Erin Smith - Corporate Relations A. J. Kazimi - Founder, Chairman, CEO & President Martin Cearnal - EVP, Chief Commercial Officer & Director Michael Bonner - CFO & Senior Director of Finance & Accounting.

Andrew D'Silva - B. Riley FBR, Inc..

Thank you for joining the Cumberland Pharmaceuticals Third Quarter 2018 Financial Report and Company Update. Please note that this conference call is being recorded at the company's request and will be archived on Cumberland's website for one week from today's date.

Now I would like to introduce Erin Smith, who is responsible for Corporate Relations at Cumberland. Erin, please go ahead..

Hello, everyone. Before we begin today, I'd like to point out that earlier, we issued a press release containing Cumberland's financial results and corporate update for the third quarter ended September 30, 2018. You can find a copy of that release including the financial tables on our website at www.cumberlandpharma.com.

I'd next like to review the following safe harbor language. Today's call may contain forward-looking statements within the meaning of the Private Securities Reform Act of 1995. Because such statements reflect the company's current views and expectations concerning future events, they may involve risks and uncertainties.

Please note that many factors could affect the company's future results as more fully described under the caption Risk Factors in our most recent Form 10-K and any updates filed with the SEC.

Any forward-looking statements made during today's call are qualified by those risk factors, and future results could differ materially from the views expressed in today's call, and we don't assume any obligation to publicly update such forward-looking statements, whether as a result of new information or future developments.

During today's call, we will be referring to some -- to several of the company's marketed brands. For more information on each of these brands, including full prescribing and safety information, you can find links to each of the individual product websites at www.cumberlandpharma.com.

Also, please note that today, we'll provide adjusted earnings and financial metrics with respect to our performance, and explanation and reconciliation to GAAP measures can be found in our earnings release and in financial tables. I'll now turn the call over to our Chief Executive Officer, A.J.

Kazimi, to begin our corporate update and discussion of the company's performance..

Thanks, Erin. Good afternoon, everyone, and thank you for joining us. We appreciate your participation in today's call. As Erin noted, we'll provide an overall company update as well as a review of our third quarter financial results.

Also with me on the call today are Marty Cearnal, Cumberland's Chief Commercial Officer; and Michael Bonner, our Chief Financial Officer. Today, we'll start with a report on several major developments.

We'll then follow with an update on our commercial products and our development activities and then review our financial results, before finishing with our closing remarks, and then opening the call to any questions that you may have. So let's begin.

As you will hear today, there has been an abundance of activity here at Cumberland, and I'm pleased to report we had another successful quarter as a result of that meaningful progress we've made in several key areas in building towards our long-term growth strategy.

We believe this progress will translate into incremental revenues starting as soon as the end of this year. And even though our revenue performance for Q3 was a bit down when compared to the prior year and sequentially, once put into context, we believe the quarterly financial performance was actually better than it might appear.

The key takeaway from these highlights I'm about to share is that 2019 is shaping up to be one of solid incremental revenue growth. We expect to have three new revenue drivers if all goes well. First, our newest acquisition should provide meaningful contributions during all of next year.

Next, we're planning for our launch of the next-generation Caldolor product during the first half of 2019, and then during the second half of next year, we'll be planning to launch our new RediTrex product line pending favorable approval decisions by the FDA.

We'll also continue to advance our clinical pipeline and even if just one of those product candidates in development receives approval, that could be a game changer for Cumberland's growth profile. So now let's get into the specifics.

Over the past several years, we've communicated that a key pillar of our growth strategy was to develop or acquire new pharmaceutical brands.

As you may know, we've delivered on that promise by adding a number of products to the portfolio and as a result, we've never been more diversified from a revenue or a product standpoint in our company's history. Today, we are very pleased to report a significant new addition to our commercial product line.

We recently announced a definitive agreement with Theravance Biopharma to assume global responsibility for the Vibativ. Today, I'm pleased to share that we have now closed on that agreement and therefore we now own Vibativ, Cumberland's eighth FDA approved brand.

Vibativ is a patented FDA-approved injectable product designed for the treatment of certain serious and difficult-to-treat infections. The brand's approved indications include hospital-acquired bacterial pneumonia and complicated skin infections.

It addresses a range of gram-positive bacterial pathogens including those that are considered difficult to treat and multidrug-resistant such as MRSA.

Consideration for the transaction includes a $20 million payment tied to closing, and an additional $5 million payment in early 2019, and tiered royalties of up to 20% on future net sales of the product. The $20 million upfront payment is being funded through our line of credit with Pinnacle Bank.

Under the terms of this new agreement, Cumberland assumes full responsibility for the product including its marketing, distribution, manufacturing and regulatory activities. And we'll support Vibativ in the U.S.

through our established hospital sales infrastructure, and we expect to selectively add to our sales and medical capabilities to ensure the needed support for this potentially life-saving product.

Our immediate plan for Vibativ is to ensure a smooth transition of the product supply and medical support to the current users of the brand and then we'll launch our hospital promotion and marketing initiatives to help ensure the product is available to the patients who need it.

We'll be shipping and recognizing revenue from this product during the remainder of the year and we're very excited and optimistic about the opportunity that Vibativ will offer Cumberland.

Well, in addition to strengthening our portfolio by adding new brands, we also look for opportunities to support and expand the use of our currently marketed products. As many of you know that have been following us, earlier this year, we filed an application with the FDA for the approval of our next-generation Caldolor product.

That product features an easier-to-administer package and an improved patented formulation. Last quarter, we responded -- we reported that we had received a complete response from the FDA outlining additional information they needed for the application's approval.

Well, our regulatory colleagues acted quickly and during the third quarter, they held a telecon with the FDA to discuss the additional requirements. After speaking with the agency, we promptly filed an amendment to our application that contained the requested additional quality and nonclinical data.

We now await the FDA's response and approval decision as we initiate the manufacture and prepare for the launch of this new Caldolor product, hopefully, in the first half of next year.

In another major initiative, today, I'm pleased to report that we have filed the new drug application with the FDA for the approval of RediTrex, our new methotrexate line of products. Methotrexate is approved in the U.S.

as a treatment for several diseases including arthritis, and we've been working to introduce a line of new injectable methotrexate products for this country, intended for the treatment of active rheumatoid arthritis, juvenile idiopathic arthritis and severe psoriatic arthritis.

Following our submission, we now await the FDA's determination of its acceptance for review. Meanwhile, we are working to establish a long-term manufacture and supply plan for these products, and pending a favorable and timely FDA decision, our goal is to introduce these methotrexate products using the RediTrex brand name by the end of 2019.

So those are my highlights and initial update and I'd now like to turn to Marty Cearnal, Cumberland's Chief Commercial Officer, and ask him to provide you with a briefing on our marketing and sales activities.

Marty?.

Thanks, A.J. This is both a busy and exciting time for our commercial endeavors. We continue to develop and implement programs for our seven marketed products while planning for the successful transition of Vibativ and the pending launches of the next-generation Caldolor and later next year for RediTrex.

During the third quarter, we held a successful National Sales Meeting. At the gathering, our field and hospital sales representatives received the preparation needed to conclude 2018 and to start 2019 with a strong sales effort. The meeting included presentations from senior management, brand marketing and outside experts in our medical department.

The district managers each conducted sessions with their teams devoted to ensuring competent implementation of all planned promotional activities. Later this month, we will convene an additional special meeting for our hospital sales force as a part of the transition activities for Vibativ. Turning to our in-line products.

We recently announced two favorable Caldolor clinical study publications, adding to the growing library of literature supporting the brands. A study at the Ohio State Wexner Medical Center revealed more effective pain control and opioid-sparing activity with Caldolor when compared to ketorolac in patients undergoing arthroscopic knee surgery.

Another clinical study conducted at Tufts University School of Dental Medicine concluded that preemptive treatment with Caldolor is more effective than treatment with IV acetaminophen in reducing both postsurgical pain and opioid use.

In addition to the recent Caldolor publications, we also had favorable Ethyol clinical study results published during the third quarter. Ethyol is our patented, branded amifostine product indicated to reduce xerostomia, or dry mouth, which is often a side effect in patients undergoing postoperative radiation treatment for head and neck cancer.

It also reduces the cumulative renal toxicity associated with the repeated administration of cisplatin in patients with advanced ovarian cancer. This new study demonstrated that amifostine administered before radiotherapy postponed the onset of acute esophagitis in stage 3 small cell lung cancer patients.

Meanwhile, there has been important and favorable competitive development impacting the prescription laxative market segment. The FDA is withdrawing their approval for a group of generic prescription polyethylene glycol, or PEG, laxative products. Beginning this month, these prescription products are to be phased out.

As the FDA implements that decision, lactulose products like Kristalose will remain available as osmotic laxatives by prescription. Furthermore, Kristalose is the only lactulose product actively promoted to physicians.

We're planning a new marketing and sales initiative to reinforce the Kristalose message to physicians based on this withdrawal of several competitive products.

We previously reported on our agreement with Gastro-Entero Logic, or GEL, to acquire the assets associated with Omeclamox-Pak and the closing of that agreement is pending and will occur once we finalize the documentation and complete the arrangements for transferring the manufacturing of Omeclamox-Pak to Cumberland.

Once this acquisition is complete, Cumberland will no longer provide GEL with royalties on sales and fees for overseeing the product's manufacturing. We will then become responsible for maintaining the FDA approval and overseeing the product's packaging, trademarks and other assets. That completes today's update on our key commercial activities.

A.J., I'll on the call back to you..

Thanks for sharing our progress, Marty. Well, during the third quarter, we welcomed our newest board member, Joe Galante at our September Board of Directors meeting. Joe is the former Chairman of Sony Music here in Nashville and a former President of RCA Records in New York.

We are fortunate to be headquartered in Nashville, one of the country's most successful cities in the 21st century and our two largest industries here are health care and entertainment, and we now have leaders of both of those industries helping to build our company through participation on our board.

We are delighted to welcome Joe to our Board of Directors and his successful business track record, entrepreneurial and public company experience make him a valuable new member. Meanwhile, we've continued to advance our robust clinical pipeline, which includes several potential orphan drug candidates.

As an update, we've now completed study enrollment for Portaban, our portal hypertension clinical program. Portaban is a form of ifetroban and is in development for the treatment of the portal hypertension associated with liver disease.

We enrolled 30 patients in a randomized, double-blind, placebo-controlled pilot study to assess ifetroban for the treatment of portal hypertension in cirrhotic patients. Cirrhosis is a life-threatening condition that can impair the flow of blood through the liver resulting in portal hypertension.

The preclinical studies have shown ifetroban can reduce that portal pressure, necrosis, inflammation and fibrosis in multiple models of liver injury. An initial review of the data emerging from our study shows that ifetroban was safe and well tolerated with no unexpected side effects.

Please note that the study was primarily designed to evaluate the safety of the ifetroban treatment in this population and it was not powered for an efficacy measurement.

We did monitor hepatic venous pressure and patients enrolled had a greater degree of variability than expected in their pressure gradient, both at baseline and throughout the study, and therefore no definitive conclusion could be made on the impact of ifetroban on that particular gradient.

A full analysis of the data that will include biomarkers and exploratory endpoints is ongoing. The patients enrolled in this study came from a variety of disease backgrounds and different etiologies causing a decreased ability of their liver to function.

And given the size of the trial, and the variability seen in the venous pressure that I mentioned as well as the cause of the portal hypertension and liver problems, these inconclusive efficacy results are not unexpected. As previously stated, ifetroban was indeed well tolerated with no unexpected safety findings.

We will now await the results from our other Phase II ifetroban studies before deciding which development plan provides us with the best opportunity for the approval and commercialization of ifetroban, our first new chemical entity.

We also continue to advance our Vasculan and Boxaban clinical programs with patient enrollments progressing in each of those phase II studies. As you may recall, we're developing Vasculan for patients with systemic sclerosis, the deadliest autoimmune disorder, which involves a thickening of the skin and internal organs.

Boxaban's development for the treatment of aspirin-exacerbated respiratory disease, a severe form of asthma including chronic rhinitis, nasal polyps, that are impacted and worsened by aspirin.

With FDA clearance of the study protocols, sites established and enrollment underway, we look forward to reporting the top line results from these two additional studies once the enrollment is completed.

We firmly believe meanwhile it's important to build a pipeline of innovated -- innovative new product opportunities and we continue to work through Cumberland Emerging Technologies, or CET, to establish our long-term pipeline and in addition to ifetroban, which emerged from CET, we are supplementing our acquisition and late-stage development work with the early-stage drug development activities being conducted at CET.

During the third quarter, the U.S. National Cancer Institute issued an award of $2 million in support of a joint research program involving Cumberland, CET and Vanderbilt University.

The objective of the collaborative program is to further develop a novel small molecule designed to enhance the effectiveness of radiation treatment for certain lung cancers.

By enhancing the cancer sensitivity to radiation therapy, this technology addresses a significant medical need by seeking to improve clinical outcomes for these oncology patients. So that completes the update on the clinical front and I'd now like to turn to our Chief Financial Officer, Michael Bonner for the financial review.

Michael?.

Thank you, A.J. Total net revenues for the nine months ended September 30, 2018, were $27.2 million compared to $29.5 million for the prior year period. For the three months in September 30, 2018, net revenues were $8.5 million compared to $11.2 million for the prior year period. Our gross margin for the quarter was 83%.

A major driver of this decrease was the significant sales of Totect last year resulting from a competitive drug shortage. Sales in the third quarter were also impacted by modest reorders of Vaprisol, following a surge in that product sales in the prior quarter.

Net revenue by product for the three months ended September 30, 2018, included $3 million for Kristalose and $2.6 million for Ethyol. Net revenue for the quarter also included $1.3 million for Caldolor and $1.1 million for Acetadote.

While net revenues were down sequentially in the third quarter, if you evaluate the results by product, 6 of our 7 marketed brands performed consistently with the prior quarter. One product, Vaprisol accounted for the majority of the sequential shortfall.

In Q2, we reported $1.7 million in Vaprisol sales following increased product supply to the market after limited availability. Customers replenished their inventory of Vaprisol last quarter so sales this quarter were minimal. We do expect to see a return in Vaprisol shipments to more normalized trends in subsequent quarters.

We believe that the best way to analyze our performance is on an annual basis as quarterly results do vary. Recall that our revenues grew 25% during the last full calendar year.

We look forward to our next set of growth drivers associated with the shipments of our newest commercial brand, Vibativ, the launch of our next-generation Caldalor product and the launch of our new methotrexate product line.

If all goes well, these three products should be contributing to our revenue, first with Vibativ in late 2018, followed by our next-generation Caldolor and RediTrex in 2019 pending their FDA approvals. We believe the combination of these three new products should have a meaningful impact on our revenue next year.

Total operating expenses for the three months ended September 30, 2018, were $10.3 million compared to $12 million during the prior year period. That completes our financial report for the third quarter of 2018..

Thanks, Michael. We're working hard to build a specialty pharma company that delivers sustained growth, profitable operations and long-term value. As you've heard today, we've been extremely active in pursuing our goals and we expect the results of those efforts to be contributing as soon as this quarter.

We're very excited about the potential of these developments that we reported today, including the Vibativ acquisition, the Caldolor and RediTrex FDA submissions and the new NIH grant award associated with CET.

As we continue through the end of this year, the same initiatives remain our focus, and we're confident that our strategy of building a diversified product portfolio is on track and well suited to deliver sustained growth and profitability in the years to come.

We'll continue to manage our operations with financial discipline, with the goal of delivering positive cash flow. And we remain in a strong financial position with high margins and a favorable balance sheet as we continue our work to advance our mission of improving patient care through the delivery of high-quality pharmaceutical products.

So that's our review and update. And now let's open the call if there are any questions. Operator, please proceed..

[Operator Instructions]. And our first question comes from the line of Andrew DeSilva with B. Riley FBR..

If you could please just touch base on Vibativ, the acquisition, and what it does to your broader R&D activity as it relates to the ifetroban candidates primarily? Should we expect this to be viewed as a steady state from your internal development goals or should we expect a shift now that you'll obviously need to focus on the integration? And then what kind of increase should we model for hospital sales force from an additional team member standpoint or additional costs?.

Sure. So the first -- to answer your first question, I would assume a steady state, full steam ahead in pursuing the development of ifetroban. The Vibativ acquisition does not impact that strategy, and as we've noted, getting any one of those ifetroban products to the market could be a game changer for our company and a key value driver.

Regarding the expansion of the organization, we are fortunate that we have an existing infrastructure that we can layer Vibativ into. And a lot of costs to commercialize and support Vibativ are already being incurred.

As you noted, there will be some expansion and we will be adding a few hospital sales territories and perhaps a few medical positions in the field as well as a position or two in the home office. But no major expansion but just a rounding out of our current team..

And you had some comarketing agreements in the past with other products.

Is this a situation where we should expect that as well?.

As you know, we do have copromotion agreements for Caldolor and Vaprisol with one company and then for Kristalose with another.

We are -- right now, regarding Vibativ in your question, we are focusing on the smooth transition of the product from Theravance to Cumberland, and the training needed to get our people up to speed on how to best support the brand. That's our focus in the near term.

But you're correct that over time, we do consider copromotion opportunities and that's certainly a possibility for this new brand..

[Operator Instructions].

Okay. Well, thank you, everyone, for joining our call today. As we've mentioned in the past, we do understand that many of you prefer a private discussion with management and if so, just reach out to Erin here and she can help us schedule such a call.

We do appreciate your time and interest in Cumberland, and we look forward to then providing you with an update after the end of the fourth quarter. Goodbye, everyone..

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 4258737. Alternatively, a replay of the webcast will be available on the company's website. I would like to thank you for your participation. You may all disconnect..