Cumberland Pharmaceuticals Inc. — Form 10-Q Summary
Business context and reporting period
Cumberland Pharmaceuticals is a specialty pharmaceutical company focused on hospital acute care and gastroenterology products. Its marketed products include Acetadote, Caldolor and Kristalose; it also develops Hepatoren. The company operates as one segment and sells primarily in the United States.
This report covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. The financial statements are unaudited. The company had 19,110,546 common shares outstanding as of October 27, 2012.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net revenues | $12.5 million | $13.1 million | $35.2 million | $38.1 million |
| Operating income | $3.0 million | $3.1 million | $5.6 million | $8.1 million |
| Net income attributable to common shareholders | $1.9 million | $1.8 million | $4.0 million | $4.7 million |
| Diluted EPS | $0.10 | $0.09 | $0.20 | $0.23 |
| Operating margin | 23.8% | 23.7% | 15.8% | 21.4% |
| Net margin attributable to common shareholders | 14.9% | 14.1% | 11.5% | 12.5% |
Q3 revenue declined approximately 4%, while nine-month revenue declined approximately 8%. Q3 operating income decreased modestly, but nine-month operating income fell approximately 32%. Q3 earnings attributable to common shareholders increased slightly, whereas nine-month earnings declined approximately 15%.
- Q3 Acetadote revenue was $9.8 million, down from $10.9 million; Kristalose revenue was $2.4 million, up from $2.1 million; and Caldolor revenue was $0.3 million, up from less than $0.1 million.
- For the first nine months, Acetadote revenue declined $4.7 million, partially offset by $0.5 million increases in both Kristalose and Caldolor revenue.
- Cost of products sold was $0.9 million in Q3 and $2.9 million for nine months. Reported gross margin was approximately 92.6% in Q3 and 91.8% for nine months.
- Q3 research and development expense increased 38% to $1.7 million; nine-month expense increased 42% to $4.7 million, primarily due to clinical studies, medical science liaison expansion and FDA fees.
- Nine-month interest income increased to $0.3 million from $0.1 million, while interest expense declined to approximately $0.06 million from $0.3 million because of the prior-year payoff of term debt.
- Nine-month income tax expense was $1.8 million versus $3.2 million. The effective tax rate decreased to 30.4% from 40.7%, partly due to a deferred tax benefit from the stock-option exchange program.
Net cash provided by operating activities was $5.1 million for the first nine months, compared with $7.7 million in 2011. Cash and cash equivalents were $50.8 million at September 30, 2012, supplemented by $18.6 million of marketable securities, for total cash and securities of approximately $69.4 million. Working capital was $78.1 million, and the current ratio was 10.0x.
Investing activities used $20.4 million, primarily because the company purchased $18.8 million of marketable securities and invested $1.6 million in intangible assets. Financing activities used $4.6 million, including $6.8 million for share repurchases. The company had $4.4 million outstanding under its revolving credit facility and reported an additional $5.6 million of availability. The facility bears interest at LIBOR plus an applicable margin, reported as 2.22% at September 30, 2012.
Material changes versus the prior comparable period
- Revenue weakened primarily because of lower Acetadote volume; management attributed the 2011 comparison to unusually strong sales caused by a shortage of competing oral products.
- Kristalose and Caldolor continued to grow, but did not fully offset the Acetadote decline.
- Research and development spending increased substantially, while selling and marketing expense declined 5% for the first nine months.
- The company recognized approximately $0.7 million of revenue from an exclusive Acetadote and Caldolor licensing agreement with Harbin Gloria Pharmaceuticals in China. Additional milestone payments of up to $2.9 million remain possible, but none had been recognized as of September 30, 2012.
- The company repurchased approximately 1.0 million shares for $6.8 million during the first nine months and had approximately $7.1 million remaining under the repurchase authorization at September 30, 2012.
- Inventory increased to $7.5 million from $5.8 million, with approximately $2.0 million reserved primarily for potential Caldolor obsolescence. Caldolor inventory had expiration dates extending through January 2015.
- The company invested cash reserves in government and government-backed securities. This investment shift was the principal reason for the $19.8 million decrease in cash and cash equivalents during the first nine months.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management stated that internally generated cash flow, available credit and cash on hand were expected to be adequate to service existing debt, fund internal growth and finance capital expenditures.
Management’s strategy is to maximize existing products, expand selectively into international markets, pursue additional indications and acquire or in-license marketed products and late-stage candidates. A pediatric Caldolor study reported statistically significant reductions in postoperative narcotic doses in the efficacy-evaluable population, and management expected the results, together with ongoing fever studies, to support pursuit of a pediatric indication.
Acetadote faces significant patent litigation risk. Several companies submitted Paragraph IV certifications challenging the Acetadote patent on invalidity and/or non-infringement grounds, and Cumberland filed infringement lawsuits. The patent is scheduled to expire in May 2026, but the company stated that any applicable FDA stay or bar may not be available and that the litigation outcome was too early to evaluate. Loss of protection could materially reduce Acetadote sales and adversely affect financial results.
- Future results depend on Acetadote sales, successful commercialization of Caldolor and Kristalose, product development, regulatory approvals and the ability to acquire additional products.
- Inventory may require additional obsolescence charges if Caldolor sales are below projections.
- The company has approximately $55.8 million of unrecognized net operating loss carryforwards from nonqualified option exercises and expects minimal future cash taxes due to their use.
- The company reported no off-balance-sheet arrangements and stated that its disclosure controls were effective.
Important facts for investors to verify
- Progress, timing and potential financial impact of the Acetadote patent lawsuits and related FDA proceedings.
- Whether Acetadote volume stabilizes and whether Caldolor and Kristalose growth can offset further declines.
- CalDolor inventory aging, expiration exposure and adequacy of the approximately $2.0 million obsolescence reserve.
- Clinical and regulatory progress toward a pediatric Caldolor indication and development of Hepatoren.
- Receipt and timing of milestone payments under the Harbin Gloria licensing agreement.
- Use of cash for marketable securities and share repurchases relative to operating cash generation and future product investments.
- Availability and terms of the revolving credit facility, including exposure to variable interest rates.