Cumberland Pharmaceuticals Inc. — FY2018 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 for hospital acute care, gastroenterology and oncology supportive care. The filing covers the fiscal year ended December 31, 2018; quarterly data show fourth-quarter revenue of $13.5 million and a fourth-quarter net loss attributable to common shareholders of $2.2 million.
The company marketed eight FDA-approved products in the United States and maintained a pipeline of Phase II candidates, including Hepatoren, Boxaban, Vasculan and Portaban, plus the pre-approval RediTrex methotrexate product line.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenue | $40.7 million | $41.2 million | Down 1.0% |
| Cost of products sold | $7.4 million | $7.4 million | Essentially flat |
| Gross profit and margin | $33.4 million; 81.9% | $33.8 million; 82.1% | Margin down approximately 20 basis points |
| Operating loss and margin | $7.4 million; (18.1%) | $4.1 million; (9.9%) | Loss widened |
| Net loss attributable to common shareholders | $7.0 million | $8.0 million | Loss improved by $1.0 million |
| Diluted loss per share | $0.45 | $0.50 | Improved |
| Cash flow from operations | $3.1 million | $(0.6) million | Improved by $3.7 million |
| Cash and cash equivalents | $27.9 million | $45.4 million | Down $17.5 million |
| Marketable securities | $8.3 million | $4.7 million | Up $3.6 million |
| Total liquidity | $36.2 million | $50.1 million | Down $13.9 million |
| Working capital | $31.3 million | $51.0 million | Down $19.7 million |
| Revolving credit borrowings | $20.0 million | $9.8 million | Up $10.2 million |
Research and development expense increased 88% to $7.3 million, including $1.3 million in FDA program fees related to the RediTrex submission and higher clinical investment. Selling and marketing expense declined 6% to $20.3 million, while amortization increased to $2.8 million. Interest income was $0.6 million and interest expense was $0.2 million.
Operating cash flow benefited from working-capital changes and noncash expenses. Investing cash outflow was $27.7 million, including $20.0 million paid for Vibativ, $3.8 million of intangible-asset additions and net purchases of marketable securities. Financing cash inflow was $7.1 million, including net borrowings under the revolving credit facility, partially offset by $2.9 million of share repurchases.
Material changes versus the prior comparable period
- Vibativ contributed $5.1 million of 2018 revenue after its November 2018 acquisition from Theravance. The transaction included $20.0 million paid at closing, a further $5.0 million payment due in early 2019 and a contingent consideration liability of $9.0 million at acquisition.
- Acetadote revenue declined 35% to $4.3 million, primarily because of generic competition. Revenue from Cumberland’s Authorized Generic declined to $3.1 million from $4.6 million.
- Totect revenue declined 79% to $0.9 million as competitors returned following the national dexrazoxane shortage that supported initial 2017 demand.
- Omeclamox-Pak revenue declined 65% to $0.6 million, reflecting lower sales volume and higher expired-product returns. Cumberland acquired the remaining product rights from GEL in December 2018, ending royalty and manufacturing-fee payments to GEL.
- Kristalose revenue increased 5% to $12.1 million, Caldolor increased 20% to $5.0 million, and Vaprisol increased 12% to $1.8 million. Vaprisol benefited from restored inventory supplies during the second quarter.
- Ethyol revenue declined 3% to $10.5 million, primarily because of higher chargeback deductions related to the 340B drug-pricing program.
- Research and development investment increased by $3.4 million, while the operating loss widened by $3.3 million. The net loss improved because 2017 included approximately $4.2 million of tax expense from deferred-tax valuation allowance adjustments.
Guidance, outlook, commentary, risks and unusual items
Management did not provide numerical revenue, earnings or cash-flow guidance in the filing. Management stated that existing working capital, internally generated cash flow and the expanded $20 million credit facility were expected to support internal growth, business development, capital expenditures and pipeline activities for the foreseeable future.
- The company received FDA approval in January 2019 for the next-generation Caldolor formulation and package.
- The FDA accepted the RediTrex NDA in January 2019 and set a September 2019 PDUFA action date.
- Portaban enrollment was completed, but the study was not powered for efficacy; initial data showed safety and tolerability, while no definitive conclusion could be drawn regarding hepatic venous pressure.
- The company relies on third-party manufacturers and has supply-transition risks for Vaprisol, Ethyol, Vibativ and Omeclamox-Pak. Vibativ also carries future royalties of up to 20% of net sales.
- The $20 million revolving credit facility bears variable interest based on LIBOR plus a 1.75% to 2.75% spread, representing a 4.3% rate at year-end 2018, and matures in July 2020. The company used all available borrowing capacity at year-end and achieved covenant compliance through the agreement’s covenant-cure provision.
- Contractual obligations totaled approximately $34.7 million, including $20.0 million of line-of-credit principal, $9.5 million of contingent consideration and $3.9 million of operating-lease payments. The table excludes royalties under the Ethyol and Totect agreements.
- Acetadote remains subject to patent challenges, although Cumberland prevailed against Mylan and the appellate court affirmed the relevant patent ruling. Generic competition nevertheless affected 2018 sales.
- The company had significant customer concentration: four customers each represented at least 10% of 2018 revenue, and customers representing at least 10% of revenue accounted for 78% of accounts receivable at year-end.
- The company adopted ASC 606 in 2018 with no material impact on revenue recognition. It adopted the new lease guidance on January 1, 2019 and expected to record right-of-use assets and lease liabilities of approximately $3.6 million to $4.2 million.
- The company repurchased 443,041 shares for approximately $2.9 million during 2018 and does not anticipate paying cash dividends in the foreseeable future.
Most important facts for investors to verify
- Whether Vibativ can generate sustainable revenue and operating contribution after the acquisition and as manufacturing responsibilities transition to new suppliers.
- The durability of Caldolor, Kristalose and Vaprisol growth and the extent to which Acetadote generic competition continues to reduce revenue.
- Compliance with the credit facility’s financial covenants and the company’s ability to refinance or repay the $20 million balance due in 2020.
- Cash requirements associated with the $5.0 million Vibativ payment, contingent royalties, clinical development and product acquisitions.
- FDA decisions and commercialization prospects for RediTrex, the next-generation Caldolor product and the Phase II ifetroban programs.
- Inventory recoverability, particularly the significant Vibativ-related inventory balance and the company’s exposure to expired or short-dated products.
- Customer concentration, 340B and rebate deductions, third-party manufacturing capacity and the status of Acetadote patent challenges.