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 2023 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, May 12, 2023. 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.

Good morning, everyone, and thank you for joining this call. As a reminder, all amounts stated are in U.S. dollars unless otherwise noted. On today's call, I will provide some insights into the current market for pharmaceutical assets, provide a brief product update and then discuss our plans for growth. I will then turn the call over to Bryan for his insights into our financial performance. Recent issues in the banking sector, tightening credit conditions and rapidly increasing interest rates have impacted many industries, including our pharmaceutical industry. As a result, the number of opportunities being brought to our attention have increased significantly in recent months whereby pharmaceutical companies are needing to turn to asset monetization to stay afloat. In the first quarter of 2023, Cipher generated $4.7 million in cash from operating activities with nearly all of it flowing to our balance sheet, strengthening our cash reserves, which now exceed USD 33 million. Additionally, Cipher demonstrated exceptional foresight, negotiating a $35 million acquisition facility with RBC at the end of 2022, which closed in February of 2023. With both cash on hand and available credit facilities totaling nearly USD 70 million, we believe this gives us the upper hand in what is becoming an increasingly more attractive M&A market. Cipher's strong balance sheet and cash-generating abilities puts us in a unique position to benefit from the current market environment as we evaluate product and business acquisitions. Cipher's first quarter results once again demonstrate the power of our light and lean operating model, which is a key differentiator from our peers. In the first quarter, Cipher delivered consistent operating results with our robust product portfolio, generating substantial cash flow from operations. During the quarter, Cipher achieved a 54% net margin and delivered 25% year-over-year growth in EPS. We added the quarter -- we ended the quarter with USD 33.4 million in cash or CAD 45.2 million. And again, we have no debt. On a share basis, Cipher has $1.33 per share in cash or CAD 1.80 in cash per share. Our product business generated 66% of our first quarter revenue while our licensing business contributed 34% of our first quarter revenue. I would now like to briefly touch on recent events on product -- on our key products in development. The first product I would like to discuss is Can-Fite Biopharma's CF-101 or piclidenoson. In January of 2023, Can-Fite submitted its market registration plan to the European Medicines Agency, stating that a submission to the FDA would follow. In April of 2023, Can-Fite announced that it received a positive opinion from the Committee of Medicinal Products for Human Use of the European Medicines Agency with respect to the submission of a registration plan for a pivotal Phase III clinical trial for the treatment of moderate to severe psoriasis. The pivotal Phase III study and the safety of the 3-milligram twice-daily dose of piclidenoson were accepted by the agency. Following additional feedback from the FDA, the company intends to initiate a prospective double-blind, placebo-controlled and randomized clinical trial with its lead product, piclidenoson, aimed at demonstrating clinical safety and efficacy for the treatment of moderate to severe psoriasis, sufficient to support a marketing authorization application. We are pleased to see Can-Fite's progress and are excited about the commercial potential of this product. The annual Canadian market for plaque psoriasis treatments is $600 million-- with the market for moderate to severe plaque psoriasis estimated at approximately $45 million. Cipher holds Canadian marketing rights to this novel product, which we expect possesses substantial commercial potential. The second product I'd like to discuss is Moberg Pharma's MOB-015. The North American study with MOB-015 is progressing as Moberg has planned. There are now 30 different clinics in the U.S. and Canada, which are treating patients in the study. The randomized vehicle-controlled multicenter Phase III study will enroll a total of 350 patients with nail fungus. The patients are being evaluated over 52 weeks, and the primary endpoint will be the proportion of subjects achieving a complete cure rate of their target now. EU Product approval is expected in 2023. Top line results from the ongoing North American Phase III study are expected 15 months after full patient enrollment, which would set the timeline for the first quarter of 2025. Cipher holds the exclusive Canadian rights to MOB-015. In Canada, according to IQVIA the total prescription market for onychomycosis was CAD 82 million with a single product having over 90% of that market. We are pleased to see the continued progress that Moberg is making to commercialize MOB-015. We look forward to competing in this large market with an innovative topical product that would provide a safe and effective treatment option for many Canadians who suffer from this common nail infection. Cipher's primary focus for the remainder of 2023 remains on effectively allocating our capital in order to maximize value for our shareholders. This involves a continued emphasis on investing in our commercial products to drive organic growth, advancing our product pipeline and increasingly spending time accessing opportunities for profitable product and company acquisitions. With these levers at our disposal, we are confident in our ability to accelerate growth and drive shareholder value. I will now turn the call over to Bryan for a discussion on our financial results.

Thank you, Craig, and good morning, everyone. Sound businesses report strong earnings quarter after quarter, and that's what Cipher achieved in the first quarter of 2023 and what I'll be discussing today. Total net revenue was $4.5 million in the first quarter of 2023 compared to $5.4 million in Q1 of 2022. Licensing revenue was $1.7 million for the first quarter compared to $2.1 million in the prior year quarter, a decrease of $0.4 million arising from the Absorica portfolio. Licensing revenue from the Absorica portfolio in the U.S. was $1 million compared to $1.4 million in the prior year quarter. This decrease is primarily attributable to lower royalty rates earned on the Absorica portfolio in connection with the renegotiated distribution and supply agreement entered into with Sun Pharmaceuticals toward the end of Q1 2022. Despite the decrease in licensing revenue, during the quarter for the Absorica portfolio, both Absorica and the authorized generic of Absorica's market share was approximately 6.1% compared to 4.3% as of March 31, 2023, according to Symphony Health. Licensing revenue from Lipofen and the authorized generic version of Lipofen was flat year-over-year at $0.7 million. Product revenue decreased by $0.1 million or 3% to $3.2 million for the 3 months ended March 31, 2023, compared to $3.3 million for the 3 months ended March 31, 2022. Product revenue from Epuris was $2.7 million for the 3 months ended March 31, 2023, a decrease of $0.4 million or 13% from $3.1 million for the 3 months ended March 31, 2022. Product revenue from Epuris is transacted in Canadian dollars and therefore, subject to foreign exchange changes with the U.S. dollar. Excluding the impact from foreign exchange translation of $0.2 million, Epuris revenue decreased only slightly by approximately 7% or $0.2 million, and we're optimistic on the potential for Epuris sales for the remainder of the year. The product revenue from the rest of the Canadian portfolio was $0.5 million in Q1 2023 compared to $0.2 million in Q1 '22, an increase of $0.3 million. Selling, general and administrative expenses of $1.2 million was flat for the 3 months ended March 31, 2023, and 2022 due to active management of general business costs. Excluding higher noncash based -- share-based compensation included in SG&A, cash costs decreased by $0.4 million during Q1 2023. Adjusted EBITDA for the first quarter was $3.2 million compared to $3.1 million in the prior year quarter, an increase of $0.1 million. Focused management teams are those who adapt and manage both the top and the bottom line to ensure they deliver value and consistent earnings. It is because of this management style, we've been able to preserve earnings levels in the first quarter of Q1 2023 with both our comparative quarter and our trailing quarters. Net income for the quarter ended March 31, 2022, was $2.6 million -- my apologies, net income for the quarter ended March 31, 2023 was $2.6 million or $0.10 per basic common share, 25% higher than net income at March 31, 2022, of $2.2 million or $0.08 per basic common share. Company had $33.4 million in cash and no debt at the end of the quarter. Cipher generated $4.7 million in cash from operating activities, and total net increase of cash balances of $4.6 million during the 3 months ended March 31, 2023. Cipher has a demonstrated track record, whereby net income positive cash generation and earnings metrics such as EBITDA, are tightly correlated. This is what we believe is how sound businesses are managed. I'm also proud to highlight at the end of February 2023, we announced the closing of a USD 35 million credit facility with the Royal Bank of Canada, which is at our disposal and greatly expands our reach for future M&A opportunities. In today's M&A market, the ability to move quick and closing short time frames are what sellers are looking for and with our cash on hand and our available credit facility, this positions Cipher uniquely among our peers. Now I'll open up the call to questions. Operator?

[Operator Instructions] Your first question comes from the line of Doug Loe from Leede Jones Gable.

Congratulations on the quarter, gentlemen. A couple of thoughts, one of which is notwithstanding the issues with regard to royalty rate on Absorica, your cash flow from that product continues to decline steadily. And yet fenofibrate, which competes in an equally competitive generic environment has been remarkably stable for several years now actually. So I was just kind of wondering if there were any sort of key learnings from your marketing partners with regard to how fenofibrate stability might be ascribed to how Absorica could be marketed in order to generate comparable stability, mindful that they compete in distinct markets. So that's the first thing. And then second of all, congratulations on the uptick in non-Epuris product sales in Canada. You provided several of the brands that you sell into derma and acute care hospital markets in your MD&A, but without specifically identifying which of those products might have been a key revenue driver in the quarter. I just wonder if you could provide some additional granularity on which of the non-Epuris products in Canada might be generating some of that growth and what sort of growth trajectory we might expect going forward based on that feedback. And I'll leave it there.

Doug, yes, thanks for the question -- questions. On Absorica, your observation on some of the licensing revenue is correct. We've actually been in discussions with Sun Pharma, and they've noticed over recent periods that their market share had been declining. Recall with Absorica, there are a number of generics in the U.S. market. So they're kind of competing -- both the brand and the authorized generic are kind of competing for space. So where they saw some erosion, and you heard me talk about the Symphony Health metrics, they're actually moving in the right direction. So they have taken some tactical moves with their channel partners to prevent the erosion of share that they've seen. And we believe that they'll have some opportunity there in the coming quarters. So we recently had that call with Sun, and we believe that they're taking the right tactical moves.

Yes. Just to add to that, Doug, as Bryan said, that we are meeting constantly with Sun with regards to this issue about market share for Absorica, the entire Absorica portfolio. We think that they've made some gains recently at the wholesale level, which will help that -- the issue of declining or increasing market share in this case. On the fenofibrate side, I believe that it's -- our revenue flow or royalty flow from that product in the U.S. has been improved by -- based on the fact that we changed commercial partners down in the U.S. from Kowa to ANI, and they appear to have very strong connections at the wholesale level. And I think that we're benefiting from some of that.

And then, Doug, on your other question of kind of the key contributors from the other -- the remaining Canadian portfolio, the ones that I would highlight is we made the move to start selling Durela directly. We -- before, we had a channel partner that was managing that in the past. And that was -- that move was made at the beginning of last year or didn't actually flow through until Q3 of last year. So that's kind of one of the year-over-year business changes that we made that's contributing to growth there. And then the other one I would call out is Aggrastat sales contributed to the $0.5 million as well. We had $0.1 million of Aggrastat sales as we've seen a competitor leave the market and have supply disruption. So we think that there's good opportunity for Aggrastat going forward as well, as you saw in Q1.

Yes. I actually thought you might have specifically flagged Aggrastat in reference to Durela there. I mean the absence of Integrilin and ReoPro in the Canadian market would give me some comfort that your Aggrastat sales could grow and not shrink going forward. Do you have any sort of sense on how you might be able to quantify that in coming quarters?

All I'd offer is what you saw in Q1, we believe, is a good way of looking at it going forward, and -- but we also hope to grow on that. So we hope to come into future earnings calls and have good outcomes there as well.

We're currently working with Verity, our hospital partner and are focused on what they call 45 cath labs throughout Canada that require this product, and we're making good headway and I think that will continue into the future here.

[Operator Instructions] And your next question comes from the line of Andre Uddin from Research Capital.

Just wanted to ask you, in terms of an update on your pipeline, can you give us a little color in terms of what's going on with Galephar. Are you advancing any products there? Or is that more research at this point?

No, we are in discussions with Galephar about a number of potential products that they have in their development pipeline. Nothing that I could report at this point in time, but we're hopeful that we will be able to find another successful drug as we have Absorica, fenofibrate and Galephar has got a knack for finding products or developing products that are improvements on existing products usually through a 505(b)(2) pathway. And we hope to report in the coming quarters results of our discussions and negotiations with Galephar.

And just in terms of the M&A front, I know you've been looking both our products and companies. Can you give us a little bit of color? Are you looking more towards on the U.S. side or the Canadian side and how...

I would say both. We've had a lot of focus on the U.S. market, but opportunities have arisen here in Canada with some of the existing players, and we've allocated some of our time to reviewing those potential either product acquisitions, company acquisitions or perhaps some type of royalty arrangement. So I think that both sides of the border, we're looking at, at the moment as opportunities arise.

And it's also not lost on us that the U.S. is a much larger market than Canada. So we are spending relative time there, and we believe because of the larger market, there may be bigger growth opportunities there.

And your next question comes from the line of [ Ryan Graham ].

Few quarters ago, you guys mentioned that you held the rights to South American distribution. I was just wondering if you guys could comment on this? Yes, go ahead.

We have a partnership with Galephar, and that partnership includes Latin America and South America. The product, Absorica was recently launched, and we're in the process of being launched in Mexico at the moment. Galephar supplies the product and pays us a royalty on sales.

I was wondering when [indiscernible]...

Can you -- my apologies. Can you repeat that question? I couldn't hear you.

I was just wondering when you thought the results of launching it there would be realized on the financial.

Well, I think we're expecting to start collecting royalties in the near term. But that will be based on the sales of the product in Mexico in this case. The product is being sold in Mexico by a company called Telemax, and they're in the midst of launching that product. So I think we would expect to see royalties being generated in the near term.

And your next question comes from the line of [ Peter Raytec ] from [ Raytec Consulting. ]

I'm wondering if you could provide a brief update on the activity and status of the normal course issuer bid.

It's Bryan here. On the normal course issuer bid, obviously, because during Q1 and the longer period to release our annual results, we were largely in blackout. So the opportunity to buy back was a lot lower. And we do have a selective program, so it's not the automated program that was approved years before that. But as we get out of blackout and come out of Q1 here, we anticipate that we are going to restart that as we believe our share price is undervalued and we see opportunity to return value to shareholders by recommencing the NCIB.

Okay. Yes. No, I mean as I'm sure -- as you're well aware, at current levels, your cash position per share is now exceeding 50% of the market value, so...

Thanks, Peter.

Thanks, Peter.

Mr. Mull, there are no further questions at this time. Please proceed.

As both Bryan and I have discussed today, the current M&A environment is presenting us with attractive opportunities, and our pipeline of potential deals continues to grow. We intend to be diligent in evaluating deals and are seeing an increasing number of potential transactions come our way. Until we are confident in completing one or more of these transactions, we will continue to grow our substantial cash balance. Thank you very much for joining us today.

Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.