Cumberland Pharmaceuticals Inc. — Q3 2017 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 in hospital acute care, gastroenterology and oncology supportive care. The filing covers the three and nine months ended September 30, 2017. The financial statements are unaudited.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net revenue | $11.2 million | $8.8 million | $29.5 million | $23.9 million |
| Operating income (loss) | $(0.8) million | $0.1 million | $(3.2) million | $(0.5) million |
| Net income (loss) attributable to common shareholders | $(0.7) million | $0.1 million | $(7.2) million | $(0.2) million |
| Net income (loss) per diluted share | $(0.05) | $0.01 | $(0.45) | $(0.01) |
| Cash flow from operations | Not separately reported for the quarter | $(0.1) million | $(0.3) million |
- Q3 revenue increased 27.4% year over year; nine-month revenue increased 23.2%.
- Cost of products sold was 19.3% of Q3 revenue versus 22.5% in the prior-year quarter, and 17.7% of nine-month revenue versus 18.2% in the prior-year period.
- Q3 operating margin was approximately negative 7.5%, compared with positive 1.5% in Q3 2016. The nine-month operating margin was approximately negative 10.8%, compared with negative 2.0% in the prior-year period.
- Selling and marketing expense increased $2.6 million in Q3 and $5.6 million for the first nine months, primarily due to additional royalties associated with higher product sales. Research and development expense increased $0.3 million in Q3 and $0.9 million year to date.
- The nine-month tax expense was $4.2 million, compared with a $0.2 million tax benefit in the prior-year period. The 2017 expense primarily reflected $1.0 million and $3.5 million additions to valuation allowances on deferred tax assets.
- At September 30, 2017, cash and cash equivalents were $42.0 million and marketable securities were $8.1 million, for total cash and marketable securities of $50.1 million, broadly unchanged from December 31, 2016.
- Working capital was $50.3 million and the current ratio was 4.2. The company reported $8.0 million of revolving debt and $4.0 million of remaining revolving credit availability.
- Total assets were $90.4 million, total liabilities were $25.4 million and total equity was $64.9 million at September 30, 2017.
Material changes versus the prior comparable period
- Totect generated $2.9 million of Q3 and nine-month revenue after U.S. distribution began in July 2017. Cardioxane contributed approximately $0.3 million in Q3 revenue.
- Ethyol revenue increased to $2.6 million in Q3 from $0.5 million and to $8.3 million for the first nine months from $0.5 million in the prior-year period.
- These gains were partly offset by lower revenue from Kristalose, Acetadote, Omeclamox-Pak and Caldolor. Nine-month Kristalose revenue declined $2.9 million, primarily due to lower volume, higher Medicaid rebates and higher wholesaler fees.
- The company adopted new share-based payment accounting guidance on January 1, 2017. The adoption resulted in a $1.1 million increase to retained earnings and recognition of a $1.1 million net non-current deferred tax asset. Subsequent valuation allowances resulted in all deferred tax assets being fully reserved.
- Cash increased $7.5 million during the first nine months, primarily from $6.6 million of investing cash inflow, including net marketable-securities proceeds, and $1.0 million of financing inflow. Operating activities used $0.1 million.
- The company repurchased 438,715 shares for approximately $2.9 million during the first nine months and 155,859 shares during Q3. Approximately $4.7 million remained available under the $10.0 million repurchase authorization at September 30, 2017.
Debt, liquidity, outlook and risks
- On July 31, 2017, Cumberland entered into a new three-year revolving credit agreement with Pinnacle Bank expiring July 31, 2020. The facility provides for an initial borrowing capacity of up to $12 million and potential capacity of up to $20 million subject to conditions. Borrowings bear interest based on LIBOR plus a 1.75% to 2.75% spread; the reported rate was 3.0% at September 30, 2017.
- The facility is secured by substantially all company assets and includes a Funded Debt Ratio covenant. Cumberland was compliant at quarter-end through use of the covenant cure provision.
- Management stated that internally generated cash flows and available borrowing capacity should be adequate to finance internal growth and capital expenditures. The filing does not provide formal revenue or earnings guidance.
- Management expects minimal income-tax payments during 2017 and beyond as available net operating loss carryforwards offset taxable income, although utilization depends on achieving taxable income.
- Totect benefited from a national dexrazoxane shortage, creating strong initial demand. Cardioxane was expected to be available only through the end of 2017 or until the shortage was alleviated, making related revenue potentially temporary.
- Key risks include product competition and generic entry, reliance on patent and regulatory protection, product sales and reimbursement assumptions, dependence on third-party manufacturers and distributors, clinical and regulatory uncertainty, acquisition and integration execution, and the need for additional capital if cash generation or credit availability is insufficient.
- On November 3, 2017, the company became aware of a Paragraph IV certification from Exela challenging five Acetadote patents. The company continues to defend its Acetadote intellectual property. The Federal Circuit had affirmed Cumberland’s favorable Mylan patent ruling in January 2017.
Important facts for investors to verify
- Whether Totect demand and Ethyol sales can offset continuing declines in established products, particularly Kristalose and Acetadote.
- The sustainability of revenue associated with the dexrazoxane shortage and the timing of Cardioxane discontinuation or normalization of supply.
- Compliance with the Pinnacle Bank Funded Debt Ratio covenant and remaining borrowing capacity under the new facility.
- The effect of the Exela Acetadote patent challenge and any future generic competition on Acetadote revenue.
- Whether operating cash flow turns consistently positive after increased selling, marketing and research spending.
- Progress, funding requirements and regulatory outcomes for the Boxaban, Vasculan, Portaban, Hepatoren and methotrexate programs.
- The company’s ability to realize approximately $44 million of federal net operating loss carryforwards and other tax attributes.