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 for hospital acute care and gastroenterology markets. Its principal products are Acetadote, Kristalose and Caldolor; Hepatoren is a Phase II candidate. The filing covers the three and six months ended June 30, 2013, and was filed August 9, 2013. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Net revenues | $7.1 million | $12.4 million | $17.3 million | $22.6 million |
| Operating income (loss) | $(1.1) million | $1.9 million | $0.2 million | $2.6 million |
| Net income (loss) attributable to common shareholders | $(0.6) million | $1.7 million | $0.2 million | $2.2 million |
| Diluted EPS | $(0.03) | $0.09 | $0.01 | $0.11 |
| Operating margin | (16.1%) | 15.7% | 1.1% | 11.4% |
| Net margin attributable to common shareholders | (9.0%) | 14.1% | 1.2% | 9.6% |
Gross margin was approximately 83.7% in the second quarter and 86.9% for the first six months of 2013, compared with 91.1% and 91.4%, respectively, in the comparable 2012 periods. The decline primarily reflected product mix.
- Second-quarter product revenue was $7.1 million, comprising Acetadote of $4.1 million, Kristalose of $2.0 million, Caldolor of $0.6 million and other products of $0.3 million.
- Acetadote revenue included $2.1 million in second-quarter and $5.0 million in six-month revenue from the authorized generic supplied to Perrigo.
- Selling and marketing expense declined 35.5% in the second quarter and 31.1% for the six-month period, following a commercial strategy and sales-force realignment implemented in late 2012.
- Research and development expense declined modestly for the six-month period, while amortization increased due primarily to capitalized patents and patent-defense costs.
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $1.8 million for the six months ended June 30, 2013, compared with $3.2 million in the prior-year period.
- Cash used in investing activities was $4.8 million, including $1.8 million of additions to intangible assets and net investment of approximately $2.9 million in marketable securities.
- Cash used in financing activities was $1.7 million, including $3.2 million for repurchases of 676,551 common shares, partially offset by $1.5 million of net borrowings.
- Cash and cash equivalents were $49.7 million at June 30, 2013, compared with $54.3 million at December 31, 2012. Marketable securities increased to $19.5 million from $16.7 million.
- Cash and marketable securities totaled approximately $69.2 million, and working capital was approximately $76.3 million. Management reported a current ratio of 13.5x.
- Borrowings under the revolving credit facility were $5.9 million, with approximately $4.1 million of availability. The facility is collateralized by substantially all company assets, bears interest at LIBOR plus an applicable margin, and is subject to financial covenants. The company was in compliance with all covenants at June 30, 2013.
Material Changes Versus the Prior Comparable Period
- Revenue declined 42.7% in the second quarter and 23.4% for the six-month period, primarily because of lower branded Acetadote sales resulting from generic competition.
- Caldolor revenue increased $0.4 million in the second quarter and $0.7 million for the six-month period, driven by higher volume and continued market penetration.
- Kristalose revenue declined modestly in both comparison periods.
- The second quarter shifted from operating income of $1.9 million to an operating loss of $1.1 million and from net income attributable to common shareholders of $1.7 million to a loss of $0.6 million.
- Weighted-average basic shares declined to 18.4 million in the second quarter and 18.6 million for the six-month period, reflecting share repurchases.
- Marketable securities increased, while total cash and cash equivalents declined because of securities purchases, share repurchases and lower operating cash generation.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide formal revenue or earnings guidance. Management states that internally generated cash flow and available credit are expected to be adequate to service existing debt, finance internal growth and fund capital expenditures.
- Management intends to expand the product portfolio through acquisitions and late-stage development opportunities, build international partnerships, and develop early-stage candidates through Cumberland Emerging Technologies.
- During the second quarter, Cumberland entered international licensing agreements for Caldolor and expanded its China territory agreement to include Hong Kong and Macau. It recognized approximately $0.2 million of upfront payments in the quarter and $0.6 million in the first six months. Additional milestone payments and royalties remain contingent on regulatory and sales achievements.
- The FDA approved updated Acetadote labeling in June 2013. Caldolor pediatric study results announced in August 2013 were favorable, and a follow-up knee-arthroscopy study was underway.
- Acetadote patents are subject to multiple Paragraph IV challenges and related litigation. The company filed an additional infringement lawsuit against Akorn in July 2013. Failure to protect the patents could materially reduce Acetadote sales and margins.
- CalDolor inventory represented most inventory at June 30, 2013, with expiration dates beginning in the second quarter of 2014. The company is conducting stability testing to seek expiration-date extensions. Approximately $2.6 million of potential obsolescence and discontinuance charges had been recognized, primarily for Caldolor; additional losses are possible if sales underperform or extensions are not approved.
- The company had approximately $48.6 million of unrecognized net operating loss carryforwards from prior nonqualified stock-option exercises and expects to pay minimal income taxes in 2013.
- The company relies on third-party manufacturers and Cardinal Health as its exclusive U.S. distribution agent. The Cardinal agreement was extended through June 30, 2016.
Investor Verification Items
- Verify the sustainability of Acetadote revenue, including the economics and duration of the Perrigo authorized-generic arrangement and the effect of additional generic entrants.
- Assess whether Caldolor sales growth can offset Acetadote declines and whether inventory expiration dates can be extended without additional impairment charges.
- Review the status and potential financial impact of the outstanding Acetadote patent and FDA litigation.
- Confirm the company’s compliance with revolving-credit covenants and available borrowing capacity.
- Track operating cash flow, international licensing milestones, royalties and the use of cash for share repurchases.
- Reconcile future results to the company’s statement that current liquidity is adequate, particularly if revenue pressure or litigation costs increase.