Cumberland Pharmaceuticals Inc. — Q2 2014 Form 10-Q Summary
Business Context and Reporting Period
Cumberland is a specialty pharmaceutical company focused on acquiring, developing and commercializing branded prescription products, primarily in hospital acute care and gastroenterology. The filing covers the three and six months ended June 30, 2014; financial statements are unaudited.
The product portfolio included Acetadote, Caldolor, Kristalose, Omeclamox-Pak, Vaprisol and the Phase II Hepatoren candidate. The company began commercializing Omeclamox-Pak in 2014 and acquired Vaprisol rights in February 2014.
Financial Performance and Liquidity
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Net revenue | $9.75 million | $7.08 million | $17.84 million | $17.34 million |
| Operating income | $1.22 million | $(1.14) million | $1.62 million | $0.19 million |
| Net income attributable to common shareholders | $0.72 million | $(0.64) million | $1.01 million | $0.22 million |
| Diluted EPS | $0.04 | $(0.03) | $0.06 | $0.01 |
| Operating margin | 12.5% | (16.1%) | 9.1% | 1.1% |
| Net margin attributable to common shareholders | 7.4% | (9.0%) | 5.7% | 1.2% |
- Q2 product mix improved gross margin: cost of products sold was 13.3% of revenue versus 16.3% in the prior-year quarter. Six-month cost of products sold was 13.2%, broadly consistent with 13.1% in 2013.
- Q2 selling and marketing expense increased to $3.93 million from $3.54 million, primarily due to Omeclamox-Pak royalties and promotional activity.
- Q2 research and development expense declined to $0.86 million from $1.39 million; six-month expense declined to $1.69 million from $2.84 million following completion of Caldolor clinical studies.
- Cash flow from operations was $1.82 million for the first six months, compared with $1.79 million in the prior-year period.
- Investing cash outflow was $3.77 million, including the $2.0 million Vaprisol acquisition payment, $0.73 million of intangible additions and a net $0.99 million increase in marketable securities.
- Cash and cash equivalents were $39.05 million at June 30, 2014, compared with $40.87 million at December 31, 2013. Marketable securities were $14.83 million, producing total cash, cash equivalents and marketable securities of $53.88 million.
- Working capital was $58.77 million and the current ratio was 6.0x. The decrease from 9.1x at year-end primarily reflects higher current liabilities.
- The company had no borrowings under its revolving credit facility. A new facility provides initial availability of $12 million, with potential capacity up to $20 million, through June 2017. The facility is secured by substantially all company assets and carries LIBOR-based pricing plus a 1.0% to 2.85% spread.
- The company reported compliance with all debt covenants at June 30, 2014.
Material Changes Versus the Prior Comparable Period
- Q2 revenue increased 37.7%, driven by Kristalose, which increased $1.52 million; new Omeclamox-Pak revenue of $1.34 million; and new Vaprisol revenue of $1.07 million.
- Six-month revenue increased only 2.9% because Acetadote revenue declined $5.61 million, substantially offsetting growth in Kristalose, Omeclamox-Pak and Vaprisol.
- Acetadote sales were pressured by generic competition. Authorized Generic revenue distributed by Perrigo declined to $1.8 million in Q2 from $2.1 million and to $3.2 million for the first six months from $5.0 million.
- Kristalose revenue benefited from a first-quarter price increase and patient affordability initiatives; Q2 revenue increased 74.4% year over year.
- The company repurchased 340,436 shares for approximately $1.6 million during the first six months, compared with 676,551 shares for approximately $3.2 million in the prior-year period. Approximately $4.02 million remained available under the repurchase authorization at June 30.
- In April 2014, Gloria invested approximately $1.0 million in Cumberland Emerging Technologies. Cumberland also contributed $1.0 million in cash and forgave $2.4 million of CET loans; its ownership declined from 85% to 80%.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific revenue, earnings or other quantitative financial guidance. Management stated that internally generated cash flow and available credit were expected to fund existing debt service, internal growth and capital expenditures.
- Management’s strategy is to maximize existing brands, acquire additional marketed or late-stage products, expand international partnerships and develop early-stage candidates through CET.
- Vaprisol generated $1.1 million of Q2 revenue and $1.4 million for the first six months following its March 2014 launch; a contingent milestone payment of up to $2.0 million may be due based on first-year sales.
- Omeclamox-Pak is subject to additional milestones totaling $4.0 million and tiered royalties to Pernix ranging from 15% to 20% of gross profits, along with other promotional royalties.
- Acetadote patent validity, infringement and exclusivity remain material risks. The company is defending multiple patent challenges and has filed arbitration against Mylan alleging breaches of manufacturing and supply agreements, seeking damages or injunctive relief through April 2016.
- Loss of Acetadote patent protection or additional generic competition could reduce sales, require price reductions or increase marketing costs.
- Inventory included approximately $3.4 million of cumulative potential obsolescence and discontinuance charges, primarily related to Caldolor. Additional charges could result if future sales are below projections.
- The company held approximately $42.7 million of unrecognized net operating loss carryforwards arising from employee option exercises and expected these benefits to significantly offset future income tax obligations. Q2 income tax expense was $0.52 million, compared with a $0.46 million benefit in the prior-year quarter.
- Marketable securities were primarily U.S. government-backed instruments and municipal variable-rate demand notes. Management estimated that a 1% decline in their fair value would reduce pretax income by approximately $0.1 million.
- The company reported no off-balance-sheet arrangements and considered disclosure controls effective.
Important Facts for Investors to Verify
- Whether growth from Kristalose, Omeclamox-Pak and Vaprisol can offset continued Acetadote erosion from generic competition.
- The commercial performance of Vaprisol and any resulting contingent milestone payment.
- The status and potential financial impact of Acetadote patent litigation and the Mylan arbitration.
- Future inventory-obsolescence exposure, particularly for Caldolor.
- Compliance with the new revolving credit facility’s financial covenants and the cost of any future borrowings.
- The sustainability of reported profitability after lower research and development spending and the impact of promotional and royalty costs for newer products.
- Use and availability of the approximately $42.7 million tax carryforwards and the company’s resulting future cash tax obligations.