CUMBERLAND PHARMACEUTICALS INC quarterly report, Q1 FY2015

Full document

Cumberland Pharmaceuticals Inc. — Q1 2015 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, 2015, compared with the three months ended March 31, 2014.

Financial performance and position

  • Revenue: Net revenue was $8.69 million, up $0.59 million, or 7.3%, from $8.09 million.
  • Product revenue changes: Kristalose increased 21.4% to $4.10 million; Vaprisol increased to $1.02 million from $0.30 million; and Caldolor increased 137.8% to $1.19 million. Acetadote declined 43.3% to $1.54 million, while Omeclamox-Pak declined 33.5% to $0.76 million.
  • Profitability: Operating income was $4,116 versus $408,051. Net income was $26,512 versus $275,182, and net income attributable to common shareholders was $46,281 versus $286,320. Basic and diluted EPS were reported as zero dollars per share for 2015 because of rounding.
  • Margins: Cost of products sold was 13.4% of revenue versus 13.0% in the prior-year quarter, implying gross margins of approximately 86.6% and 87.0%, respectively. Operating margin declined to approximately 0.05% from 5.0%; net income attributable to common shareholders represented approximately 0.5% of revenue versus 3.5%.
  • Expense drivers: Research and development increased $1.03 million, primarily due to a $1.2 million FDA fee related to the Caldolor supplemental NDA. Amortization increased $0.19 million. Selling and marketing declined $0.08 million, and general and administrative expense declined $0.25 million, including a $0.4 million gain related to reduced Vaprisol contingent consideration.
  • Operating cash flow: Cash provided by operating activities was $2.03 million versus $0.98 million.
  • Investing and financing cash flow: Investing activities used $1.17 million, including $2.06 million of intangible asset additions. Financing activities used $1.68 million, primarily for $1.71 million of share repurchases. Cash declined $0.82 million to $39.04 million.
  • Liquidity: Cash, cash equivalents and marketable securities totaled $52.91 million at March 31, 2015, compared with $54.71 million at December 31, 2014. Working capital was $55.65 million and the current ratio was 5.7.
  • Debt: No borrowings were outstanding under the revolving credit facility. The facility provided $12.0 million of initial availability, with potential capacity up to $20.0 million, and expires June 26, 2017. The company was in compliance with its covenants.

Material changes versus the prior comparable period

  • Revenue growth was driven by Kristalose, Vaprisol and Caldolor, partially offset by lower Acetadote and Omeclamox-Pak revenue.
  • Acetadote revenue was adversely affected by a temporary shortage of marketable authorized-generic product and higher expired-product deductions. Authorized-generic revenue fell to $0.5 million from $1.3 million.
  • Vaprisol benefited from two additional months of ownership compared with the 2014 period.
  • Operating income and net income decreased substantially because expense growth, particularly R&D and amortization, exceeded revenue growth.
  • The company repurchased 268,179 shares for approximately $1.7 million, compared with 193,486 shares for approximately $0.9 million in the prior-year quarter.
  • Inventory decreased to $4.63 million from $5.60 million, and cumulative inventory-obsolescence reserves, primarily related to Caldolor, declined to approximately $3.0 million from $3.2 million.

Guidance, outlook, commentary, risks and unusual items

  • Management expects 2015 Caldolor revenue to grow compared with 2014 but cautions that quarterly results may fluctuate because of wholesaler buying patterns and other factors.
  • The company submitted a Caldolor supplemental NDA seeking pediatric labeling changes and received FDA approval to extend the shelf life of Caldolor 800 mg vials to seven years.
  • Hepatoren Phase II top-line results indicated generally favorable tolerability and a possible urine-output benefit at higher doses; the company intends to proceed with development. A Phase II Boxaban study in patients with aspirin-exacerbated respiratory disease was initiated.
  • The company entered into an international Vaprisol commercialization agreement covering Saudi Arabia, the United Arab Emirates and Pakistan. International agreements provide for potential upfront payments and milestones; the filing states that $1.4 million of cumulative upfront revenue had been recognized and no milestone revenue had been recognized as of March 31, 2015.
  • The company paid Astellas $1.6 million in April 2015 for Vaprisol contingent consideration. A $0.4 million gain from reducing the acquisition-related contingent consideration was recognized in the first quarter.
  • Acetadote patents continue to face Paragraph IV challenges, including a March 2015 notice from Zydus. The company is pursuing patent defense and related legal actions. Failure to protect the patents could reduce Acetadote sales and margins.
  • The company is also pursuing arbitration against Mylan concerning alleged breaches of manufacturing, supply and exclusivity agreements for acetylcysteine products through April 2016.
  • Management states that internally generated cash flow and available credit are expected to fund internal growth and capital expenditures. The filing provides no formal revenue or earnings guidance.
  • The company expects minimal cash income taxes in 2015 because of approximately $44.2 million of unrecognized net operating loss carryforwards related to nonqualified stock-option exercises.
  • Key risks include product sales volatility, dependence on third-party manufacturers, patent and generic competition, regulatory approval, clinical-development outcomes, inventory obsolescence, acquisition integration and access to capital.

Important facts for investors to verify

  • Whether the temporary Acetadote authorized-generic shortage and expired-product deductions have been resolved and whether Acetadote revenue stabilizes.
  • Whether Caldolor growth continues after the benefit from a competitor product shortage and whether the pediatric sNDA generates meaningful commercial benefits.
  • Vaprisol sales momentum, international regulatory progress and the effect of the $1.6 million contingent-consideration payment.
  • The outcome and timing of Acetadote patent challenges, including the Zydus and Aurobindo matters, and the Mylan arbitration.
  • The pace and cost of Hepatoren and Boxaban clinical development and the likelihood of regulatory or commercial success.
  • Whether elevated R&D, amortization and other operating costs compress profitability despite revenue growth.
  • Cash deployment through share repurchases, intangible-asset investments and potential acquisitions, as well as continued compliance with revolving-credit covenants.