Cumberland Pharmaceuticals Inc. — Q1 2013 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. Key products include Acetadote, Kristalose, Caldolor and the Phase II candidate Hepatoren. This unaudited report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net revenues | $10.26 million | $10.26 million | Flat |
| Operating income | $1.33 million | $0.65 million | Up 105% |
| Net income attributable to common shareholders | $0.85 million | $0.42 million | Up 102% |
| Diluted EPS | $0.05 | $0.02 | Improved |
| Cash flow from operations | $1.67 million | $2.61 million | Down 36% |
| Cash and marketable securities | $70.17 million | $71.04 million at Dec. 31, 2012 | Down $0.87 million |
| Revolving credit borrowings | $4.36 million | $4.36 million at Dec. 31, 2012 | Flat |
Gross margin was approximately 89.2%, compared with 91.7% in Q1 2012, primarily due to sales mix. Operating margin increased to approximately 12.9% from 6.3%, while net income attributable to common shareholders represented approximately 8.3% of revenue versus 4.1%.
Current assets were $86.0 million and current liabilities were $8.2 million at March 31, 2013, resulting in working capital of approximately $77.8 million and a current ratio of 10.4x. The company reported approximately $5.6 million of additional availability under its line of credit and stated that internally generated cash flows and available borrowing capacity should be adequate to service debt, fund growth and finance capital expenditures.
Investing activities used $3.31 million, including $2.97 million of marketable-security purchases and $0.96 million of intangible-asset additions. Financing activities used $1.51 million, principally due to $1.94 million of share repurchases. The company held $19.0 million of marketable securities, consisting of U.S. Treasury, government agency, mortgage-backed, SBA loan pool and municipal variable-rate demand securities.
Material changes versus the prior comparable period
- Total revenue was essentially unchanged. Acetadote revenue declined by approximately $0.1 million and Kristalose revenue declined by approximately $0.1 million, while Caldolor revenue increased by approximately $0.3 million.
- Acetadote revenue included approximately $3.0 million from the company’s share of authorized-generic sales distributed by Perrigo.
- Selling and marketing expense declined approximately $1.3 million, or 26.2%, following the 2012 commercial strategy and sales-force realignment.
- General and administrative expense increased approximately $0.3 million, or 13.7%, primarily due to accounting and legal fees and inventory donations.
- Cost of products sold increased to 10.8% of revenue from 8.3%, reflecting product mix.
- Operating income more than doubled despite flat revenue, reflecting lower selling and marketing costs.
- The company repurchased 433,166 shares for approximately $1.9 million, compared with 319,723 shares for approximately $2.3 million in Q1 2012.
- Three international licensing agreements were entered into during Q1 2013. Approximately $0.4 million of upfront licensing revenue was recognized; additional regulatory and sales milestones remain contingent.
Outlook, commentary, risks and unusual items
Management’s growth strategy is to maximize existing products, acquire or in-license additional branded or late-stage products, expand international partnerships and develop early-stage candidates through Cumberland Emerging Technologies. Management stated that the company has been profitable since 2004 and expects minimal cash income-tax payments in 2013 because of approximately $48.1 million of unrecognized net operating loss carryforwards related to nonqualified option exercises.
Management highlighted positive results from two Caldolor registry studies involving 450 patients; shortened five- to ten-minute infusion times were reported as well tolerated. A study of a new Acetadote formulation was terminated because of insufficient enrollment.
Acetadote patent litigation remains material. The company is defending multiple challenges to its patents, including challenges involving InnoPharma, Mylan, Sagent, Perrigo and others. The company settled with Paddock and Perrigo and supplies Perrigo with an authorized generic. A new Acetadote patent was issued in March 2013 and listed in the FDA Orange Book in April 2013, but Perrigo and Sagent subsequently challenged that patent. An unsuccessful defense could reduce Acetadote sales and market share.
Inventory included approximately $4.6 million of finished goods, with Caldolor representing the majority and expiration dates beginning in the second quarter of 2014. The company has recorded approximately $2.6 million of potential obsolescence and discontinuance charges, primarily for Caldolor, and could incur additional losses if future sales are below projections.
The revolving facility is collateralized by substantially all company assets and includes financial covenants. The company reported compliance with all covenants. Borrowings bear interest at LIBOR plus an applicable margin of 2.2% at March 31, 2013; a 1% increase in interest rates would increase annual interest expense by less than $0.1 million. No off-balance-sheet arrangements were reported, and disclosure controls were deemed effective.
Important facts investors should verify
- Progress and outcomes of the pending Acetadote patent and FDA-related litigation, including potential generic competition.
- Sustainability of Acetadote revenue, including the $3.0 million authorized-generic contribution.
- CalDolor sales growth, inventory expiration exposure and potential additional obsolescence charges.
- Timing and collectability of milestones and royalties under the new international licensing agreements.
- Use of cash for marketable securities and share repurchases versus investment in product development and acquisitions.
- Availability under, covenant compliance with and collateral requirements of the revolving credit facility.
- Whether the company’s reduced selling and marketing expense supports future revenue growth without impairing commercial execution.