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

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Cipher Pharmaceuticals Second Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, August 13, 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 law, 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 make 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. Our second quarter results demonstrated strong sequential and year-over-year growth in revenue, EBITDA and earnings per share, driven by growth in our license and product portfolios. In addition, we generated $7.6 million in cash from operating activities in the 6 months ending June 30, 2021. The ending the quarter with a strong balance sheet and placing us in an excellent financial position as we continue to assess growth opportunities and maximize income generated from our distribution agreements. During the second quarter, we launched Absorica AG with our marketing partner, Sun Pharmaceutical Industries. We believe that this will broaden Cipher's isotretinoin portfolio and ensure we have products to serve each segment of this market and maximize the value of this portfolio. The U.S. isotretinoin prescription market increased by 18.2% in the 6-month period ended June 30, 2021, which helped drive growth in our licensing revenue during the second quarter as we were first to market with an authorized generic version of Absorica. Although it is still early, it is our belief that the lower-priced generic may have driven an expansion of the overall market. Currently, in our isotretinoin portfolio, Cipher is receiving royalties from Sun Pharma for the branded product, Absorica, the authorized generic as well as ABSORICA LD. We are confident that working with Sun Pharma is the right economic decision for Cipher and is consistent with our overall strategy to maximize the value of the isotretinoin portfolio. Absorica was a key contributor to our strong second quarter revenue growth. I'm pleased to report that our licensing revenue from Absorica was $2.4 million in the second quarter, an increase of 25% compared to $1.9 million for the comparative period. Market share for Absorica and the authorized generic version of Absorica for the three months ended June 30, 2020, was approximately 4.2% compared to 6.5% for the 3 months ended June 30, 2020. Market share, including Sun's ABSORICA LD, was approximately 6.2%. In addition to Absorica, revenues for product revenue for Epuris grew 63% to $3.1 million compared to $1.9 million in the comparative period. According to IQVIA, Epuris had prescription market share of 43% in Canada for the 3 months ended June 30, 2021, compared to 41% last year. We are extremely pleased with the performance of Epuris and the stability of revenue and cash flow during this challenging period. During the second quarter, we drove 10% -- a 10.3% decrease in SG&A, and we generated 67% adjusted EBITDA margins. Earnings for the second quarter were $0.11 per share, an increase of 450% over the comparable period. 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, the common shares trade in price ranges that do not fully reflect their value. In such circumstances, the Company believes that acquiring common shares for cancellation may represent an attractive and desirable use of available funds. During the 6-month period ending June 30, 2021, the Company reached for cancellation 527,500 shares at an average price of $1.30 for cancellation. Cipher has assembled an attractive portfolio of assets beyond our currently marketed products and we continue to move these products towards commercialization. We are advancing our tattoo program, our product development with Moberg and our products that we have in development with Galephar. 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. I will now turn the call over to Scott for a financial review of our quarterly results. Scott?

Thanks, Craig. Revenue in the first quarter was $6.1 million compared to $4.7 million for the comparative period. Licensing revenue increased $2.8 million for the quarter compared to $2.7 million for the same period last year. Licensing revenue from Absorica in the U.S. was $2.4 million for the 3 months ended June 30, 2021, compared to $1.9 million in Q2 2020. Licensing revenue from Lipofen and the authorized generic version of Lipofen was $0.4 million for Q2 of 2021 compared to a decrease of -- $0.2 million compared to revenue in $0.6 million for Q2 2020. Licensing revenue for extended-release tramadol, which is ConZip and Durela, was $0.05 million, a decrease of $0.2 million compared to $0.25 million for the 3 months ended June 30, 2020. Product revenue increased by $1.3 million or 65% to $3.3 million for Q2 2021, compared to $2 million for the comparable period in 2020. The increase in product revenue was attributable to Epuris in respect of revenue increased to $3.1 million compared to $1.9 million in the comparative period. According to IQVIA, Epuris had a prescription market share of 43% in Canada for the 3 months ended June 30, 2021, compared to 41% for the 3 months ended June 30, 2020. Product revenue for Ozanex, Beteflam, Actikerall Brinavess Aggrestat and Vaniqa was $0.2 million in aggregate compared to $0.1 million for comparative period. The operating expenses increased to $2.3 million for the quarter compared to $2.1 million for Q2 2020. The increase in operating expenses for the second quarter is primarily due to an increase in cost of goods sold. SG&A expense was $1.2 million for the quarter, a decrease of 10% compared to the same period in prior year. Income from continuing operations was $2.8 million or $0.11 per basic and diluted share in Q2 2021 compared to income from continuing operations of $0.4 million or $0.02 per basic and diluted share in Q2 2020. Adjusted EBITDA for Q2 increased by 40% to $4.1 million compared to $2.9 million in Q2 2020. the Company had $16.1 million in cash and no debt as at June 30, 2021. the Company generated $7.6 million in cash from operating activities in the 6-month period ended June 30, 2021, and the net increase -- net cash increased $6.9 million during the same period. Subsequent to June 30, 2021, the Company has signed the office lease for its corporate operations head office to an arms' length third party. The term of the lease was 10 years and 3 months and commenced on January 1, 2019. the Company expects to incur a nonrecurring early termination expense in the 3 months ended September 30, 2021. It is expected that the early termination of the lease will result in a net savings of approximately $25,000 per month. Cipher has purchased for cancellation 377,300 common shares during the quarter at an average price of $1.45. With our strengthened balance sheet, we are in an excellent position to continue to execute our NCIB while investing in our development pipeline and selectively looking for attractive 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 product and business acquisitions in a prudent manner. We'll now open the call for questions. Operator?

[Operator Instructions] Your first question comes from Doug Loe, Leede Jones Gable.

Congratulations on the strong financial data. Craig, just kind of piecing together a couple of data points in your financials, starting with a pure strength in the quarter. Congratulations on that. Then your commentary about the growth of the U.S. isotretinoin market going up 18.2%. You attribute that, in part, if not entirely to, availability of Teva's lower-priced generic Absorica. Piecing those 2 data points together, I'm just wondering if you or Sun or both of you have revisited your branded Absorica pricing strategy and perhaps revisited the price volume curves that I'm sure you put together on that product, just to see if there is a different price points that might allow you to capture more Epuris like market share in the U.S. and perhaps capture more revenue as a consequence.

Yes, Doug. We worked with Sun very closely on the launch of the AG product, and pricing was a big issue. It's something that we did some modeling around as to what type of volume changes may occur based on different price points. And we believe that the product is priced right now to maximize total income from the product. And, I guess, maybe, Doug, I'll just add a little bit. Obviously, the pricing in the U.S. market is significantly different than in Canada where Epuris is priced at a slight premium to the competitors in the market right now. And given the extra value that the product has, the people are prepared to pay the extra amount for that premium value.

Understood. Understood. And then maybe just a second quick question here, and then I'll throw it over to others. I mean you did incur about $1 million in income tax expense in the quarter, and it's a little bit surprising given that you purchased, a couple of years ago, all of Correvio's tax losses. Just, kind of, walk me forward on what and how you intend to monetize all the tax laws required to that transaction and why your taxes were so high specific in this period.

Yes, I'm going to ask Scott to help me through this a little bit, but there is a difference between the reporting of taxes and the cash taxes.

Yes. Doug, working closely with our auditors, it was determined that we would accrue taxes on a normal basis, excluding any tax utilization from Cardiome losses for financial statement purposes. In other words, recording for books is normal tax provisions. However, when we go to file our tax returns for the year ended, we will indeed apply the Cardiome tax losses. So there is now a difference between book and when we go to file the taxes, and that was determined working very closely with our auditors.

[Operator Instructions] There are no further questions. So I will turn the conference back to Mr. Craig Mull. Please go ahead, sir.

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 we've discussed today. Thank you, and have a great day.

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