Cipher Pharmaceuticals Inc. (CPH) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cipher Pharmaceuticals Fiscal Third Quarter 2020 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, November 13, 2020. On behalf of the speakers that follow, listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements within the meaning of the safe harbor provisions of the Canadian provincial securities laws. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are implied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that could cause results to vary, please refer to the risks identified in the company's annual information form and other filings with Canadian regulatory authorities. Except as required by Canadian securities laws, the company does not undertake to update any forward-looking statements. Such statements speak only as of the date made. I would now like to turn the call over to Mr. Craig Mull, Interim Chief Executive Officer of the company. Please go ahead, Mr. Mull.

Thank you, operator, and good morning, everyone. Joining me today is Scott Langille, Cipher's CFO. On today's call, I will be making opening remarks before passing the call over to Scott to review the financial results in detail. Following our prepared remarks, we will open the call for your questions. Note that all amounts are in U.S. dollars unless otherwise stated. The COVID-19 pandemic continued to impact the economy during the third quarter of 2020. Cipher is navigating through this environment while executing on business improvements and cost reductions. Cipher demonstrated strong profitability during the third quarter and sequential growth in revenue despite market conditions that have not fully normalized. Our focus continues to be on driving profitability, strengthening the balance sheet and looking for the right opportunities for growth. Epuris continued to perform well in the quarter with revenues of $1.8 million compared to $1.9 million in the third quarter of 2019. Epuris finished the quarter with a 41% market share in the Canadian market, up from 40% in the comparative period. We are extremely pleased with the performance of Epuris and the stability of the revenue and cash flow during this challenging period. Licensing revenue from Absorica in the U.S. was $2.3 million, up from $1.8 million in the second quarter of 2020, but a decrease of $0.3 million compared to Q3 2019. Absorica's market share for the 3 months ended September 30, 2020, was approximately 6% compared to approximately 8% from the 3 months ended September 30, 2019, according to Symphony. Market share, including Sun's ABSORICA LD was approximately 7%. Earlier this year, Sun Pharmaceutical Industries, Cipher's marketing partner for Absorica, launched ABSORICA LD capsules in the U.S. for the management of severe nodular acne in patients 12 years of age and older. In addition to the benefits of ABSORICA LD will bring to the patient population, the launch triggered an extension or agreement with Sun Pharmaceuticals, providing us with 2 additional years of royalties on Sun's isotretinoin product portfolio. As previously communicated, the royalty rate on ABSORICA LD will be identical to the royalty on Absorica until December 2021. The extension allows for a reduced royalty rate in subsequent years. On January 13, 2020, the company received a notice of termination from Bausch Health for alleged breach of contract in respect of its licensing agreement for TRULANCE. The company is currently in arbitration to resolve the matters contained within. Third quarter results show sequential growth in revenue and strong year-over-year growth in earnings. Excluding an impairment charge, total operating costs decreased 18% in the third quarter over last year. This optimized cost structure resulted in EBITDA increasing to $2.7 million or 55% of net revenue compared to a loss of $0.4 million last year. Net income increased to $1.6 million during the third quarter compared to a loss of $2.1 million in the prior year, and EPS increased to USD 0.06 or CAD 0.08 compared to a loss of USD 0.08 in the prior period. We also continue to work with our development partner, Galephar, on a number of interesting projects, including alitretinoin, a drug for severe hand eczema for the U.S. market. Cipher and Galephar are working closely and expect to receive feedback on recent submissions to the FDA. Cipher continues to evaluate the market potential for this product. In our Tattoo program, the U.S. patent office issued a notice of allowance for the U.S. patent application covering Tattoo dermal compositions. We have received encouraging results from the proof-of-concept studies and identified a lead candidate compound. Planning is currently underway for the next focused animal study that will incorporate test parameters that will potentially broaden and reinforce the existing IP portfolio. Our development partner, Moberg, has developed a proprietary formulation that can deliver high concentrations of active drug to the nail that competing products on the market have difficulty in matching. To date, Moberg has conducted 2 North American Phase III studies. In these studies, the overall cure rate were lower than competing products at 4.5%. However, in contrast to the competing products, the mycological cure rate was 50% in less than 24 weeks, while the competing products require longer to reach this rate. Moberg is considering conducting additional trials to address the complete cure rate by shortening the treatment period. I will now turn the call over to Scott for a financial review of our third quarter results.

Thanks, Craig. Revenue in the third quarter was $4.9 million, up sequentially from $4.7 million in [Audio Gap] for 3 months ended September 20 -- September 30, 2020, compared to $3.9 million for 3 months ended September 30, 2019. Licensing revenue from Absorica in the U.S. was $2.3 million, up sequentially from $1.8 million in Q2 2020, but down when compared to $2.9 million for the 3 months ended September 30, 2019. Absorica ended the quarter with a 6% market share compared to 8% for the 3 months ended September 30, 2019, according to Symphony. Market share, including Sun's ABSORICA LD was approximately 7%. Licensing revenue from Lipofen and the authorized generic of Lipofen was $0.6 million for Q3 2020 compared to $0.8 million for the 3 months ending September 30, 2019. Licensing revenue from the extended-release tramadol, ConZip and Durela, was $0.4 million for the 3 months ended September 30, 2020, compared to revenue of $0.22 million for the prior year. Product revenue was $2 million for Q3 2020 compared to $2.2 million in 2019. Product revenue from Epuris was $1.8 million for the 3 months ended September 30, 2020, compared to $1.9 million for the 3 months ended September 30, 2019. Epuris had a prescription market share of approximately 41% in Canada for the 3 months ended June 30, 2020, compared to 40% for the 3 months ended September 30, 2019. Total operating expenses decreased by 61% in the third quarter over last year. The decrease was primarily driven by a decrease in impairment of intangibles and restructuring costs. Excluding an impairment charge, total operating cost decreased by 18%. SG&A expense was $1.6 million for Q3 2020, an increase of $0.4 million compared to the prior year. The increase in SG&A was primarily driven by an increase in costs related to legal and consulting spend. Net income was $1.6 million or $0.06 per basic and diluted share in Q3 2020 compared to a loss of $2.1 million or a loss of $0.08 per basic and diluted share in Q3 2019. EBITDA in the quarter increased to $2.7 million or 55% of net revenue compared to a loss of $0.4 million in the prior year. Adjusted EBITDA for Q3 2020 was $2.8 million or 58% of net revenue compared to $3.7 million in Q3 2019. The company used $1.8 million in cash from operating activities during the quarter. As of September 30, 2020, the company had cash of $4.7 million and $1.7 million drawn on a credit facility. The company's credit facility has been paid off as of October of 2020. I will now turn the call back to Craig for closing remarks.

Cipher's business and operations have demonstrated resilience as the COVID-19 pandemic continues to impact the world. With a profitable business and a reduced cost structure, we feel that we are in an excellent position to start ramping up strategic promotional efforts to drive market share in our core brands, and looking for the right opportunity to return Cipher to growth. We'll now open the call to questions. Operator?

[Operator Instructions] Your first question comes from Prasath Pandurangan from Bloom Burton.

Firstly, could you -- is there any progress in terms of taking advantage of the tax losses?

Yes. We've made significant progress. We are in serious discussions, including drafting of agreements with a partner that will co-promote our hospital products. And with that, we believe that we will be able to access the Cardiome losses as we are conducting an active business in the area that Cardiome had participated in. And we expect to be able to utilize those losses as soon as the end of 2020.

Okay. Okay. And secondly, I had -- more color on the working capital changes, if you could, in the quarter?

Scott, I'll turn that over to you.

Specifically, in terms of working capital, we had a -- year-to-date, we had a reduction in accounts receivable or usage in receivables and an increase in payables. But that was really driving the working capital change. But the increase in receivables, we actually had a fairly large sum from one of the license partners that came in just shortly after the quarter ended. So that really drove the increase or use in working capital, and then it will reverse itself in Q4.

The next question comes from Doug Loe at Leede Jones Gable.

So Absorica is always the product azure in your quarterly financials. And I was just struck by the difference in prescription market share in Canada versus the U.S. And I know that most of that is pricing strategy. But I was just wondering whether or not in any consultation with some that there might be a re-exploration of pricing as a way to drive market share here in the near term. And then sort of secondarily to that, I think we're all obviously focused on time lines when Allergan can launch its own generic Absorica, which I believe is next month. Any update on that would be helpful. And then I have a follow-up.

Okay. So the the launch of a generic is something that we are watching very closely. We're trying to get as much information that we can about any potential launch of a generic of Absorica. We have not seen it. There has been no [indiscernible] constantly with Sun. We have talked to them about different pricing strategies. We are preparing, in the event of a launch of a generic, to be able to come out with an authorized generic and maintain a significant share of that market. So this is a day-to-day thing, and we're certainly in communication with Sun. And also doing our own reconnaissance on any potential launch of a generic.

Okay. That's helpful. And then just on pipeline. I mean you were pretty transparent about your partnered DTR-001 program, which is great to hear that, that program is being resurrected and on the ongoing TRULANCE dispute resolution. And obviously, the Moberg nail fungus drug. You didn't mention the psoriasis drug that Can-Fite BioPharma is developing. And I see that they had some mildly positive news on permission to go forward with interim analysis on a Phase III psoriasis program. Just I mean any update on the status of that program and your sense on time lines to when a Phase III could conclude and when potential regulatory milestones could be forthcoming there? And I'll leave it there.

Yes. We're working to set up times to get a better idea of where Can-Fite is with their process and their overall schedule. I think that we could do more work in that area than we have done. The product sounds like or it shows some potential of positive results. But we want to get more detail from Can-Fite with regards to the specifics of the results. And what their plans are and schedule for moving the product towards approval, and those discussions are ongoing.

[Operator Instructions] Next question comes from [ Ishant Reo ] at Alliance Global.

Can you please identify in terms of the time lines for the TRULANCE arbitration. And also, can you please tell us in terms of the goalpost in terms of the next 1 year, please?

Sorry, I missed that second question.

The second question was trying to understand in terms of the time lines of where we should see the company in the next 12 months? We obviously are reducing expenses, which seems very good. But equally, the revenue from other products is going down. So I wanted to understand what the goalposts are for the company for the next 12 months?

Okay. Let me start with the second question first. The Canadian business, the Canadian commercial business continues to grow. Yes, we are having declines in the Absorica royalty payments related to price competition, primarily, which we are planning as a -- the game plan there would be once the generics launch that we work -- we will launch our own generic with Sun. And we believe that coming under the Absorica name will allow the product to maintain significant market share. What we -- what the game plan is for the next 2 years, or even the next 12 months, is to continue to watch our cost and our cost structure. But to start focusing on the development of some of our different programs, including the Tattoo program; the Moberg nail fungus program; and then thirdly, a number of different potential projects with Galephar, the first and foremost being alitretinoin, which is the hand eczema product. Your second question with regard to Bausch and the arbitration that we're having with them. We are going through the process. We expect that the arbitrator will make a decision no later than the end of January of 2021, and unless the matter is settled between the parties before that.

The next question comes from [ Peter Ratech ] at [ Ratech Consulting ].

I'm wondering with respect to the normal course issuer bid. You indicated that 30,000 shares, I think, were purchased in the period, August 12 to September 30, August 12 being the initial effective date of it. What was the average price of purchase of those shares?

I'm not sure, Peter, of the exact price. But as you probably are aware, that Cipher is not able to purchase stock at anything greater than the last traded price.

Right. No, I'm aware of that. But I was...

So I guess, if you looked in the range for those days, I don't know the average price.

Okay. That would give an indication...

We have to get back.

Okay. No, that's fine for that. It was 30,000 shares. Are you able to give us an indication of how many additional shares have been purchased in the next basically 45 or so days, i.e., between October 1 and yesterday?

Well, Peter, we were under a blackout for a good part of that. We were fairly restricted from buying. I can tell you what our intentions are going forward. We expect to be an active buyer of our stock, subject to the regulatory requirements that we have to abide by. So the stock is, as you no doubt can see, it's very thinly traded. We would like to buy as much stock as we can.

Right, right. Okay. Fair enough. And then 1 follow-up, if I could. Just back to the TRULANCE arbitration. I appreciate that there's confidentiality provisions and you're -- you've got to abide by those, I know that well, obviously. But the question is, has the formal part of the arbitration concluded such that it is now in the arbitrator's hands to decide? Or is there still more additional arbitration hours that need to be had?

I would say that it is in the arbitrator's hands at this point. Although I'm sure that there could be further discussion amongst the parties, but I would say that it is in the arbitrator's hands at this point.

Okay. No, fair enough. And I think we can all appreciate that the pandemic has certainly slowed all legal processes, arbitrations included, and drawn them out from what they would otherwise be. And I'd expect that would have been the case in the TRULANCE situation as well.

Correct.

There are no further questions. I will now turn the call back over to Craig Mull for closing remarks.

Thank you for joining us today. We look forward to reporting on our progress throughout the balance of 2020 as we execute on the priorities discussed today. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.