Cumberland Pharmaceuticals Inc. 10-Q Summary
Business Context and Reporting Period
Cumberland Pharmaceuticals is a specialty pharmaceutical company focused on acquiring, developing and commercializing branded prescription products, primarily for hospital acute care and gastroenterology markets. The company markets seven FDA-approved products and maintains a pipeline of clinical-stage candidates.
This unaudited Form 10-Q covers the three and six months ended June 30, 2017, with comparisons to the corresponding 2016 periods. The company reported 15,896,578 common shares outstanding as of August 4, 2017.
Financial Performance and Position
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Net revenue | $8.7 million | $7.4 million | $18.3 million | $15.2 million |
| Operating income (loss) | $(1.7) million | $(0.1) million | $(2.3) million | $(0.6) million |
| Net income (loss) | $(5.2) million | $(0.1) million | $(6.5) million | $(0.3) million |
| Net loss per diluted share | $(0.32) | — | $(0.40) | $(0.02) |
| Net cash used in operating activities | — | — | $(1.1) million | $(0.5) million |
Second-quarter revenue increased 16.9%, while six-month revenue increased 20.8%. Revenue growth was primarily driven by the addition of Ethyol and higher Caldolor sales. Ethyol contributed $2.1 million in Q2 and $5.8 million for the first half of 2017.
Q2 gross margin was approximately 80.7%, compared with 84.4% in the prior-year quarter. Six-month gross margin was approximately 83.3%, compared with 84.3%. Q2 operating margin was approximately negative 19.4%, versus negative 1.4% in 2016; six-month operating margin was approximately negative 12.8%, versus negative 4.0%.
Selling and marketing expense increased 42.2% in Q2 and 42.7% for the first half, primarily due to higher royalties. Research and development expense increased 59.2% in Q2 and 42.8% for the first half as the company invested in clinical and manufacturing initiatives.
At June 30, 2017, cash and cash equivalents were $34.6 million, marketable securities were $14.4 million, and total cash, cash equivalents and marketable securities were $49.0 million. Working capital was $50.3 million and the current ratio was 4.9. Accounts receivable were $6.1 million and inventories were $5.6 million.
Borrowings under the revolving credit facility were $6.7 million, leaving reported availability of $5.3 million under the existing facility. Total liabilities were $21.3 million and total equity was $66.5 million. The company repurchased $1.8 million of common stock during the first six months.
Operating activities used $1.1 million of cash in the first half, investing activities provided $0.4 million, and financing activities provided $0.8 million. Cash increased by $0.1 million to $34.6 million during the period.
Material Changes Versus the Prior Comparable Period
- Revenue increased, primarily because Ethyol was launched in late 2016 and Caldolor sales improved.
- Kristalose revenue declined $0.7 million in Q2 and $2.0 million for the first half, reflecting lower volume, higher Medicaid rebates and higher wholesaler fees.
- Acetadote revenue declined because of generic competition; Omeclamox-Pak revenue declined because of lower sales volume.
- Total operating expenses grew faster than revenue, resulting in a substantially larger operating loss.
- The company recorded $3.5 million of additional valuation allowance against deferred tax assets in Q2 and a total $4.2 million income tax expense for the first half, compared with a $0.2 million tax benefit in the prior-year period.
- Effective January 1, 2017, the company adopted new share-based compensation tax accounting guidance, recording approximately $1.1 million of net deferred tax assets and retained earnings through a cumulative-effect adjustment.
Guidance, Outlook, Risks and Unusual Items
No formal quantitative revenue or earnings guidance is provided in the filing. Management expects to support existing brands, selectively acquire complementary products, advance its clinical pipeline, expand international partnerships and manage expenses with the objective of generating positive operating cash flow. Management stated that internal cash flows and available credit are expected to fund internal growth and capital expenditures, although first-half operating cash flow was negative.
On July 31, 2017, after the reporting date, the company replaced its SunTrust facility with a Pinnacle Bank revolving credit agreement. The new facility has a three-year term through July 31, 2020, an initial borrowing capacity of up to $12 million and potential capacity of up to $20 million, subject to conditions. Interest is based on LIBOR plus a 1.75% to 2.75% spread, and borrowings are secured by substantially all company assets.
Also after quarter-end, on July 31, 2017, the company began U.S. distribution and sales of Totect. Ethyol faces potential generic competition: Mylan received approval for an abbreviated new drug application in July 2017, while the principal Orange Book-listed Ethyol patent expires December 9, 2017. The company is evaluating the development with its licensing partner.
Cumberland’s Acetadote patent litigation position improved when the Federal Circuit affirmed the company’s favorable ruling against Mylan in January 2017. The company remains exposed to pharmaceutical competition, generic substitution, product returns and rebates, regulatory and clinical-development risk, manufacturing and supply risks, intellectual-property challenges, and the need for capital to support growth and acquisitions.
The company recorded approximately $0.5 million of cumulative inventory obsolescence and discontinuance reserves at June 30, 2017. It had no off-balance-sheet arrangements and reported that its disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether Ethyol sales can offset declining Kristalose, Acetadote and Omeclamox-Pak revenue, particularly following potential generic entry.
- The sustainability of revenue growth and whether selling, marketing and research spending can be reduced relative to revenue.
- The impact of the $3.5 million deferred-tax valuation allowance and the realizability of remaining deferred tax assets and net operating loss carryforwards.
- Operating cash flow trends, share repurchases and reliance on revolving credit borrowings.
- Compliance with the Funded Debt Ratio and other covenants under the new Pinnacle Bank facility.
- Progress, funding requirements and regulatory outcomes for Hepatoren, Boxaban, Vasculan, Portaban, methotrexate and other pipeline candidates.
- The commercial performance and integration costs associated with Totect and the Kristalose co-promotion agreement.
- Potential legal, patent and generic-competition effects on Acetadote and Ethyol.