Back in February I covered the detailed bull case for Cumberland Pharmaceuticals (NASDAQ:CPIX), a small-cap pharmaceutical company. Cumberland, which currently distributes three products, has just a $90 million market capitalization; yet the stock offers some $70 million in cash and investments and nine consecutive years of profitability. A patent dispute concerning its top-selling drug -- Acetadote, used to treat acetaminophen overdose -- has caused concern about the company's near-term revenue prospects, but the company's plan to diversify internationally and acquire new developed products and/or late-stage candidates could set the table for longer-term revenue growth.
Earlier this month, Cumberland released first quarter earnings that show the company is on the right track in its growth strategy. Indeed, the stock gained more than 5.4 percent following the release, even after gaining 5.2 percent heading into the afternoon report. Yet it has given back most of those gains, closing Tuesday at $4.65 per share.
Cumberland's Q1 revenue was largely flat year-over-year; while that's not normally a cause for optimism, the challenges facing Acetadote mean that even treading water is a solid result for Cumberland. Acetadote saw revenue decline by little more than one-tenth of a percent; $3 million of $7.25 million in Acetadote sales came from authorized generic versions of the drug, the result of a settlement between Cumberland and challengers Perrigo (NYSE:PRGO) and Paddock Laboratories.
The strength, on a revenue basis, of the authorized generic should give some calm to investors worried that Acetadote sales would be devastated by the introduction of an unauthorized generic competitor introduced by privately held InnoPharma. While Q1 results don't disprove the potential effect of generics from InnoPharma -- or other potential products from Mylan (NASDAQ:MYL) and Sagent Pharmaceuticals (NASDAQ:SGNT), both of which have contested Cumberland's patent -- they do give some comfort to near-term concerns that Acetadote revenue was set to fall sharply.
Cumberland has sued the FDA over its Acetadote patent, granted in 2004 and re-issued in 2012 based on a different formulation that excluded a compound known as EDTA. According to Cumberland, that formulation was developed "in response to a request by the FDA" to remove EDTA from the product. The FDA then turned and granted approval to InnoPharma's generic version that is based on the prior formulation containing EDTA. Cumberland has argued that the new formulation requested by the FDA was withdrawn for safety reasons; however, the FDA has disputed that, arguing instead [pdf] that its request was for Cumberland to evaluate the effect of removing EDTA on "the stability of the drug product."
If Cumberland's legal efforts against the FDA and/or InnoPharma, Mylan, and Sagent do not bear fruit, Acetadote revenues will surely drop. But Q1 results show that the company can still create revenue out of the franchise, whether through its branded version or through Perrigo's authorized generic. To be sure, as InnoPharma and other potential competitors ramp up their marketing efforts, Acetadote sales may see pressure down the line; but the fears of an immediate revenue cliff and perhaps the company's first unprofitable year since 2003 should be allayed for the time being.
Sales of Kristalose were flat; but sales of Caldolor (an injectable form of ibuprofen) better than quadrupled, according to the 10-Q. Admittedly, those sales came off a very small base -- $99,000 in revenue in Q1 2012 versus $410,000 in Q1 2013 -- but Caldolor did set a record for quarterly sales, according to CEO A.J. Kazimi on the post-earnings conference call. More importantly, during the quarter the company completed several clinical trials for the drug, with two covering shortened infusion times and a third in which Caldolor compared favorably with existing product keterolac. (A fourth trial concerning pediatric applications is also expected to be completed this year.) In addition, the company announced international partnerships in India and Indonesia to boost Caldolor's distribution range. While it remains a long way off, the company has set a target for $50 million in annual sales for Caldolor, which would substantially exceed current sales of Acetadote ($37.5 million in 2012, according to the 10-K).
Amidst the modest optimism of the Q1 numbers, however, the key frustration for Cumberland shareholders remains: the company's continued inability to find a way to effectively use its large cash balance. As noted, Cumberland has expressed interest in expanding its product line through acquisitions, but beyond the purchase of early-stage candidate Hepatoren in 2011, there has been little movement. On the Q&A portion of the call, CEO Kazimi offered the following defense for the company's inability to make a deal:
We're waiting for the right match. So as I mentioned, we are actually stepping up our business development activities and we remain very interested in bringing in a product that will be a good strategic pair with this organization and our capabilities. We are very selective and we're seeing plenty of opportunities and we're looking for a candidate that has competitive advantages, appropriate protection, attractive margins and something available at a reasonable cost. I can tell you, we've come close on potential acquisitions that ultimately decided not to move forward with our due diligence findings. But we remain very active on that front and our goal is to acquire the good profit.
The company did repurchase shares in Q1, buying back 433,000 shares, roughly 2.5% of shares outstanding, for an average price of $4.39 per share, a 5.6% discount to Tuesday's close.
Cumberland's patience is likely somewhat sensible; with the well-known patent cliff entering its third year, it is likely a seller's market for commercially viable late-stage or approved drugs. In the meantime, the company can focus on preserving Acetadote and growing Caldolor sales, while also perhaps making smaller, early-stage acquisitions for its Cumberland Emerging Technologies [CET] subsidiary. But until the company finally makes its move(s) -- and the market judges those purchase(s) -- it seems likely that Cumberland's short-term upside will remain limited, barring a surprise legal win in the defense of Acetadote or above-projected growth with Caldolor.
Of course, with $3.48 per share in cash and a history of profitability, the downside for CPIX is likely limited as well. Much of the risks surrounding Acetadote seem priced in, and the company's low valuation means a failure of Hepatoren would likely do little to torpedo the bull case for the stock. For the near term, Cumberland shares seems likely to stay relatively range-bound; but for traders who can navigate the range, or long-term investors with the patience to wait for developments at the corporate level, CPIX is definitely worth a look.