Cumberland Pharmaceuticals Inc. — Q1 2018 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. The filing covers the unaudited three months ended March 31, 2018, compared with the three months ended March 31, 2017.
The company markets seven FDA-approved products and is advancing Phase II ifetroban programs, a RediTrex approval submission and other pipeline candidates. Cumberland adopted ASC 606 revenue guidance on January 1, 2018; management reported no material impact or cumulative-effect adjustment.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenues | $8.6 million | $9.6 million | Down 10.9% |
| Gross profit | $7.1 million | $8.3 million | Down approximately 14.5% |
| Gross margin | 82.2% | 85.7% | Down 3.5 percentage points |
| Operating loss | $(2.5) million | $(0.7) million | Loss increased $1.8 million |
| Operating margin | (28.6%) | (6.8%) | Down approximately 21.8 points |
| Net loss attributable to common shareholders | $(2.4) million | $(1.3) million | Loss increased $1.1 million |
| Loss per diluted share | $(0.15) | $(0.08) | Worsened by $0.07 |
| Net cash provided by operating activities | $0.2 million | $1.4 million | Down $1.2 million |
Revenue declines were concentrated in Ethyol, down $1.4 million; Vaprisol, down $0.6 million; and Omeclamox-Pak, down $0.5 million. These declines were partly offset by higher Kristalose revenue of $0.9 million, Caldolor revenue of $0.2 million, and $0.4 million of Totect revenue following its 2017 launch.
Cost of products sold increased 10.6% to $1.5 million, and product cost as a percentage of revenue rose to 17.8% from 14.3%, primarily due to product mix. Selling and marketing expense declined $0.6 million, while research and development expense increased $1.0 million to $1.9 million due primarily to pipeline clinical initiatives and higher FDA fees. General and administrative expense increased $0.2 million.
At March 31, 2018, cash and cash equivalents were $35.3 million, marketable securities were $15.6 million, and total cash, cash equivalents and marketable securities were $50.9 million. Working capital was $50.5 million, with a current ratio of 4.1. Total assets were $91.1 million and total equity was $60.9 million.
The company had $12.0 million outstanding under its revolving credit facility, which provides for borrowings of up to $20.0 million subject to conditions. The interest rate was 3.3% at March 31, 2018, based on LIBOR plus a spread. The facility is secured by substantially all company assets.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $1.0 million, or 10.9%, primarily because of lower Ethyol and Vaprisol sales and higher Omeclamox-Pak returns and lower volume.
- Operating loss increased from $0.7 million to $2.5 million despite lower selling and marketing costs, reflecting the revenue decline and increased research and development spending.
- Operating cash flow declined to $0.2 million from $1.4 million.
- Cash and cash equivalents declined $10.1 million during the quarter, primarily because of net purchases of marketable securities, while marketable securities increased by approximately $10.9 million.
- The company drew and repaid amounts under its revolving facility, ending the quarter with $12.0 million outstanding versus $9.8 million at December 31, 2017.
- Cumberland repurchased 172,079 shares for approximately $1.2 million and issued 30,704 shares through its ATM program for net proceeds of approximately $0.2 million.
Guidance, Outlook, Risks, Contingencies and Unusual Items
No formal numerical revenue or earnings guidance is provided. Management stated that internally generated cash flows and the line of credit are expected to be adequate to finance internal growth and capital expenditures for the foreseeable future, and expects to maintain compliance with the debt covenant, including use of the covenant cure provision if necessary.
- Vaprisol supply constraints limited first-quarter sales; the company reported that the issue was resolved when new shipments were received in April 2018.
- Management is pursuing product expansion, acquisitions, international commercialization, clinical development and the RediTrex regulatory submission planned for 2018.
- The company achieved compliance with its Funded Debt Ratio covenant at March 31, 2018 through the covenant cure provision. Revolver availability was reported as zero at quarter-end because the initial $12.0 million borrowing capacity was fully drawn.
- Product revenue depends on estimates for chargebacks, rebates, returns, discounts and damaged or expired goods. Changes in these estimates could affect revenue and earnings.
- The company faces pharmaceutical competition, product supply risks, regulatory and clinical development risks, dependence on third-party manufacturers and distributors, and the need for future capital to support growth.
- Cumberland continues to defend Acetadote intellectual property. Prior court rulings upheld its patent and enjoined Mylan’s competing product through August 2025; related patent challenges and legal matters remain relevant to the product’s competitive position.
- Totect benefited from a prior national dexrazoxane shortage, but competing supplies subsequently became available, creating uncertainty around future demand.
- The Tax Cuts and Jobs Act generated a reported net tax benefit of approximately $0.1 million related to realizable AMT credits. The company expects to pay minimal taxes in future periods through use of net operating loss carryforwards.
- The company reported no off-balance-sheet arrangements and stated that disclosure controls and procedures were effective as of March 31, 2018.
Important Facts for Investors to Verify
- Whether Ethyol, Vaprisol and Omeclamox-Pak sales stabilize and whether Kristalose, Caldolor and Totect can offset those declines.
- Whether the Vaprisol supply issue remains resolved and whether Totect demand persists after normalization of competitor supply.
- The company’s ability to generate positive operating cash flow while funding increased clinical and regulatory spending.
- Compliance with the Funded Debt Ratio covenant, including reliance on the covenant cure provision and the availability of additional borrowing capacity.
- Progress and cost of the RediTrex submission, Caldolor development and Phase II ifetroban programs.
- Potential effects of revenue allowances, product returns, inventory obsolescence and third-party manufacturing or distribution constraints.
- Current status of Acetadote patent protections and any changes in generic competition or related litigation.