustainability and margin contribution of Caldolor and the commercial impact of Omeclamox-Pak and Vaprisol.
Current status and potential financial exposure of Acetadote patent litigation and generic challenges.
Completion, results and regulatory path for the Hepatoren Phase II program.
Post-year-end manufacturing transitions for Acetadote and Caldolor and the adequacy of product supply.
Actual inventory utilization, additional write-down risk and the accuracy of sales-return and rebate accruals.
Renewal or replacement of the revolving credit facility, which was scheduled to expire December 31, 2014.
The filing reports unqualified audit opinions and effective internal control over financial reporting as of December 31, 2013.