Business Context and Reporting Period
Cumberland Pharmaceuticals Inc. is a specialty pharmaceutical company focused on hospital acute-care and gastroenterology products, including Acetadote, Kristalose and Caldolor. The unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods.
The company had more than 100 sales representatives and managers at June 30, 2012 and has been profitable since 2004. It also develops earlier-stage candidates through majority-owned Cumberland Emerging Technologies, including Hepatoren.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Net revenues | $12.4 million | $14.4 million | $22.6 million | $25.1 million |
| Operating income | $1.9 million | $3.6 million | $2.6 million | $5.0 million |
| Net income attributable to common shareholders | $1.7 million | $2.2 million | $2.2 million | $2.9 million |
| Diluted EPS | $0.09 | $0.11 | $0.11 | $0.14 |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $3.2 million | $4.9 million |
- Calculated operating margin was approximately 15.7% in Q2 2012 versus 25.2% in Q2 2011, and approximately 11.4% for the first six months versus 20.1% in the prior-year period.
- Calculated net margin attributable to common shareholders was approximately 14.1% in Q2 2012 versus 15.1% in Q2 2011, and approximately 9.6% for the first six months versus 11.6% in the prior-year period.
- Cash and cash equivalents were $52.3 million at June 30, 2012. Marketable securities were $18.2 million, bringing cash and marketable securities to approximately $70.5 million, broadly consistent with $70.6 million at December 31, 2011.
- Working capital was $79.1 million and the current ratio was 12.1x at June 30, 2012, compared with $80.7 million and 13.2x at December 31, 2011.
- Total liabilities were $12.2 million, including $4.4 million outstanding under the revolving line of credit. The company reported $5.6 million of additional availability under the line.
- Six-month cash flow was affected by $18.4 million of purchases of marketable securities. Financing cash outflows included $3.6 million for share repurchases and $0.5 million of net repayments on the line of credit.
Material Changes Versus the Prior Comparable Period
- Q2 revenue declined approximately 14%, and six-month revenue declined approximately 10%, primarily because Acetadote volume normalized after unusually strong 2011 sales associated with a shortage of oral acetylcysteine. Acetadote revenue fell approximately $2.4 million in Q2 and $3.6 million for the six-month period.
- Kristalose revenue was broadly stable in Q2 and increased for the six-month period, primarily due to higher average selling prices. Caldolor revenue increased as wholesaler reorders and market acceptance improved.
- Other revenue included approximately $0.2 million in Q2 and $0.7 million for the six months from the Harbin Gloria licensing arrangement.
- Six-month selling and marketing expense decreased 6% to approximately $10.5 million, while research and development expense increased 45% to approximately $3.0 million due to clinical studies, product candidates and FDA fees.
- Operating income declined substantially because of lower revenue and higher research and development spending, despite lower selling and marketing costs.
- Income tax expense declined to $0.5 million for the six months from $2.0 million in the prior-year period. The 2012 result included an approximately $0.5 million deferred tax benefit related to the stock-option exchange program and was also supported by approximately $57.1 million of net operating loss carryforwards.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management stated that cash on hand, internally generated cash flow and available credit were expected to be adequate to service existing debt, fund internal growth and finance capital expenditures. No specific revenue or earnings guidance was provided.
- The company entered into an exclusive China licensing agreement for Acetadote and Caldolor with Harbin Gloria. The agreement includes potential milestone payments of $0.7 million upon specified regulatory developments and $1.1 million upon regulatory approval for both products; no milestone revenue had been recognized through June 30, 2012.
- In April 2012, the company received a U.S. patent covering its new Acetadote formulation, scheduled to expire in May 2026. Multiple companies issued Paragraph IV certifications challenging the patent, and Cumberland filed infringement lawsuits. The company stated that the outcome could materially affect its financial condition and results of operations.
- The company filed a Citizen Petition requesting that the FDA refrain from approving acetylcysteine injection products containing EDTA. The availability of a statutory approval stay for certain patent litigation was uncertain.
- Inventory was $7.3 million at June 30, 2012, including a reserve of approximately $2.1 million primarily related to potential obsolescence or discontinuance of Caldolor inventory. Caldolor inventory had expiration dates extending through January 2015, and additional losses could result if sales are below projections.
- The company repurchased 491,123 shares for approximately $3.6 million during the first six months and amended its repurchase authorization to permit additional purchases of up to $10.0 million beyond prior repurchases.
- During Q2, 424,475 options were exchanged for 147,828 shares of restricted stock. The exchange generated an approximately $0.5 million deferred tax asset and had approximately $0.3 million of remaining unrecognized compensation cost.
- After quarter-end, the company expanded its research-facility lease and amended its Acetadote manufacturing agreement with Bayer Healthcare, extending the agreement to September 2013 and establishing monthly minimum purchase requirements.
Important Facts for Investors to Verify
- Monitor Acetadote volume, pricing, competitive entry and the status and outcome of the pending patent litigation.
- Assess whether Caldolor sales can support existing inventory levels and whether the approximately $2.1 million reserve is sufficient.
- Distinguish recurring operating performance from the 2012 tax benefit, licensing revenue and other unusual items.
- Verify the timing and conditions for Harbin Gloria regulatory milestones and any related future revenue.
- Review cash deployment into marketable securities, ongoing share repurchases, credit-line availability and variable-rate debt exposure.
- Evaluate the effect of increased research and development spending on future clinical, regulatory and commercialization objectives.