Cumberland Pharmaceuticals Inc. — 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 filing covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenues | $7.74 million | $8.69 million | Down $0.95 million, or 10.9% |
| Cost of products sold | $1.22 million | $1.16 million | Up $0.06 million |
| Gross margin | 84.2% | 86.6% | Down 2.4 percentage points |
| Operating income (loss) | $(0.50) million | $0.004 million | Down $0.50 million |
| Operating margin | (6.5%) | 0.05% | Lower |
| Net income (loss) attributable to common shareholders | $(0.25) million | $0.05 million | Down $0.30 million |
| Diluted EPS | $(0.02) | Nominally zero | Lower |
| Cash flow from operations | $0.60 million | $2.03 million | Down $1.44 million |
Product revenue was led by Kristalose at $3.62 million, Acetadote at $1.84 million, and Caldolor at $1.07 million. Acetadote revenue increased $0.29 million, including $1.2 million of Authorized Generic revenue versus $0.5 million in the prior-year quarter. Kristalose revenue declined $0.48 million, Vaprisol declined $0.66 million, and Caldolor declined $0.12 million.
At March 31, 2016, cash and cash equivalents were $36.44 million and marketable securities were $14.87 million, for total cash and liquid investments of $51.31 million. Working capital was $53.78 million and the current ratio was 5.8. The company had $1.70 million outstanding under its revolving credit facility and reported $10.30 million of remaining availability. The facility expires June 26, 2017, is secured by substantially all company assets, and carries an interest rate of approximately 1.4% at quarter-end. The company was in compliance with its covenants.
Cash decreased $1.76 million during the quarter. Investing activities used $0.95 million, including $0.62 million for intangible assets, while financing activities used $1.41 million, including $0.98 million for share repurchases. The company repurchased 212,948 shares during the quarter. No off-balance-sheet arrangements were reported.
Material Changes Versus the Prior Comparable Period
- Revenue declined 10.9%, primarily because of lower Vaprisol and Kristalose sales. Vaprisol revenue fell 64.1% due mainly to lower sales volume.
- Cost of products sold as a percentage of revenue increased to 15.8% from 13.4%, reflecting a less favorable product mix.
- Operating results moved from near break-even to a $0.50 million operating loss.
- Research and development expense fell $1.15 million, primarily because Q1 2015 included a $1.2 million FDA filing fee for the Caldolor pediatric supplemental application.
- General and administrative expense increased $0.43 million, driven principally by higher legal and professional fees and the absence of a prior-year reduction in contingent consideration.
- Operating cash flow declined to $0.60 million from $2.03 million, partly due to unfavorable working-capital changes and lower earnings.
- Share repurchases decreased to approximately $1.0 million from $1.7 million in the prior-year quarter.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management stated that internally generated cash flow and available borrowing capacity are expected to be adequate to finance internal growth and capital expenditures. The company expects minimal income taxes in 2016 because of approximately $43.0 million of unrecognized net operating loss carryforwards associated with prior nonqualified stock-option exercises.
Growth initiatives include expanding the commercial potential of existing brands, pursuing product acquisitions and late-stage candidates, developing the CET pipeline, expanding international partnerships, and increasing promotional coverage through the Piramal co-promotion agreement for Caldolor and Vaprisol.
- Caldolor pediatric promotion began in March 2016 following FDA approval for children six months and older, with three years of marketing exclusivity through November 20, 2018.
- A new Caldolor patent was issued in March 2016 and is scheduled to expire in September 2029. Two new commercial manufacturers were secured for 2016 supply.
- In April 2016, the FDA cleared the Phase II IND for Vasculan, an ifetroban program for systemic sclerosis. In May 2016, the company announced a U.S. commercialization agreement for Ethyol; these events occurred after the reporting quarter.
- Acetadote remains subject to significant patent and generic-competition risk. Cumberland prevailed against Mylan in patent litigation and arbitration, but Mylan appealed the district court decision. The arbitration injunction extends through April 30, 2018, while the relevant patent injunction extends to the patent’s scheduled August 2025 expiration.
- Inventory obsolescence and discontinuance reserves, primarily related to Caldolor, totaled approximately $2.8 million at March 31, 2016.
- Marketable securities are primarily government-backed securities and variable-rate demand notes. A 1% decrease in their fair value would reduce pretax income by approximately $0.1 million.
- Management identified revenue recognition, marketable-security valuation, inventory valuation, income taxes, share-based compensation, research and development costs, and intangible assets as significant areas requiring estimates and judgment.
Facts Investors Should Verify
- Whether Vaprisol and Kristalose sales stabilize or continue to decline, and whether Caldolor pediatric expansion offsets weaker quarterly demand.
- The outcome and timing of Mylan’s appeal and the effect of generic competition on Acetadote and Authorized Generic revenue.
- Execution of the 2016 Caldolor manufacturing transition and availability of replacement inventory.
- Progress, costs, and clinical results for Vasculan, Hepatoren, Boxaban, and other pipeline programs.
- Whether operating cash flow remains positive while the company funds product development, intangible-asset additions, and share repurchases.
- Availability and covenant compliance under the revolving credit facility before its June 2017 expiration.
- The recoverability of Caldolor inventory and the adequacy of related obsolescence reserves.