Cumberland Pharmaceuticals Inc. — Q1 2017 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, primarily for hospital acute care and gastroenterology markets. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Financial Highlights
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenues | $9.64 million | $7.74 million | +$1.90 million, +24.5% |
| Gross profit | $8.26 million | $6.51 million | +$1.74 million |
| Gross margin | 85.7% | 84.2% | +1.5 percentage points |
| Operating income (loss) | ($0.66 million) | ($0.50 million) | Loss increased $0.16 million |
| Operating margin | (6.8%) | (6.5%) | Declined modestly |
| Net income (loss) | ($1.29 million) | ($0.27 million) | Loss increased $1.03 million |
| Net loss attributable to common shareholders | ($1.27 million) | ($0.25 million) | Loss increased $1.02 million |
| diluted loss per share | ($0.08) | ($0.02) | Unfavorable change |
| Net cash provided by operations | $1.44 million | $0.60 million | +$0.84 million |
Revenue growth was driven primarily by $3.67 million of Ethyol revenue, compared with none in the prior-year quarter, and an 86.0% increase in Vaprisol revenue. These gains were partly offset by lower Kristalose, Acetadote, Caldolor and Omeclamox-Pak revenue.
Selling and marketing expense increased 43.1% to $5.29 million, mainly because of royalties owed to Clinigen for Ethyol sales. Research and development expense increased 27.2% to $0.90 million. Income taxes shifted from a $0.18 million benefit in Q1 2016 to a $0.66 million expense in Q1 2017, primarily due to a $1.0 million additional valuation allowance for federal Orphan Drug and research and development tax credits.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $34.97 million at March 31, 2017, compared with $34.51 million at December 31, 2016.
- Marketable securities totaled $15.48 million; total cash, cash equivalents and marketable securities were $50.45 million.
- Working capital was $49.47 million, with a current ratio of 4.5.
- Operating cash flow was $1.44 million. Investing activities used $0.43 million, including $0.45 million of intangible-asset additions. Financing activities used $0.55 million for share repurchases.
- The revolving credit facility had $4.10 million outstanding and $7.90 million of stated availability at March 31, 2017. Borrowings bear interest based on LIBOR plus a spread; the stated rate was 1.8% at quarter-end.
- The credit facility is collateralized by substantially all company assets. Cumberland reported compliance with all financial covenants.
Material Changes and Unusual Items
- Ethyol, acquired through an exclusive U.S. rights agreement with Clinigen, generated $3.67 million of first-quarter revenue. Its U.S. launch began in Q3 2016.
- The company adopted new stock-compensation accounting guidance on January 1, 2017. Adoption recorded approximately $1.1 million of net deferred tax assets and retained earnings related to previously unrecognized net operating loss carryforwards.
- The company recorded an additional $1.0 million valuation allowance against certain tax credits, materially increasing the quarterly tax expense.
- Cumberland repurchased 155,150 common shares for approximately $1.0 million during the quarter. Approximately $6.59 million remained available under the repurchase authorization at March 31, 2017.
- On January 26, 2017, the Federal Circuit affirmed Cumberland’s favorable Acetadote patent ruling against Mylan, including the validity of the ’445 patent.
- The company selected BDO USA, LLP to replace KPMG LLP as independent registered public accounting firm for 2017. The filing reports no disagreements with KPMG on accounting, disclosure or audit matters.
Outlook, Management Commentary and Risks
Management stated that internally generated cash flow and available credit were expected to be adequate to finance internal growth and capital expenditures. The company plans to launch Totect in the United States later in 2017, expand promotion of existing products, pursue additional acquisitions and licensing opportunities, and advance its clinical pipeline.
Key development programs include Phase II candidates Hepatoren, Boxaban, Vasculan and Portaban, as well as a methotrexate approval-submission candidate. The filing does not provide formal revenue or earnings guidance.
Principal risks include dependence on product sales and successful commercialization, product acquisition and integration risk, clinical and regulatory uncertainty, manufacturing and supply delays, patent litigation, wholesaler purchasing fluctuations, reliance on third-party manufacturers and distributors, availability of capital, and the company’s ability to manage higher commercialization costs. International Caldolor revenue was affected by a temporary delay in product delivery from the primary manufacturer.
Investor Verification Items
- Verify whether Ethyol revenue growth is sustainable and whether related Clinigen royalties allow adequate contribution margins.
- Monitor Kristalose, Acetadote and Caldolor trends, including the effects of wholesaler buying patterns and international supply constraints.
- Assess whether selling and marketing expense growth can be contained while the company expands its product portfolio.
- Review the realizability of deferred tax assets, net operating loss carryforwards and tax-credit valuation allowances.
- Confirm Totect launch timing, commercial investment requirements and early prescription or revenue performance.
- Track Acetadote patent enforcement and the April 2018 contractual injunction milestone, as well as the patent expiration date in 2025.
- Evaluate liquidity after share repurchases, intangible-asset investment and potential use of the secured revolving credit facility.