Cumberland Pharmaceuticals Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2013, filed November 6, 2013. Cumberland is a specialty pharmaceutical company focused on acquiring, developing and commercializing branded prescription products primarily for hospital acute care and gastroenterology markets. Its principal products were Acetadote, Kristalose and Caldolor; Hepatoren was a Phase II candidate.
Key Financial Metrics
| Metric | Three Months Ended Sept. 30, 2013 | Three Months Ended Sept. 30, 2012 | Nine Months Ended Sept. 30, 2013 | Nine Months Ended Sept. 30, 2012 |
|---|---|---|---|---|
| Net revenue | $6.5 million | $12.5 million | $23.9 million | $35.2 million |
| Operating income (loss) | $(1.5) million | $3.0 million | $(1.3) million | $5.6 million |
| Net income (loss) attributable to common shareholders | $(0.8) million | $1.9 million | $(0.6) million | $4.0 million |
| Diluted EPS | $(0.04) | $0.10 | $(0.03) | $0.20 |
| Operating cash flow | Not separately provided | Not separately provided | $0.9 million | $5.1 million |
Revenue declined approximately 47.9% year over year in the third quarter and 32.1% for the first nine months. Operating margins were approximately negative 23.2% and negative 5.6%, respectively, compared with approximately 23.8% and 15.8% in the comparable periods. Cost of products sold increased to 15.8% of revenue in the quarter and 13.8% year to date, versus 7.4% and 8.2% in the prior-year periods.
At September 30, 2013, cash and cash equivalents were $46.0 million, marketable securities were $19.2 million and total cash, cash equivalents and marketable securities were $65.2 million. Working capital was $72.9 million and the current ratio was 14.5. The company had $4.9 million outstanding under its revolving credit facility, with $5.1 million available, subject to borrowing conditions. The facility bears interest at LIBOR plus an applicable margin, stated as 2.2% at September 30, 2013, and the company was in compliance with its covenants.
Year-to-date investing cash outflows were $5.3 million, including $2.6 million of additions to intangible assets and net purchases of marketable securities. Financing cash outflows were $4.0 million, including $3.9 million for share repurchases. Cash decreased by $8.3 million during the first nine months. No off-balance-sheet arrangements were reported.
Material Changes Versus the Prior Comparable Period
- Acetadote revenue decreased by approximately $6.0 million in the third quarter and $11.8 million year to date, primarily because of generic competition. Acetadote revenue included $1.9 million in third-quarter and $7.0 million year-to-date sales of the authorized generic distributed by Perrigo.
- Caldolor revenue increased by approximately $0.2 million in the quarter and $0.9 million year to date, reflecting higher volume and continued market penetration.
- Kristalose revenue decreased by approximately $0.2 million in the quarter and $0.4 million year to date.
- Selling and marketing expense decreased 30.6% in the quarter and approximately $4.8 million year to date, primarily following a commercial strategy and sales-force realignment implemented in the fourth quarter of 2012.
- Research and development expense decreased 15.1% in the quarter and 8.1% year to date due to lower study costs.
- Amortization expense increased to $0.2 million in the quarter and $0.6 million year to date, primarily from capitalized patents and patent-defense costs.
- The company repurchased 828,551 shares for approximately $3.9 million during the first nine months, compared with 1,029,414 shares for approximately $6.8 million in the prior-year period.
- Shares outstanding declined to 18.2 million at September 30, 2013, from 18.9 million at December 31, 2012.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide quantitative revenue or earnings guidance. Management stated that internally generated cash flow and available credit were expected to be adequate to service existing debt, finance internal growth and fund capital expenditures, but cautioned that results are subject to product sales, access to capital, acquisitions and management of growth.
- Management continued to emphasize expansion of Caldolor, acquisition or licensing of additional branded or late-stage products, international partnerships and early-stage development through Cumberland Emerging Technologies.
- During 2013, the company entered multiple international commercialization agreements and recognized approximately $0.6 million of non-refundable upfront payments during the first half of the year. Up to $0.5 million of regulatory milestones and $3.7 million of sales milestones were available under certain new agreements, but no such milestones had been recognized as of September 30, 2013.
- Caldolor inventory represented most inventory on hand and had expiration dates beginning in the second quarter of 2014 through January 2015. The company had recorded approximately $2.5 million of potential obsolescence and discontinuance charges, primarily related to Caldolor, and expected an FDA decision by the end of January 2014 regarding possible expiration-date extensions.
- Acetadote patents were subject to challenges by multiple generic-drug manufacturers. A court granted summary judgment to the FDA on September 30, 2013, and courts dismissed the company’s suits against Sagent and InnoPharma on November 1, 2013. Cumberland stated that it was evaluating its legal options and would continue defending its intellectual property.
- On October 28, 2013, after the quarter ended, Cumberland announced an agreement with Pernix Therapeutics to promote Omeclamox-Pak in the United States.
- The company had approximately $49.2 million of unrecognized net operating loss carryforwards from the exercise of nonqualified stock options, expected to offset future income tax obligations when usable.
- Interest-rate risk was limited but present because the revolving facility had a variable rate. A one-percentage-point increase in rates was estimated to increase annual interest expense by less than $0.1 million.
Important Facts for Investors to Verify
- Whether Acetadote generic competition continues to reduce branded sales and margins, and the economic impact of the Perrigo authorized-generic arrangement.
- The status and potential outcomes of the remaining Acetadote patent litigation and any effect on market exclusivity.
- Whether Caldolor sales growth and FDA expiration-date relief are sufficient to avoid additional inventory-obsolescence charges.
- Progress toward regulatory approvals, milestones and royalties under the international licensing agreements.
- Operating cash-flow generation, continued share repurchases and compliance with the revolving-credit facility’s financial covenants.
- Commercial performance and investment requirements associated with the post-quarter Omeclamox-Pak promotion agreement.