Cumberland Pharmaceuticals Inc. (CPIX) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to the Cumberland Pharmaceuticals Second Quarter 2012 Earnings Conference Call. [Operator Instructions] This call is being recorded, and a replay will be available for 1 week shortly following its conclusion. At this time, I would now like to turn the call over to Elizabeth Davis, who handles corporate relations for Cumberland Pharmaceuticals. Please go ahead.

Good afternoon, and thank you for joining us as we discuss our second 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 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 second quarter results. With me on today's call are Martin Cearnal, our Chief Commercial Officer; and Rick Greene, Cumberland's Chief Financial Officer. We'll start by reviewing highlights from the quarter, and then we'll provide updates on each of our products. We'll also provide the development update and discuss our financial performance. So let's begin. During the second quarter, we continued to work towards achieving our goals for 2012. Earlier this year, we implemented a new commercial strategy with the objective of driving growth in each of our marketed brands. As we reach the halfway point of 2012, we're beginning to see the impact of this new strategy. Kristalose's revenues have grown since we streamlined its supply chain and are up 5% year-over-year compared to the first half of 2011. Remember that Acetadote revenues during the second quarter of last year were unusually strong due to the shortages of oral competitors during that period. While this makes for a difficult year-over-year comparison, Acetadote revenues are up over 30% from the first quarter of this year, and that product resumes a more normal growth path following the fluctuating wholesaler buying patterns for the brand subsequent to the competitor's shortages of last summer. Finally, Caldolor revenues more than doubled sequentially over both last year and over the first quarter of this year, as wholesaler inventories continue to deplete and our reorder volume increases. We are encouraged that this brand is benefiting from the more targeted approach we're implementing, and we're working hard to continue to build on this momentum and develop Caldolor into a meaningful revenue stream for the company. We believe, we'll continue to see the benefits of realigning our sales organization, their territories and their promotional tie to support near and long-term growth for all our brands. We also made progress in the ongoing clinical programs during the second quarter, and we continued to pursue partnerships to commercialize our products in new international markets. Expanding into international markets is the key component of our growth strategy and our efforts to build an international presence for our brands. We've also continued to aggressively pursue opportunities to expand our product portfolio with the goal of adding a fifth product. I'd like to turn to a review of our progress in each of our marketed brands, and I'd like to ask Marty Cearnal, our Chief Commercial Officer, to provide you with that update. Marty?

Thank you, A.J. As we stated in the first quarter, a key element of our 2012 strategy is to place more emphasis on Acetadote, following approval of the brand's new formulation and the recent issuance of its patent. This strategy increases promotional resources for Acetadote, which includes a redeployment of our sales organization and allocating a greater percentage of our sales team's turn to Acetadote's promotional efforts. We believe these efforts, coupled with the new marketing programs that were introduced earlier this year, will maximize our return of investment. We have intensified our coverage of poison control centers to ensure that each center understands our message and to help ensure that patients are dosed completely and correctly. This coincides with our new direct mail campaign, which for the first time includes a sales-force-directed component to reach the decision-makers and reinforce sales force contacts within the hospital. The second quarter of 2012 presented a difficult year-over-year comparison for Acetadote because last year, there was a severe shortage in the oral competitors, and Acetadote sales received a significant boost. We do not expect that to occur again this year since these shortages have abated and normal competitive supplies have resumed. While Acetadote sales did not match the second quarter of last year, they were up 30% from the first quarter of 2012. Taking a broader view, it should be noted that Acetadote's second quarter sales have grown at a compounded annual rate of over 10% during a 3-year period from the second quarter in 2009 through the second quarter of 2012. We believe the additional resources we've devoted to this brand contributed to Acetadote's strong first to second quarter growth this year and will contribute to its long-term success. Let's move onto Kristalose. The acquisition of the Kristalose FDA registration and trademark…

Okay. Thank you, Marty. Before we review our financial performance, I'd like to provide an update on our development activities. Today, I'm pleased to report that we've now completed enrollment in our first Phase IV pediatric study to support Caldolor. This clinical study evaluated the product for treatment of pain in children involving 160 tonsillectomy patients ages 6 to 16. We're now gathering the resulting data and expect to provide top line results once that data is analyzed. Meanwhile, enrollment continues in our pediatric fever study, as well as the 2 adult studies evaluating a more rapid infusion of the product. We believe that all 4 studies can provide important new information to further support Caldolor for both the U.S. and international markets. Also in 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. Following FDA clearance to commence the clinical program, we identified, contracted with and initiated a network of clinical sites around the country to conduct this study. Those sites began screening for eligible patients, and enrollment is now well underway. We'll continue to update you as this critical program progresses. So now, let's turn to our financial performance for the second quarter. Rick, would you please walk us through those results?

Yes, and thanks, A.J. For the 3 months ended June 30, 2012, net revenues were $12.4 million compared to $14.4 million during the corresponding period in 2011. In the second quarter of 2012, net revenues by product where $9.8 million for Acetadote, $2.1 million for Kristalose and $0.2 million for Caldolor. For the 6 months ended June 30, 2012, net revenues were $22.6 million compared to $25.1 million for the prior-year period. As Martin mentioned, revenues last year were boosted by the increase in Acetadote volume due to shortages of competitive products. Total operating expenses for the 3 months ended June 30, 2012 were $10.4 million compared to $10.8 million during the prior-year period. This decrease was driven by lower selling and marketing expenses, partially offset by an increase in R&D expense. Total operating expenses for the 6 months ended June 30, 2012, were $20 million, the same as the prior-year period. Lower cost of products sold and selling and marketing expenses were offset by higher R&D and G&A expenses during that period. Income tax expense for the quarter was $0.3 million compared to $1.4 million for the previous year. Our effective tax rate was positively impacted by the recognition of tax benefits associated with our stock option exchange program, which we completed in the second quarter. Cash flow from operations during the 6 months ended June 30, 2012 was $3.2 million compared to $4.9 million during the prior-year period. Net income for the second quarter was $1.7 million compared to $2.2 million for the same period in 2011. Net income for the 6 months ended June 30, 2012 was $2.2 million compared to net income of $2.9 million for the same period in 2011. Diluted earnings per share for the second quarter were $0.09 compared to $0.11 for the second quarter of 2011. Diluted earnings per share for the 6 months ended June 30, 2012 were $0.11 compared to $0.14 during the prior-year period. We remain comfortable and on track to hit our 2012 financial guidance for earnings per share of $0.32 to $0.36. We suggest that you evaluate our business on an annual basis as our quarterly progressions can vary. We remain in a strong financial position with high margins and a strong balance sheet. At the end of Q2 2012, we had over $70 million in cash and securities, with approximately $52.3 million in cash and cash equivalents and $18.2 million in marketable securities. Total assets at June 30, 2012 were $95.4 million. With that A.J., I'll turn it back over to you.

Thanks for that financial review, Rick. Well, today, I'd like to announce that Caldolor has been approved and launched in Canada through our commercial partner, Alveda Pharmaceuticals. The product has been approved there for the treatment of both pain and fever. We now work closely with Alveda to support their commercial launch of this brand in that country. This, we believe, is another step in our efforts to expand the international presence of Cumberland and this brand. Last quarter, we reported that the U.S. Patent and Trademark Office had allowed our patent application associated with Acetadote. Following the subsequent issuance of the patent, we did receive our first challenges. We understand that challenges such as this are not uncommon for valuable pharmaceutical brands, and we've initiated our defense to contest these challenges and will continue to vigorously dispense our newly issued Acetadote patent and related intellectual property. We have and will continue to maintain current disclosure through our SEC filings regarding any material developments in this process. As we move into the second half of 2012, we'll continue to implement our strategy to build each of our established brands through our targeted marketing and our ongoing development efforts. Through our new commercial strategy, we'll work to drive both near and long-term growth across each of our brands. We'll continue to pursue additional patent protection for our products, as well as new international partnerships to make our products available to patients in new markets. We'll also seek opportunities to expand our portfolio of new indications, and we'll work hard to deliver our fifth product. While we do remain selective disciplined buyers, we are seeing very interesting new product opportunities. As always, we'll continue to focus on strong revenue and earnings growth, acting with financial discipline and remain focused on our mission of advancing patient care. And finally, as Rick mentioned, we remain on track with our 2012 financial guidance and look forward to providing you with another update following the conclusion of the third quarter. I'd now like to turn the call back over to the operator and open the line for any questions.

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

A.J., just let me just ask one question. As I look at the SG&A expense for the quarter, sequentially it was up from Q1. And I'm trying to reconcile your sales force with the alignment versus that increase and just wondering if there were any one-timers in there or any seasonal patterns as it relates to your SG&A spend level.

Michael, this is Rick. There was nothing unusual in SG&A for the quarter.

Michael, as I look at the selling and marketing expenses for the company, if we compare what's happening here in 2012 with year-to-date, for example, back in 2010, we'll see a reduction in overall selling and marketing by $1 million in the first half of the year. And furthermore, as a percentage of sales, our selling and marketing expenses have dropped from 55% in the first half of 2010 to 46% here in the first half of 2012. So I think that reflects the implementation of our new strategy and a reduction in overall selling and marketing, if you look at 2012 year-to-date versus 2010.

The next question is from Ami Fadia of UBS.

I just have a follow-up to the previous question and then another one. So given your current expense rate, is that the run rate that we should expect for both R&D and SG&A going forward? And the second one is just on the tax rate. How should we think about the tax rate for the remainder of the year and into next year?

On the tax rate, you should think about it as we said in the past, in the low 40s. That's what we expect this year -- this quarter's tax rate. There was a one-time item, so going forward, you should expect them in the low 40s. And SG&A, we're comfortable where we are. We do -- there's nothing unusual in that. We have implemented our programs, and we expect those to continue going forward.

The next question is from Michael Tong of Wells Fargo.

Maybe I'll follow up on Ami's question regarding the tax rate. I just want to make sure I understand you correctly, Rick. In terms of your going-forward, you're looking for low 40s on a quarterly basis, which would suggest that for the full year, you're going to end up somewhere below 40 or at least, not in the low 40s, but close to the 40. Is that the right way to think about it? Or are you saying that for the full year, you're going to be in the low 40s?

Well, Michael, you stated it exactly right. We expect it to be in the 40s -- in the low 40s for the sequential quarters, and it would be somewhere between at 40 or a little less than 40 for the whole year.

That's helpful. And if I can sneak one question in regarding Hepatoren. Can you remind us how many patients you intend to enroll in the Phase II? And based on what you're seeing now, when do you think that patient enrollment will be completed?

We're targeting 64 patients in this Phase II study. And just -- I'll remind you, this is an orphan indication, and it's difficult to predict exactly when this study will be finished. But I can tell you, as of today, the enrollment is well underway.

At this time, I'd like to turn the call back over to management for any closing remarks.

Okay. Well, we appreciate everyone joining our call today. And I'd like to acknowledge and thank our employees for their fine and dedicated efforts. Thank you for your time and interest in Cumberland. And we look forward to providing you with another update at the end of our third quarter. 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 99440842. Alternatively, a replay of this webcast will be available in the company's website. I would now like to thank you for your participation. You may now disconnect.