Cumberland Pharmaceuticals Inc. — 2019 Q1 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 reports unaudited results for the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
The company marketed eight FDA-approved products in the United States, including Acetadote, Caldolor, Kristalose, Omeclamox-Pak, Vaprisol, Ethyol, Totect and Vibativ. Vibativ was acquired in November 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenues | $11.9 million | $8.6 million | +$3.3 million, or 39% |
| Gross profit | $9.9 million | $7.1 million | +$2.8 million |
| Gross margin | 83.2% | 82.2% | +1.0 percentage point |
| Operating income (loss) | $(0.2) million | $(2.5) million | Improved by $2.3 million |
| Operating margin | (1.5%) | (28.6%) | Improved |
| Net income (loss) | $(0.04) million | $(2.4) million | Improved by $2.4 million |
| Net loss attributable to common shareholders | $(0.07) million | $(2.4) million | Improved by $2.3 million |
| Net cash from operating activities | $(0.4) million | $0.2 million | Declined by $0.6 million |
Reported diluted loss per share was presented as a dash for Q1 2019 and was $(0.15) for Q1 2018. Weighted-average diluted shares were 15.5 million in Q1 2019 versus 15.7 million in Q1 2018.
Revenue growth was led by Vibativ revenue of $2.1 million, higher Ethyol revenue of $0.8 million, and increases in Caldolor, Vaprisol, Kristalose, Omeclamox-Pak and other revenue. Acetadote revenue declined by $0.4 million because of generic competition, and Totect revenue declined by $0.3 million.
Cash, cash equivalents and marketable securities totaled $34.3 million at March 31, 2019, down from $36.2 million at December 31, 2018. Working capital was $30.0 million, and the current ratio was 2.1. The company had no remaining borrowing availability because the full $20.0 million revolving credit facility was drawn.
Total assets were $114.6 million and total liabilities were $59.4 million at March 31, 2019. The revolving credit balance was $20.0 million, with an interest rate of approximately 5.2% at quarter-end, based on LIBOR plus a contractual spread. Borrowings were secured by substantially all company assets.
Material changes versus the prior comparable period
- Revenue increased 39%, primarily reflecting the addition of Vibativ and stronger sales of several existing products.
- Cost of products sold increased $0.5 million, but improved product mix reduced cost of products sold to 16.8% of revenue from 17.8%.
- Selling and marketing expense increased $0.4 million, primarily from higher royalties tied to increased product sales.
- Research and development expense decreased $0.6 million because of lower variable spending on clinical initiatives.
- General and administrative expense increased $0.3 million, partly due to advisory, legal and professional fees related to the Vibativ acquisition.
- Amortization expense increased $0.4 million because of intangible assets acquired in the Vibativ transaction.
- Operating cash flow changed from $0.2 million provided to $0.4 million used, primarily because accounts receivable increased $2.1 million.
- The company repurchased 121,466 shares for approximately $0.7 million during the quarter under its $10 million repurchase program.
- The company adopted the new lease accounting standard on January 1, 2019, recording approximately $3.5 million of operating lease right-of-use assets and $3.6 million of lease liabilities at March 31, 2019.
Guidance, outlook, commentary, risks and unusual items
Management stated that existing working capital, internally generated cash flows and the revolving credit facility were expected to support internal growth, business development initiatives and capital expenditures for the foreseeable future. Management also stated that it expected to pay minimal income taxes through continued use of approximately $44 million of net operating loss carryforwards.
The company initiated a strategic review in March 2019 following several acquisitions and other business development transactions. It agreed for WinHealth Pharmaceuticals to assume responsibility for Acetadote and Caldolor in China, with potential milestone payments of $2 million and estimated future supply revenue of up to $290 million over ten years after product registration. It also agreed to return U.S. rights to Ethyol and Totect to Clinigen Group for $5 million payable over two years. These arrangements and their ultimate financial contribution remain subject to execution, regulatory approvals and market conditions.
The FDA accepted Cumberland’s methotrexate NDA for filing and set a September 2019 PDUFA action date. The FDA also approved a next-generation Caldolor injection product in January 2019.
Vibativ added $34.2 million of acquisition consideration, including a $9.2 million fair value estimate for contingent royalty consideration and $0.9 million of goodwill. The company paid $5.0 million related to the acquisition in early April 2019 and is obligated to pay royalties of up to 20% on future Vibativ net sales. The contingent consideration liability was $9.1 million at March 31, 2019 and is a Level 3 fair value measurement.
Key risks identified by management include dependence on product sales, generic competition, the availability and terms of additional debt or equity capital, the ability to acquire and integrate branded products, regulatory approvals, clinical development outcomes, management of growth, and the integration and commercialization of Vibativ. The filing states that there were no material changes to the risk factors in the 2018 Form 10-K and no legal proceedings were reported.
As a subsequent event, the company amended its Pinnacle Bank credit agreement on May 10, 2019. The amendment extended the facility through July 31, 2021 and modified certain financial covenant definitions and requirements. The company reported compliance with the Tangible Capital Ratio covenant as of March 31, 2019.
Important facts for investors to verify
- Whether Vibativ sales, inventory utilization and royalty obligations develop as projected, given the acquisition’s material effect on revenue, amortization and liquidity.
- The company’s ability to generate positive operating cash flow after the Q1 use of cash and the impact of accounts receivable and inventory levels.
- Remaining liquidity, covenant compliance and refinancing risk because the full $20 million revolving facility was drawn.
- The timing and outcome of the FDA’s September 2019 decision on the methotrexate product line.
- The financial and strategic effects of returning U.S. Ethyol and Totect rights and expanding the China partnership.
- Exposure to generic competition, particularly for Acetadote, and concentration in a limited portfolio of branded products.
- The valuation and payment timing of the $9.1 million contingent Vibativ consideration, including royalties of up to 20% of future net sales.
- Whether the $10 million share repurchase program remains appropriate while operating cash flow is negative and debt capacity is fully utilized.