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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Cipher Pharmaceuticals' First Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, May 14, 2021. 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 questions. Note that all figures quoted here are in U.S. dollars. During this quarter, we continued to execute against our stated strategy to rightsize the business, optimize our cost structure and broaden our portfolio through key partnerships. Towards that, we entered into a co-promotional agreement with Verity Pharmaceuticals for marketing, sales and co-promotion of Brinavess, Aggrastat, and Trevyent. We believe that working with Verity's experienced, specialized sales force will not only drive down cost but also enhance profitability within our hospital business. First quarter results were negatively impacted by a legal provision in connection with the impairment of TRULANCE. The company accrued $1.25 million as an estimate of the additional amounts owing to the arbitration. Excluding this provision, EPS would have been -- would have come in at USD 0.10, demonstrating the strong earning power of the business. Subsequent to quarter end, we launched Absorica AG with our marketing partner, Sun Pharmaceuticals. We believe that this will broaden Cipher's isotretinoin portfolio and ensure that we have products to serve each segment of this market and maximize the value of this portfolio. The launch of an authorized generic version of Absorica was contemplated when Cipher amended its distribution and supply agreement with Sun Pharma for Absorica in July of 2018. The company launched its authorized generic on April 29, 2021, which was triggered by Teva Pharmaceuticals' launch of its generic version of Absorica. Currently, our isotretinoin portfolio contains our flagship premium branded product Absorica, ABSORICA LD and our newly launched authorized generic for the price-sensitive segment of the market. Cipher will continue to earn a royalty on the Absorica brand as well as the new AG. We will also earn a margin on the COGS for these products. In addition, we will continue to earn a royalty on ABSORICA LD. We are confident that working with Sun is the right economic decision for Cipher and is consistent with our overall strategy to maximize the value of the isotretinoin portfolio. The launch of Absorica AG with our marketing partner, Sun, was part of our overall strategy to broaden our isotretinoin portfolio and ensure that we have products to serve each segment of the market. First quarter 2021 results showed strong control of costs, which translated into a 67% EBITDA margin and strong earnings. During the quarter, we continued to focus on executing against our priorities, including reducing our cost structure, utilizing cash flow effectively and establishing the right partnerships to drive growth. Our Verity partnership is off to a strong start and we believe that Verity's sales force will continue to help manage our cost efficiencies and drive growth and profitability within the hospital segment. Earnings for the first quarter was USD 0.05 per share, and as I previously mentioned, were impacted by legal provision related to TRULANCE. Excluding this provision, EPS would have been $0.10 per share, up 11% versus the prior year. Net income and earnings per share were both impacted by a $1.5 million accrual, which is an estimate of the additional amounts owing under the arbitration. Although we are disappointed with the results of the arbitration, it is important to know that TRULANCE was not currently being marketed or generating revenue for Cipher. In addition to our strong earnings from continuing operations, the company generated $4.3 million in cash from operating activities, with almost all of that cash ending up on the balance sheet at quarter end. In March, the company received approval from the Toronto Stock Exchange to amend its normal-course issuer bid in order to enter into an automatic repurchase plan with a designated broker. Cipher believes that, from time-to-time, common share trade in price ranges that do not fully collect the value. In such circumstances, the company believes that acquiring common shares for cancellation may represent an attractive and desirable use of its available funds. During the first quarter 2021, the company repurchased 150,200 shares, average price of $0.93. With our pristine balance sheet, Cipher is now in an excellent position to continue to execute on the normal-course issuer bid and to selectively pursue product and business acquisitions in a prudent manner with a focus on high growth potential and near-term profitability. One avenue of growth continues to be our development partners. With -- we continue to work with Galephar on a number of interesting projects we are evaluating, including key products in the Lucy portfolio. Cipher and Galephar are working very closely and expect feedback on some of the key projects from the FDA in the coming months. Cipher continues to evaluate the market potential for these products. Included in this portfolio is the -- is with our development partner, Moberg, who has developed a proprietary formulation that can deliver a higher concentration of active drug to the nail than competing products in the market. To date Moberg has conducted 2 North American Phase III studies. In these studies, the overall cure rates 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 required longer to reach this rate. Moberg is considering conducting additional trials to address the complete cure rate by shortening the treatment period. In addition to this program, we are also advancing our Tattoo program, known as DTR-001. The U.S. Patent Office issued notice of allowance for the U.S. patent applications covering tattoo dermal compositions: topical, transdermal and intradermal. 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 studies that will incorporate test parameters that will potentially broaden and reinforce the existing IP [ portfolio ]. Cipher has assembled an attractive portfolio of assets beyond our currently marketed products, and we continue to selectively look for additional products and businesses with gross -- growth potential while remaining focused on profitability. I will now turn the call over to Scott for a financial review of the first quarter results.

Thanks, Craig. Revenue in the first quarter was $5.4 million compared to $5.9 million for the comparative period. Licensing revenue decreased to $2.8 million for the quarter compared to $3.3 million for the same period last year. Licensing revenue from Absorica in the U.S. was $2.3 million dollars for the 3 months ended March 31, 2021, compared to $2.8 million in Q1 2020. Licensing revenue from Lipofen and the authorized generic of Lipofen was $0.4 million for Q4 2020, a decrease of $0.1 million compared to a revenue in $0.5 million for Q1 2021. Just to correct that statement, that should be Q1 2021 is the $0.4 million. Licensing revenue for extended-release tramadol, ConZip and Durela was $0.1 million, which remained relatively unchanged for the comparative period. Product revenue increased by $0.1 million or 5% to $2.7 million for Q1 2021 compared to $2.6 million for the comparable period in 2020. The increase in product revenue was attributable to Epuris in respect of which revenue increased $2.6 million compared to $2.4 million in the comparative period. According to IQVIA, Epuris had a prescription market share of 42% in Canada for the 3 months ended March 31, 2021, compared to 40% for the 3 months ended March 31, 2020. Product revenue for Ozanex, Beteflam, Actikerall, Brinavess, Aggrastat and Vaniqa was $0.1 million in aggregate compared to $0.2 million for the comparative period. The operating expenses increased to $3.4 million for the quarter compared to $2.3 million for Q1 2020. The increase in operating expenses for the 3 months ended March 31, 2021, is primarily due to the provision for legal settlement in connection with TRULANCE. Excluding the provision for the legal settlement of $1.2 million, operating expenses decreased by $0.2 million or 8.3% to $2.1 million for the quarter compared to $2.3 million for Q1 2020. Income from continuing operations was $1.3 million or $0.05 per basic and diluted share in Q1 2021 compared to income from continuing operations of $2.5 million or $0.10 per basic and diluted share in Q1 2020. Income from continuing operations was impacted by the provision for legal settlement of $1.25 million. Excluding this charge, the income from continuing operations increased by $0.1 million or 5% -- 4.5% to $2.6 million or EPS of $0.10 compared to $2.5 million or $0.09 per basic and diluted share in Q1 2020. Adjusted EBITDA for Q1 was $3.6 million compared to $4.1 million in Q1 2020. The company had $13.3 million in cash and no debt at March 31, 2021. The company generated $4.3 million from operating activities for the quarter, and net cash increased by $4.2 million for -- during the quarter -- for first quarter. Cipher has purchased for cancellation 150,200 common shares during the quarter at an average price of $0.93. With our strengthened balance sheet, we are in excellent position to continue to execute on our NCIB while selectively looking for attractive product acquisitions. I will now turn the call back to Craig for closing remarks.

Thanks, Scott. With a profitable business and a reduced cost structure, we feel that we are in an excellent position to start accelerating our strategic promotional efforts to drive market share in our core brands and explore attractive products and businesses in a prudent manner. We are now open -- we will now open the call to questions. Thank you. Operator?

[Operator Instructions] First question comes from Doug Loe at Leede Jones Gable.

The Q&A for me is obviously going to be Absorica focused, and I was just mindful that revenue declined a little bit year-over-year in Q1, but some of that could be pandemically related. So that's fine. But just with regard to the pending generic launched by Teva, which I guess transpired within the last couple of weeks. Was just trying to think about the relevance of pricing Absorica through your branded generic in a way that might actually be more positive for your royalty revenue going forward, given that it would seem to me that Teva's generic Absorica could definitely steal some market share from its own Claravis brand and from Mylan's Amnesteem brand just because of its superior bioavailability, which we've -- it's well documented that Absorica [ in an absence ] of food [ can affect ] efficacy. And so was just thinking that if Teva's generic Absorica can steal market share from its own generic, could that perhaps have some secondary positive benefits on Absorica's overall brand, including the branded generic or ABSORICA LD or Absorica itself? So I don't know, it's maybe less of a question and more of a comment. But I was just wondering if you had any market data or clinical data or feedback from dermatologists that within -- with revised pricing of Absorica that you might actually see some heightened market share lift, and that, that could actually have a positive impact on your royalty revenue going forward.

Doug, it's Craig here. I agree with that. We are monitoring the situation pretty closely and we've had numerous calls with Sun. There is a potential that as a result of the reduced price of the [ product ] that the product could go after other segments of the acne market, including the Accutane-type market. So we don't know for certain but we are thinking that because it's a superior product now at a lower price, the market may expand. So we're hoping to see increased volumes, although at a reduced price.

[Operator Instructions] There are no further questions at this time. 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 2021 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. Enjoy the rest of your day.