Cumberland Pharmaceuticals Inc (CPIX) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cumberland Pharmaceuticals second-quarter 2010 earnings conference call. (Operator Instructions). At this time I will turn the call over to Ms. Angela Novak, who handles Corporate Relations for Cumberland Pharmaceuticals.

Thank you. Hello everyone and thank you for joining us this afternoon. Before I turn the call over to A. J. Kazimi, our Chief Executive Officer, I would like to take a couple of announcements.

Each quarter our management team will provide our current view of the Company's future. This means that we will share forward-looking information. Forward-looking statements include, among other things, statements regarding our intents, beliefs or expectations, and can be affected by risks and uncertainties involving the business.

Despite our best efforts, what actually happens may be materially different from what you hear today. To get a better understanding of why this might occur, please review the Safe Harbor section in today's news release or the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2009, a copy of which is available on our website.

The information shared on this call should be considered current as of today only. After today please use this information for your reference only, and remember that the Company assumes no duty to update it.

This call is being recorded, and a replay will be available for one week shortly following its conclusion. The call is also being webcast and an archived version will be available on the Investor Relations page of our website at www.cumberlandpharma.com. If you don't have a copy of today's news release, you can also find it on our website.

With that, I will turn the call over to A.J. Cassini.

Thanks, Angela, and good afternoon everyone, and thank you for joining us for today's call. Also with me on the call are Dave Lowrance, Cumberland's Chief Financial Officer, and Marty Cearnal, our Chief Commercial Officer.

We will begin with some highlights from the quarter, provide an update on each of our products, and a review of our financial performance. Then we will share some closing remarks before opening the call to your questions. So let's begin.

For the three months ended June 30, 2010, net revenues were $10.7 million, up 9% from $9.8 million in the corresponding prior-year period. Net income for the second quarter 2010 was $0.3 million compared to $0.3 million for the same period in 2009.

We are pleased to have delivered topline growth this quarter, and we continue to invest significantly in the marketing and selling of our new product, Caldolor. I would now like to comment on our Caldolor launch strategy in progress.

As the product makes its way into a growing number of facilities, I am particularly encouraged to hear from physicians reporting positive experiences with their use of Caldolor. And we will be seeking opportunities to share with you this qualitative feedback as we continue to lay the foundation for another successful hospital brand.

We are also pleased with our continued progress in formulary approvals and stockings for this new product. Today I would like to report that as of the end of the second quarter we have secured stocking of Caldolor in 230 institutions nationwide. This represents growth of 53% in the past quarter.

And with this growing momentum in institutional stockings we will continue to focus our resources on securing broad formulary approval for the product. Our goal remains to establish a critical base of institutions stocking the product as quickly as possible. We are pursuing this strategy in order to maximize our first-to-market advantage with this product.

And in Caldolor we have the first injectable fever treatment approved in the United States, and the first new injectable pain treatment available here in more than 20 years. However, we are not the only company to identify the opportunity for a new product in this category, and we note there are other product candidates in development behind us.

We found that new products presented to hospital pharmacy and therapeutics committees for formulary addition are now being stringently compared to other products already on formulary. P&T committees focus sharply on a new product's efficacy and safety. And we believe Caldolor's clinical profile is very strong in this regard.

We believe that securing broad formulary approval for Caldolor will put us in a strong position in advance of any potential competition. For these reasons and the growing momentum in institutional stockings, we will continue to concentrate our efforts on building formulary acceptance at this time.

Meanwhile, we have begun preparations for a shift in strategy to drive pull-through sales and are currently developing the sales training tools and related marketing materials necessary to effect that shift.

While our focus on formulary approvals has impacted near-term revenue for Caldolor, we believe it is critical to building the brand for its long-term sustained success. Moreover, we remain confident of Caldolor's potential to become our Company's most successful product to date.

I will now turn it over to Marty Cearnal to provide you with a further update on the Caldolor launch.

Thanks, A. J., and good afternoon everyone. I am pleased to report that our sales and marketing strategy is being successfully implemented. As previously discussed, during the first six months of marketing we were limited by FDA regulations to use only data included in our NDA. We now have the ability to use all of our clinical data to support the product, and enhanced marketing materials incorporating our expanded clinical data package was provided to our salesforce during the second quarter.

These materials are now being featured by our sales team, and include data from several newer clinical studies, including our orthopedic study, which was presented at the 2010 Annual Meeting of the American Academy of Orthopedic Surgeons in New Orleans. The data from this study demonstrated that administration of Caldolor at induction of anesthesia, as well as postoperative administration of Caldolor, was safe and effective in reducing both pain and morphine used in postsurgical orthopedic patients.

Our new materials also now include the results of our PK study, which demonstrated that Caldolor can be safely and effectively administered over 5 to 7 minutes, as well as stability data, which demonstrates a shelf life of more than five years at room temperature in the original vials, and the diluted product for up to one week on the pharmacy shelf.

Lastly, our burn study, which evaluated safety and efficacy of Caldolor in treating pain and fever in hospitalized burn patients, and supports the safety of Caldolor treatment over five days, was presented at the 42nd Annual Meeting of the American Burn Association in Boston.

Our sales professionals now have over 15 different communication tools available to them to present the product and to address physician questions. We find that pharmacy and therapeutics committee policies and procedures vary widely from hospital to hospital. As a result, we were able to obtain rapid approvals at certain institutions at the early stages of the launch, which led to our initial 100 formulary approvals. We were able to add 50 more approvals during the first quarter of this year as we continued to work through the approval process at many institutions.

We believe that the availability of our full clinical data package to our salesforce, as well as the ongoing presentation and publication of our clinical data at major medical meetings and in peer-reviewed medical journals, has contributed to the acceleration and the momentum of formulary stockings during the second quarter, resulting in 80 new accounts that have added the product during this 90-day period.

The publication and presentation of our clinical data has continued throughout 2010. During the second quarter a meta-analysis of 85 previously published studies was published in the annuals of pharmacotherapy, comparing the efficacy and safety of ibuprofen versus acetaminophen in both adult and pediatric populations.

A majority of the evaluated studies demonstrated superior efficacy for ibuprofen compared to acetaminophen for the treatment of pain and fever, and found no significant safety differences between the two drugs. This data supports findings from several of our own published studies with Caldolor.

Most recently in July data from our single cause fever study was published in the American Journal of Tropical Medicine and Hygiene. This data supports the efficacy of Caldolor in treating fever associated with malaria, and demonstrated that patients who received intravenous ibuprofen experienced a greater reduction in their temperatures than those who received placebo.

In addition to the ongoing publication of our clinical data, we recently hosted a two-day meeting of leading recognized experts in the field of pain management. The focus of this meeting was a discussion of multimodal approaches to pain treatment, including historical standards of care and new developments underway and on the horizon.

A primary goal for assembling this esteemed group of physicians was to explore current opinions and gauge sentiment regarding changes in this field. Another goal for Cumberland was to explore how Caldolor fits into this bigger picture. We were pleased to have hosted such a relevant group of -- and such an important topic of discussion.

With the feedback that we received specific to our product, we are now working through the key takeaways from the meeting, and will incorporate them into our strategy as appropriate.

I would now like to turn the floor back over to you, A. J.

Okay, thanks for that update, Marty. I would now like to discuss one of the most important and perhaps underappreciated assets here at Cumberland, and that is our sales organization. We started with 15 sales professionals and our hospital force launched Acetadote and decided on a significant expansion to launch Caldolor.

You may recall that we had previously converted this hospital sales group from a contract force to Cumberland employees. Well, today I would like to announce that we have now initiated the conversion of our contact field force that is currently featuring both Kristalose and Caldolor.

While this represents a significant commitment for our Company, it expands our proprietary sales capabilities, and we look forward to welcoming these individuals to the Cumberland team.

We believe we are building a strong sales and marketing organization, coupled with a compelling product portfolio. As we discussed before, we have worked closely with an industry-leading sales and marketing firm to design the optimal territory to address our target market. Those activities guided the expansion of our salesforce last summer to include over 100 sales representatives and managers.

When we shift to a pull-through strategy for Caldolor, we will look to prudently expand our sales capabilities as appropriate. This is consistent with how we grew our hospital salesforce over time during the launch of Acetadote, which is now stocked in more than 1,600 hospitals, representing over 90% of our targeted accounts.

In addition, we decided to expand our sales support capabilities, which includes adding further sales training expertise. Today I'm announcing that Todd Anthony has joined Cumberland as Director of Sales Training and Development, and we will consolidate all training activities under his leadership. Todd comes to us with over 20 years experience in pharmaceutical and sales training from Bayer Healthcare, and we are very excited about this new addition to our team and the contributions he will bring to our sales and marketing organization.

Now turning to Acetadote, we announced during our last conference call that we had submitted a new sNDA at the end of March, requesting approval for a new indication to treat patients with acute liver failure from a wide variety of causes, and seeking extended exclusivity for the product.

While acetaminophen poisoning is the leading cause of acute liver failure, and the leading cause of toxic drug ingestions reported to poison control centers in this country, there are a number of other insults, such as hepatitis C that can damage the liver and lead to acute liver failure.

We are excited about this opportunity to help an important new patient group and create a market for which no other approved therapy currently exists.

This sNDA was accepted by the FDA in the second quarter and granted a priority review. We have had extensive interactions with the FDA regarding this submission as we work our way through the FDA approval process, and once approved, our goal is to introduce Acetadote for this new indication in 2011.

During our last -- our call last quarter we announced that Acetadote has received regulatory approval in Australia, and we continue to work with Phebra Pty Ltd. to prepare for the launch of Acetadote in that market.

We have also partnered with Phebra to commercialize Caldolor in Australia, where it is already available for compassionate use. Phebra recently filed a submission for full regulatory approval of Caldolor with the Australian Therapeutic Goods Administration.

In addition, our South Korean partner for Caldolor, DB Pharm, submitted their New Drug Application for the product to the Korean regulatory authorities in June. We look forward to working with both these partners to progress their initiatives. And we have also continue discussions with other potential partners for additional markets around the world.

Meanwhile we are pleased with the consistent performance of Kristalose and Acetadote and their prospects for additional growth, including potential label expansion. We also remain excited and confident about the long-term potential of Caldolor as we execute our strategies to make the most of our first market advantage.

I will now turn the call over to Dave Lowrance, Cumberland's Chief Financial Officer, to discuss our second-quarter financial results.

Thanks, A. J., and hello everyone. I will begin by reiterating our continued revenue growth during the quarter. For the three months ended June 30, 2010, net revenues were $10.7 million, up from $9.8 million for the corresponding period in 2009, representing a 9% increase.

Net product revenues were comprised of $8.3 million for Acetadote and $2.3 million for Kristalose. Caldolor sales for the quarter were not material as we remain focused on formulary acceptance rather than driving pull-through sales.

For the six months ended June 30, 2010, net revenues grew 9% to $20.9 million, up from $19.2 million for the same period in 2009. Total operating expenses for the three months ended June 30, 2010, increased 5.5% to $9.7 million, up from $9.2 million for the same period in 2009.

This increase was driven primarily by a 33% increase in sales and marketing expense going from $4.4 million in second quarter 2009 to $5.8 million in second quarter 2010, resulting from the expansion of our hospital salesforce and other expenses related to Caldolor's introduction.

This increase in sales and marketing expense was partially offset by a decrease in research and development expense going from $2.6 million in Q2, 2009, to $1 million in Q2 2010. The decrease was primarily due to milestone fees associated with the FDA's approval of Caldolor last June.

For the six-month period ended June 30, 2010, total operating expenses were $19.1 million compared with $16.5 million for the corresponding period in 2009. The difference was also primarily a result of an increase in sales and marketing expense, partially offset by a decrease in research and development costs.

Net income for the second quarter was $0.3 million compared to net income of $0.3 million for the same period in 2009. Our net income for the six months ended June 30, 2010, was $0.6 million compared with $1.5 million for the same period in 2009. Again, the difference was primarily a result of increased sales and marketing expense associated with the expansion of the salesforce and the launch of Caldolor.

Diluted earnings per share for the second quarter was $0.01 compared to $0.02 per share in the second quarter of 2009. This decrease was due to the fact that our weighted average diluted shares outstanding jumped from 16 million in Q2 2009 to 21.2 million in Q2 2010, as a result of our initial public offering in August 2009.

On an EBITDA basis earnings before interest, taxes, depreciation and amortization were $1.2 million for the second quarter. At the end of the quarter we had approximately $71.5 million in cash and cash equivalents compared to $73.8 million as of March 31, 2010. Total assets at June 30, 2010, were $96.7 million.

We have been able to preserve much of the proceeds from our initial public offering for future support of our products and business development activities due to our continued profitability and operating cash flow.

As of June 30, 2010, we have approximately $13.8 million of debt outstanding with $6 million of that classified as current. During the quarter we made principal payments of $1.5 million, which reduced the outstanding balance of our term loan, while the revolver balance remained unchanged.

Net accounts receivable were approximately $4 million. Inventories totaled approximately $8 million as we continue to build stocking for all three products.

During our last call we announced that our Board of Directors had approved the repurchase of up to an aggregate of $10 million of our common stock. Under this program we repurchased approximately 200,000 shares of our common stock during the second quarter at an average price of $6.86. We continue to believe that our stock is undervalued and represents an attractive investment alternative.

With that, I will turn the call back over to A. J.

Thanks, Dave. I would now like to provide the financial community with our revenue expectations for 2010. This is the first time we are issuing guidance, as we have noted a wide range in the estimates of our Company sales. We have taken a fresh look at the long-term potential for Caldolor sales, and our goals and expectations for this product have not changed. However, our 2010 focus remains on building a strong base of institutions stocking the product before shifting our strategy to focus on pull-through sales, which we expect to commence 2011.

As a result, we expect total revenues for fiscal 2010 to be between $42 million and $43 million. This is based on the expected continued growth of Acetadote and Kristalose, as well as our continued focus on achieving broad formulary acceptance for Caldolor during the remainder of this year.

In closing, we feel very fortunate to have three FDA approved products, and are taking the necessary steps for sustained, long-term success. We are executing on our strategy that has been developed by leading industry professionals. We remain confident in the long-term market opportunity for Caldolor based on the feedback from physicians who are successfully using the product, and we are pleased with our continued formulary progress.

Momentum is building, as evidenced by the strong sequential growth in formulary approvals and stockings. We are continuing to focus on securing additional formulary approvals for the product at this time in order to maximize our extended first-to-market advantage and best position Caldolor for long-term success.

We will continue to grow all our brands through formulary expansion, label expansion, strong sales and marketing support, and compelling clinical data. We have a lean organization, and I would like to thank my colleagues here at Cumberland for all their hard work and dedication.

And with that, I would like to now turn the call back over to the operator so we can open the lines for questions.

Ladies and gentlemen, that concludes the Company's presentation and we will now begin the question-and-answer session. (Operator Instructions). Marc Goodman, UBS.

A couple of things. First, can you comment on the Kristalose sales? They were a little bit below trend.

Second of all, can you talk about your confidence in the exclusivity of Acetadote and what you're doing to -- the changes on Acetadote, what gives you confidence you're going to get that exclusivity?

Then the third thing, can you just comment on the tax rate in the quarter, how should we think about it going forward?

Okay, we will ask Dave Lowrance to comment on Kristalose and the tax rate, and then we will turn to Amy Rock, who is here, to discuss Acetadote exclusivity. Dave, can we start with you?

Yes, let me address Kristalose first. First of all, Kristalose prescriptions and gross sales have actually increased from their prior period. However, we haven't -- we have also experienced an increase in our gross net adjustments, primarily due to increased activity in our Medicare and Medicaid reimbursements, as well as increase sales activity within the pharmacy benefit management contracts, and increased wholesaler fee-for-service costs.

With respect to the tax rate, our tax rate is based on several factors, including the impact of permanent items in relation to our projected income for the year. Of course, these permanent items, such as incentive stock options, have a higher ratio to pretax income versus the prior year. I will tell you as projected earnings increase we expect to see that tax rate decrease.

What should we be thinking about for the tax rate next year?

We are not giving guidance on that at this time.

Hi, Marc, it is Amy Rock. In regards to your question about Acetadote, if you remember, we have a twofold strategy in place to continue to protect this product. And the ongoing negotiations and pending sNDA submission with FDA is one of those means. With the sNDA we have requested additional exclusivity for Acetadote and are certainly pursuing that.

Remember, we also have an alternative formulation. And, again, we are proceeding with those discussions and activities to, again, continue to protect this product.

Can you remind us of the timing of that new formulation?

Well, if you're referring to the submission for approval of that new formulation, that submission is imminent, and then we will announce one that submission has occurred.

Irina Rivkind, Duncan-Williams.

Thanks for taking the call. I wanted to explore the Acetadote question a little further. Given that the study that was submitted has some -- failed to reach its primary endpoint and did worse in certain patient groups, and also given that the patent application around Acetadote just got rejection and will probably take some time, how can we feel comfortable that this drug is not going to go away around 2011 to generic competition if your two-pronged strategy fails?

Hi, Irina, it is Amy again. In terms of the sNDA I will comment on that. I think the very important thing to remember is that the data that is released -- was released in the published study that you're referring to is only one part of a very comprehensive package that we submitted to the FDA that is currently under review. And, A. J., if you would like to address this.

Yes, we are in the process of prosecuting the patent application for our new formulation, and the back-and-forth at the Patent Office is typical of this type of process.

Right, but I guess understanding that it takes some time if you have a rejection at this point then by the time your exclusivity expires in early '11, you may not have a patent allowance issued at that time, not to mention a patent.

We feel we are at the tail end of the prosecution process, which has taken quite a while in working with the Patent Office. But we are focused in addition on the submission of the sNDA and confident in the provability of that package.

Just one more follow-up on this. If you get delayed for additional trials or anything on Acetadote, would you be willing to finance the program?

Well, right now we are awaiting FDA's response to the sNDA. That response is anticipated this fall. We will see what additional information the FDA may need or request that they have, and then we will deal with those appropriately.

Michael Tong, Wells Fargo.

A. J., maybe just a little bit to think about in terms of philosophy of broadening formulary acceptance versus driving sales through the existing hospitals, which have already taken Caldolor into formulary. Are those two events necessarily mutually exclusive? Why can't you think -- why can't you pursue demand pull through in the 230 hospitals that have already gotten Caldolor proved on their formulary?

Well, we do feel that obtaining formulary approval and in driving pull-through sales involve two different types of activities. Right now we have trained our salesforce and asked them to focus on the formulary approvals.

Again, the reason for doing that is we have this extended first-to-market opportunity that we want to maximize by building a critical mass of approved institutions prior to the arrival of any competition.

However, we are beginning the preparations for the training and other materials that will be necessary to effect that shift to the pull-through strategy, and we do look forward to unlocking the revenue potential of Caldolor a little further down the road.

Would you consider expanding the current salesforce to take on both things at once?

Well, salesforce expansions, they don't happen overnight. And they can be very disruptive with changes in the territories and changes in the targeting that is involved. Remember, last year we tripled the size of our hospital salesforce, invested heavily in that expansion, and we are still digesting those activities.

We are managing the formulary growth process, and we feel that is going well. We've got growing momentum and favorable feedback from the physicians who are using Caldolor. And we believe the best sales representative for Caldolor in an institution is the one that has taken it through the formulary approval, and then they could build on that to generate the pull-through sales.

Again, once we have built out the initial phase of our formulary network, we will begin to task those same representatives with driving the pull-through sales.

Shiv Kapoor, Morgan Joseph Investments.

Thank you so much for taking my questions. A couple of questions on the guidance first. Does the guidance include any additional revenues from the pull-through strategy for Caldolor? It seems like you pushed it out to 2011 now, so are you expecting minimal contribution from Caldolor this year? And does it include any contribution from label expansion of Acetadote this year?

Well, remember, we are providing total revenue guidance rather than product revenue guidance. Meanwhile, we are focused at the moment and for the foreseeable future, 2010, on building formulary acceptances and stockings for Caldolor rather than switching to the pull-through sales effort. So that will occur a little further down the road, probably at the beginning of 2011.

Okay, a couple of other questions. One, what is -- what kind of financial gains can you get from Caldolor being approved in countries like Australia and South Korea?

Second, you have converted your field salesforce to Company employees. Can you explain why that move was made?

Sure, okay. So in establishing overseas arrangements for our products led by Caldolor, we are not seeking just to sell off the product rights, but to ensure a healthy participation in the long-term sales and the success of the product, because we believe in this product for the long-term.

So we are working with our partners as they go through the regulatory approval process, and once the product is approved we will support the launch of Caldolor in those markets, and then expect a significant participation in the sales that result.

Dave Windley, Jefferies & Co.

Thanks for taking the questions. Michael touched on one of them around the mutually exclusive question. I guess I would just maybe pose that in a slightly different way. Thinking about the concept of the selling for formulary approval versus selling for pull-through being separate activities, A. J., I was hoping you could reconcile that statement with the idea that the rep who orchestrate the formulary approval needing to be the one that actually sells for the pull-through. If they are separate activities and a somewhat different audience, not always physicians on the P&T committee, who would be the users of our product like Caldolor, why does it need to be the same rep?

And maybe reinforcing the question, why is it more important to spend capital on share buyback than on the sales launch of Caldolor, which is what your investors invested in the Company for?

Let me try this -- this is Marty here -- let me try the first part of that. You are right; the rep is in fact initially calling on a broad range of department heads who are members of the P&T committee to gain formulary acceptance. But, importantly, within that group are the one, two, three or four advocates from key departments that will in fact be the key contacts for continuing penetration of the institution.

So to the extent that the head of anesthesiology, the head of surgery, or in larger institutions, orthopedics, colorectal surgery, etc., the head of the ER, the head of the ICU, are usual members of the P&T committee. These are all key contacts. And the rep who has built a relationship with them in the first place is the best person to leverage that relationship as he expands efforts through those departments to build pull-through sales.

The other thing to remember is that initially we won't have every hospital on formulary. So that as we hit our goals on formulary acceptance and rep activity changes, we have signaled that we will slowly expand the sales organization to ensure appropriate coverage. But that can be done in an orderly fashion without inducing a lot of disruption, and allows us to maintain these key contacts that we build during the formulary acceptance process.

Then the second question was about the investment in our sales force. I just want to remind you that we are investing heavily in sales and marketing to support all three brands led by Caldolor. And we'll continue to monitor our activities in these areas, and adjust it appropriately. The design of the salesforce and the leadership of their activities was developed and is being monitored by leading industry veterans in this area.

Now even though the salesforce has not been expanded, we are adding to the support for the salesforce in a number of ways, led by the addition of a new sales training executive that I mentioned.

Then circling back to an earlier question maybe that got left dangling, why are we changing the arrangements for the contract salesforce?

We felt, as a Company, that it made the most sense for us to get involved in pharmaceutical sales through contract forces, and that was an efficient, rapid way to establishing sales capability. But we always had in mind the ability to convert each of our salesforce to Cumberland employees at the appropriate time.

Management and the Board has taken a look at the performance of our field salesforce, and we are pleased with the team and the contributions they have made, and we feel that now is the appropriate time to invest in the conversion of those representatives to Cumberland employees. Recognizing it is a major commitment by the Company, but feeling is the right thing to do, both for Caldolor and Kristalose is at this time.

Thank you. At this time I would like to turn the call back over to management for any closing remarks.

One final note I would like to share is based on the insider ownership and purchases, our senior management and Board interest, we feel are clearly aligned with the interests of our investors.

I would just like to thank everyone for your participation today during this call. We appreciate your interest in our Company. And we do look forward to providing you with another earnings update following the conclusion of our third quarter.

Thank you and goodbye.

Ladies and gentlemen, that concludes our conference for today. If you would like to listen to the replay of today's conference, please dial 800-642-1687, using the access code 90510603. Alternatively, a replay of the webcast will be available on the Company's website at http.//investor.shareholder.com.