Cumberland Pharmaceuticals Inc. — Q3 2011 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. The company operates as one specialty pharmaceutical segment, with substantially all assets in the United States.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. The filing was dated November 7, 2011. Products included Acetadote, Kristalose and Caldolor; the company was also developing Hepatoren (ifetroban) Injection.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net revenues | $13.1 million | $12.2 million | $38.1 million | $33.1 million |
| Operating income | $3.1 million | $2.4 million | $8.1 million | $4.3 million |
| Income before taxes | $3.1 million | $1.9 million | $8.0 million | $3.1 million |
| Net income attributable to common shareholders | $1.85 million | $1.01 million | $4.75 million | $1.62 million |
| Diluted EPS | $0.09 | $0.05 | $0.23 | $0.08 |
| Cash flow from operations | Not separately provided | Not separately provided | $7.7 million | $1.0 million |
- Q3 revenue increased approximately 7.1%; nine-month revenue increased approximately 15.3% year over year.
- Q3 operating margin was approximately 23.7%, versus 20.1% in Q3 2010. Nine-month operating margin was approximately 21.4%, versus 12.9% in the prior-year period.
- Q3 net margin attributable to common shareholders was approximately 14.2%, versus 8.3%. Nine-month net margin was approximately 12.5%, versus 4.9%.
- Revenue growth was led by Acetadote: Q3 revenue was $10.9 million versus $9.6 million, and nine-month revenue was $31.6 million versus $25.6 million. Kristalose revenue declined to $2.1 million in Q3 and $6.2 million for nine months, primarily because of generic competition.
- Cash and cash equivalents were $71.1 million at September 30, 2011, compared with $65.9 million at December 31, 2010. Working capital was $78.4 million and the current ratio was 11.5x.
- Net cash increased $5.2 million during the first nine months, compared with a $13.2 million decrease in the 2010 period. Investing cash use was $0.4 million and financing cash use was $2.1 million.
- At September 30, 2011, revolving credit borrowings were $4.6 million, with approximately $5.4 million of additional availability under the facility. The company had repaid its $4.0 million term debt in July 2011.
Material changes versus the prior comparable period
- Acetadote benefited from the launch and acceptance of its new formulation, higher selling prices and a shortage of oral acetylcysteine. A royalty agreement related to Acetadote expired in January 2011, reducing selling and marketing expense.
- Caldolor revenue increased with greater volume and market penetration, while the company shifted toward a pull-through strategy at hospitals that had already stocked the product.
- Cost of products sold increased as a percentage of revenue to approximately 10% in Q3 from 8%, and to 9% for nine months from 8%, partly because of approximately $0.5 million of Q3 inventory reserves and approximately $1.0 million of reserves for the first nine months.
- Research and development expense increased to $3.3 million for nine months, reflecting infrastructure investments, FDA fees and development activity. General and administrative expense increased to $6.4 million, partly because of consulting and charitable contribution expenses.
- Interest expense declined substantially following the reduction and repayment of term debt. The company drew $2.75 million on its revolving credit facility during the first nine months and repurchased 508,545 shares for $2.9 million.
- Income tax rates declined to approximately 41.0% in Q3 and 40.7% for nine months, compared with 48.5% and 49.0%, respectively, in the prior-year periods. Approximately $56.5 million of unrecognized federal net operating loss carryforwards from stock-option exercises remained available for future tax liabilities.
Guidance, outlook, risks and unusual items
- The filing does not provide formal revenue or earnings guidance. Management stated that selling and marketing expense was expected to remain consistent for the remainder of 2011, while research and development expense was expected to increase as Hepatoren and additional Acetadote and Caldolor studies progressed.
- Hepatoren entered Phase II development for hepatorenal syndrome after FDA clearance of the investigational application. Development, manufacturing and patent activities were underway, but approval and commercialization remained uncertain.
- An Acetadote supplemental application for non-acetaminophen acute liver failure had received an FDA Complete Response Letter. The company was analyzing additional data before further submission or discussions with the FDA.
- Inventory totaled $6.9 million, and management stated that some inventory might exceed current requirements. The inventory-obsolescence reserve increased to approximately $1.0 million from $0.1 million at December 31, 2010; additional reserves could be required.
- The revolving credit facility provides up to $10 million, potentially expandable to $20 million subject to conditions, expires December 31, 2014, bears interest at LIBOR plus an applicable margin and is secured by substantially all assets. It contains financial and restrictive covenants and change-of-control and default provisions.
- The company identified risks involving product sales, generic competition, product acquisitions, regulatory approvals, clinical development, manufacturing, access to capital and integration of acquisitions. Management reported no material changes to the risk factors in the 2010 Form 10-K.
- The IRS was examining the company’s 2009 federal tax return, with completion expected in the fourth quarter of 2011. The filing also reported no off-balance-sheet arrangements.
- After quarter-end, the company repurchased an additional 46,271 shares for approximately $0.3 million through October 28, 2011. In November 2011, it agreed to acquire the remaining rights associated with Kristalose in exchange for a royalty on product sales.
Important facts for investors to verify
- Whether Acetadote revenue growth and pricing benefits are sustainable after the 2011 formulation transition and acetylcysteine shortage.
- The extent and timing of additional inventory reserves, particularly given the increased obsolescence reserve and potentially excess inventory.
- Progress, costs, clinical results and regulatory prospects for Hepatoren and the additional Acetadote and Caldolor studies.
- The impact of generic competition on Kristalose and the economic terms of the subsequent acquisition of its remaining rights.
- Compliance with the revolving credit facility’s leverage, interest-coverage and other covenants, as well as exposure to variable LIBOR-based interest rates.
- The outcome of the IRS examination and the timing and usability of the approximately $56.5 million in unrecognized tax carryforwards.
- Whether operating cash flow can support product development, share repurchases and potential product acquisitions without materially increasing borrowings.