Cumberland Pharmaceuticals Inc. — Form 10-Q 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 and oncology supportive care. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net revenue | $8.5 million | $11.2 million | $27.2 million | $29.5 million |
| Gross profit | $7.0 million | $9.0 million | $22.7 million | $24.3 million |
| Gross margin | 82.8% | 80.7% | 83.4% | 82.3% |
| Operating income (loss) | $(1.8) million | $(0.8) million | $(5.1) million | $(3.2) million |
| Net income (loss) attributable to common shareholders | $(1.6) million | $(0.7) million | $(4.7) million | $(7.2) million |
| Loss per diluted share | $(0.11) | $(0.05) | $(0.30) | $(0.45) |
| Operating cash flow | Not separately provided | Not separately provided | $(0.6) million | $(0.1) million |
Q3 operating margin was approximately negative 21.3% and net margin was approximately negative 19.6%. Nine-month operating margin was approximately negative 18.8% and net margin was approximately negative 17.4%.
At September 30, 2018, cash and cash equivalents were $38.3 million, marketable securities were $9.5 million, and total liquidity including those securities was $47.8 million. Working capital was $48.1 million and the current ratio was 4.1. The company had $12.0 million outstanding under its revolving credit facility, bearing interest at approximately 4.0%, with substantially all assets pledged as collateral. The company was in compliance with its Tangible Capital Ratio covenant.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 24% year over year, while nine-month revenue declined 8%.
- The primary revenue pressure was Totect, whose Q3 revenue fell to $0.05 million from $2.9 million and whose nine-month revenue fell to $0.7 million from $2.9 million, following the end of a national dexrazoxane shortage that had supported initial demand.
- Q3 revenue also reflected negative Vaprisol sales of $0.07 million due to higher-than-usual expired-product returns. Nine-month Vaprisol revenue increased 27% because supply availability improved during the second quarter.
- Kristalose and Caldolor performed well. Nine-month revenue increased by $1.5 million and $0.7 million, respectively. Q3 revenue also increased for Kristalose, Caldolor and Omeclamox-Pak.
- Cost of products sold as a percentage of revenue improved to 17.2% in Q3 and 16.6% for the nine-month period, versus 19.3% and 17.7%, respectively, in 2017.
- Research and development expense increased $0.4 million in Q3 and $1.7 million for the nine-month period, reflecting greater clinical, manufacturing and FDA-related spending.
- Selling and marketing expense decreased $1.4 million in Q3 and $1.6 million year to date, primarily due to lower royalties and promotional spending.
- The nine-month net loss improved versus 2017 primarily because the prior-year period included significant non-cash deferred tax and valuation allowance charges. Operating loss increased in 2018 despite lower total expenses because revenue declined and research spending increased.
Guidance, Outlook, Risks and Unusual Items
Management stated that internally generated cash flows, working capital and the expanded credit facility were expected to be adequate to finance internal growth, business development initiatives and capital expenditures for the foreseeable future. No formal revenue or earnings guidance was provided.
- On October 17, 2018, the revolving credit facility was expanded from $12 million to $20 million. The $12 million outstanding was repaid during October and the facility was then used to fund the initial payment for the VIBATIV acquisition.
- VIBATIV was acquired from Theravance Biopharma on November 12, 2018 for an upfront payment of $20 million, a further $5 million payment expected in early 2019, and tiered royalties of up to 20% on future U.S. net product sales. Pro forma financial information was not yet available in the filing.
- The company expects to expand selected sales, medical science liaison and corporate resources to support VIBATIV and other acute-care and oncology brands.
- The FDA issued a complete response regarding the Next Generation Caldolor application; Cumberland submitted additional quality and nonclinical data and was awaiting an approval decision.
- Cumberland submitted its RediTrex methotrexate application to the FDA in November 2018 and paid a $1.3 million PDUFA application fee. Acceptance for review was pending.
- Enrollment was completed in the Portaban Phase II study. Initial data indicated that ifetroban was safe and well tolerated, but the study was not powered for efficacy and no definitive conclusion could be drawn regarding hepatic venous pressure.
- The company faces pharmaceutical competition, product demand and supply variability, product returns and rebate-estimation risk, dependence on third-party manufacturers and distributors, regulatory approval risk, clinical-development risk, acquisition and integration risk, and the need for continued access to capital.
- The company adopted ASC 606 revenue recognition in 2018 without a material impact. The upcoming lease standard was expected to add right-of-use assets and lease liabilities, including for its Nashville headquarters and CET facilities.
- No material legal proceedings or changes to previously disclosed risk factors were reported. Management concluded that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether VIBATIV generates sufficient sales to offset the $20 million acquisition funding, the additional $5 million payment and royalties of up to 20%.
- The timing and outcome of FDA actions for Next Generation Caldolor and RediTrex.
- Whether Totect revenue remains depressed and whether Vaprisol returns or supply conditions create further volatility.
- The company’s ability to generate positive operating cash flow while funding clinical development and acquisitions.
- Compliance with revolving-credit covenants and the interest-rate impact of LIBOR-based borrowings.
- The accounting and pro forma financial impact of the VIBATIV acquisition, which was not available in this filing.
- The accuracy of revenue deductions for rebates, chargebacks, discounts, returns and expired products, which are significant management estimates.