Cumberland Pharmaceuticals Inc. — Q2 2011 Form 10-Q Summary
Business context and reporting period
Cumberland is a specialty pharmaceutical company focused on acquiring, developing and commercializing branded prescription products, primarily for hospital acute care and gastroenterology markets. The filing covers the three and six months ended June 30, 2011, with financial statements presented on an unaudited basis.
Marketed products include Acetadote, Kristalose and Caldolor. In April 2011, Cumberland acquired rights to Hepatoren (ifetroban), a Phase II candidate for hepatorenal syndrome.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net revenues | $14.4 million | $10.7 million | $25.1 million | $20.9 million |
| Operating income | $3.6 million | $1.0 million | $5.0 million | $1.8 million |
| Net income attributable to common shareholders | $2.2 million | $0.3 million | $2.9 million | $0.6 million |
| Diluted EPS | $0.11 | $0.01 | $0.14 | $0.03 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $4.9 million | $0.8 million |
Approximate operating margin increased to 25.2% in Q2 2011 from 9.4% in Q2 2010 and to 20.1% for the six-month period from 8.7%. Net margin attributable to common shareholders was approximately 15.1% in Q2 2011 versus 2.7% in Q2 2010, and 11.6% for the six-month period versus 2.9%.
- Acetadote revenue was $12.2 million in Q2 and $20.7 million for the six months, compared with $8.3 million and $16.0 million, respectively, in the prior-year periods.
- Kristalose revenue declined to $2.1 million in Q2 and $4.2 million for the six months, primarily because of increased generic competition.
- Caldolor revenue increased to $86,000 in Q2 and $98,000 for the six months.
- Cash and cash equivalents were $69.8 million at June 30, 2011, up from $65.9 million at December 31, 2010.
- Working capital was $73.6 million, and the current ratio was 7.9x at June 30, 2011.
- At June 30, debt consisted of approximately $4.0 million of current term debt and $1.8 million drawn on the revolving credit facility. Total borrowings were approximately $5.8 million.
- Six-month investing cash use was $152,000, primarily for property, equipment and patents. Financing cash use was $845,000, including $1.3 million of term-debt principal payments and $1.6 million for share repurchases.
Material changes versus the prior comparable period
- Q2 revenue increased 34%, while six-month revenue increased 20%, driven primarily by Acetadote.
- Operating income increased approximately 260% in Q2 and 177% for the six-month period.
- Interest expense declined substantially because of lower average term debt balances.
- Six-month selling and marketing expense declined 2%, primarily due to the expiration of the Acetadote royalty agreement and sales-force changes, partially offset by increased advertising and speaker-program costs.
- Six-month research and development expense increased 13%, and general and administrative expense increased 18%.
- Cost of products sold was 8.9% of revenue in Q2 2011 versus 8.0% in Q2 2010; the filing attributes the increase to product mix and approximately $0.4 million of inventory reserves. The six-month ratio remained 8.3%.
- The company repurchased 285,226 shares for approximately $1.6 million during the first six months and repurchased an additional 43,272 shares for approximately $0.3 million from July 1 through July 29, 2011.
Guidance, outlook, commentary and risks
- No specific revenue, earnings or other quantitative guidance is provided. Management stated that cash on hand, internally generated cash flow and credit availability were expected to fund existing debt service, internal growth and capital expenditures.
- The new preservative-free Acetadote formulation was approved by the FDA in January 2011 and launched in the first quarter; management reported favorable medical-community response. Increased 2011 Acetadote sales were also helped by a shortage of oral acetylcysteine, which may not be recurring.
- The FDA issued a Complete Response Letter regarding the proposed Acetadote indication for non-acetaminophen acute liver failure. Cumberland was analyzing additional data before further discussions with the FDA.
- Caldolor sales efforts shifted in Q2 from formulary stocking to a pull-through strategy. Four clinical studies were underway, including pediatric and registry studies.
- Hepatoren entered Phase II dose-escalation development after the FDA cleared the investigational new drug application. The program remains subject to clinical, regulatory and commercialization risks.
- Cumberland entered agreements to commercialize Caldolor and Acetadote in Malaysia and Taiwan and continued regulatory and partnership activities in Canada, Australia and other international markets.
- The IRS notified the company that its 2009 federal tax return was selected for examination; management expected completion in the fourth quarter of 2011.
- Approximately $60.3 million of unrecognized federal net operating loss carryforwards related to stock-option exercises may reduce future cash taxes when usable. Management expected minimal cash tax outflows during 2011 and 2012.
- In July 2011, Cumberland repaid its $4.0 million term debt without prepayment fees. On August 2, 2011, it amended and extended its revolving facility to $10 million, with an option to increase it to $20 million, subject to conditions. The facility expires December 31, 2014, bears interest at LIBOR plus an applicable margin, is secured by substantially all assets and contains financial and other restrictive covenants.
- Principal risks include dependence on product sales, generic competition, product supply and manufacturing, clinical and regulatory approvals, acquisition and integration execution, access to capital, leverage and debt covenants, and management of growth. The filing reports no material changes to the risk factors in the 2010 Form 10-K.
Important facts for investors to verify
- Whether Acetadote revenue growth remains durable after the oral acetylcysteine shortage and as the new formulation matures.
- The competitive and pricing effects of generic products on Kristalose and other products.
- Clinical, regulatory and funding milestones for Hepatoren and the pending Acetadote indication.
- Utilization, interest costs and covenant compliance under the amended revolving credit facility.
- The outcome of the IRS examination and the timing and usability of the approximately $60.3 million of tax carryforwards.
- Future cash requirements for share repurchases, clinical programs, acquisitions and international commercialization.