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CPIX > SEC Filings for CPIX > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for CUMBERLAND PHARMACEUTICALS INC


8-May-2013

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 32, and "Special Note Regarding Forward-Looking Statements" on page 32 of our Annual Report on Form 10-K for the year ended December 31, 2012. 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 included in this Form 10-Q.
OVERVIEW
Our Business
Cumberland Pharmaceuticals Inc. ("Cumberland," the "Company," or as used in the context of "we," "us," or "our"), is a specialty pharmaceutical company focused on the acquisition, development and commercialization of branded prescription products. Our primary target markets are hospital acute care and gastroenterology. These markets are characterized by relatively concentrated prescriber bases that we believe can be penetrated effectively by relatively small, targeted sales forces. Cumberland is dedicated to providing innovative products that improve quality of care for patients and address poorly met medical needs.
Our product portfolio includes Acetadote® (acetylcysteine) Injection for the treatment of acetaminophen poisoning, Caldolor® (ibuprofen) Injection, the first injectable treatment for pain and fever, Kristalose® (lactulose) for Oral Solution, a prescription laxative, and Hepatoren®(ifetroban) Injection, a Phase II candidate for the treatment of critically ill hospitalized patients suffering from hepatorenal syndrome (HRS).We market and sell our approved products through our hospital and field sales forces in the United States, which together comprised more than 65 sales representatives and managers as of March 31, 2013. 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, manufacturing, sales, marketing, 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 quality and manufacturing professionals oversee the manufacture of our products. 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.
We have been profitable since 2004, generating sufficient cash flows to fund our development and marketing programs. In 2009, we completed an initial public offering of our common stock to help facilitate our further growth. 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:
?Continue to build a high-performance sales organization to address our target markets. We believe our commercial infrastructure can help to maximize prescription volume and product sales. We currently utilize two distinct sales teams to address our primary target markets: a hospital sales force for the acute care market and a field sales force for the gastroenterology market. ?Expand our product portfolio by acquiring rights to additional products and late stage product candidates. In addition to our product development activities, we are also seeking to acquire products or late-stage development product candidates to continue to build a portfolio of complementary products. We focus on under-promoted, FDA-approved drugs as well as late-stage development products that address poorly met medical needs, which we believe helps mitigate our exposure to risk, cost and time associated with drug discovery and research. We plan to continue to target products that are competitively


differentiated, have valuable trademarks or other intellectual property, and allow us to leverage our existing infrastructure. We also plan to explore opportunities to seek approval for new uses of existing pharmaceutical products. ?Expand our global presence through select international partnerships. We have established our own commercial capabilities, including a sales organization to cover the U.S. market for our products. We are also building a network of select international partners to register our products and make them available to patients in their countries.
?Develop a pipeline of early-stage products through Cumberland Emerging Technologies, or CET. In order to build our product pipeline, we are supplementing our acquisition and late-stage development activities with the early-stage drug development activities of CET, our majority-owned subsidiary. CET partners with universities and other research organizations to develop promising, early-stage product candidates, and Cumberland has the opportunity to negotiate rights to further develop and commercialize them.
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® Registry Studies
In February 2013, we announced the top-line results from two registry studies evaluating the safety and efficacy of Caldolor® (ibuprofen) Injection administered over a shortened infusion time in treating pain and fever in adult patients. The studies involved 450 patients receiving Caldolor at 34 leading medical centers throughout the United States.

The first of two registry studies was a phase IV multi-center, open-label surveillance clinical study to assess the safety and efficacy of ibuprofen administered intravenously over five to ten minutes to adult patients in the hospital setting with temperature fever (>101ºF) and/or pain (visual analog scale (VAS) assessment >3). Eligible patients were enrolled to receive one of two dose strengths (400 mg for treatment of fever, 800 mg for treatment of pain) of intravenous ibuprofen for up to a 24-hour dosing period. One hundred fifty patients from 13 clinical sites were enrolled in this study. Intravenous ibuprofen reduced fever and pain and the shortened infusion time was well tolerated.

The second of two registry studies was a phase IV multi-center, open-label surveillance clinical study to assess the safety of ibuprofen administered intravenously over five to ten minutes to adult hospitalized patients undergoing surgical procedures. Eligible patients were enrolled to receive 800 mg intravenous ibuprofen administered at induction of anesthesia and could continue Caldolor therapy for up to 24 hours. Three hundred patients from 21 clinical sites were enrolled in this study. The shortened infusion time was well tolerated.

A comparison study of Caldolor and a competitor product, ketorolac, was recently completed through The Ohio State University Medical Center. The study enrolled fifty-one patients and the results indicate, compared to patients receiving ketorolac, patients receiving intravenous ibuprofen experienced less postoperative pain prior to discharge. Patients receiving Caldolor also needed fewer narcotics and were less likely to require narcotics prior to discharge. This data supports the benefits of using Caldolor in a pre-emptive model of multimodal analgesia.
We expect the results from this study, in combination with the ongoing work to evaluate the treatment of adult medical procedures will be used to pursue additional adult indications for Caldolor. Acetadote Clinical Study
The safety and efficacy of a new formulation of Acetadote has been under investigation in a multi-center, double-blind, randomized controlled study. We have terminated this study due to lack of enrollment. Acetadote Patent Challenge Update
We developed a new formulation of Acetadote (acetylcysteine) Injection as part of a Phase IV commitment in response to a request by the Food and Drug Administration ("FDA"). In April 2012, the United States Patent and Trademark Office (the "USPTO") issued U.S. Patent number 8,148,356 (the "356 Acetadote Patent") which is assigned to us. The claims of the 356 Acetadote Patent encompass the Acetadote formulation and include composition of matter claims. Following its issuance, the 356 Acetadote Patent was listed in the FDA Orange Book. The 356 Acetadote Patent is scheduled to expire in May 2026 which time period includes a 270-day patent term adjustment granted by the USPTO. Following the issuance of the 356 Acetadote Patent, we received separate Paragraph IV certification notices from InnoPharma, Inc., Paddock Laboratories, LLC, Mylan Institutional LLC, Sagent Agila LLC and Perrigo Company challenging the 356


Acetadote Patent on the basis of non-infringement and/or invalidity. We responded by filing five separate infringement lawsuits to contest each of the challenges.
On November 12, 2012, we entered into a settlement agreement with Paddock Laboratories, LLC and Perrigo Company to resolve the challenges and the pending litigation with those two companies. The remaining infringement suits are currently pending.
On November 13, 2012, we brought suit against the FDA contesting the FDA's decision to approve the Innopharma Inc. generic. We intend to continue to vigorously defend and protect our Acetadote product and related intellectual property rights.
On March 19, 2013, the USPTO issued U.S. Patent number 8,399,445 (the "445 Acetadote Patent") which is also assigned to us. The claims of the 445 Acetadote Patent encompass the use of the 200 mg/ml Acetadote formulation to treat patients with acetaminophen overdose. On April 8, 2013 the 445 Acetadote Patent was listed in the FDA Orange Book. The 445 Acetadote Patent is scheduled to expire in August 2025.
We also have additional patent applications relating to Acetadote which are pending with the USPTO.
International Licensing Agreements
During 2013, we entered into three separate agreements with international partners for commercialization of certain of our products into additional international territories. One of the three agreements is with an India-based Company that will register and commercialize Caldolor® (ibuprofen) Injection in India and surrounding territories. Another agreement is with an Indonesia-based Company that will register and commercialize Caldolor throughout Indonesia. A third agreement is with a Qatar-based Company that will register and commercialize Caldolor, Acetadote® (acetylcysteine) Injection and Kristalose® (lactulose) within the greater Arabian Peninsula market. Each of the international partners has expertise in registering and commercializing products in their respective markets. We recognized approximately $0.4 million as other revenue in the condensed consolidated statement of income during the first quarter of 2013 upon completion of the agreements and the transfer of certain intellectual property, including product dossiers, to the licensees. The agreements entered into during 2013 provide that each of the partners are responsible for seeking regulatory approvals for the products, and following approvals, will handle ongoing distribution and sales in the respective international territories. We maintain responsibility for the intellectual property, product formulations, development and manufacturing, and will provide finished product for sale. Under the licensing agreements we are entitled to receive additional milestone payments upon the achievement of defined regulatory approvals and sales milestones.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES Please see a discussion of our critical accounting policies and significant judgments and estimates on pages 38 through 41 in "Management's Discussion and Analysis" of our Annual Report on Form 10-K for the year ended December 31, 2012.
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, fair value of marketable securities, inventories, provision for income taxes, share-based compensation, research and development expenses and intangible assets.

RESULTS OF OPERATIONS
Three Months Ended March 31, 2013 Compared to the Three Months ended March 31, 2012
Net revenues. Net revenues for the three months ended March 31, 2013 and March 31, 2012 remained constant at approximately $10.3 million for both periods. The total net revenues were impacted by decreases in Acetadote product revenue of $0.1 million and Kristalose product revenue of $0.1 million with an offsetting increase in Caldolor product revenue of $0.3 million. The increase in Caldolor revenue was primarily due to increased volume associated with continued success in penetrating our target market. We have continued to focus more of our sales and marketing resources to driving pull-through use of Caldolor in facilities stocking the product.


The $0.1 million decrease in Acetadote net revenue is driven by a decrease in sales volume of the branded Acetadote product, partially offset by the impact of increases in the average selling price. In 2013, Acetadote product revenue includes $3.0 million for our share of revenue from sales of the authorized generic distributed by Perrigo.
We recognized $0.4 million and $0.5 million in 2013 and 2012, respectively, of other revenue as the result of upfront payments we received in connection with out-licensing agreements with international commercial partners.
Cost of products sold. As a percentage of net revenues, cost of products sold increased to 10.8% during the three months ended March 31, 2013 compared to 8.3% during the three months ended March 31, 2012. The increase in costs of sales as a percentage of revenue was attributable to a change in the sales mix. Selling and marketing. Selling and marketing expense for the three months ended March 31, 2013 totaled approximately $3.7 million, compared to $5.0 million in 2012, representing a decrease of approximately $1.3 million, or 26.2%, over the three months ended March 31, 2012. The decrease was driven by $1.5 million in decreased salaries, benefits and selling expenses. These reductions were primarily a result of our new commercial strategy and sales force realignment in 2012. These cost decreases were offset by a $0.3 million increase in meeting costs, marketing samples and printed materials.
General and administrative. General and administrative expense for the three months ended March 31, 2013 totaled approximately $2.6 million, representing an increase of approximately $0.3 million, or 13.7%, over the $2.3 million incurred in the three months ended March 31, 2012. The increase was primarily due to accounting and legal fees as well as inventory donations made in 2013 for humanitarian needs.
Interest income. Interest income for the three months ended March 31, 2013 totaled approximately $0.09 million as compared to approximately $0.07 million for the same period in 2012. The increase in 2013 was primarily due to investing a portion of our cash balances in longer duration marketable securities for the entire period during 2013 compared to only a portion of the first quarter of 2012.

Interest expense. Interest expense for the three months ended March 31, 2013 totaled approximately $0.018 million as compared to approximately $0.022 million in 2011. The decrease was primarily due to a lower average outstanding balance on our revolving line of credit during 2013 compared to 2012.

Income tax expense. Income tax expense for the three months ended March 31, 2013 totaled approximately $0.6 million, representing a decrease of approximately $0.3 million, over the same period in 2012. As a percentage of net income before income taxes, income tax expense decreased from 40.5% for the three months ended March 31, 2012 to 39.9% for the three months ended March 31, 2013. The decrease in tax rate was primarily due to the reinstatement of the U.S. research and development tax credit during 2013.

As of March 31, 2013, we have approximately $48.1 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 benefits will be recognized in the year in which they are able to reduce current income taxes payable.

LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Our primary sources of liquidity are cash flows provided by our 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 three months ended March 31, 2013 and 2012, we generated $1.7 million and $2.6 million in cash flow from operations, respectively. We believe that our internally generated cash flows and amounts available under our line of credit will be adequate to service existing debt, finance internal growth and fund capital expenditures.
During 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 investments 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 March 31, 2013 and December 31, 2012, we had a total of approximately $19.0 million and $16.7 million invested in marketable securities.
As of March 31, 2013 and December 31, 2012, our cash and cash equivalents, including marketable securities, totaled $70.2 million and $71.0 million, respectively. Our working capital (current assets minus current liabilities) was $77.8 million and $79.2


million, respectively, and our current ratio (current assets to current liabilities) was 10.4x and 10.8x, respectively. As of March 31, 2013, we also had approximately $5.6 million available on our line of credit.
The following table summarizes our net changes in cash and cash equivalents for the three months ended March 31, 2013 and 2012:

                                                 Three Months Ended
                                                     March 31,
                                                 2013         2012
                                                   (in thousands)
Net cash provided by (used in):
Operating activities                          $  1,671     $   2,611
Investing activities                            (3,305 )     (16,206 )
Financing activities                            (1,505 )      (1,360 )
Net decrease in cash and cash equivalents (1) $ (3,139 )   $ (14,955 )

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

The net decrease in cash and cash equivalents for three months ended March 31, 2013 was attributable to the net investment of $2.3 million of our cash reserves in certain government and government-backed securities, as previously noted. We continue to repurchase shares of our common stock, totaling $1.9 million during the period. These decreases were offset by $0.8 million in net income. The net decrease in cash and cash equivalents for three months ended March 31, 2012 was attributable to the investment of $16.0 million of our cash reserves in certain government and government-backed securities, as previously noted. We continued to repurchase shares of our common stock, totaling $2.3 million during the period. These decreases were offset by $0.4 million in net income.

OFF-BALANCE SHEET ARRANGEMENTS
During the three months ended March 31, 2013 and 2012, we did not engage in any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosure about Market Risk Interest Rate Risk
We are exposed to market risk related to changes in interest rates on our revolving credit facility. We do not utilize derivative financial instruments or other market risk-sensitive instruments to manage exposure to interest rate changes. The main objective of our cash investment activities is to preserve principal while maximizing interest income through low-risk investments. The interest rate related to borrowings under our revolving credit facility is a variable rate of LIBOR plus an Applicable Margin, as defined in the debt agreement (2.2% at March 31, 2013). As of March 31, 2013, we had outstanding borrowings of approximately $4.4 million under our revolving credit facility. If interest rates increased by 1.0%, our annual interest expense on our borrowings would increase by less than $0.1 million. Exchange Rate Risk
While we operate primarily in the United States, some of our research and development is performed abroad. As of March 31, 2013, our outstanding payables denominated in a foreign currency were less than $0.1 million.
Currently, we do not utilize financial instruments to hedge exposure to foreign currency fluctuations. We believe our exposure to foreign currency fluctuation is minimal as our purchases in foreign currency have a maximum exposure of 30 days based on invoice terms. Foreign currency exchange gains and losses were not significant for the three months ended March 31, 2013 and 2012. Neither a 10% increase nor decrease from current exchange rates would have a significant effect on our operating results or financial condition. Item 4. Controls and Procedures
Our principal executive and principal financial officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2013. Based on that evaluation, our disclosure controls and procedures are considered effective to ensure that material information relating to us and our consolidated subsidiaries is made known to officers within these entities in order to allow for timely decisions regarding required disclosure.


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