Cumberland Pharmaceuticals Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015; filed March 14, 2016. The filing also provides unaudited fourth-quarter 2015 results. Cumberland is a specialty pharmaceutical company focused on branded prescription products for hospital acute care and gastroenterology. Its five marketed products are Acetadote, Caldolor, Kristalose, Omeclamox-Pak and Vaprisol. Hepatoren and Boxaban are Phase II ifetroban candidates.
Financial Performance and Position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenue | $33.5 million | $36.9 million | Down 9.2% |
| Operating income | $1.1 million | $3.6 million | Down $2.4 million |
| Net income attributable to common shareholders | $0.7 million | $2.4 million | Down $1.7 million |
| Diluted EPS | $0.04 | $0.14 | Down $0.10 |
| Operating cash flow | $5.9 million | $6.7 million | Down $0.8 million |
- Gross margin, calculated from net revenue less cost of products sold, was approximately 85.2% in 2015 versus 86.3% in 2014. Cost of products sold increased to 14.8% of revenue from 13.7%, partly because of product mix and $0.3 million of inventory write-downs.
- Research and development expense increased 13.5% to $3.8 million, including a $1.2 million FDA fee related to the Caldolor supplemental application and continued Hepatoren and Boxaban studies.
- Selling and marketing expense declined to $14.0 million from $14.9 million, while amortization increased to $2.0 million from $1.6 million.
- Cash, cash equivalents and marketable securities totaled $52.8 million at year-end, down from $54.7 million. Working capital was $54.7 million and the current ratio was 5.4.
- Debt consisted primarily of $1.7 million outstanding under the SunTrust revolving credit facility. The facility permits initial borrowings of up to $12 million and potential total availability of up to $20 million, subject to conditions. The interest rate was 1.2% at year-end, and all financial covenants were satisfied.
- Total assets were $91.9 million, total equity was $76.8 million and total long-term debt and other long-term obligations were $2.7 million.
- The company repurchased 829,003 shares for approximately $5.3 million in 2015. No cash dividends have been paid, and none are expected in the foreseeable future.
Product Revenue
| Product | 2015 revenue | 2014 revenue | Change |
|---|---|---|---|
| Kristalose | $15.7 million | $14.9 million | Up $0.8 million |
| Acetadote | $8.5 million | $11.9 million | Down $3.4 million |
| Caldolor | $3.1 million | $2.7 million | Up $0.4 million |
| Omeclamox-Pak | $3.0 million | $4.1 million | Down $1.1 million |
| Vaprisol | $2.6 million | $3.0 million | Down $0.4 million |
Fourth-quarter 2015 net revenue was $8.0 million, operating income was $0.2 million and net income attributable to common shareholders was $0.2 million. Fourth-quarter revenue declined from $9.3 million in the comparable 2014 quarter.
Material Changes Versus the Prior Period
- Revenue declined primarily because of lower Acetadote, Omeclamox-Pak and Vaprisol sales. Acetadote revenue was affected by generic competition, increased expired-product deductions and a temporary packaging-related shortage affecting the Authorized Generic.
- Kristalose benefited from its repositioning, patient affordability initiatives, improved managed-care deductions and higher net revenue per unit.
- Caldolor revenue increased 14.4%, supported by sales and marketing activities, international growth, the Australian launch and a temporary shortage of a competing product. Management expects 2016 Caldolor revenue to grow, but cautions that quarterly results may fluctuate.
- In November 2015, Cumberland assumed full U.S. commercial responsibility for Omeclamox-Pak under a new agreement with Gastro-Entero Logic, LLC and terminated its prior Pernix arrangement. Cumberland became responsible for supply chain, national accounts and promotion and intends to seek a new primary-care co-promotion partner.
- Caldolor received FDA approval for pediatric patients six months and older in November 2015.
- Cumberland entered into a co-promotion agreement with Piramal Critical Care for Caldolor and Vaprisol and expanded international activity, including the Caldolor launch in Australia.
- The company completed initial Phase II studies for Hepatoren and Boxaban. Hepatoren results showed tolerability and a potential urine-output signal at higher doses in Type II patients; Type I results were still under analysis. Boxaban enrollment was completed, with no adverse events reported versus placebo in preliminary results.
Cash Flow, Outlook and Risks
Management states that internally generated cash flow and available borrowing capacity should be adequate to finance internal growth and capital expenditures. The filing does not provide formal quantitative revenue or earnings guidance. Management expects continued Caldolor growth, continued efforts to expand international partnerships, further development of Hepatoren and Boxaban, and additional product acquisitions or licensing opportunities.
- Key liquidity uses in 2015 included $5.3 million for share repurchases, $1.7 million for the remaining Vaprisol consideration and $2.6 million of additions to intangible assets, partly offset by $1.7 million of borrowings.
- Sales-related accrued liabilities for rebates, product returns, administrative fees and service fees increased to $6.8 million from $5.2 million. Revenue is sensitive to estimates for rebates, returns, chargebacks and discounts.
- Acetadote patent litigation remains material. A federal court upheld the 445 Acetadote patent and enjoined Mylan from marketing its generic product until August 2025; Mylan appealed. Other patent challenges and related proceedings remain possible.
- Vaprisol’s principal patent expires in December 2019, creating a potential future competitive risk.
- The company relies on third-party manufacturers, distributors and research collaborators, including limited suppliers for certain products. Manufacturing interruptions, quality failures or regulatory noncompliance could reduce product availability.
- Major risks include generic competition, product safety or recall issues, FDA and other regulatory actions, reimbursement and pricing pressure, dependence on wholesalers and third parties, clinical-development failure, intellectual-property challenges, product-liability claims and the potential need for additional capital.
- Four customers accounted for significant portions of gross revenue, and their combined accounts receivable represented 71% of year-end receivables, indicating customer concentration.
- Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2015. KPMG issued an unqualified audit opinion.
Investor Verification Items
- Verify the sustainability of Kristalose and Caldolor growth and whether Acetadote declines continue as generic competition expands.
- Review the status and outcome of Mylan’s Acetadote patent appeal and other Paragraph IV challenges.
- Assess the commercial impact and economics of the new Omeclamox-Pak agreement, including the search for a new co-promotion partner and 15% to 20% tiered royalty payments.
- Monitor Vaprisol performance and competitive exposure before the expected December 2019 patent expiration.
- Evaluate clinical, regulatory and funding milestones for Hepatoren and Boxaban; neither candidate was approved for sale at year-end.
- Reconcile cash generation with share repurchases, intangible-asset investment and debt usage, and confirm compliance with the revolving-credit covenants.
- Review the $6.8 million sales-related accrual balance and assumptions for product returns, rebates and other deductions.
- Consider the effect of future accounting changes, including revenue recognition adoption beginning January 1, 2018 and lease accounting adoption beginning after December 15, 2018.