Cumberland Pharmaceuticals Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014; filed November 7, 2014. The financial statements are unaudited. Cumberland is a specialty pharmaceutical company focused on acquiring, developing and commercializing branded prescription products, primarily in hospital acute care and gastroenterology.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net revenue | $9.7 million | $6.5 million | $27.6 million | $23.9 million |
| Operating income (loss) | $1.0 million | ($1.5 million) | $2.6 million | ($1.3 million) |
| Net income (loss) | $0.7 million | ($0.8 million) | $1.7 million | ($0.6 million) |
| Net income (loss) attributable to common shareholders | $0.7 million | ($0.8 million) | $1.8 million | ($0.6 million) |
| Diluted EPS | $0.04 | ($0.04) | $0.10 | ($0.03) |
| Operating cash flow | Not separately provided | Not separately provided | $4.0 million | $0.9 million |
Revenue growth: Q3 revenue increased 49.0% year over year, while nine-month revenue increased 15.5%. Q3 growth was led by Kristalose, which increased $1.8 million, and contributions from Omeclamox-Pak and Vaprisol. Nine-month growth was led by Kristalose, Omeclamox-Pak and Vaprisol, partly offset by a $6.1 million decline in Acetadote revenue.
Margins: Cost of products sold was 13.8% of revenue in Q3 versus 15.8% in the prior-year quarter, implying gross margins of approximately 86.2% and 84.2%, respectively. For the first nine months, cost of products sold was 13.4% versus 13.8%, implying gross margins of approximately 86.6% and 86.2%. Operating margin was approximately 10.2% in Q3 2014 versus negative 23.2% in Q3 2013, and approximately 9.5% for the first nine months versus negative 5.6% in the prior-year period.
Expense trends: Q3 selling and marketing expense rose to $3.8 million, while research and development declined to $0.9 million following completion of Caldolor clinical studies. Nine-month selling and marketing expense increased to $11.4 million, while research and development declined 38.7% to $2.6 million. Amortization increased to $0.5 million in Q3 and $1.1 million year to date because of additional product rights, patents and patent defense costs.
Liquidity and balance sheet: At September 30, 2014, cash and cash equivalents were $39.6 million, marketable securities were $14.6 million and total liquidity from those sources was $54.3 million. Working capital was $58.0 million, compared with $61.1 million at year-end 2013, and the current ratio was 5.8 versus 9.1. Total assets were $93.9 million and total liabilities were $13.0 million. The company had no borrowings under its revolving credit facility.
Cash flow and capital allocation: Nine-month operating cash flow was $4.0 million. Investing cash outflows were $4.5 million, including the $2.0 million Vaprisol acquisition payment, $1.6 million of intangible-asset additions and net purchases of marketable securities. Financing cash outflows were $0.7 million, including $2.7 million of share repurchases, partly offset by a $1.0 million investment in Cumberland Emerging Technologies by Gloria. Cash declined $1.2 million from year-end.
Debt: A new SunTrust revolving credit agreement became effective June 26, 2014. It provides an initial $12.0 million facility, expandable to $20.0 million subject to conditions, and expires June 26, 2017. Interest is based on LIBOR plus a 1.0% to 2.85% spread, with a 0.25% annual unused-line fee. The facility is secured by substantially all company assets, and Cumberland was in compliance with its covenants at September 30, 2014.
Material changes versus the prior comparable period
- Omeclamox-Pak generated $1.0 million of Q3 revenue and $3.5 million for the first nine months following its launch and distribution arrangement with Pernix.
- Vaprisol generated $0.7 million of Q3 revenue and $2.0 million for the first nine months following the February 2014 acquisition from Astellas.
- Kristalose revenue increased 79.7% in Q3 and 71.3% for the first nine months, supported by pricing changes and patient affordability initiatives.
- Acetadote revenue declined, primarily because of generic competition and lower Authorized Generic sales. Authorized Generic revenue was $1.4 million in Q3 2014 versus $1.9 million in Q3 2013, and $4.6 million for the first nine months versus $7.0 million.
- Q3 Omeclamox-Pak sales were negatively affected by a temporary product shortage, which management stated was resolved at the end of October 2014.
- The company returned to profitability, with operating income of $1.0 million in Q3 and $2.6 million for the first nine months, compared with operating losses in the prior-year periods.
- Cumberland repurchased 236,542 shares during Q3 and 576,978 shares during the first nine months, for approximately $2.7 million year to date.
- Cumberland’s ownership of Cumberland Emerging Technologies declined from 85% to 80% after Gloria’s investment and Cumberland’s additional contribution. Cumberland received approximately $1.0 million from Gloria and contributed $1.0 million in cash plus $2.4 million in loan forgiveness.
Outlook, risks and unusual items
Management’s strategy is to maximize existing brands, selectively acquire marketed products and late-stage candidates, expand international partnerships and develop earlier-stage candidates through Cumberland Emerging Technologies. Hepatoren, based on ifetroban, was in a Phase II program, and the company had cleared an amendment to its IND to evaluate an oral formulation.
Management stated that internally generated cash flow and available credit were expected to be adequate to service existing obligations, finance internal growth and fund capital expenditures. The company expected to pay minimal income taxes in 2014 because of approximately $47.4 million of unrecognized net operating loss carryforwards related to exercises of nonqualified stock options.
Key risks include generic competition and loss or weakening of patent protection, particularly for Acetadote; product shortages and manufacturing or supply-chain dependence; the ability to integrate and successfully commercialize acquired products; clinical and regulatory uncertainty for development candidates; the need for additional capital to support the business model; and management of growth.
Cumberland filed arbitration claims against Mylan concerning alleged breaches of agreements requiring exclusive manufacture and supply of acetylcysteine products through April 2016. The company is also defending and enforcing Acetadote intellectual property against multiple patent challenges. Loss of relevant patent rights could materially reduce Acetadote sales and profitability.
The filing reports no off-balance-sheet arrangements. Marketable securities totaled $14.6 million and consisted of U.S. government, agency, municipal and related securities. A 1% decrease in their fair value would reduce pretax income by approximately $0.1 million, according to the filing.
Investor verification checklist
- Verify whether the launch and commercialization of Omeclamox-Pak and Vaprisol can offset continuing Acetadote erosion from generic competition.
- Review the resolution and financial impact of the Omeclamox-Pak product shortage.
- Track Acetadote patent litigation, arbitration with Mylan and the durability of Authorized Generic revenue.
- Assess whether the company’s high gross margins and improved profitability are sustainable after increased selling, marketing and amortization costs.
- Confirm the terms, covenants and collateral requirements of the SunTrust revolving credit facility.
- Evaluate the Vaprisol contingent milestone obligation of up to $2.0 million and the Omeclamox-Pak milestone obligations of up to $4.0 million.
- Monitor inventory obsolescence exposure, particularly Caldolor inventory, for which cumulative potential obsolescence charges were approximately $3.4 million at September 30, 2014.
- Reconcile future tax payments with the company’s stated use of approximately $47.4 million of unrecognized net operating loss carryforwards.