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CPIX > SEC Filings for CPIX > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for CUMBERLAND PHARMACEUTICALS INC

Form 10-Q for CUMBERLAND PHARMACEUTICALS INC


2-Nov-2012

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains certain forward-looking statements which reflect management's current views of future events and operations. These statements involve certain risks and uncertainties, and actual results may differ materially from them. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that our actual results may differ significantly from the results we discuss in these forward looking statements. Some important factors which may cause results to differ from expectations include: availability of additional debt and equity capital required to finance the business model; market conditions at the time additional capital is required; our ability to continue to acquire branded products; product sales; and management of our growth and integration of our acquisitions. Other important factors that may cause actual results to differ materially from forward-looking statements are discussed in "Risk Factors" on pages 17 through 31, and "Special Note Regarding Forward-Looking Statements" on page 31 of our Annual Report on Form 10-K for the year ended December 31, 2011, as well as Part II, Item 1A, "Risk Factors," of this Form 10-Q. We do not undertake to publicly update or revise any of our forward-looking statements, even in the event that experience or future changes indicate that the anticipated results will not be realized. The following presentation of management's discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in this Form 10-Q.

OVERVIEW

Our Business

We are a growing specialty pharmaceutical company focused on the acquisition, development and commercialization of branded prescription products. Our primary specialty markets are hospital acute care and gastroenterology, which are characterized by concentrated physician bases that we believe can be penetrated effectively by relatively small, targeted sales forces. We are dedicated to providing innovative products that improve quality of care for patients.

Our marketed product portfolio includes Acetadote® (acetylcysteine) Injection for the treatment of acetaminophen poisoning, Caldolor® (ibuprofen) Injection, for the treatment for pain and fever, and Kristalose® (lactulose) for Oral Solution, a prescription laxative. In early 2011, we acquired the rights to a late-stage Phase II product candidate that we intend to develop under the brand name Hepatoren® (ifetroban) Injection for the treatment of hepatorenal syndrome. We promote our approved products through our hospital and field sales forces in the United States, which together comprised approximately 100 sales representatives and managers as of September 30, 2012.

We have both product development and commercial capabilities, and believe we can leverage our existing infrastructure to support our expected growth. Our management team consists of pharmaceutical industry veterans experienced in business development, product development, commercialization and finance. Our business development team identifies, evaluates and negotiates product acquisition, in-licensing and out-licensing opportunities. Our product development team develops proprietary product formulations, manages our clinical trials, prepares all regulatory submissions and manages our medical call center. Our products are manufactured by third parties, which are overseen and managed by our quality control and manufacturing group. Our marketing and sales professionals are responsible for our commercial activities, and we work closely with our third-party distribution partner to ensure availability and delivery of our products to our customers.

We have been profitable since 2004, with annual revenues funding our development and marketing programs and generating positive cash flow. In 2009, we completed an initial public offering of our common stock, and listed on the NASDAQ exchange.


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Growth Strategy

Our growth strategy involves maximizing the potential of our existing products while continuing to build a portfolio of new, differentiated products. Specifically, we expect to grow by executing the following plans:

• We market our products in the United States through comprehensive marketing and promotional campaigns to support each of our approved brands.

• We are working to bring our products to select international markets-with our first international launch occurring in 2010 with the introduction of Acetadote into the Australian market. We have since expanded into Canada, Korea and China.

• We seek opportunities to expand the use of our approved products into additional patient populations with new data and product indications. These initiatives include our own development work and our support of promising investigator-initiated studies at research institutions.

• We actively pursue opportunities to acquire rights to additional late-stage development product candidates as well as marketed products in our target medical specialties.

• We supplement the aforementioned strategies with the earlier-stage drug development activities of Cumberland Emerging Technologies, Inc., or CET, our majority-owned subsidiary. CET partners with university research centers to identify and cost-effectively develop promising early-stage product candidates, which we have the opportunity to commercialize. Hepatoren represents the first development candidate to emerge from CET as an addition to our portfolio.

We were incorporated in 1999 and have been headquartered in Nashville, Tennessee since inception. Our website address is www.cumberlandpharma.com. We make available through our website our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments, as well as other documents following their filing with the SEC. These filings are also made available to the public by the SEC at www.sec.gov.

Quarter Highlights and Recent Developments

Caldolor®

In September 2012, we announced the top-line results from a pediatric pain study evaluating the safety and analgesic efficacy of Caldolor® (ibuprofen) Injection in treating pain in tonsillectomy patients ranging from 6 to 16 years old.

When administered prior to surgery, Caldolor use was associated with a statistically significant reduction in the number of post-operative narcotic doses required in patients in the efficacy evaluable population. There were also consistent trends toward reduction in pain scores and the incidence of nausea and vomiting in patients receiving Caldolor. Importantly, no safety concerns were observed during this study.

We expect the results from this study, in combination with the ongoing work to evaluate the treatment of fever in children, will be used to pursue a pediatric indication for Caldolor.

Acetadote Patent Challenge Update

A new formulation of Acetadote (acetylcysteine) Injection was developed by us as part of a Phase IV commitment we made in response to a request by the Food and Drug Administration ("FDA") to evaluate the reduction of ethylene diamine tetraacetic acid ("EDTA") from the product's formulation. The new Acetadote formulation does not contain EDTA or any other chelating or stabilization agent and is free of preservatives. The new formulation was listed in the FDA Orange Book following its FDA approval in January 2011. In April 2012, the United States Patent and Trademark Office (the "USPTO") issued U.S. Patent number 8,148,356 (the "Acetadote Patent") which is assigned to us. The claims of the Acetadote Patent encompass the new Acetadote formulation and include composition of matter claims. Following its issuance, the Acetadote Patent was listed in the FDA Orange Book. The Acetadote Patent is scheduled to expire in May 2026 which time period includes a 270-day patent term adjustment granted by the USPTO. We also have additional patent applications relating to the uses of Acetadote which are pending with the USPTO.


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Following the issuance of the Acetadote Patent, we received separate Paragraph IV certification notices from InnoPharma, Inc., Paddock Laboratories, LLC and Mylan Institutional LLC challenging the Acetadote Patent on the basis of non-infringement and/or invalidity. On May 17, 2012, we responded to the Paragraph IV certification notices by filing three separate lawsuits for infringement of the Acetadote Patent. The first lawsuit was filed against Mylan Institutional LLC and Mylan Inc. in the United States District Court for the Northern District of Illinois, Eastern Division. The second lawsuit was filed against InnoPharma, Inc. in the United States District Court for the District of Delaware. The third lawsuit was also filed in the United States District Court for the District of Delaware against Paddock Laboratories, LLC and Perrigo Company. On May 20, 2012, we received a fourth Paragraph IV certification notice from Sagent Agila LLC challenging the Acetadote Patent. On June 26, 2012, we filed a lawsuit for infringement of the Acetadote Patent against Sagent Agila LLC and Sagent Pharmaceuticals, Inc. in the United States District Court for the District of Delaware. On July 9, 2012, we received a Paragraph IV certification notice from Perrigo Company. On August 9, 2012, we filed a lawsuit for infringement of the Acetadote Patent against Perrigo Company in the United States District Court for the Northern District of Illinois, Eastern Division. We intend to vigorously defend and protect our Acetadote product and related intellectual property rights.

By statute, where the Paragraph IV certification is to a patent timely listed before an Abbreviated New Drug Application ("ANDA") is filed, a company has 45 days to institute a patent infringement lawsuit during which period the FDA may not approve another application. In addition, such a lawsuit for patent infringement filed within such 45-day period may stay, or bar, the FDA from approving another product application for two and a half years or until a district court decision that is adverse to the asserted patents, whichever is earlier. On May 18, 2012, we requested the aforementioned bar or stay in connection with the filing of the three lawsuits on May 17, 2012. The aforementioned bar or stay may or may not be available to us with respect to the lawsuits.

On May 18, 2012, we also submitted a Citizen Petition to the FDA requesting that the FDA refrain from approving any applications for acetylcysteine injection that contain EDTA, based in part on the FDA's request that we evaluate the reduction or removal of EDTA from our original Acetadote formulation.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Please see a discussion of our critical accounting policies and significant judgments and estimates on pages 35 through 38 in "Management's Discussion and Analysis" of our Annual Report on Form 10-K for the year ended December 31, 2011.

Accounting Estimates and Judgments

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. We base our estimates on past experience and on other factors we deem reasonable given the circumstances. Past results help form the basis of our judgments about the carrying value of assets and liabilities that cannot be determined from other sources. Actual results could differ from these estimates. These estimates, judgments and assumptions are most critical with respect to our accounting for revenue recognition, inventories, fair value of marketable securities, provision for income taxes, stock-based compensation, research and development expenses and intangible assets.

Fair Value of Marketable Securities

We invest in variable rate demand notes and a portfolio of government-backed securities (including U.S. Treasuries, government-sponsored enterprise debentures and government-sponsored adjustable rate, mortgage-backed securities), in order to maximize our return on cash. We classify these investments as trading securities, and mark the investments to fair value at the end of each reporting period, with the adjustment being recognized in the statement of income as a component of interest income. These investments are generally valued using observable market prices by third-party pricing services, or are derived from such services' pricing models. The level of management judgment required in establishing fair value of financial instruments for which there is a quoted price in an active market is minimal. Similarly there is little subjectivity or judgment required for instruments valued using valuation models that are standard across the industry and where all parameter inputs are quoted in active markets. Inputs to the models may include, but are not limited to, reported trades, executable bid and ask prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security.


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RESULTS OF OPERATIONS

Three months ended September 30, 2012 compared to the three months ended September 30, 2011

Net revenues. Net revenues for the three months ended September 30, 2012 totaled approximately $12.5 million compared to $13.1 million over the same period in 2011. Net revenue for Acetadote decreased approximately $1.1 million due primarily to a decrease in sales volume, partially offset by an increase in the average selling price. The decrease in Acetadote volume was driven by increased sales volume in 2011 caused by a shortage of the oral form of competitive products. Caldolor net revenue increased $0.2 million due to an increase in sales volume as we continued to gain acceptance in our target market. Kristalose net revenue increased approximately $0.3 million due primarily to an increase in the average selling price offset by a decrease in volume.

Cost of products sold. As a percentage of net revenues, cost of products sold decreased from 10.3% for the three months ended September 30, 2011 to 7.4% for the same period in 2012. The decrease was primarily due to the recognition in 2011 of $0.5 million of inventory reserves for potential obsolescence. Excluding this adjustment, cost of products sold as a percentage of net revenues for the three months ended September 30, 2011 was 6.3%. On an adjusted basis, the increase in 2012 over 2011 was due to a change in the sales mix.

Selling and marketing. Selling and marketing expense for the three months ended September 30, 2012 totaled approximately $4.9 million, representing a decrease of approximately $0.1 million, or 3%, over the same period in 2011. The decrease was primarily due to (1) lower royalty expense due to our acquisition of the Kristalose brand during late 2011 and (2) lower hiring and consulting expenses due to the implementation of our new commercial strategy in 2012.

Research and development. Research and development expense for the three months ended September 30, 2012 totaled approximately $1.7 million, representing an increase of approximately $0.5 million, or 38%, over the same period in 2011. The increase was primarily due to (1) increased expenses associated with continuing clinical studies for our current products and product candidates,
(2) increased costs related to the expansion of our medical science liaison team and (3) increased expense related to our annual FDA fees.

General and administrative. General and administrative expense for the three months ended September 30, 2012 totaled approximately $1.9 million, representing a decrease of approximately $0.2 million, or 12%, over the same period in 2011. The decrease was primarily due to inventory donations made in 2011 for humanitarian needs.

Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Net revenues. Net revenues for the nine months ended September 30, 2012 totaled approximately $35.2 million, representing a decrease of approximately $3.0 million, or 8%, over the same period in 2011. The decrease in net revenues was primarily due to decreased Acetadote revenue of $4.7 million partially offset by increases of $0.5 million in revenue for each of Kristalose and Caldolor. The decrease in Acetadote revenue was primarily due to a decrease in volume partially offset by an increase in the average selling price. The decrease in Acetadote volume was driven by increased sales volume in 2011 caused by a shortage of the oral form of competitive products. The increase in Kristalose revenue was primarily due to an increase in the average selling price. The increase in Caldolor revenue was due to an increase in wholesaler reorders as we continue to gain acceptance in our target market.


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Other revenues increased approximately $0.7 million due to the recognition of approximately $0.7 million in revenue related to an out-licensing agreement with Harbin Gloria Pharmaceuticals Co. in the first quarter of 2012.

Cost of products sold. Cost of products sold as a percentage of net revenues decreased from 9.0% for the nine months ended September 30, 2011 to 8.2% for the same period in 2012. We recognized approximately $0.9 million of inventory reserves for potential obsolescence during the nine months ended September 30, 2011. Excluding this reserve, the increase in 2012 as compared to the adjusted percentage in 2011 was primarily due to a change in the sales mix between the periods.

Selling and marketing. Selling and marketing expense for the nine months ended September 30, 2012 totaled approximately $15.4 million, representing a decrease of approximately $0.9 million, or 5%, over the same period in 2011. The decrease was primarily due to (1) a decrease in royalty expense due to the Acetadote royalty agreement expiring in January 2011, (2) decreased marketing and advertising expense related to the implementation of our new commercial strategy in 2012 and (3) decreased freight expense for outgoing shipments due to improved pricing and lower sales volume.

Research and development. Research and development expense for the nine months ended September 30, 2012 totaled approximately $4.7 million, representing an increase of approximately $1.4 million, or 42%, over the same period in 2011. The increase was primarily due to (1) increased clinical studies expenses related to our current products and product candidates, (2) increased costs related to the annual FDA product and establishment fees for our products and
(3) increased costs related to the expansion of our medical science liaison team.

General and administrative. General and administrative expense decreased $0.2 million, or 3%, for the nine months ended September 30, 2012 as compared to the same period in 2011. The decrease was primarily due to a decrease in charitable donations of inventory for humanitarian needs partially offset by increased legal and printing costs associated with our stock option exchange program during the second quarter of 2012.

Interest income. Interest income for the nine months ended September 30, 2012 totaled approximately $0.3 million as compared to $0.1 million for the same period in 2011. The increase in 2012 was primarily due to investing a portion of our cash balances in longer duration marketable securities beginning in the first quarter of 2012.

Interest expense. Interest expense for the nine months ended September 30, 2012 totaled approximately $0.05 million as compared to approximately $0.3 million in 2011. The decrease was primarily due to the early payoff of our term debt in 2011.

Income tax expense. Income tax expense for the nine months ended September 30, 2012 totaled approximately $1.8 million, representing a decrease of approximately $1.5 million, over the same period in 2011. As a percentage of net income before income taxes, income tax expense decreased from 40.7% for the nine months ended September 30, 2011 to 30.4% for the same period in 2012. The decrease was primarily due to the recognition of a deferred tax benefit associated with the exchange of certain incentive stock options during the second quarter of 2012.

As of September 30, 2012, we have approximately $55.8 million of unrecognized net operating loss carryforwards resulting from the exercise of nonqualified stock options in 2009 that will be used to significantly offset future income tax obligations. These net operating losses will be recognized in the consolidated financial statements when they reduce income taxes currently payable.


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LIQUIDITY AND CAPITAL RESOURCES

Working Capital

Our primary sources of liquidity are cash flows provided by operations, our availability under our line of credit and the cash proceeds from our initial public offering of common stock that was completed in August 2009. For the nine months ended September 30, 2012, we generated $5.1 million in cash flow from operations compared to $7.7 million for the same period in 2011. We believe that our internally generated cash flows, amounts available under our credit facilities and cash on hand will be adequate to service existing debt, finance internal growth and fund capital expenditures.

In 2012, we began investing a portion of our cash reserves in variable rate demand notes and a portfolio of government-backed securities (including U.S. Treasuries, government-sponsored enterprise debentures and government-sponsored adjustable rate, mortgage-backed securities). The variable rate demand notes, or VRDNs, are generally issued by municipal governments and are backed by a financial institution letter of credit. We hold a put right on the VRDNs, which allows us to liquidate the investment relatively quickly (less than one week). The government-backed securities have an active secondary market that generally provides for liquidity in less than one week. At September 30, 2012, we had a total of approximately $18.6 million invested in marketable securities.

As of September 30, 2012 and December 31, 2011, our cash and cash equivalents, including marketable securities, totaled $69.4 million and $70.6 million, respectively.

At September 30, 2012 and December 31, 2011, our working capital (current assets minus current liabilities) was $78.1 million and $80.7 million, respectively, and our current ratio (current assets to current liabilities) was 10.0x and 13.2x, respectively. As of September 30, 2012, we had an additional $5.6 million available to us on our line of credit.

The following table summarizes our net changes in cash and cash equivalents for the nine months ended September 30, 2012 and 2011:

                                                              Nine Months Ended
                                                                September 30,
                                                             2012           2011
                                                               (in thousands)
   Net cash provided by (used in):
   Operating activities                                    $   5,147      $  7,692
   Investing activities                                      (20,375 )        (382 )
   Financing activities                                       (4,570 )      (2,129 )

   Net (decrease) increase cash and cash equivalents (1)   $ (19,798 )    $  5,181

(1) The sum of the individual amounts may not agree due to rounding.

The net decrease in cash and cash equivalents for the nine months ended September 30, 2012 was primarily due to the investment of our cash reserves in certain government and government-backed securities, as previously noted. Our cash flow from operating activities was primarily due to the net income for the period supplemented by cash inflows from our receivables. We continue to repurchase shares of our common stock under our Rule 10(b)-5 Plan.

The net increase in cash and cash equivalents of $5.2 million for the nine months ended September 30, 2011 was primarily due to cash generated from our operating activities. Net income for the period was $4.7 million. In addition, our accounts payable and other current liabilities, net of the excess tax benefit generated by the exercise of nonqualified options in 2011, increased by $1.3 million from December 31, 2010, which had a favorable impact on our operating cash flows. In addition, our receivables decreased $0.6 million due to the timing of cash receipts from customers. Contributing to our increase in cash was the cash proceeds received from (1) the exercise of stock options during 2011 and (2) additional funding from our line of credit for working capital needs. We paid in full our outstanding term debt balance during 2011, with scheduled principal payments and the early payoff totaling $5.3 million for the nine months ended September 30, 2011.


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OFF-BALANCE SHEET ARRANGEMENTS

During the nine months ended September 30, 2012 and 2011, we did not engage in any off-balance sheet arrangements.

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