Cumberland Pharmaceuticals Inc. — FY2019 Form 10-K Summary
Business context and reporting period
Cumberland Pharmaceuticals is a specialty pharmaceutical company focused on branded prescription products for hospital acute care and gastroenterology. The company markets products through U.S. hospital and field sales forces and international partners. The filing covers the fiscal year ended December 31, 2019; fourth-quarter results are also provided.
The portfolio included Acetadote, Caldolor, Kristalose, Omeclamox-Pak, Vaprisol, Vibativ and newly approved RediTrex. The company also maintained Phase II ifetroban programs in Duchenne muscular dystrophy, systemic sclerosis and aspirin-exacerbated respiratory disease.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenue | $47.5 million | $40.7 million | +16.7% |
| Gross profit | $38.8 million | $33.4 million | +16.0% |
| Gross margin | 81.6% | 81.9% | Down 0.3 points |
| Operating loss | $(3.6) million | $(7.4) million | Improved $3.8 million |
| Operating margin | (7.6)% | (18.1)% | Improved |
| Net loss attributable to common shareholders | $(3.5) million | $(7.0) million | Improved $3.4 million |
| Basic and diluted loss per share | $(0.23) | $(0.45) | Improved |
| Cash flow from operations | $3.1 million | $3.1 million | Essentially flat |
Fourth-quarter 2019 revenue was $13.7 million, compared with $13.5 million in the fourth quarter of 2018. Fourth-quarter operating loss was $1.0 million and net loss attributable to common shareholders was $1.0 million, compared with losses of $2.3 million and $2.2 million, respectively, in the prior-year quarter.
Product revenue was led by Ethyol at $12.8 million, Kristalose at $12.9 million and Vibativ at $8.7 million. Vibativ revenue increased by $3.6 million as 2019 included a full year of sales versus a partial year in 2018. Other revenue increased to $2.0 million, including international licensing and grant-related revenue.
At December 31, 2019, cash and cash equivalents were $28.2 million, working capital was $26.0 million and the current ratio was 2.1. The company had $18.5 million outstanding under its revolving credit facility, with $1.5 million of stated availability. Total liabilities were $53.5 million and total equity was $51.1 million.
The revolving facility has a $20.0 million maximum commitment, bears interest at LIBOR plus 1.75% to 2.75%, and had an interest rate of approximately 4.5% at year-end. It matures July 31, 2021, is secured by substantially all company assets, and includes financial covenants. Cumberland reported compliance with its tangible capital ratio covenant at December 31, 2019.
Material changes versus the prior comparable period
- Revenue increased primarily from the full-year contribution of Vibativ, higher Ethyol, Kristalose, Caldolor and Omeclamox-Pak revenue, and higher other revenue.
- Acetadote revenue declined 10.7% because of generic competition; Vaprisol declined because the prior year benefited from a product supply replenishment; and Totect revenue declined as competitive supply returned.
- Selling and marketing expense increased $1.2 million, primarily due to Vibativ-related sales force and promotional costs.
- Research and development expense decreased $1.1 million, mainly because 2018 included a $1.3 million FDA program fee related to RediTrex.
- Amortization expense increased $1.4 million to $4.1 million, primarily from acquired product rights and Vibativ-related assets.
- Cash increased modestly by $0.3 million despite a $3.5 million net loss. Operating cash flow and $8.3 million of net marketable-securities sales were partly offset by the $5.0 million Vibativ payment, debt repayment and $3.5 million of share repurchases.
- The company repurchased 623,478 shares for approximately $3.5 million during 2019, leaving approximately $8.0 million available under its repurchase authorization at year-end.
Guidance, outlook, commentary and unusual items
- Management stated that existing cash flows, working capital and the revolving facility were expected to fund internal growth, business development initiatives and capital expenditures for the foreseeable future; no formal revenue or earnings guidance was provided.
- Management planned a full-scale 2020 launch of the next-generation, ready-to-use Caldolor presentation. The product was launched in January 2020.
- RediTrex received FDA approval in November 2019, with a 2020 commercial launch planned.
- Cumberland initiated a Phase II DMD ifetroban program supported by just over $1 million of FDA Orphan Drug Grant funding. Other Phase II programs continued in systemic sclerosis and AERD.
- The company returned Ethyol and Totect rights to Clinigen effective December 31, 2019. Cumberland expects to receive $5 million over two years and agreed not to compete with those products during that period. The products are treated as discontinued operations beginning January 1, 2020, although 2019 revenue included $12.8 million from Ethyol and $0.4 million from Totect.
- Vibativ includes contingent royalty consideration of up to 20% of future net sales. The related liability was $8.6 million at year-end 2019.
- COVID-19 was identified as a subsequent-event risk. As of the March 20, 2020 filing date, management could not estimate its potential impact on operations, supply, clinical trials or financial results.
Principal risks and contingencies
- Dependence on third-party manufacturers and suppliers, including a single active pharmaceutical ingredient supplier for Kristalose and the need to identify a long-term Vaprisol manufacturer.
- Generic and branded competition, particularly for Acetadote, and potential patent challenges affecting product exclusivity.
- High customer concentration: four customers represented 81% of 2019 revenue, and those customers represented 72% of net accounts receivable at year-end.
- Clinical, regulatory and commercialization uncertainty for ifetroban programs and other pipeline candidates.
- Debt covenant, variable-interest-rate and refinancing risk associated with the revolving credit facility.
- Potential impairment of acquired product rights, intangible assets and goodwill; intangible assets represented approximately 30% of total assets at year-end.
- Exposure to reimbursement changes, Medicaid and 340B pricing obligations, product liability, recalls, regulatory enforcement, intellectual-property litigation and supply interruptions.
Facts investors should verify
- Whether the 2020 launches of RediTrex and next-generation Caldolor generated sustainable revenue and improved profitability.
- Post-transition revenue, margins and cash-flow effects after Ethyol and Totect exited the portfolio.
- Vibativ demand, manufacturing execution, royalty obligations and potential impairment risk.
- Remaining liquidity, debt maturity and covenant compliance as the July 2021 credit-facility maturity approaches.
- Progress, safety, enrollment and funding for the Phase II ifetroban and hospital-product programs.
- The effect of COVID-19 on product demand, manufacturing, distribution, clinical trials and international partnerships.
- Customer concentration, revenue allowances and returns, including the $4.8 million sales-related accrual balance at year-end.