Cumberland Pharmaceuticals Inc. (CPIX) Q1 2012 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to the Cumberland Pharmaceuticals First Quarter 2012 Earnings Conference Call. [Operator Instructions] This call is being recorded and the replay will be available for one week shortly following its conclusion. At this time, I would like to turn the call over to John Lane, who handles Corporate Development for Cumberland Pharmaceuticals. Please go ahead.

Good afternoon, and thank you for joining us as we discuss our first quarter results. Before we begin, we'd like to advise that this call will include forward-looking statements which reflect our current views about future events. These statements are subject to risks outlined in the Safe Harbor section of today's news release and detailed in our 10-K and 10-Q reports on file with the SEC. Despite our best efforts, actual results could differ materially from our expectations. Information shared on the call today should be considered current as of today only, and please remember that the company assumes no duty to update it. I'll now turn the call over to our Chief Executive Officer, A.J. Kazimi.

Good afternoon, everyone, and thank you for joining us as we review our first quarter results. With me on today's call are Marty Cearnal, our Chief Commercial Officer; and Rick Greene, Cumberland's Chief Financial Officer. We'll start by reviewing highlights from the quarter and then provide updates on each of our products. We'll finish by discussing our financial performance and then open the call to your questions. So let's begin. Net revenues for the first quarter were $10.3 million compared to $10.7 million during the prior year period. Net income for the quarter was $0.4 million compared to $0.7 million in 2011. While the first quarter is seasonally our lightest of the year, this year's results were also impacted by the timing of wholesaler buying patterns over the last 6 months. It's important to note that end user for market demand for our products remains strong and continued to grow during the first quarter. We also announced and implemented a shift in our commercial strategy for the quarter. And we do remain on track to achieve our financial guidance in 2012. Cash flow from operations during the first quarter was $2.6 million compared to $1 million during the prior year period. We ended the quarter with over $71 million in cash and securities. During the first quarter, we signed our most significant international licensing agreement to date with Harbin Gloria Pharmaceuticals, a Chinese pharmaceutical company. Under the terms of this agreement, Gloria will have the exclusive rights to register and commercialize both Acetadote and Caldolor in China. In exchange for the license of these products, Cumberland's receiving upfront and milestone payments along with royalties on product sales. Expanding into international markets is a key component of our growth strategy, and this partnership represents an important milestone in our efforts to build an international presence for our brands. The first quarter of 2012 also brought an important milestone for Acetadote. In February, we received a Notice of Allowance regarding our patent application associated with this product. A new patent with composition of matter claims was granted, with a term extending into 2026. The patent was formally issued in early April and then listed in the FDA Orange Book. Soon after the patent was issued, we did receive our first challenges. We're currently evaluating the challenges and developing our defense strategy. We understand that these challenges are routine for valuable pharmaceutical brands, and we have a strong patent with composition of matter claims and intend to vigorously defend our product and related intellectual property rights. I'd now like to turn to a review of our progress with each of our brands and I'll ask Marty Caernal, our Chief Commercial Officer, to provide you with that update.

Thank you, A.J. On our last call, we announced our new commercial strategy for 2012. The theme of that strategy is to maximize near-term potential for our brands, while preserving long-term opportunity. I'd like to report on our progress in implementing this new strategy. We've completed the consolidation of our sales organization, reducing net group size from 113 to 100 sales professionals. Having taken a fresh look at the potential for our brands, we feel that our sales organization is now optimally sized for our current product line. We need this team of sales professionals to pursue the near-term opportunities we have identified and drive continued growth of our business. We will continue to monitor the productivity of our sales organization and the return on our investment for each of our brands. We have also completed the redeployment of our representatives, having reorganized our territories based on Acetadote and Kristalose targets. We have closed territories where the potential or access to that potential is lacking and opened new territories where new opportunities for untapped potential have been identified. We will continue to monitor the results of this redeployment and our ability to access new sales opportunities. Furthermore, we have reallocated our sales force promotional efforts in order to shift significant support to Acetadote and Kristalose. These are our largest 2 brands, and we believe they can contribute to significant near-term growth in our revenues. Also during the first quarter, we completed the announced elimination of the 400-milligram vial size for Caldolor. We believe that the 800-milligram vial size can adequately supply the market for this product, particularly in the multimodal management of pain. This new commercial strategy was rolled out at our national sales meeting, which took place late in the first quarter. At this meeting, we introduced the new strategy to our sales organization, reviewed the new deployment and promotional allocations, as well as the focus on select priority accounts. We also introduced new marketing campaigns for each of our brands. We have already begun to see the positive impact of these initiatives as we move into the second quarter. A key element of our strategy is to place more emphasis on Acetadote following the approval of the new formulation and the recent issuance of the patent. Our new strategy increases promotional resources for Acetadote, including the redeployment of our sales organization to maximize coverage of high potential Acetadote accounts across the country. We have allocated a much greater percentage of our sales team's time to Acetadote promotional efforts. We believe these efforts, coupled with initiatives to drive higher productivity, will maximize return on investment in our sales organization. During 2011, we reported that midyear shortages of competing oral products positively impacted volume for Acetadote. These shortages abated as competitive product supplies resumed later in the year. These dynamics affected our business as hospitals first bought in extra Acetadote supplies during the competitive shortages and then slowed their Acetadote purchases later in the year as competitive supplies resumed. Wholesaler purchases, meanwhile, were also clearly impacted by the competitive supply dynamics, which resulted in fluctuating wholesaler buying patterns of Acetadote during the year. These fluctuations continued into the first quarter of this year as wholesalers corrected their inventory levels. As we move into the second quarter, the wholesaler inventories and buying patterns appear to have normalized. However, it is also important to point out that overall hospital demand for Acetadote grew in 2011 and continued to grow in the first quarter of 2012. Now on to Kristalose. With the acquisition of the FDA registration and trademark in November of 2011, we were able to simplify the supply chain and resume full supply and avoid disruptions like those we experienced earlier in 2011. This recovery gives us the confidence to allocate additional promotional time and effort to this brand as a part of our new strategy. We have continued to see Kristalose volume build since we've been able to provide a steady supply. We believe this recovery trend and our increased promotional effort contributed to Kristalose's strong performance in the first quarter. Next, I would like to discuss Caldolor. As a part of our new commercial strategy, we are adopting a more focused approach for Caldolor. We are targeting a limited number select priority accounts specifically focusing on the opportunity in pain management. We expect this concentrated approach will be a more productive and cost efficient way to build the product in the current market environment. We are encouraged by the continued favorable feedback from a growing number of physicians successfully using Caldolor to treat their patients. We are also encouraged by the growth in our shipments, as well as the growth in hospital demand for the product. Finally, we expect that our new commercial strategy will result in an overall decrease in sales and marketing expenses as a percentage of revenue as we continue to enhance efficiencies moving forward. We continue to develop this more efficient and targeted sales organization into a high-quality specialty force capable of promoting both current and future products. As part of this development, we will continue to implement new sales training, new sales support and improved assessment tools to further enhance productivity. With that, I'll turn the call back over to you, A.J.

Thank you, Marty. Before we review our financial performance, I'd like to provide an update on our clinical activities. I'll start with Hepatoren, our newest pipeline product. We're initially developing Hepatoren for the treatment of hepatorenal syndrome, the first of several potential niche indications we've identified for this brand. We previously reported that we had received FDA clearance to commence this clinical program, and we then identified, contracted with and initiated a network of clinical sites to conduct the study. Those sites began screening for eligible patients and today, I'm pleased to report that patient enrollment is now underway. This is an orphan indication and we can't predict how long it will take to enroll the full 64 patients, but we will keep you posted on our progress. Future milestones for the program include enrollment completion and then an announcement of the topline study results. We continue to believe this late-stage acute care product is an excellent strategic fit for our company and our hospital sales organization. We're also working to complete the 4 remaining Phase IV clinical studies to support Caldolor to our adult registry studies evaluating a rapid administration of the product and to our pediatric studies, evaluating the product for the treatment of pain and fever in children. Once complete, these studies can provide important new data to further support the brand for both the U.S. and international markets. So now let's turn to our financial performance for the first quarter. Rick, could you please walk us through those results?

Yes, A.J. Thank you, and good afternoon, everyone. For the 3 months ended March 31, 2012, net revenues were $10.3 million compared to $10.7 million during the corresponding period in 2011. In the first quarter of 2012, net revenues by product were $7.4 million for Acetadote, $2.3 million for Kristalose and $0.1 million for Caldolor. While Kristalose and Caldolor sales were up year-over-year, Acetadote sales were affected by wholesaler buying patterns. This appears to be an anomaly driven by higher-than-usual orders near the end of the year that resulted in high wholesale inventory levels that returned to normal by the end of the first quarter. We note that hospital demand for Acetadote remains strong and has continued to grow over the first quarter based on the hospital purchase data we monitor. If we were to normalize Acetadote sales across the 2 quarters, our net sales would show a steady upward trend line with our historical performance. We continue to expect overall year-over-year growth for this brand in 2012. During the first quarter, the company received an upfront payment of $0.7 million for licensing -- with the licensing agreement with Harbin Gloria Pharmaceuticals. Included in net revenue is $0.5 million related to that payment. Total operating expenses for the 3 months ended March 31, 2012, were $9.6 million compared to $9.3 million during the prior year period. The net effect of the increase was primarily due to increases in research and development and general and administrative expenses, partially offset by a decrease in selling and marketing expenses. Cash flow during the first quarter benefited from the same purchase patterns that impacted Acetadote sales. Cash flow from operations during the 3 months ended March 31, 2012, was $2.6 million, up from $1 million during the prior year period. Net income for the first quarter was $0.4 million compared to $0.7 million for the same period in 2011. Diluted earnings per share for the first quarter were $0.02 compared to $0.03 in the first quarter of 2011. During the first quarter, we shifted a portion of our cash reserves into marketable securities in an effort to increase our yields without significantly increasing our risk. The funds remain highly liquid and available as growth investment opportunities arise. At the end of Q1 2012, we had approximately $71.6 million in cash and securities, with approximately $55.6 million in cash and cash equivalents and $16 million in marketable securities. Total assets at March 31, 2012, were $94.5 million. As A.J. said in his opening remarks, we remain on track to hit our 2012 financial guidance, and we suggest that you evaluate our business on an annual basis as our quarterly progression can vary. With that, A.J., I'll turn the call back over to you.

Thanks for that financial review, Rick. We believe 2012 is off to a fine start, with 2 important strategic milestones, the issuance of the Acetadote patent and the international agreement reached with Harbin Gloria for China. As we move further into 2012, we look forward to a favorable financial impact from the new commercial strategy we recently launched. We believe that the implementation of this strategy will support a highly targeted approach that will drive near and long-term growth across each of our brands and we've already begun to see the benefits and impact of realigning our sales organization, their territories and their promotional allocations. We also continue to pursue our overall growth strategy for the company. We continue to build each of our established brands through our promotional campaigns and through our ongoing product development activities. We will vigorously defend our newly issued Acetadote patent against the challenges that have been filed and will also pursue additional patent protection for all our brands. We'll continue to pursue partnerships to commercialize our products and make them available to patients in new international markets. And our business development team is working hard to add a fifth product to our portfolio this year. I'd now like to turn the call back over to the operator and open the lines for any questions.

[Operator Instructions] Our first question comes from Michael Tong of Wells Fargo.

Just a quick question trying to understand the Acetadote situation. If buying patterns were to be normalized -- or maybe asked in a different way, what do you think the actual demand for Acetadote was in the first quarter?

Well, when we look at the sales from wholesalers to the hospitals themselves, what we see is an increase year-over-year. So if we look at first quarter 2012 sales from wholesalers to hospitals as compared to first quarter 2011, we see that our sales continue to increase along the lines of historic trends. So this shift in wholesaler buying patterns, which we really attribute to the disruption in supply of the oral product that was occurring earlier in the market triggering erratic buying patterns from hospitals and then changes in the computer models that the wholesalers use to try to predict their stocking requirements, all resulted in reducing our sales out to wholesalers but had no effect on what's really important in terms of driving our success, which is a sale from wholesalers to hospitals.

And if I can just kind of try to clarify your answer there, Marty. First quarter of 2011, there was some disruption as you switch out the old formulation with the new formulation and that quarter was somewhat compressed or depressed. So again, if we clean everything up, would you have seen growth Q1 over Q1 year-over-year?

Yes, that's a series of events in quarter 1 of 2011 was mostly things happening between us and the wholesalers; not between the wholesalers and the hospitals. So what we're looking at when we're talking about year-over-year growth are the sales from the wholesalers to the hospitals, which we think is the clearest indicator of demand. And there we see a clear growth year-over-year.

[Operator Instructions] We have a follow-up question from Michael Tong of Wells Fargo Securities.

So A.J., if you -- when you look at the Paragraph 4 certifications on Acetadote, based on what you know now, if you were to trigger patent infringement litigation, do you know whether that would put in place the 30-month stay of approval?

Well, we worked hard to secure this patent, to protect our proprietary discoveries, and frankly, we were thrilled when the patent office recently allowed the patent. And we quickly added the patent number to the FDA Orange Book. As I mentioned, we did receive some initial Paragraph 4 certifications. And we are evaluating the details of those notices and we are analyzing our options, Michael. And as I understand it, it would be inappropriate really for me to comment further on our strategy or the alternatives or our response to these challenges. But we recognize this is an important issue, and we will keep you posted on material developments going forward and be assured we intend to vigorously defend and protect our Acetadote product and related intellectual property rights.

[Operator Instructions] At this time, I'd like to turn the call back over to management for closing remarks.

All right. Well, we appreciate everybody joining our call today. We’d also like to thank and acknowledge our employees for their ongoing dedicated efforts. We appreciate your time and interest in Cumberland. And we will look forward to providing you with an update after the end of the second quarter. Thank you, and goodbye.

Thank you, sir. Ladies and gentlemen, that concludes our conference for today. If you would like to listen to a replay of today's conference, please dial (855) 859-2056, using the access code 70848539. A replay of this webcast will be available on the company's website. I would like to thank you for your participation. You may now disconnect.