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CPIX > SEC Filings for CPIX > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for CUMBERLAND PHARMACEUTICALS INC

Form 10-Q for CUMBERLAND PHARMACEUTICALS INC


6-Nov-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 60 sales representatives and managers as of September 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 the 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 two hours after the start of the initial dose of the 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 U.S. medical centers. Caldolor Poster Presentations
Posters with data from three Caldolor studies were presented at the Annual Meeting of the American Society of Anesthesiologists in San Francisco in October 2013. The poster presentations were presented by Dr. Alberto Uribe, Post-Doctoral Researcher, Department of Anesthesiology, Wexner Medical Center at the Ohio State University.


A poster entitled "Multicenter, Open-label Surveillance Trials to Evaluate the Safety and Efficacy of a Shortened Infusion Time of Intravenous Ibuprofen" was presented. Two registry studies made up this presentation. In the first registry study 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 registry study 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 of 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. Another poster presentation was entitled "A Pilot Study to Determine the Efficacy of Intravenous Ibuprofen for Pain Control Following Arthroscopic Knee Surgery." This study was conducted at 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. Acetadote®
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 encompasses the Acetadote formulation and includes 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. ("InnoPharma"), Paddock Laboratories, LLC, Mylan Institutional LLC, Sagent Agila LLC ("Sagent") 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 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, Sagent Pharmaceuticals, Inc., and Mylan Institutional LLC challenging the 445 Acetadote Patent on the basis of non-infringement, unenforceability and/or invalidity. 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 also have additional patent applications relating to Acetadote which are pending with the USPTO.
On September 30, 2013, the United States District Court for the District of Columbia filed an opinion granting a summary judgment in favor of the FDA regarding Cumberland's November 13, 2012 suit. On November 1, 2013, the United States District Court for the District of Delaware filed opinions granting Sagent's and InnoPharma's motions to dismiss our May 2012 and June 2012 suits. We are considering our legal options and intend to continue to vigorously defend and protect our Acetadote product and related intellectual property rights.


International Licensing Agreements
During the first quarter of 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 was with an India-based Company that will register and commercialize Caldolor® (ibuprofen) Injection in India and several adjacent countries. Another agreement was with an Indonesia-based Company that will register and commercialize Caldolor throughout Indonesia. A third agreement was with a Qatar-based Company that will register and commercialize Caldolor, Acetadote® (acetylcysteine) Injection and Kristalose® (lactulose) within the greater Arabian Peninsula market. During the second quarter of 2013, we entered into two additional agreements for the registration and commercialization of Caldolor outside the United States. The first agreement was with a Spanish-based company for a territory that includes Spain, Portugal, Argentina, Chile, Brazil, Ecuador, Peru, and Uruguay. The second agreement was 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 ("Gloria") for the registration and commercialization of Caldolor and Acetadote in China by extending the territory to include Hong Kong and Macau. During the third quarter, we entered into an agreement with Gloria for their participation in Cumberland Emerging Technologies Inc. ("CET"). Gloria will purchase shares in CET in exchange for rights to CET products for the Chinese market.
The commercialization 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 and product formulations. With the exception of one partner, we will maintain responsibility for the 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.
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 September 30, 2013 compared to the three months ended September 30, 2012
Net revenues. Net revenues for the three months ended September 30, 2013 decreased to approximately $6.5 million compared to $12.5 million for the three months ended September 30, 2012. The decline was attributable to a decrease in Acetadote product revenue of $6.0 million. An increase in Caldolor product revenue of $0.2 million was offset by a decrease in Kristalose product revenue of $0.2 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 decrease in Acetadote net revenue was due to 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. Our Acetadote product revenue for the three months ended September 30, 2013 also included $1.9 million in sales of the authorized generic distributed by Perrigo.
Cost of products sold. As a percentage of net revenues, cost of products sold increased to 15.8% during the three months ended September 30, 2013 compared to 7.4% during the three months ended September 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 September 30, 2013 totaled approximately $3.4 million, compared to $4.9 million in the three months ended September 30, 2012, representing a decrease of approximately $1.5 million, or 30.6%. The decrease was driven by $1.6 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.
Research and development. Research and development costs for the three months ended September 30, 2013 totaled approximately $1.4 million, compared to $1.7 million in the three months ended September 30, 2012, representing a decrease of approximately $0.3 million, or 15.1%. The decrease is a result of lower study costs in 2013 compared to 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 September 30, 2013 totaled approximately $0.2 million, representing an increase of approximately $0.1 million over the three months ended September 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 September 30, 2013 totaled approximately $0.7 million, representing a decrease in expense of approximately $1.9 million, from the same period in 2012. As a percentage of (loss) income before income taxes, the income tax benefit was 45.2% for the three months ended September 30, 2013 compared to an income tax expense of 39.3% for the three months ended September 30, 2012. The tax rate for the three months ended September 30, 2013 was impacted positively by the reinstatement of the U.S. research and development tax credit during 2013.

As of September 30, 2013, we have approximately $49.2 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.

Nine months ended September 30, 2013 compared to the nine months ended September 30, 2012
Net revenues. Net revenues for the nine months ended September 30, 2013 decreased approximately $11.3 million compared to the nine months ended September 30, 2012. The decline in net revenues was attributable to decreases in Acetadote product revenue of $11.8 million and decreases of Kristalose product revenue of $0.4 million. These decreases were partially offset by an increase in Caldolor product revenue of $0.9 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 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. Our Acetadote product revenue for the nine months ended September 30, 2013 also included $7.0 million in sales of the authorized generic distributed by Perrigo.


We recognized $0.8 million of other revenue in both the nine months ended September 30, 2013 and 2012, primarily 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 13.8% during the nine months ended September 30, 2013 compared to 8.2% during the nine months ended September 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 nine months ended September 30, 2013 totaled approximately $10.6 million, compared to $15.4 million for the nine months ended September 30, 2012. The $4.8 million decrease was driven by $5.2 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 $0.4 million increase in marketing research and direct marketing.
Research and development. Research and development costs for the nine months ended September 30, 2013 totaled approximately $4.3 million, compared to $4.7 million in the nine months ended September 30, 2012, representing a decrease of approximately $0.4 million, or 8.1%. The decrease is a result of lower study costs in 2013 compared to 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 nine months ended September 30, 2013 totaled approximately $0.6 million, representing an increase of approximately $0.2 million compared to the nine months ended September 30, 2012. The increase was primarily due to increased capitalized patents and capitalized patent defense costs.

Income tax expense. Income tax benefit for the nine months ended September 30, 2013 totaled approximately $0.6 million, representing a decrease in expense of $2.3 million from the $1.8 million of income tax expense for the same period of 2012. As a percentage of income before income taxes, the income tax benefit was 48.0% for the nine months ended September 30, 2013 compared to 30.4% for the nine months ended September 30, 2012. The tax rate for the nine months ended September 30, 2013 was positively impacted by the reinstatement of the U.S. research and development tax credit during 2013.
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.

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 nine months ended September 30, 2013 and 2012, we generated $0.9 million and $5.1 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 September 30, 2013 and December 31, 2012, we had a total of approximately $19.2 million and $16.7 million invested in marketable securities.


The following table summarizes our liquidity and working capital as of September 30, 2013 and December 31, 2012:

                                                       September 30,
                                                           2013            December 31, 2012

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