Cumberland Pharmaceuticals Inc. 10-Q Summary
Business context and reporting period
Cumberland is a specialty pharmaceutical company focused on acquiring, developing, and commercializing branded prescription products, primarily for hospital acute care and gastroenterology. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
The portfolio included Acetadote, Caldolor, Kristalose, Omeclamox-Pak, Vaprisol, and newly launched Ethyol. The development pipeline included Phase II candidates Hepatoren, Boxaban, Vasculan, and Portaban.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net revenue | $8.8 million | $7.9 million | $23.9 million | $25.5 million |
| Net income attributable to common shareholders | $0.1 million | $0.1 million | $(0.2) million | $0.6 million |
| Operating income (loss) | $0.1 million | $0.3 million | $(0.5) million | $0.9 million |
| Operating margin | 1.5% | 3.4% | (2.0)% | 3.7% |
| Net margin attributable to common shareholders | 1.2% | 1.6% | (0.8)% | 2.3% |
| Net cash provided by operating activities | — | — | $(0.3) million | $4.6 million |
Q3 gross profit was approximately $6.8 million, representing a 77.5% gross margin versus 87.6% in the prior-year quarter. Nine-month gross profit was approximately $19.6 million, or an 81.8% gross margin versus 86.7% in 2015.
- Cash and cash equivalents at September 30, 2016 were $35.5 million; marketable securities were $14.6 million, for total cash, cash equivalents, and marketable securities of $50.1 million.
- Working capital was $55.3 million and the current ratio was 5.7.
- Revolving credit borrowings were $3.7 million, with reported availability of $8.3 million. The facility permits aggregate borrowings of up to $20 million subject to conditions.
- Net cash used in investing activities was $1.6 million, including $1.6 million of additions to intangible assets.
- Financing activities used $0.8 million, reflecting $1.9 million of share repurchases partially offset by $2.0 million of new revolving-credit borrowings.
Material changes versus the prior comparable periods
- Q3 revenue increased 11.5% to $8.8 million, driven primarily by a $1.0 million increase in Caldolor revenue and $0.5 million of initial Ethyol revenue.
- Nine-month revenue declined 6.0% to $23.9 million. Declines in Kristalose, Vaprisol, and Acetadote more than offset growth in Caldolor and the Ethyol launch.
- Nine-month branded Acetadote revenue declined approximately $1.1 million because of generic competition, partly offset by growth in the Perrigo-distributed authorized generic, which generated $3.5 million versus $3.3 million in the prior-year period.
- Cost of products sold increased 28.8% for the first nine months, and product cost as a percentage of revenue rose to 18.2% from 13.3%. Management attributed the change to product mix and stated that Q3 Caldolor costs were temporarily elevated because new inventory had a higher unit cost.
- Nine-month research and development expense decreased 41.1% to $2.0 million, primarily because 2015 included a $1.2 million FDA filing fee related to the Caldolor pediatric supplemental application.
- Operating performance weakened for the nine-month period, moving from $0.9 million of operating income to a $0.5 million operating loss. Cash from operations declined from $4.6 million provided to $0.3 million used, largely because of working-capital changes.
- The company repurchased 407,457 shares for approximately $1.9 million during the first nine months, compared with 712,134 shares repurchased for approximately $4.7 million in 2015.
Guidance, outlook, commentary, risks, and unusual items
- No formal numerical revenue or earnings guidance is provided in the filing. Management expects Caldolor annual revenue to continue growing but cautions that quarterly results may fluctuate because of wholesaler and hospital purchasing patterns.
- Ethyol distribution began in August 2016, national promotional support began in September, and the product generated $0.5 million of revenue in Q3.
- Management initiated the Portaban Phase II program after FDA clearance of its investigational new drug application. Hepatoren and Boxaban Phase II studies were completed, with further Phase IIb development under consideration.
- The company reported a new hospital product candidate for which the FDA cleared an investigational new drug application in late October 2016; a Phase I study was being initiated.
- The revolving-credit facility is secured by substantially all company assets and bears variable interest based on LIBOR. The company received a covenant waiver for June 30, 2016 and, on October 28, 2016, received another waiver and amended the covenant package to replace an EBIT-to-interest covenant with a minimum-liquidity requirement. Management stated that the company was compliant with all covenants as of September 30, 2016.
- Acetadote patent litigation and arbitration remain material. The company prevailed against Mylan in arbitration and in a patent-infringement case, but Mylan appealed the court ruling. The company continues to defend its intellectual property.
- Inventory included approximately $0.7 million of cumulative obsolescence and discontinuance charges at September 30, 2016, primarily related to Caldolor, compared with approximately $2.7 million at year-end 2015. The company began destroying obsolete Caldolor inventory during Q3.
- The company reported approximately $44.0 million of unrecognized net operating loss carryforwards from the exercise of nonqualified stock options, which it expects to use to significantly offset future tax obligations.
- Management identified revenue allowances, inventory obsolescence, deferred tax asset realizability, share-based compensation, research and development costs, and intangible assets as significant accounting estimates.
Important facts for investors to verify
- Whether Caldolor growth and the Ethyol launch can offset ongoing declines in Kristalose, Vaprisol, and branded Acetadote.
- Whether product-cost pressure, particularly the temporary Caldolor inventory cost increase, normalizes as management expects.
- Operating cash generation and the extent to which working-capital needs require additional revolving-credit borrowings.
- Compliance with the amended liquidity covenant and the company’s remaining borrowing capacity.
- The status and potential commercial impact of Mylan’s Acetadote patent appeal and related intellectual-property proceedings.
- Clinical, regulatory, and funding outcomes for Portaban, Hepatoren, Boxaban, Vasculan, and the new hospital product candidate.
- The sustainability of the company’s high liquidity balance after share repurchases, intangible-asset investments, and potential product-development spending.