Cumberland Pharmaceuticals Inc. — FY 2016 Form 10-K 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. Its six marketed U.S. products at December 31, 2016 were Acetadote, Caldolor, Kristalose, Omeclamox-Pak, Vaprisol and Ethyol. The company also had pipeline programs in clinical development, including Hepatoren, Boxaban, Vasculan and Portaban, plus pre-approval methotrexate and Totect rights.
The filing covers the fiscal year ended December 31, 2016, with comparisons to fiscal 2015 and 2014. Cumberland had 82 full-time employees and operated as one specialty-pharmaceutical segment.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net revenues | $33.0 million | $33.5 million | Down 1.5% |
| Operating income (loss) | $(1.4) million | $1.1 million | Declined $2.5 million |
| Net income (loss) attributable to common shareholders | $(0.9) million | $0.7 million | Declined $1.7 million |
| Basic and diluted EPS | $(0.06) | $0.04 | Declined $0.10 |
| Cash flow from operations | $0.6 million | $5.9 million | Down $5.3 million |
| Cash and cash equivalents | $34.5 million | $38.2 million | Down $3.7 million |
| Marketable securities | $15.6 million | $14.6 million | Up $1.1 million |
| Working capital | $50.8 million | $52.2 million | Down $1.4 million |
| Revolving credit borrowings | $4.1 million | $1.7 million | Up $2.4 million |
Gross profit was approximately $27.1 million, implying an 82.0% gross margin versus 85.2% in 2015. The operating margin was approximately negative 4.3%, compared with positive 3.3% in 2015; the net margin attributable to common shareholders was approximately negative 2.9%, compared with positive 2.2%.
Revenue by product was: Kristalose $15.9 million, Acetadote $7.2 million, Caldolor $4.1 million, Omeclamox-Pak $2.5 million, Vaprisol $1.9 million and Ethyol $0.8 million. Acetadote revenue included $4.8 million from the Authorized Generic, compared with $4.5 million in 2015.
Cost of products sold increased 19.9% to $6.0 million, selling and marketing expense increased 4.0% to $14.6 million, general and administrative expense increased to $8.6 million, and amortization increased to $2.2 million. Research and development expense decreased 17.0% to $3.2 million, primarily because the prior year included a $1.2 million FDA fee related to the Caldolor supplemental application.
Material changes versus the prior comparable period
- Caldolor was the fastest-growing brand, with revenue up 32.8% to $4.1 million, supported by domestic, international and pediatric-indication activities.
- Kristalose revenue increased 1.1% and remained the largest product, aided by improved managed-care coverage and lower rebate levels.
- Acetadote revenue declined $1.3 million because of generic competition and a shift from branded product to the Authorized Generic.
- Vaprisol revenue declined 29.7%, primarily because of lower shipment volume.
- Omeclamox-Pak revenue declined 16.5%, partly because the company lacked a co-promotion partner during 2016.
- Ethyol was launched in the United States during the third quarter and generated $0.8 million of 2016 revenue. The product carries tiered royalties to Clinigen ranging from 30% to 50% of net sales.
- Operating performance deteriorated despite relatively stable revenue because product costs, selling and marketing expense, general and administrative expense and amortization increased.
- Operating cash generation fell sharply, while inventory and receivables increased. Cash was also used for approximately $2.0 million of intangible-asset additions, $1.0 million of net marketable-security purchases and $2.5 million of share repurchases.
Liquidity, debt and capital resources
Total cash, cash equivalents and marketable securities were $50.1 million at year-end. The current ratio was 4.4, down from 5.2. Cumberland had $7.9 million of remaining availability under its revolving credit facility, which had a borrowing capacity of $12.0 million and could potentially be increased to $20.0 million subject to conditions.
The revolving facility bears interest at LIBOR plus a spread of 1.0% to 2.85%; the reported rate was 1.6% at December 31, 2016. Borrowings are secured by substantially all company assets. Cumberland received covenant waivers in July and October 2016, amended a covenant to add a minimum-liquidity requirement, and reported compliance with all covenants at year-end. The facility matures in June 2018.
Contractual obligations totaled approximately $9.5 million, including $4.1 million of line-of-credit principal, estimated debt interest of $0.1 million and operating leases of $5.2 million. Future royalties and certain product-related payments are excluded because they depend on future sales.
Outlook, management commentary, risks and unusual items
- Management’s strategy is to grow existing brands, expand targeted sales forces, acquire complementary marketed products and late-stage candidates, build international partnerships and develop early-stage programs through majority-owned Cumberland Emerging Technologies.
- The company provided no specific quantified revenue, earnings or cash-flow guidance in the filing. Management stated that internally generated cash flow and available credit were expected to fund internal growth and capital expenditures.
- Pipeline development advanced through FDA-cleared Phase II programs for Vasculan and Portaban, follow-on planning for Hepatoren and Boxaban, a Phase I study for a new hospital product candidate, and the acquisition of U.S. methotrexate rights.
- In January 2017, Cumberland acquired exclusive U.S. commercialization rights to Totect from Clinigen; the product was not yet generating 2016 revenue.
- The Federal Circuit affirmed Cumberland’s Acetadote patent victory over Mylan on January 26, 2017. The company’s Acetadote patents and related litigation remain important to future market protection, although other generic products already compete in the market.
- Four wholesale customers represented 89% of gross revenue, and those customers accounted for 86% of accounts receivable at year-end, creating significant customer-concentration risk.
- Cumberland relies on third-party manufacturers and Cardinal Health for distribution. Supply interruptions, manufacturing noncompliance, product recalls or inventory obsolescence could materially affect results.
- Revenue recognition depends on estimates for rebates, returns, chargebacks and service fees. Related accrued liabilities declined to $4.1 million from $6.8 million in 2015.
- Product and license rights, patents and trademarks totaled $22.2 million, or approximately 24% of total assets. Impairment or accelerated loss of product value could materially reduce earnings.
- The company did not pay dividends and does not expect to pay them in the foreseeable future. The loan agreement also restricts dividends.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2016. No material unresolved SEC staff comments were reported.
Important facts investors should verify
- Whether Caldolor growth, Ethyol’s launch and improved Kristalose coverage can offset continuing declines in Acetadote, Vaprisol and Omeclamox-Pak.
- The timing and terms of the Totect and methotrexate launches, including FDA approvals, manufacturing readiness, milestone payments and royalty obligations.
- The company’s ability to maintain compliance with the amended credit-facility covenants and refinance or repay the facility at its June 2018 maturity.
- The sustainability of operating cash flow given the 2016 decline, higher inventory and receivables, and continued investment in intangible assets and clinical programs.
- The status of Acetadote patent challenges, generic competition and the extent to which branded versus Authorized Generic sales affect revenue and margins.
- The accuracy of revenue-related accruals, inventory-obsolescence estimates and the recoverability of the company’s substantial intangible assets.
- The concentration of sales and receivables among four wholesale customers and the company’s dependence on third-party manufacturers and Cardinal Health.