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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Cumberland Pharmaceuticals, Inc.    CPIX

CUMBERLAND PHARMACEUTICALS, INC.

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CUMBERLAND PHARMACEUTICALS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/14/2019 | 05:30pm EDT
Disclosure regarding forward-looking statements
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. While forward-looking statements reflect our
beliefs and best judgment based upon current information, they are not
guarantees of future performance. Other important factors that may cause actual
results to differ materially from forward-looking statements are discussed in
the sections entitled "Risk Factors" and "Special Note Regarding Forward-Looking
Statements" of our Annual Report on Form 10-K for the year ended December 31,
2018 ("2018 Annual Report on Form 10-K"). 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 report on Form 10-Q.

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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 medical specialties are characterized by relatively
concentrated prescriber bases that we believe can be penetrated effectively by
small, targeted sales forces. Cumberland is dedicated to providing innovative
products that improve the quality of care for patients and address unmet or
poorly met medical needs. We promote our approved products through our hospital
and field sales forces in the United States and are establishing a network of
international partners to bring our medicines to patients in their countries.
Our portfolio of FDA approved brands includes:
•Acetadote® (acetylcysteine) Injection, for the treatment of acetaminophen
poisoning;
•Caldolor® (ibuprofen) Injection, for the treatment of pain and fever;
•Kristalose® (lactulose) for Oral Solution, a prescription laxative, for the
treatment of chronic and acute constipation;
•Omeclamox®-Pak, (omeprazole, clarithromycin, and amoxicillin) for the treatment
of Helicobacter pylori (H. pylori) infection and related duodenal ulcer disease;
•Vaprisol® (conivaptan) Injection, to raise serum sodium levels in hospitalized
patients with euvolemic and hypervolemic hyponatremia;
•Ethyol® (amifostine) Injection, for the reduction of xerostomia (dry mouth) in
patients undergoing post-operative radiation treatment for head and neck cancer
and the renal toxicity associated with the administration of cisplatin in
patients with advanced ovarian cancer;
•Totect® (dexrazoxane hydrochloride) Injection, for emergency oncology
intervention, to treat the toxic effects of anthracycline chemotherapy in case
of extravasation (drug leakage from the bloodstream into the tissues); and
•Vibativ® (telavancin) Injection, for the treatment of certain serious bacterial
infections including hospital-acquired and ventilator-associated bacterial
pneumonia, as well as complicated skin and skin structure infections.

Our pipeline of product candidates includes:
•Hepatoren® (ifetroban) Injection, a Phase II candidate for the treatment of
critically ill patients suffering from liver and kidney failure associated with
hepatorenal syndrome ("HRS");
•Boxaban® (ifetroban) Oral Capsules, a Phase II candidate for the treatment of
asthma patients with aspirin-exacerbated respiratory disease ("AERD");
•Vasculan® (ifetroban) Oral Capsules, a Phase II candidate for the treatment of
patients with the systemic sclerosis ("SSc") form of autoimmune disease;
•Portaban® (ifetroban) Injection and Oral Capsules, a Phase II candidate for the
treatment of patients with portal hypertension associated with liver disease;
and
•RediTrex™ (methotrexate) Injection, an approval submission candidate for the
treatment of active rheumatoid, juvenile idiopathic and severe psoriatic
arthritis, as well as severe disabling psoriasis.
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, regulatory, manufacturing, sales,
marketing, and finance. Our business development team identifies, evaluates, and
negotiates product acquisition, licensing, and co-promotion opportunities. Our
product development team creates proprietary product formulations, manages our
clinical studies, prepares all regulatory submissions, and manages our medical
call center. Our quality and manufacturing professionals oversee the
manufacture, release, and shipment of our products. Our marketing and sales
professionals are responsible for our commercial activities, and we work closely
with our distribution partners to ensure availability and delivery of our
products.

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Growth Strategy
Our growth strategy involves maximizing the potential of our existing brands,
while continuing to build a portfolio of differentiated products. We currently
market eight FDA approved products for sale in the United States. Through our
international partners, we are working to bring our products to patients in
their countries. We also look for opportunities to expand our products into
additional patient populations through clinical trials, new indications, and
select investigator-initiated studies. We actively pursue opportunities to
acquire additional marketed products, as well as late-stage development product
candidates in our target medical specialties. Our clinical team is developing a
pipeline of new product candidates to address poorly met medical needs. Further,
we are supplementing these activities with the early stage drug development
activities at Cumberland Emerging Technologies ("CET"), our majority-owned
subsidiary. Specifically, we are seeking long term sustainable growth by
executing the following plans:
Support and expand the use of our marketed products. We continue to evaluate our
products following their FDA approval to determine if additional clinical data
could expand their market and use. We will continue to explore opportunities for
label expansion to bring our products to new patient populations. We have
secured pediatric approval, expanding the labeling for both our Acetadote and
Caldolor brands.
Selectively add complementary brands. 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 brands. We
focus on under-promoted, FDA approved drugs, as well as late-stage development
products that address poorly met medical needs. We will continue to target
product acquisition candidates that are competitively differentiated, have
valuable intellectual property or other protective features, and allow us to
leverage our existing infrastructure. Our acquisition of Vibativ represents our
largest product acquisition.
Progress clinical pipeline and incubate future product opportunities at CET. We
believe it is important to build a pipeline of innovative new product
opportunities. Our ifetroban Phase II development programs represent the
implementation of this strategy. At CET, we are supplementing our acquisition
and late-stage development activities with the early-stage drug development
activities. CET partners with universities and other research organizations to
develop promising, early-stage product candidates, which Cumberland has the
opportunity to further develop and commercialize. We expanded our network of
university collaborations with the addition of Louisiana State University and
the Medical University of South Carolina.
Leverage our infrastructure through co-promotion partnerships. We believe that
our commercial infrastructure can help drive prescription volume and product
sales. We look for strategic co-promotion partners that can complement our
capabilities and enhance the opportunity for our brands. Our co-promotion
arrangements with Poly Pharmaceuticals, Inc. and Foxland Pharmaceuticals, Inc
allow us to expand current promotional support for Kristalose across the United
States.
Build an international contribution to our business. We have established our own
commercial capabilities, including two sales divisions to address 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.
We will continue to develop and expand our network of international partners
while supporting our partners' registration and commercialization efforts in
their respective territories. The acquisition of Vibativ resulted in several new
international partners and market opportunities.
Manage our operations with financial discipline. We continually work to manage
our expenses in line with our revenues in order to deliver positive cash flow
from operations. We remain in a strong financial position, with favorable gross
margins, and a strong balance sheet. We continue to use cash flow from
operations for our ongoing share repurchase program.
We were incorporated in 1999 and have been headquartered in Nashville, Tennessee
since inception. During 2009, we completed an initial public offering of our
common shares and listing on the Nasdaq stock exchange. Our website address is
www.cumberlandpharma.com. We make available through our website our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K and all material press releases and other reports as soon as reasonably
practicable after their filing with the U.S. Securities and Exchange Commission,
("SEC"). These filings are also available to the public at www.sec.gov.


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RECENT DEVELOPMENTS
Strategic Review Update
Earlier this year, we announced a strategic review of our brands, capabilities,
and international partners. This review followed our accelerated business
development initiative, which resulted in a series of transactions. Because of
that progress, we felt that it was prudent to take a fresh look at our product
portfolio, partners, and organization to ensure we have the proper focus and
capabilities. As a result:
•We executed a License and Distribution agreement with HongKong WinHealth Pharma
Group Co. Limited ("WinHealth") for our Caldolor and Acetadote brands in China
and Hong Kong. We anticipate WinHealth will provide $2 million in milestone
payments and up to an estimated $290 million in revenue contribution over a ten
- year period for supplies of the products following their registration in
China. In conjunction with these new arrangements, we terminated a previous
License and Distribution agreement with Gloria Pharmaceuticals Co for the two
brands.
•We also entered into a Strategic Alliance agreement with WinHealth to explore
future business opportunities that will further the mission and goals of each
organization. Founded in Hangzhou, China and currently headquartered in Hong
Kong, WinHealth has developed a wide breadth of capabilities including drug
licensing, product development and registration, and has established a strong
network of distribution and sales promotional capabilities for the Chinese
market. Further, WinHealth has established partnerships with international
companies that include Boehringer-Ingelheim, Janssen, Novartis, Pfizer, and
Roche, generating approximately $330 million in annual sales in 2018.
•In addition, WinHealth entered into an agreement with CET to make a $1 million
investment through the purchase of shares of CET stock. As part of that
agreement, WinHealth obtained a Board position at CET and the first opportunity
to license CET products for the Chinese market. Subsequently, the Investment
agreement CET had with Gloria Pharmaceuticals Co. was terminated.
•We completed the assignment and amendment of a Commercialization Agreement with
Hikma Pharmaceuticals LLC ("Hikma") to register and distribute Vibativ in a
number of countries throughout the Middle East. Hikma is a multinational
pharmaceutical company currently headquartered in London, United Kingdom.
Originally founded in Amman, Jordan the company now has market representation
throughout the world, with a particular focus in the Middle East and North
African regions. Hikma develops, manufactures, and markets a broad range of
branded and non-branded generic medicines, generating over $2 billion in gross
sales during 2018.
•We also completed the assignment and amendment of a Commercialization Agreement
with R-Pharma JSC ("R Pharma") associated with ongoing distribution of Vibativ
in Russia and a number of adjacent countries in Eastern Europe. R-Pharma is one
of the leading multinational pharmaceutical organizations based in Russia.
Headquartered in Moscow and focusing in a wide breadth of therapeutic areas in
the specialty and hospital care markets, R-Pharma generated over $1.6 billion in
revenues in 2018.
•Cumberland also completed the assignment and amendment of a Commercialization
Agreement with Dr. Reddy's Laboratories Limited ("Dr. Reddy's") for the
registration and distribution of Vibativ in India. Dr. Reddy's is a
multinational pharmaceutical company based in Hyderabad, India. The company
currently markets over 190 medications through their commercial operations in
over 35 countries. Combined with their extensive network of manufacturing
capabilities, Dr. Reddy's generated over $2.2 billion in sales during their 2018
- 2019 fiscal year.
•In addition, we also signed a new License and Distribution agreement with DB
Pharm Korea Co., Ltd. ("DB Pharm") for Vibativ in South Korea. DB Pharm is also
currently distributing our Caldolor product in that market.
•Meanwhile, we reached an agreement with Clinigen Healthcare Limited to return
the U.S rights to their Ethyol and Totect brands at the end of the third quarter
2019, in exchange for $5 million in financial consideration paid over a two-year
period.
•As a result, our hospital product efforts will now be focused on our three key
acute care products - Caldolor, Vibativ, and Vaprisol. In order to support this
acute care business, we have completed the expansion of our hospital sales
division, as well as our field-based medical science team.
•Lastly, we also concluded the License and Distribution agreement with Teligent
Inc. for Caldolor in Canada.




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Methotrexate

In January 2019, the Company received notification from the U.S Food and Drug
Administration ("FDA") that the new drug application ("NDA") for our new line of
methotrexate products is complete and acceptable for filing. Furthermore, the
FDA has set September 2019 as the Prescription Drug User Fee ("PDUFA") action
date for an approval decision.
In November 2018, we submitted the NDA for approval from the FDA. In conjunction
with this submission, we remitted payment of $1.3 million to the FDA for the
PDUFA Application Fee associated with this methotrexate product line
application. These products are designed to treat adult and pediatric patients
with rheumatoid arthritis, as well as adults with psoriasis.
During 2019, we provided additional data to the FDA to address a number of
requests arising from their review of our NDA. There is no assurance that the
information provided in our response will be sufficient for the product line's
approval.
Caldolor
In February 2018, Cumberland completed and filed with the FDA an application for
approval. The product features a new, patented formulation in a more convenient
to use package. In April 2018, the FDA determined that the application was
complete and notified us of their acceptance for review. In August 2018, we
received a complete response from the FDA outlining additional quality and
nonclinical data needed for the application's approval. In September 2018, the
Company submitted an amendment to our application containing additional quality
and nonclinical data.
In January 2019, the FDA approved the application, and in April 2019, the
Company began initial shipments of the product to select customers. A full
launch of this next generation product is planned for late 2019.
In addition, we completed a submission to the FDA an application in support of
an update to our Caldolor approval that included new geriatric, shortened
infusion, pediatric, and safety data. Aiming to further expand the product's
label, we provided important data generated from our clinical studies regarding
an optimal infusion time, additional safety information, as well as geriatric
and pediatric administration. The revised label will also include class label
update on the use of NSAIDs with aspirin.
Meanwhile, we completed enrollment in our study of Caldolor in newborns with
ages ranging from birth to six months of age. Once the data gathering and
evaluation is complete, we will provide top line results from this trial. We
also submitted a label update to the FDA for Caldolor.
Ifetroban
We have been evaluating our ifetroban product candidate in a series of clinical
studies. We have completed three pilot Phase II studies involving 1) patients
suffering from hepatorenal syndrome, a life threatening condition involving
liver and kidney failure, 2) patients with portal hypertension associated with
chronic liver disease and 3) patients suffering from aspirin-exacerbated
respiratory disease, a severe form of asthma. A follow-up Phase II study is
currently underway for this asthma indication. In addition, we are currently
evaluating ifetroban in pilot Phase II study of patients with systemic sclerosis
or scleroderma, a debilitating autoimmune disorder characterized by diffuse
fibrosis of the skin and internal organs. Additional pilot studies of ifetroban
are underway including several investigator initiated trials. We are awaiting
further study results before deciding on the best path for approval for
ifetroban, our first new chemical entity.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
Please see a discussion of our critical accounting policies and significant
judgments and estimates in Note 1 to the Company's Condensed Consolidated
Financial Statements accompanying this report and the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our 2018 Annual Report on Form 10-K.
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.

                                       19
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RESULTS OF OPERATIONS
Three months ended June 30, 2019 compared to the three months ended June 30,
2018
The following table presents the unaudited interim statements of operations for
the three months ended June 30, 2019 and 2018:
                                                                          Three months ended June 30,
                                                     2019                      2018                        Change
Net revenues                                   $    11,580,600        $          10,163,724        $            1,416,876
Costs and expenses:
Cost of products sold                                2,012,196                    1,523,319                       488,877
Selling and marketing                                5,153,129                    5,076,250                        76,879
Research and development                             1,458,366                    1,450,390                         7,976
General and administrative                           2,528,916                    2,334,223                       194,693
Amortization                                         1,029,708                      648,520                       381,188
Total costs and expenses                            12,182,315                   11,032,702                     1,149,613
Operating income (loss)                               (601,715)                    (868,978)                      267,263
Interest income                                        130,565                      149,706                       (19,141)
Interest expense                                       (91,200)                     (22,019)                      (69,181)
Income (loss) before income taxes                     (562,350)                    (741,291)                      178,941
Income tax (expense) benefit                            (4,462)                      (4,159)                         (303)
Net income (loss)                              $      (566,812)       $            (745,450)       $              178,638


The following table summarizes net revenues by product for the periods
presented:
                                                                           Three months ended June 30,
                                                         2019                      2018                        Change
Products:
Acetadote                                          $       983,473        $             841,431        $              142,042
Omeclamox-Pak                                              478,604                       89,952                       388,652
Kristalose                                               3,476,807                    3,203,743                       273,064
Vaprisol                                                   212,526                    1,685,900                    (1,473,374)
Caldolor                                                 1,054,718                    1,101,023                       (46,305)
Ethyol                                                   2,008,247                    2,809,691                      (801,444)
Totect                                                     154,910                      269,190                      (114,280)
Vibativ                                                  2,599,280                            -                     2,599,280
Other                                                      612,035                      162,794                       449,241
Total net revenues                                 $    11,580,600        $          10,163,724        $            1,416,876



Net revenues. Net revenues for the three months ended June 30, 2019 were $11.6
million, an increase of 14% over the $10.2 million for the three months ended
June 30, 2018. The increase was due primarily to our newest product, Vibativ,
which delivered $2.6 million in net revenue. As detailed in the table above, net
revenue increased for three of our marketed products: Acetadote, Omeclamox-Pak
and Kristalose during the quarter. These increases were partially offset by the
decreases in Ethyol and Vaprisol net revenue.
Kristalose revenue increased by $0.3 million or 9% during the second quarter of
2019 when compared to the prior year period. The product's net revenue was
positively impacted by an improvement in sales volumes and net pricing.
Omeclamox-Pak revenue increased $0.4 million or 432% for the second quarter of
2019 compared to the second quarter of 2018 primarily due to an increase in
sales volumes and improved net pricing during the period. This improvement in
net pricing included a decrease in expired product returns in the current
period.
                                       20
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Acetadote revenue includes net sales of our Acetadote brand and our share of net
sales from our Authorized Generic. During the quarter, there was a 17% increase
in the product's revenue when compared to the prior year period as a result of
improved sales volumes.
Caldolor revenue was $1.1 million for both the second quarter of 2019 and the
second quarter of 2018. While there were higher domestic shipments of the
product and improved net pricing, these changes were offset by a reduction in
international shipments of Caldolor when compared to the prior year period.
Vaprisol revenue decreased $1.5 million during the second quarter of 2019 when
compared to the prior year period due to lower sales volumes. The prior year
period sales were higher as a result of the arrival of a new lot of the product
during April 2018 resolving temporary supply issues associated with product.
Ethyol revenue decreased by $0.8 million for the three months ended June 30,
2019 compared to three months ended June 30, 2018 primarily as a result of lower
sales volume, partially offset by improved net pricing.

Other revenue during the three months ended June 30, 2019 includes $0.3 million
in revenue related to non-refundable up-front payments associated with two new
agreements with International partners.
Cost of products sold. Cost of products sold for the second quarter of 2019
increased $0.5 million compared to the prior year period as a result of
increased sales. Cost of products sold, as a percentage of net revenues, were
17.4% during the three months ended June 30, 2019 compared to 15.0% during the
three months ended June 30, 2018. This change in costs of products sold as a
percentage of revenue was attributable to a change in the product sales mix,
including the sales of Vibativ.
Selling and marketing. Selling and marketing expense for the second quarter of
2019 increased $0.1 million compared to the prior year period. This increase is
primarily attributable to higher royalties related to the increased product
sales during the second quarter of 2019.
Research and development. Research and development costs were $1.5 million for
the second quarter of 2019 and for the same period last year. A portion of our
research and development costs is variable based on the number of trials, study
sites, cost of the per patient study protocol and patients involved in the
development of our new product candidates. We continue to fund our ongoing
clinical initiatives associated with our pipeline products.
General and administrative. General and administrative expense for the second
quarter of 2019 increased to $2.5 million from $2.3 million during the second
quarter of 2018 as a result of increases in advisory, legal and professional
fees during the period. A portion of these increased costs were related to our
acquisition of Vibativ.
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 June 30, 2019 and
the three months ended June 30, 2018 totaled approximately $1.0 million and $0.6
million, respectively. This increase was driven primarily by the amortization of
the intangible assets acquired in the Vibativ transaction.
Income taxes. Income tax expense for the three months ended June 30, 2019 as a
percentage of income (loss) before income taxes was 0.8% for the three months
ended June 30, 2019 compared to 0.6% for the three months ended June 30, 2018.
As of June 30, 2019, we had approximately $44 million of net operating loss
carryforwards resulting from the exercise of nonqualified stock options that
have historically been used to significantly offset income tax obligations. We
expect to continue to pay minimal income taxes during 2019 and beyond, through
the continued utilization of these net operating loss carryforwards, on any
taxable income generated from our operations.

                                       21
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Six months ended June 30, 2019 compared to the six months ended June 30, 2018
The following table presents the unaudited interim statements of operations for
the six months ended June 30, 2019 and 2018:
                                                                           

Six months ended June 30,

                                                     2019                      2018                        Change
Net revenues                                   $    23,483,347        $          18,751,329        $            4,732,018
Costs and expenses:
Cost of products sold                                4,011,932                    3,051,280                       960,652
Selling and marketing                               10,273,634                    9,746,761                       526,873
Research and development                             2,725,967                    3,325,329                      (599,362)
General and administrative                           5,198,972                    4,664,504                       534,468
Amortization                                         2,051,353                    1,284,655                       766,698
Total costs and expenses                            24,261,858                   22,072,529                     2,189,329
Operating income (loss)                               (778,511)                  (3,321,200)                    2,542,689
Interest income                                        246,426                      232,200                        14,226
Interest expense                                      (152,111)                     (40,321)                     (111,790)
Income (loss) before income taxes                     (684,196)                  (3,129,321)                    2,445,125
Income tax (expense) benefit                            76,966                       (8,318)                       85,284
Net income (loss)                              $      (607,230)       $          (3,137,639)       $            2,530,409


The following table summarizes net revenues by product for the periods
presented:
                                                                           Six months ended June 30,
                                                         2019                     2018                        Change
Products:
Acetadote                                          $     1,832,976        $          2,115,741        $             (282,765)
Omeclamox-Pak                                              678,141                     231,344                       446,797
Kristalose                                               6,785,050                   6,473,097                       311,953
Vaprisol                                                   499,202                   1,779,790                    (1,280,588)
Caldolor                                                 2,372,599                   2,140,771                       231,828
Ethyol                                                   5,099,429                   5,065,764                        33,665
Totect                                                     235,805                     681,964                      (446,159)
Vibativ                                                  4,659,471                           -                     4,659,471
Other                                                    1,320,674                     262,858                     1,057,816
Total net revenues                                 $    23,483,347        $         18,751,329        $            4,732,018



Net revenues. Net revenues for the six months ended June 30, 2019 were $23.5
million, an increase of $4.7 million, or 25% compared to $18.7 million for the
six months ended June 30, 2018. The increase was due primarily to our newest
product, Vibativ, which delivered $4.7 million in net revenue. As detailed in
the table above, net revenue increased for four of our marketed products:
Caldolor, Ethyol, Omeclamox-Pak and Kristalose during the six months ended June
30, 2019. These increases were partially offset by the decreases to Totect,
Acetadote and Vaprisol net revenue.
Kristalose revenue increased by 5% or $0.3 million during the six months ended
June 30, 2019. The product's net revenue was positively impacted by an
improvement in sales volumes and net pricing.
Caldolor revenue experienced an increase of $0.2 million during the six months
ended June 30, 2019 compared to the same period last year. This 11% increase in
revenue in the six months ended June 30, 2019 compared to the prior year period
was the result of higher domestic shipments of the product and improved net
pricing, these changes were offset by a reduction in international shipments of
Caldolor when compared to the prior year period.
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Omeclamox-Pak revenue increased $0.4 million during the six months ended June
30, 2019 compared to the prior year, primarily due to an increase in sales
volumes and improved net pricing during the period. This improvement in net
pricing included a decrease in expired product returns in the current period.
Ethyol revenue was $5.1 million for the six months ended June 30, 2019 and the
six months ended June 30, 2018. The product experienced a decrease in sales
volumes but an improvement in net pricing.
Acetadote revenue includes net sales of our Acetadote brand and our share of net
sales from our Authorized Generic. During the six months ended June 30, 2019 the
Acetadote net revenue decreased $0.3 million as a result of lower sales volumes
and a decrease in net pricing.
Vaprisol revenue decreased $1.3 million during the six months ended June 30,
2019 compared to the prior year period primarily due to decreased sales volume.
The prior year period sales were higher as a result of the arrival of a new lot
of the product during April 2018 resolving temporary supply issues associated
with the product.
Totect revenue decreased to $0.2 million during the six months ended June 30,
2019. We began shipments of Totect during a national shortage of dexrazoxane,
resulting in strong initial demand for the product. Following our launch,
supplies of dexrazoxane became available from competing suppliers, all with
labeling for the cardiac indication. Totect is the only dexrazoxane available in
the U.S. FDA approved for the extravasation indication.
Other revenue during the six months ended June 30, 2019 includes $0.3 million in
revenue related to non-refundable up-front payments associated with two new
agreements with International partners as well as $0.8 million in CET grant
revenue.
Cost of products sold. Cost of products sold for the six months ended June 30,
2019 and six months ended June 30, 2018 were $4.0 million and $3.1 million,
respectively. Cost of products sold, as a percentage of net revenues were 17.1%
compared to 16.3% during the prior year. This change in costs of products sold
as a percentage of revenue was attributable to a change in the product sales
mix, including the sales of Vibativ.
Selling and marketing. Selling and marketing expenses for the six months ended
June 30, 2019 were $10.3 million, compared to $9.7 million for the prior year
period, representing an increase of approximately $0.5 million or 5% This
increase was primarily attributable to increased royalties related to product
sales. There were also increases in sales and promotional spending during the
six months ended June 30, 2019 to promote Vibativ, our newest brand.
Research and development. Research and development costs for the six months
ended June 30, 2019 were $2.7 million, compared to $3.3 million for the same
period last year, representing a decrease of approximately $0.6 million. A
portion of our research and development costs is variable based on the number of
trials, study sites and patients involved in the development of our product
candidates. The decrease was primarily the result of lower expenditures in our
ongoing clinical initiatives associated with our pipeline products as well as
decreases in our FDA fees.
General and administrative. General and administrative expenses were $5.2
million for the six months ended June 30, 2019, compared to $4.7 million during
the same period last year. The $0.5 million increase from the prior year was
primarily driven by an increase in compensation and benefits, including non-cash
stock based compensation.
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 six months ended June 30, 2019
totaled approximately $2.1 million, which was an increase of $0.8 million over
the prior year. The increase in expense was attributable to the amortization of
additional product rights and capitalized patents, including those assets
associated with the Vibativ acquisition.
Income taxes. Income tax benefit for the six months ended June 30, 2019 as a
percentage of income (loss) before income taxes was 11.2%. This is compared to
income tax expense as a percentage of loss before income taxes of 0.3% for the
six months ended June 30, 2018.


                                       23
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LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Our primary sources of liquidity are cash flows provided by our operations, the
amounts borrowed and available under our line of credit and the cash proceeds
from our initial public offering of common stock that was completed in August
2009. We believe that our internally generated cash flows, existing working
capital and our line of credit, including its recent expansion to $20 million,
will be adequate to finance internal growth, finance business development
initiatives, and fund capital expenditures for the foreseeable future.
We invest a portion of our cash reserves in marketable securities including
short-term cash investments, U.S.Treasury notes and bonds, corporate bonds and
commercial paper. At June 30, 2019 and December 31, 2018, we had approximately
$9.5 million and $8.3 million, respectively, invested in marketable securities.
The following table summarizes our liquidity and working capital as of June 30,
2019 and December 31, 2018:
                                                             June 30, 2019                   December 31, 2018

Cash and cash equivalents                              $             20,951,180        $                 27,938,960
Marketable securities                                                 9,479,686                           8,290,679
Total cash, cash equivalents and marketable securities $             30,430,866        $                 36,229,639

Working capital (current assets less current
liabilities)                                           $             29,615,228        $                 31,311,813

Current ratio (multiple of current assets to current liabilities)

                                                                2.3                                 2.1

Revolving line of credit availability                  $                      -        $                          -


The following table summarizes our net changes in cash and cash equivalents for the six months ended June 30, 2019 and June 30, 2018:

                                                                   Six months ended June 30,
                                                              2019                         2018

Net cash provided by (used in):
Operating activities                                   $        1,464,926        $             1,029,675
Investing activities                                           (6,547,278)                   (10,737,490)
Financing activities                                           (1,905,428)                       201,602

Net increase (decrease) in cash and cash equivalents $ (6,987,780)

      $            (9,506,213)


The net $7.0 million decrease in cash and cash equivalents for the six months
ended June 30, 2019 was attributable to cash used in investing and financing
activities, partially offset by the $1.5 million in cash provided by operating
activities. Cash provided by operating activities of $1.5 million was positively
impacted by the decrease in inventory of $1.4 million as well as the add back of
non-cash expenses of depreciation, amortization and share-based compensation
expense totaling $2.9 million. Cash used in investing activities included the
$5.0 million payment to Theravance as part of the acquisition of Vibativ. Cash
used in investing activities also included net cash invested in marketable
securities of $1.1 million and additions to intangibles of $0.4 million. Our
financing activities reflected the $1.2 million in cash used to repurchase
shares of our common stock.
The net $9.5 million decrease in cash and cash equivalents for the six months
ended June 30, 2018 was attributable to cash used in investing activities
partially offset by cash provided by financing and operating activities. Cash
provided by operating activities of $1.0 million was primarily impacted by
changes in our working capital which provided net cash of $2.2 million,
including net collections of accounts receivable of $2.6 million and non-cash
expenses of depreciation and amortization and share-based compensation expense
totaling $2.1 million. The generation of operating cash was offset by a net loss
for the period of $3.1 million. Cash used in investing activities included net
cash invested in marketable securities of $10.0 million and additions to
intangibles of $0.6 million. Our financing activities included $2.2 million in
net cash provided by borrowings under our line of credit offset by $2.0 million
in cash used to repurchase shares of our common stock.



                                       24
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Debt Agreement
On May 10, 2019, we entered into a third amendment ("Third Amendment") to the
Revolving Credit Loan Agreement, dated July 28, 2017, with Pinnacle Bank
("Pinnacle Agreement"). The Third Amendment extended the term of the Pinnacle
Agreement through July 31, 2021 as well as modified certain definitions and
terms of the existing financial covenants. On October 17, 2018, we entered into
a second amendment ("Second Amendment") which increased the maximum aggregate
principal available for borrowing under the Pinnacle Agreement to $20.0 million.
For a summary of the material terms of the Pinnacle Agreement, as amended, see
Note 7 to the accompanying unaudited condensed consolidated financial statements
Under the Pinnacle Agreement, we were initially subject to one financial
covenant, the maintenance of a Funded Debt Ratio. On August 14, 2018 we amended
the Pinnacle Agreement ("First Amendment") to replace the single financial
covenant with the maintenance of either the Funded Debt Ratio or a Tangible
Capital Ratio, as defined in the First Amendment. The Third Amendment modified
the definition of the Funded Debt Ratio and the compliance target of the
Tangible Capital Ratio. Both Third Amendment modifications were related to the
Vibativ transaction. We were in compliance with the Tangible Capital Ratio
financial covenant as of June 30, 2019 and expect to maintain compliance with
this covenant in future periods.
OFF-BALANCE SHEET ARRANGEMENTS
During the six months ended June 30, 2019 and 2018, we did not engage in any
off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to market risk related to changes in interest rates on our cash
on deposit in highly-liquid money market accounts and our revolving credit
facility. We do not utilize derivative financial instruments or other market
risk-sensitive instruments to manage exposure to interest rate changes. The main
objective of our cash investment activities is to preserve principal while
maximizing interest income through low-risk investments.
We believe that our interest rate risk related to our cash and cash equivalents
is not material. The risk related to interest rates for these accounts would
produce less income than expected if market interest rates fall. Based on
current interest rates, we do not believe we are exposed to significant downside
risk related to a change in interest on our money market accounts. Based on the
$9.5 million in marketable securities outstanding at June 30, 2019, a 1%
decrease in the fair value of the securities would result in a reduction in
pretax net income (loss) of $0.1 million.
Based on current interest rates, we do not believe we are exposed to significant
downside risk related to change in interest on our investment accounts.
The interest rate risk related to borrowings under our line of credit is based
on LIBOR plus an interest rate spread. There is no LIBOR minimum and the LIBOR
pricing provides for an interest rate spread of 1.75% to 2.75% (representing an
interest rate of 5.15% at June 30, 2019). As of June 30, 2019, we had $20
million in borrowings outstanding under our revolving credit facility.
Exchange Rate Risk
While we operate primarily in the United States, we are exposed to foreign
currency risk. Currently, we do not utilize financial instruments to hedge
exposure to foreign currency fluctuations. We believe our exposure to foreign
currency fluctuation is minimal as our purchases in foreign currency have a
maximum exposure of 90 days based on invoice terms with a portion of the
exposure being limited to 30 days based on the due date of the invoice. Foreign
currency exchange gains and losses were immaterial for the six months ended June
30, 2019 and 2018. Neither a five percent increase nor decrease from current
exchange rates would have a material effect on our operating results or
financial condition.
Item 4. Controls and Procedures
Management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15-15(e) of the Exchange Act, as of June 30, 2019. Based on that evaluation, our
CEO and CFO concluded that, as of June 30, 2019, our disclosure controls and
procedures are considered effective to ensure that the information required to
be disclosed by the Company in reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and that such information is accumulated and communicated
to the Company's management, including the Company's CEO and CFO, as
appropriate, to allow for timely decisions regarding required disclosure.
During the three months ended June 30, 2019, there has not been any change in
our internal control over financial reporting that has materially affected, or
is likely to materially affect, our internal control over financial reporting.
                                       25

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