CUMBERLAND PHARMACEUTICALS INC annual report, FY2021

Cumberland Pharmaceuticals Inc. — FY2021 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, gastroenterology, rheumatology and oncology. The filing covers the fiscal year ended December 31, 2021; the company reports one operating segment. Its portfolio included eight FDA-approved products: Acetadote, Caldolor, Kristalose, Omeclamox-Pak, RediTrex, Sancuso, Vaprisol and Vibativ. Sancuso was acquired from Kyowa Kirin under an agreement signed at year-end; the transaction closed in January 2022.

Financial performance and key metrics

Metric	FY2021	FY2020	Change
Net revenues	$36.0 million	$37.4 million	(3.9%)
Gross profit	$27.2 million	$28.8 million	Gross margin declined to 75.5% from 76.9%
Operating loss	$(7.7) million	$(6.4) million	Loss increased by $1.3 million
Loss from continuing operations	$(5.6) million	$(6.6) million	Improved by $1.0 million
Net loss attributable to common shareholders	$(3.5) million	$(3.3) million	Loss increased by $0.2 million
Basic loss per share	$(0.24)	$(0.22)	Unfavorable change
Cash flow from operations	$6.3 million	$5.4 million	Increase of $0.9 million

Approximate margins were 75.5% gross, negative 21.3% operating and negative 15.6% for continuing operations. The company also recorded $2.0 million of discontinued-operations income from final payments under the Clinigen dissolution agreement and $2.2 million of other income from forgiveness of its Paycheck Protection Program loan. Excluding these items, the filing does not provide a non-GAAP profitability measure.

Revenue was concentrated among Kristalose ($16.0 million), Vibativ ($11.7 million) and Caldolor ($5.0 million). Three wholesale customers represented 27%, 24% and 20% of consolidated revenue, respectively.

Liquidity, debt and balance sheet

• Cash and cash equivalents were $27.0 million at December 31, 2021, compared with $24.8 million at year-end 2020.
• Working capital was $26.4 million and the current ratio was 2.4x, compared with $24.3 million and 1.9x, respectively, in 2020.
• The company had $15.0 million outstanding under its revolving credit facility, with total facility capacity increased to $20.0 million and maturity extended to October 1, 2024.
• The credit facility carried an effective interest rate of approximately 3.65% at year-end, was secured by substantially all company assets and included financial covenants. The company stated it was compliant with its tangible capital ratio covenant.
• Contractual obligations totaled approximately $43.4 million, including the $13.5 million Sancuso upfront payment due in 2022, $12.3 million of estimated Vibativ and Sancuso contingent consideration, and $15.0 million of revolving debt due at maturity.
• Operating cash flow benefited materially from a $4.8 million reduction in inventory and $2.0 million of discontinued-operations cash receipts. The company repurchased 438,359 shares for approximately $1.4 million during 2021.

Material changes versus the prior comparable period

• Net revenue declined 3.9%, primarily due to lower Acetadote, RediTrex, Caldolor and Omeclamox-Pak sales. Growth in Vibativ, Vaprisol and Kristalose partially offset the declines.
• Vibativ revenue rose 7.7% to $11.7 million, while its contribution declined to $4.9 million from $5.6 million because of higher product costs and royalty-related expenses.
• Caldolor revenue fell 6.9% as COVID-19 continued to reduce elective surgeries and domestic hospital shipments.
• Acetadote revenue fell $1.0 million, primarily because of lower Authorized Generic volume. Cumberland continued to benefit from patent litigation protecting its EDTA-free formulation against certain generic entry until at least August 2025; related patent protection extends beyond that date for certain claims.
• Omeclamox-Pak generated negative net revenue of $0.4 million because its packager’s operations remained suspended and product returns and credits exceeded sales.
• RediTrex revenue was only $0.1 million. The national launch was delayed by the pandemic and supply issues and began in October 2021.
• Cost of products sold increased as a percentage of revenue to 24.5%, partly reflecting product mix and a write-off of expired inventory. Cumulative inventory reserves increased to approximately $1.4 million from $0.2 million.
• Operating loss widened despite lower research and development and general and administrative costs, reflecting lower revenue, higher selling and marketing expense and product-cost pressure.
• The company entered into the Sancuso acquisition agreement, received expanded Caldolor labeling for pre-surgical use, launched RediTrex nationally and increased its revolving facility.

Outlook, commentary, risks and unusual items

Management did not provide quantitative revenue or earnings guidance in the filing. Management expects to leverage its commercial infrastructure, expand existing brands, pursue additional acquisitions and continue Phase II development of ifetroban candidates for AERD, systemic sclerosis and Duchenne muscular dystrophy. A Phase II program for progressive fibrosing interstitial lung diseases was also approved, and the company is evaluating next steps for a hospital cholesterol-reduction candidate after completing a Phase II study.

• COVID-19 continued to affect hospital admissions, elective procedures, physician visits, supply chains and clinical-trial enrollment. The filing states that the future financial impact cannot be quantified.
• Omeclamox-Pak remained unavailable because of packaging disruption, while Vaprisol supplies were unavailable pending FDA approval of a transferred manufacturing facility. Sancuso production was also being transferred to another facility and required FDA approval.
• The company relies on third-party manufacturers, distributors and suppliers, often with limited sourcing alternatives, creating product-shortage and compliance risks.
• Product revenue is subject to significant estimates for rebates, chargebacks, discounts, returns and service fees. Related accrued liabilities were $3.7 million at year-end; a one-percentage-point change in rebate or return estimates would have affected net sales by approximately $0.4 million.
• Generic competition, patent challenges, reimbursement pressure, FDA requirements, product liability, clinical-trial failure, customer concentration and dependence on key personnel remain material risks.
• On February 2, 2022, Cumberland sued Melinta Therapeutics and Targanta Therapeutics for allegedly unpaid milestone payments totaling at least $1.0 million. The filing does not indicate the outcome.
• The company has substantial deferred tax assets, but a full valuation allowance was recorded because management concluded realization was not more likely than not.

Most important facts for investors to verify

• Whether Sancuso’s integration, commercial launch and manufacturing-site transfer support revenue growth and satisfy the $13.5 million upfront obligation.
• Timing of FDA approval for the new Vaprisol manufacturing facility and restoration of product availability.
• Whether Omeclamox-Pak packaging resumes and whether product returns or shortages create additional charges.
• RediTrex adoption and the company’s ability to improve domestic Caldolor demand as elective procedures normalize.
• Cash generation after scheduled debt repayment, contingent consideration, Sancuso payments and ongoing share repurchases.
• Compliance with revolving-credit covenants and the effect of variable interest rates and the transition from LIBOR to a replacement benchmark.
• Progress, enrollment, safety and efficacy results for the ifetroban Phase II programs and the likelihood of eventual FDA approval.
• Customer concentration, inventory reserves, revenue allowances and the outcome of the Melinta litigation.