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CPIX > SEC Filings for CPIX > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for CUMBERLAND PHARMACEUTICALS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CUMBERLAND PHARMACEUTICALS INC


9-Aug-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, for the 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 61 sales representatives and managers as of June 30, 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.
Since 2004, we have been profitable on an annual basis 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 a distinct sales team 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 ("FDA" or "Food and Drug Administration") 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. Recent Developments and Highlights
Caldolor®
Caldolor Pediatric Fever Study
In August 2013, we announced top-line results from a clinical pediatric fever study evaluating the safety and efficacy of Caldolor (ibuprofen) Injection compared to acetaminophen in treating fever (greater than or equal to 101.0ºF) in hospitalized patients ranging from birth to 16 years old. One hundred and three patients were enrolled in this multi-center, randomized, open-label active comparator study. The pediatric patients received either 10 mg/kg intravenous ibuprofen (not to exceed 400 mg per dose) or 10 mg/kg acetaminophen (not to exceed 650 mg per dose).
The primary endpoint of the study was to assess the area under the change in temperature versus time curve from baseline to 2 hours after the start of the initial dose of study drug. In the two hours following dosing, pediatric patients receiving intravenous ibuprofen experienced a greater temperature reduction compared to patients receiving acetaminophen, p=0.012; therefore meeting the primary endpoint of the study.
After a single dose, significantly more patients receiving intravenous ibuprofen
(93%) were no longer considered to be febrile (temperature less than 100.4ºF)
compared to patients receiving acetaminophen (78%), p= 0.036.
Patients receiving intravenous ibuprofen experienced a greater temperature reduction compared to patients receiving acetaminophen upon all temperature assessments during the four hours after dosing with reductions reaching statistical significance by ninety minutes post-dose.
No safety concerns were identified in the study, as the incidence of adverse events was similar across treatment groups. Caldolor Follow-Up Knee Arthroscopy Study

In February 2013, we announced favorable top line results from a pilot clinical study evaluating the safety and analgesic efficacy of Caldolor (ibuprofen) Injection compared to ketorolac injection in treating pain following knee arthroscopy procedures in adult patients. A follow-up, larger, multi-center study has been initiated to further study the safety and analgesic efficacy of Caldolor (ibuprofen) Injection compared to ketorolac injection in treating pain following knee arthroscopy procedures in adult patients. One hundred patients are to be enrolled across three US medical centers. Acetadote®
Acetadote Updated Labeling


In June 2013, we announced that the U.S. Food and Drug Administration ("FDA") has approved updated labeling for Acetadote (acetylcysteine) Injection. The new labeling revises the product's indication and offers new dosing guidance for specific patient populations. The new indication states, "Acetadote is an antidote for acetaminophen overdose indicated to prevent or lessen hepatic injury after ingestion of a potentially hepatotoxic quantity of acetaminophen." The product's previous indication included the qualifying phrase, "administered intravenously within 8 to 10 hours," which was originally intended to impress the urgency for early treatment. This phrase has been removed to avoid any potential confusion concerning efficacy when administration within that time period is not possible.
In addition, specific dosing guidance is now included for patients weighing over 100 kg. New language has also been added to alert health care providers that in certain clinical situations, therapy should be extended for some patients. Acetadote does not contain Ethylene diamine tetracetic acid (EDTA) or any other stabilization or chelating agents and is free of preservatives. The product's formulation was developed as part of our Phase IV commitment in response to a request by the FDA to evaluate the reduction of EDTA. The current formulation's 30 month shelf life is longer than the shelf life of the previous formulation. 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 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 ("Perrigo") 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 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.
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. Following the issuance of the 445 Acetadote Patent we received separate Paragraph IV certification notices from Perrigo and Sagent Pharmaceuticals, Inc. challenging the 445 Acetadote Patent on the basis of non-infringement.
On June 10, 2013, we became aware of a Paragraph IV certification notice from Akorn, Inc. challenging the 445 Acetadote Patent and the 356 Acetadote Patent on the basis of non-infringement. On July 12, 2013, we filed a lawsuit for infringement of the 356 Acetadote Patent against Akorn, Inc. in the United States District Court for the District of Delaware. We intend to continue to vigorously defend and protect our Acetadote product and related intellectual property rights.
We also have additional patent applications relating to Acetadote which are pending with the USPTO.
Kristalose®
Pilot Study
In June 2013, we initiated a pilot study to evaluate the use of Kristalose in a new patient population following clearance by the FDA of our Investigational New Drug Application (IND) for the study.
International Licensing Agreements
During the second quarter of 2013, we entered into two new agreements for the registration and commercialization of Caldolor outside the United States. The first agreement is with a Spanish-based company for a territory that includes Spain, Portugal,


Argentina, Chile, Brazil, Ecuador, Peru, and Uruguay. The second agreement is with an Indonesian-based company and includes a territory of Singapore, Thailand, Vietnam, Cambodia, Laos, Brunei and the Philippines.
Also during the second quarter, we amended our agreement with Harbin Gloria Pharmaceuticals for the registration and commercialization of Caldolor and Acetadote in China by extending the territory to include Hong Kong and Macau. Earlier in 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.
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 upfront and milestone payments upon the achievement of defined regulatory approvals and sales milestones. Amended Distribution Agreement
Like many other pharmaceutical companies, we engage a third party contractor with appropriate facilities and logistical expertise to support our distribution efforts. Since August 2002, Cardinal Health (Cardinal) has exclusively handled U.S. product logistics efforts, including warehousing, shipping, customer billing and collections.
We extended our distribution relationship with Cardinal during May 2013, when we entered into the First Amendment ("First Amendment") to the Exclusive Distribution Agreement under which we have operated since August 2010. The Amendment primarily serves to extend the term of the Agreement through June 30, 2016 and revises the fee schedule under the Agreement. Combined, the Agreement and Amendment appoint Cardinal, as the exclusive distribution agent for Acetadote, Caldolor and Kristalose in the United States and Puerto Rico. Under the Amendment, we have also engaged Cardinal to assist with our physician sample orders based on the Prescription Drug Marketing Act of 1987 (the "PDMA") for samples shipping. After June 30, 2016, the contract is automatically renewed on a year-to-year basis that is terminable by either party with ninety days' notice. Under the Amendment and Agreement, Cardinal agrees to provide various services, including storage, distribution, returns, customer support, and system access support to us in connection with the distribution of our products under certain guidelines at established fees.
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 June 30, 2013 Compared to the Three months ended June 30, 2012
Net revenues. Net revenues for the three months ended June 30, 2013 decreased to approximately $7.1 million compared to $12.4 million for the three months ended June 30, 2012. Total net revenues were impacted by decreases in Acetadote product revenue of $5.6 million and decreases in Kristalose product revenue of $0.1 million. These decreases were partially offset by an increase in Caldolor product revenue of $0.4 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 $5.6 million decrease in Acetadote net revenue was a result of decreased sales volume of the branded Acetadote product largely as a result of generic competition during 2013. Generic competition may continue to place downward pressure on our branded Acetadote product sales. However, Acetadote product revenue for the three months ended June 30, 2013 also includes $2.1 million in revenue resulting from sales of the authorized generic distributed by Perrigo. We recognized $0.2 million of other revenue in both 2013 and 2012 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 16.3% during the three months ended June 30, 2013 compared to 8.9% during the three months ended June 30, 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 June 30, 2013 totaled approximately $3.5 million, compared to $5.5 million in the three months ended June 30, 2012, representing a decrease of approximately $2.0 million, or 35.5%. The decrease was driven by $2.1 million in decreased salaries, benefits and other selling expenses. These reductions were primarily a result of our new commercial strategy and sales force realignment that went into effect during the fourth quarter of 2012. These cost decreases were partially offset by a $0.1 million increase in marketing research and direct marketing. General and administrative. General and administrative expense for the three months ended June 30, 2013 totaled approximately $1.9 million, representing a decrease of approximately $0.2 million, or 13.6%, over the $2.1 million incurred in the three months ended June 30, 2012. The decrease was primarily due to decreased consulting fees as well as inventory donations made during 2012. Amortization. Amortization expense is the ratable use of our capitalized intangible assets including product and license rights, patents, trademarks and patent defense costs. Amortization for the three months ended June 30, 2013 totaled approximately $0.3 million, representing an increase of approximately $0.2 million, over the $0.1 million incurred in the three months ended June 30, 2012. The increase was primarily due to increased capitalized patents and capitalized patent defense costs.
Income tax benefit (expense). Income tax benefit for the three months ended June 30, 2013 totaled approximately $0.5 million, representing a decrease in expense of approximately $0.7 million, over the same period in 2012. As a percentage of (loss) income before income taxes, the income tax benefit was 41.7% for the three months ended June 30, 2013 compared to income tax expense of 13.2% for the three months ended June 30, 2012 . The tax rate percentage in 2012 was impacted by the recognition of approximately $0.5 million of tax benefits for previously recognized compensation expense associated with certain incentive stock options that were exchanged for shares of restricted stock in 2012. In prior years, we did not recognize a tax benefit for the incentive stock options because the compensation expense was not deductible for tax purposes. Expense associated with restricted stock is generally deductible for tax purposes in the year the restrictions lapse. Therefore, when the incentive stock options were exchanged for restricted stock during 2012, the previously recognized compensation expense became deductible for tax purposes, and a tax benefit was recognized in the condensed consolidated financial statements.

As of June 30, 2013, we have approximately $48.6 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.

Six months ended June 30, 2013 Compared to the Six months ended June 30, 2012 Net revenues. Net revenues for the six months ended June 30, 2013 decreased to approximately $17.3 million compared to $22.6 million for the six months ended June 30, 2012, representing a decrease of approximately $5.3 million or 23.4%. The total net revenues were impacted by decreases in Acetadote product revenue of $5.7 million and decreases of Kristalose product revenue of $0.2 million. These decreases were partially offset by an increase in Caldolor product revenue of $0.7 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 $5.7 million decrease in Acetadote net revenue was a result of decreased sales volume of the branded Acetadote product largely as a result of generic competition during 2013. However, Acetadote product revenue for the six months ended June 30, 2013, also includes $5.0 million in revenue resulting from sales of the authorized generic distributed by Perrigo.


We recognized $0.6 million and $0.7 million in the six months ended June 30, 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 13.1% during the six months ended June 30, 2013 compared to 8.6% during the six months ended June 30, 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 six months ended June 30, 2013 totaled approximately $7.2 million, compared to $10.5 million for the six months ended June 30, 2012, representing a decrease of approximately $3.3 million, or 31.1%. The decrease was driven by $3.5 million in decreased salaries, benefits and other selling expenses. These reductions were primarily a result of our new commercial strategy and sales force realignment that went into effect during the fourth quarter of 2012. These cost decreases were partially offset by a $0.2 million increase in marketing research and direct marketing. General and administrative. General and administrative expense for the six months ended June 30, 2013 totaled approximately $4.4 million, which was consistent with the $4.4 million incurred during the six months ended June 30, 2012.
Amortization. Amortization expense is the ratable use of our capitalized intangible assets including product and license rights, patents, trademarks and patent defense costs. Amortization for the six months ended June 30, 2013 totaled approximately $0.4 million , representing an increase of approximately $0.2 million, over the $0.2 million incurred in the six months ended June 30, 2012. The increase was primarily due to increased capitalized patents and capitalized patent defense costs.

Income tax expense. Income tax expense for the six months ended June 30, 2013 totaled approximately $0.1 million, representing a decrease of approximately $0.4 million over the $0.5 million for the six months ended June 30, 2012. As a percentage of income before income taxes, income tax expense was 33.3% for the six months ended June 30, 2013 compared to 20.2% for the six months ended June 30, 2012. The tax rate percentage in 2012 was primarily due to the recognition of a deferred tax benefit associated with the exchange of certain incentive stock options, as previously discussed.

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 six months ended June 30, 2013 and 2012, we generated $1.8 million and $3.2 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 . . .

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