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

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cipher Pharmaceuticals Quarterly Conference Call for the company's Q2 2024 results. [Operator Instructions] As a reminder, this conference is being recorded today, Friday, August 9, 2024. 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 for 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 the Canadian securities laws, the company does not undertake to update any forward-looking statements. Such statements speak only as one 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 us today. Before I begin, I would like to remind everyone that all figures discussed on today's call are based in U.S. dollars, unless otherwise specified. I'll keep my commentary brief on our Q2 results, given it was another quarter of consistent and predictable revenue, earnings and cash flow from our legacy business in the U.S. and Canada. Our Chief Financial Officer, Bryan Jacobs, will walk you through the financial results in a few moments. And I would like to spend the majority of my time on our recent acquisition of the Natroba business in the U.S. and our strategy moving forward, which is exciting -- is an exciting phase of Cipher's growth. Our recent quarters and quite frankly, over the past number of years, we have been transparent that we have been looking for in accretive acquisitions but would be patient in our approach. We have turned over many stones in the process and evaluated a significant number of opportunities, and I'm confident when I say today that we have found exactly what we were looking for. On Monday, July 29, Cipher Pharmaceuticals announced the acquisition of Natroba. Its authorized generic, Spinosad, and its U.S.-based commercial infrastructure headquartered in Carmel, Indiana. This acquisition excites us for many reasons. With respect to Natroba, this product truly fills an unmet need of patients given it is highly effective -- sort of highly effective treatment for head lice and scabies. Existing products in the market such as permethrin, are no longer effective due to the resistance profile developed by lice and parasites over time. The resistance is not just a concern locally in North America but an issue worldwide, which represents an area that we believe will unlock significant growth and revenue streams down the line. Specifically in the U.S. Natroba's product indication was expanded to scabies in 2021 and carries an FDA exclusivity period until 2033. The scabies market in the U.S. is larger than the head lice market, and the health care guidance provided to patients suffering from scabies recommends that all household members use the product, and it is the only scabies product on the market with a complete care offered to patients suffering from scabies. For these reasons, we believe the sales volumes and upside potential for the product in the U.S. alone is significant. Natroba currently has approximately 22% of the antiparasitic market in the U.S. and permethrin, as 75% according to IQVIA market data. The former owners of the Natroba business being ParaPRO believe in the growth profile we have just described, which is why they took back $9.5 million of Cipher common shares as a portion of the total $89 million -- $89.5 million we paid for the Natroba business. In addition to further organic growth in the United States, we will be taking Natroba global. We are already engaged in discussions to out-license Natroba to select European and Asian countries as well as have plans to bring the product to Canada, leveraging our Canadian direct sales platform. Natroba will fit well with our dermatology product portfolio in Canada, including Epuris, the market leader for the treatment of severe acne and our near-term pipeline product, MOB-015, for the treatment of nail fungus. We have developed relationships in dermatology in Canada, and we believe that it would be a natural fit for Natroba. Lastly, Cipher now has an established profitable North American sales and distribution platform, which we plan to further build out by acquiring unique complementary products. There are opportunities to cross-pollinate our existing portfolio of products as well as in-licensing new products that fit well into our expertise in dermatology and infectious disease. In order to finance our future growth plans, we obtained a revolving credit facility with the National Bank of Canada, which was only partially drawn down upon this acquisition. We see Natroba as only one step in our future growth, and we remain active in discussions to acquire complementary products, as I have described above. In the interest of time, I will leave the rest of the discussion around the transaction with Natroba to the question-and-answer portion of this call as I know there is a lot to unpack. One last thing before I pass the call over to Bryan is to touch on our near-term pipeline product, MOB-015. It's remarkable success this year in Sweden. We now have real use case evidence that supports our previously discussed enthusiasm for this product as the sales data coming out of Sweden after its February launch is meaningful. Shortly after the product launch under the brand name Teclara, MOB-015 has become the market leading nail fungus treatment in Sweden, taking 30% of the market by way of value and 31% of the market in units. Additionally, and what has always been a large part of our growth thesis in Canada is that the overall market in Sweden has grown 52% compared to the same period as last year. We attribute the success to the fact that current nail fungus treatments are ineffective and highly tedious to administer, and MOB-015 addresses these issues. We believe significant brand recognition will continue to develop as it was announced in May that MOB-015 had received national approvals in 13 additional European countries. Cipher owns the rights to MOB-015 for the Canadian market, and the first sales of the products are expected in the second half of 2026. The data out of Sweden solidifies our view that we will rapidly capture more than -- most of the $92 million market, which represents the current market size in Canadian dollars. To wrap up my commentary, I will briefly summarize the main items. Cipher's legacy business continues to generate predictable cash flow, contributing to the bottom line and has built a strong foundation for the company to build upon. The company has now entered into a new phase of substantial growth, kicked off by the acquisition of Natroba and a U.S. sales and distribution platform, which we plan to leverage and scale. Furthermore, we are 1 quarter closer to further clinical data results from MOB-015 in January 2025, and already highly effective nail fungus treatment, which we believe will quickly become the market leader in Canada as it has in Sweden. Lastly, with a strong balance sheet, with low leverage, available financing and enviable market position, Cipher will opportunistically seek to further expand our business. I thank you for your time this morning, and we'll pass the call over to our CFO, Bryan Jacobs, for an overview of our financial results. Post quarter end, I've asked Bryan to take on a new role as President to oversee the transition and integration of the Natroba into our existing Cipher business. I'm confident in Bryan's leadership abilities and that he will continue with the track record he has demonstrated in his role as CFO. Bryan, please go ahead.

Thank you, Craig, and good morning, everyone. As a reminder, all amounts provided on this call are in U.S. dollars unless otherwise noted. Today, Cipher Pharmaceuticals is reporting results from the company's 3- and 6-month periods ended June 30, 2024. Our highlights include total revenue for the 3- and 6-month periods ended June 30, 2024, were $5.3 million and $11.2 million, respectively. Net revenue for the second quarter was flat year-over-year. However, net revenue for the 6-month period ended June 30, 2024, represented an increase of 10% over the same period in the prior year. Total licensing revenue was $1.6 million for the second quarter and $4.2 million for the year -- on a year-to-date basis compared to $2.2 million and $3.8 million, respectively, in the prior year. This represents a decrease of 25% in the quarter. However, a total increase of $0.4 million or 10% on a year-to-date basis compared to the same periods in the prior year. Licensing revenue from Absorica portfolio in the U.S. was $1.1 million in the second quarter of 2024 and $3 million for the year-to-date to June 30, 2024, representing a 26% decrease in the quarter, yet a $0.6 million or 25% increase on a year-to-date basis compared to the same periods in 2023. This difference clearly represented a timing item. Market share for the overall Absorica portfolio decreased by $0.9 million to 7% at June 30, 2024, compared to 7.9% market share at June 30, 2023, according to Symphony Health market data. Licensing revenue from Lipofen and the authorized generic of Lipofen was $0.5 million in the second quarter of 2024 and $1.1 million on a year-to-date basis, a decrease of $0.1 million for both periods, which was driven by lower sales volumes on which the company earns a royalty. Moving to product sales. Total product revenue for the 3- and 6-month periods ended June 30, 2024, was $3.7 million and $7 million, respectively, an increase of $0.6 million or 18% for the quarter or $0.7 million and 10% on a year-to-date basis compared to the comparable periods in 2023. The increase in product sales was primarily driven to higher year-over-year Epuris sales. Market share for Epuris has decreased by 2% to 44.2%, down from 46.2% market share in the prior year, according to IQVIA market data. However, the total Canadian isotretinoin market has grown by 13% between -- over the comparative periods, of which Epuris has maintained a significant market share contributing to an overall increase in the volume of sales. Selling, general and administrative expenses was $1.6 million for the second quarter of 2024, an increase of $0.1 million or 7% from the comparable period in the prior year. The increase is primarily attributable to higher professional fees, acquisition restructuring and other costs incurred, partially offset by lower noncash share-based compensation. Selling, general admin expenses for the 6-month period ended June 30, 2024, was $3.1 million, an increase of $0.4 million or 13% from the $2.7 million reported in the 6 months ended June 30, 2023. This increase was due to a combination of higher salary and benefit costs, professional fees and other general expenses incurred, partially offset by lower noncash share-based compensation. Adjusted EBITDA for the 3- and 6-month period ended June 30, 2024, was $3.1 million and $6.6 million, respectively, compared to $3.1 million and $6.2 million in the comparative year. On a year-to-date basis, our adjusted EBITDA is ahead at $0.4 million over the prior year as we turn the page heading into the next quarter of growth in revenue and earnings from our Natroba acquisition, which occurred in July of this year. Our business ended the quarter with $48 million in cash on hand. And we utilized $40 million of cash combined with $40 million on a drawn new revolving credit facility to fund the $80 million cash portion of the Natroba acquisition. We are proud to welcome the National Bank of Canada as our new lead arranger, sole book runner and financial partner of a syndicated revolving credit facility. National Bank has provided Cipher with a total of $65 million revolving credit facility with an additional $25 million conditional accordion feature available. As I previously indicated, the company subsequently drew $40 million from this facility as part of funding Natroba. However, the credit facility terms were designed to allow for maximum flexibility, both with principal repayments but also provides Cipher with substantial additional capability to finance our future acquisitions. What is most important to note is we executed in a manner that great companies do, which was having generated cost savings from our existing business to pay for half the sticker price of the Natroba acquisition, which is just good business. In this regard, we stand above our peers in the industry. Cipher's balance sheet, low leverage and ongoing available liquidity places the company in an enviable position within the Canadian specialty pharma sector. As Craig mentioned earlier, the company has entered an exciting phase of growth, and we look forward to announcing progress as new milestones are achieved. Before I open up the line for questions, I'll take this opportunity to follow up with what Craig indicated earlier on the call that today's call will be my last earnings call as Cipher's CFO. As of August 10, I will be transitioning to the role of President, with my remain focus to fully integrate, transition and grow our new U.S. platform. Therefore, we're happy to announce the promotion of Ryan Mailling to Chief Financial Officer of Cipher. Ryan has been working closely with me as Vice President of Finance at the company, and with his background in the pharmaceutical industry and strong financial acumen, he will serve the company and its shareholders very well going forward. With that, we'll open up the call to questions.

Sorry, host. I just have 1 last closing remark here. Before signing off, I'd like to take this opportunity to welcome our new team members in Carmel, Indiana, as well as thank all Cipher employees for the tremendous accomplishments you've made to date. This is just the beginning of what I see being an exciting and very rewarding journey as we build North America's next highly successful specialty pharma company. Thank you for joining us today, and we will now take your questions.

[Operator Instructions] Our first question will be coming from Andre Uddin from Research Capital.

Craig, Bryan and Ryan, congratulations on your acquisition. I'm not sure if you've had a chance yet, but if you have, can you please discuss the global opportunity for Natroba outside of the U.S. and also, if you've had a chance in terms of looking for potential partners, would they need to run a Phase III trial in Europe?

Andre, it's Craig here. I'll take a shot at it. And Bryan, please add in as you see fit. The company had already, before the closing of the acquisition, had received quite a number of inquiries from U.S. potential licensors or licensees. And they just simply didn't have the bandwidth to tackle that project as well. And quite frankly, during the acquisition process, which lasted 6 to 9 months, they're focused on that, and they were planning to get back at these calls and inquiries that they've had. We've already had inquiries from potential commercial partners in Europe. And we think that the FDA data that Natroba has would likely be sufficient for your European applications. We're just getting into it, so we don't have a lot of specifics, but it's clear that there are a number of interested parties out there based on the inbound calls we've already got. Bryan, anything you'd like to add on that?

Yes. And good question, Andre. One of the things that's important to note is Natroba's biggest opportunity is warm climates where these indications are most prevalent. And a lot of the, call it, the non larger, call it, G12 type countries. A lot of those countries allow for FDA products to come into their market and use that approval as without -- for lack of a better term, good enough for the health authorities in their country. So that's where we see there's lots of opportunity where an already FDA-approved product that's been on the market with a long track record, a very safe, efficacious profile we don't see any concern with bringing it to other markets. And that's why, as Craig said, there's a lot of inbound calls in that regard.

In terms of the European market size, for example, did you figured out how big that could be in some of the other larger areas as well?

I kind of -- we're -- it's probably a little early for us to be able to quote market size data, but if you can follow the population size as 1 indication, this resistant issue that we brought up with regards to permethrin where lice and scabies have developed, they genetically modified to resist permethrin, if that's a worldwide issue. I mean, there's lots of information that you can find about that particular issue throughout the world. So we believe that there's a demand there. We need to get to the bottom of market size and what we could expect to be paid for the product, and that's what we're embarking on now.

Just one last question. I know it's always hard to predict business development timing, but when do you think we could start to see some licensing deals for Natroba outside of the U.S.?

I think, within the next 12 months.

Next question on line will be coming from Doug Loe from Leede Financial.

Congratulations, gentlemen, on the update on the quarter. And congratulations, Bryan, on your new roles and responsibilities with Cipher, good stuff. But before I forget, just -- Craig, your comments on MOB-015 and it's the sales traction that is garnering in Sweden. Is Jublia a proof in Sweden and is 015 capturing any market share for Jublia? And if it's not, maybe just any insights you have on the market dynamics and what other nail fungus products from which it might be capturing market share? Just sort of helpful to understand how it might, in fact, the Canadian market should be approved.

I don't know the exact market share in Sweden. But based on your question, I'm going to find out. The product in Sweden and the Scandinavian countries is considered an OTC product. And I'm not sure whether Jublia has that same designation or not, but we'll find that out, and I'll get back to you on that. But again, like it's clear that it's a very effective product, much more effective in Sweden than any other product just based on the fact that it has grown the market by 52%. So -- do you have any further questions on that, Doug? Just please let us know here.

Sure. No, that sounds fine. And then on [ revenue, Bryan ] several of the questions that sort of surround time lines to expanding in this robust global marketing footprint. And maybe I'll just ask another one through the back door here. You already are generating substantial revenue from royalty agreements with several partners. And so you have some understanding of what royalty revenue could be applied on a product-by-product basis. Just sort of wondering if you can kind of benchmark us on any of your Rest of World out-licensing agreement, should we assume that any royalty revenue that would be in future contracts, would it sort of approximate what you're generating with Absorica or likewise things have been around 15% that you share Galephar or would you consider that to be, I don't know, either aggressive or conservative benchmark for us to consider for modeling purposes?

No. I think from a benchmark standpoint, that would be appropriate to 15%. And Bryan, you can let them know what your opinion is as well. We'd also be striving for some milestone payments with that. And the Rest of the World, I think, is a significant market. And the question is how much can we get paid for the product. Bryan, anything further on that?

Yes. No, it's just more of dug here, 15% is the middle of the road. That would be a very common royalty rate not just with our contract but with others, some of the other opportunities we're looking at right now are in that kind of low to mid-teens royalty rate. So I think you're -- that's a good middle-of-the-road estimate.

Good stuff. And then just one last question. Again, in your commentary, you spoke to the magnitude of resistance to permethrin as an issue worldwide. We certainly see evidence of that in the medical literature. I mean the genetic mutant strains are all over the place. So at this one, is the emergence of genetic mutations that are resistant to currently approved therapies that aren't named Natroba, is that still just kind of a notional thing that doctors are talking about in the medical literature? Is that tangibly impacting permethrin revenue in ways that you think could immediately lead to Natroba revenue growth in comparison to trailing data? And I'll leave it there, guys.

I can take that question, Craig. Yes. So Doug, the way to think about it is less so of saying an actual use case of this is we had spoke with an individual who knew this product very well because it was impacting their family. And those family members when life is in the house and it's passed to another family member and they look up what works and what doesn't work, it's very clear that permethrin does not work or someone has been using it and it only got rid of half of the problem and it came back. That impacts a family greatly. It impacts sleep, it impacts people having to stay home from work. And this individual who spoke with Craig and myself had said, "we looked it up to find out the only one that worked when we were living in Chicago was Natroba. And we went and we went to the doctor and he said, "We want Natroba". So our plan on making sure we educate not just physicians, but patients out there is to make sure that Natroba is the product that's available that works. And if you want the 1 shot to cure your problem, you don't use permethrin. So that's where we see the biggest opportunity is to focus on educating not just physicians but also educating patients, which has got some digital and other types of means to really kind of get that message out there because I know what I do as a parent, I would make sure I just go out and get the 1 shot that's going to cure my family. So I can move on with day-to-day life.

Yes, I was just going to add, you've talked a lot about the -- asked some questions about the Rest of the World, et cetera. Our first focus is going to be on going after that 71% that permethrin still has in the U.S. market. That will be the easiest thing, the lowest hanging fruit that we can go after. And the fact that it has 71% tells me that the doctors may just be using it because they're not aware of anything else. And so I think that with the correct marketing and boots on the ground, we need to get that message out more and go directly after that 71% of the market. That's going to be the most profitable segment that we can do.

There are no further questions at this time. I'd now like to turn the call back over to Mr. Craig Mull for final closing comments.

I'm sorry, I must have made a mistake because the closing remarks I already said, but I'd like to say it again. Very happy to welcome our new team members in Carmel, Indiana. And I thank all of the existing Cipher employees for their work and contribution to moving the company forward. And we're very excited about the future, and we hope to have additional news in the not-too-distant future about further growth. So thanks again, and I appreciate your time this morning.

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