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

Hello, everyone, and thanks for joining us this morning. First, a quick reminder: unless we say otherwise, all figures on today's call are denominated in U.S. dollars. Cipher's Q3 2026 once again demonstrated the strength of our specialty pharma dermatology platform, which is highly profitable. Net revenue was $12.7 million, essentially in line with the same quarter a year ago, as growth in Epuris and higher licensing revenue largely offset lower U.S. sales of Natroba. Net income came in at $10.9 million, equal to $0.42 per diluted share, and that figure reflects a favorable boost from the arbitration award that Ryan Mailling, our CFO, will cover in his remarks. Adjusted EBITDA was $7.2 million, with an adjusted EBITDA margin of 57%. After my commentary, Ryan will walk through our financial results in detail. Moving to our commercial portfolio, third-quarter 2026 revenue from Natroba and its authorized generic spinosad totaled $7.1 million, down 12% from $8.1 million in the same quarter a year earlier. Similar to what we saw in the previous quarter, this decline stemmed from reduced sales volumes among patients covered by Medicaid, which came about because fewer people are enrolled in those Medicaid programs. Even so, in spite of the effects of those Medicaid program cutbacks, Natroba's results are showing gains — revenue rose 14% sequentially in the third quarter of 2026 versus the second quarter of 2026, which is well ahead of the 4% sequential growth recorded during that same period a year earlier. We keep putting investment into growing the U.S. business outside the Medicaid payer channel, including via the commercial payer, direct-to-patient, and retail pharmacy initiatives that we described last quarter. That investment shows up as elevated selling and marketing expense during Q3, which came from broader campaigns aimed at boosting U.S. awareness of Natroba. Beyond the U.S., Natroba could also present an opportunity in Canada along with other rest-of-the-world markets. In January we announced that Health Canada has accepted our New Drug Submission for review covering Natroba as a treatment for head lice and scabies; findings from that review should arrive shortly, most likely during the first quarter of 2027. Just as in the U.S., lice treatments sold in Canada and elsewhere around the world have lost effectiveness because of resistance, and we think Natroba meets an unmet need across many markets outside America with a proven single-treatment option. In the quarter, we also ramped up out-licensing work for Natroba, and parties in a range of markets are showing interest, driven by the significant unmet need and how well the product addresses it. Our Canadian portfolio kept growing in the quarter. Canadian portfolio product revenue reached CAD 4.3 million in the third quarter of 2026, up 8% from the same quarter a year earlier. Epuris brought in CAD 3.9 million of revenue, a 15% increase over the CAD 3.4 million posted in the comparable quarter last year. IQVIA data shows Epuris market share reached 48.7% on September 30, 2026, up 1.6 percentage points from the 47.1% seen in June of 2026; we also made solid headway this quarter on getting Epuris publicly reimbursed. Following the pan-Canadian Pharmaceutical Alliance's letter of intent in July, we collaborated with the federal and provincial territorial drug plans, and most of the remaining Product Listing Agreements are now finalized, including across three key markets. Epuris became eligible for public reimbursement on August 17 in British Columbia, on August 27 in Quebec, and on October 1st in Alberta, along with other provinces throughout Canada. Once these government drug programs added the product to their formularies, patients who previously lacked coverage gained broader access to Epuris, and Cipher's addressable market for the product grew. We expect this wider coverage to continue fueling gains in market share as time goes on, especially in key markets where a substantial share of patients receive drug coverage through publicly funded plans that Cipher could not reach before. Alongside this expanded coverage, we have also increased our sales and marketing efforts in Canada. This really is a positive step for Canadian patients who are dealing with severe nodular acne. For the remainder of my remarks, I'd like to update you on our business development efforts, which continue to be a major priority for Cipher. On September 21, we shared that Mr. Rajiv De Silva has joined our board of directors. Mr. De Silva has more than 30 years of healthcare sector experience, including board and executive leadership roles, and he has demonstrated success in steering high-growth organizations through intricate mergers and acquisitions. We believe his deep experience in M&A and corporate strategy will help us execute our growth strategy more effectively. With this appointment, our board now has four members, and three of them are independent. Beyond our current business, we're still pursuing three separate strategies to create future shareholder value and grow the company. First, we're seeking acquisitions or in-licensing deals for complementary products. Second, we're aiming to out-license Epuris and Natroba in markets outside North America. And third, we're pursuing company acquisitions that offer strategic value. Our growth strategy's first pillar involves seeking out complementary products to acquire or in-license that could be sold directly through the commercial operations we already have in Canada and the U.S. We keep looking for and evaluating such opportunities, and have been digging into a number of them closely—including talks with sellers both during and after Q3. We stay hopeful about identifying a prospect that suits Cipher well. That said, as noted before, this kind of work takes time. Every opportunity follows its own schedule, and some may end up not working out. Strategy number two involves seeking out-licensing deals for Natroba and Epuris in markets beyond North America; we still hold the view that there's a substantial unmet need for a highly effective option such as Natroba to treat head lice and scabies in other regions around the world. In the same way, since Epuris is the top isotretinoin product in the Canadian market, we think Epuris could likewise deliver strong results in other territories whose markets resemble Canada's. To give our out-licensing work extra backing and make it stronger, we recently brought on a consulting firm that specializes in helping companies reach their strategic business development goals. That firm is helping with out-licensing for both products, which so far has been helpful in the process, and we are getting added interest from parties regarding both products across various markets; beyond supporting our out-licensing work, the firm we brought on is also helping our internal team spot potential product acquisitions or in-licensing targets, which should widen the opportunities open to us. Third, the third component of our strategy involves assessing and going after company acquisitions that could carry strategic value for Cipher. As we've noted before, we still believe Cipher would gain from greater size and scale, both when it comes to pursuing our other business development strategies and in our current and future operations. As we talked about last quarter, earlier this year we were at an advanced stage in a process involving an acquisition target, but in the end we concluded that stepping away was the right call for Cipher, and no deal came together. After that advanced-stage opportunity that in the end did not come together, we keep actively sourcing, assessing, and going after potential acquisitions that meet our objectives, and we think adding Mr. De Silva to our board will bolster our capacity to execute in this area; we stay optimistic that we will succeed in locating and completing the right opportunity. While we haven't yet completed any deal across the three growth avenues we're working on, this remains a top priority at Cipher — we're putting resources behind it and feel we're achieving real momentum. We remain hopeful that, in time, we'll find the right opportunity. At this point I'll turn things over to Ryan Mailling, our CFO. Ryan, the floor is yours.

Appreciate that, Craig, and hello to all of you this morning. Per Craig's opening remarks on this call, all figures we cite are denominated in US dollars absent any statement to the contrary. Cipher Pharmaceuticals is now presenting its third-quarter and year-to-date 2026 numbers — that is, results covering both the three-month and nine-month stretches that concluded on September 30, 2026. Before diving into the results, I'd like to begin with the arbitration award that Craig mentioned briefly earlier, because developments on this front during the quarter had a broad impact on our third quarter results. On September 1st, we announced that a New York federal court ruled in Cipher's favor concerning the appeal process that had been initiated with respect to the previously announced award from an arbitrator. In connection with our contractual dispute related to certain clinical data, the launch of Absorica, and the launch of a product in Canada, the court denied the petition to partially vacate the arbitration award and affirmed the award, including the declaration that Cipher is the rightful owner of the clinical data in dispute. The court upheld these remedies for Cipher: first, CAD 4.2 million in compensatory damages; second, a 15% royalty on Absorica LD net sales in Canada, starting January 1st, 2026, and continuing through the end of 2040; and third, 80% of our out-of-pocket attorney's fees plus certain expenses tied directly to that arbitration. We were also granted interest on the arbitration award until it is satisfied. Before this quarter, Cipher's financial statements had not recognized the award because of uncertainty about how the court proceedings would turn out. During October, which came after Q3 closed, a payment of $5.7 million arrived covering the damages portion of the award, our out-of-pocket attorney fees and certain other expenses, plus interest. We therefore recorded those award portions in our third quarter results. That comprised $2.3 million in other operating income from damages, a $2.2 million recovery in selling general and administrative expenses tied to legal fees and certain other expenses incurred earlier, and $0.5 million of interest income. Since the recognized amounts are anticipated to be non-recurring and don't reflect our core business, this quarter we added arbitration-related recoveries as an adjustment item to how we define adjusted EBITDA. So even though those recoveries are part of our net income, adjusted EBITDA does not include their benefit. I’ll be pointing to these items as I walk through the financial results for the third quarter and the year to date. For the three- and nine-month periods that ended September 30, 2026, total net revenue came in at $12.7 million and $37.3 million, respectively. Third-quarter 2026 net revenue was down $0.1 million, or 1%, from the same quarter in 2025. Net revenue for the nine months ended September 30, 2026, fell $0.9 million, or 3%, versus the prior year’s comparable period. Part of the drop in Natroba product revenue was made up for by growth in Epuris revenue and a rise in licensing revenue. Licensing revenue for the third quarter of 2026 increased by $0.4 million, or 62%, to $1.2 million, and for the nine months ended September 30, 2026, it rose by $0.5 million, or 17%, to $3.5 million. U.S. licensing revenue from Absorica was $0.7 million for the quarter, an increase of $0.3 million, or 75%, while licensing revenue from Lipofen and its authorized generic totaled $0.5 million, up $0.2 million, or 67%. The primary factor driving licensing revenue was greater product shipments to our distribution partners, because we generate revenue by supplying product to them. In Q3 2026, product revenue came in at $11.5 million, down $0.6 million, or 5%, and for the nine months ended September 30, 2026, it was $33.8 million, a decrease of $1.5 million, or 4%. Regarding Natroba and its authorized generics, product revenue for the quarter was $7.1 million, a drop of $1 million, or 12%, while for the nine months ended September 30, 2026, it totaled $20.3 million, down $2.2 million, or 10%. We kept seeing pressure on product revenue from Natroba and its authorized generics for spinosad because fewer Medicaid-covered patients were buying—the number of covered lives in those programs has dropped. Still, Natroba did better than the previous quarter, with a 14% sequential increase over the second quarter of 2026. For the quarter, Epuris product revenue was up $0.5 million, or 15%, reaching $3.9 million, and for the nine months it gained $0.8 million, or 7%, to $11.9 million. In both periods, Epuris gained from higher sales volumes than a year earlier. During Q3, Epuris continued to capture additional market share, reaching a 48.7% slice of the Canadian isotretinoin market as of September 30, 2026, per IQVIA. Cipher's operations stayed very profitable, delivering an 82% gross margin in the third quarter, in line with the third quarter of 2025; for the year to date, gross margin rose 1%, landing at 81% across the nine months ended September 30, 2026, compared with 80% a year earlier. That year-to-date gross margin gain is mainly attributable to non-recurring fair value adjustments that had been baked into cost of products sold during the prior year. When you strip out arbitration-related income and recoveries, total operating expenses came in at $3 million for the third quarter of 2026 — a drop of $4.9 million, or 62%. For the nine months ended September 30, 2026, those expenses decreased by $8.4 million, or 32%, to $17.5 million. SG&A, which sits inside total operating expenses, was $1.2 million in the third quarter of 2026, compared with $3.7 million in the same quarter a year earlier — a decrease of $2.5 million, or 68%. Over the nine months ended September 30, 2026, SG&A fell by $5.3 million, or 41%, to $7.5 million, versus $12.8 million in the comparable period last year. As I mentioned earlier, included in those figures is $2.2 million related to recovering legal costs associated with the arbitration award, and that item is non-recurring. Beyond that recovery, two additional main factors were behind the shift in our SG&A. First, legal costs of a non-recurring nature recorded in the prior year totaled $1.2 million, together with operational efficiencies that our business delivered during the year. Total operating expenses were also reduced partly because of $2.3 million in other operating income booked in the third quarter of 2026, which is a non-recurring income source earned in connection with the arbitration award. For the quarter that closed on September 30, 2026, net income was $10.9 million, equal to $0.42 per diluted common share. A year earlier, the figures were $5.5 million, or $0.21 per diluted common share. That third-quarter gain largely reflected arbitration-related income, recoveries, and interest. Over the nine months ending September 30, 2026, net income reached $21.1 million, or $0.81 per diluted common share, compared with $14 million, or $0.54 per diluted common share in the same stretch of last year. Similarly, the improvement stemmed from arbitration-related income and recoveries, along with non-recurring expenses booked in the prior year — among them legal costs tied to the arbitration, certain restructuring costs, and fair value adjustments to acquired inventory. For Q3 2026, adjusted EBITDA came in at $7.2 million compared with $7.3 million in Q3 2025 — down $0.1 million, or 1% — which gave us an adjusted EBITDA margin of 57%, flat year over year. The drop stemmed mainly from weaker gross profit, partially offset by reduced selling, general, and administrative costs when you exclude the arbitration recovery. Looking at the nine months through September 30, 2026, adjusted EBITDA reached $21.8 million versus $21.1 million for the same period in 2025, up $0.7 million or 3%, and the adjusted EBITDA margin rose to 58% from 55% a year earlier. The improvement in adjusted EBITDA margin came primarily from lower selling, general, and administrative expenses, which was partly offset by a decline in gross profit. Cipher continues to be highly profitable, generates cash, and carries no debt. At the close of the quarter, cash stood at $15.3 million, compared with $9.1 million at the end of the second quarter, and after the third quarter concluded we collected another $5.7 million in cash, which brought the cash balance to roughly $20 million post-quarter end. On our facility, we kept $65 million of undrawn availability, along with a $25 million accordion feature that requires lender approval. Should this financing come through, it would combine with our existing cash reserves and the steady positive cash flow we keep generating from operations, giving us a solid footing to continue funding the growth plan Craig described.

Thanks, Ryan. Before we take questions on the call, I want to restate and leave you with several key points from our commentary. First, Cipher is still highly profitable and carries no debt, with gross margins at 81% and adjusted EBITDA margins at 58% on a year-to-date basis, plus $15.3 million in cash at quarter end. Second, the court's confirmation of the arbitration award is a major win for Cipher; we received $5.7 million in October, and the 15% royalty on net sales of Absorica LD in Canada through 2040 offers additional potential upside that our results do not yet reflect. Third, Epuris keeps strengthening its standing as the leading isotretinoin product in Canada by market share, at 48.7%. Public drug plan coverage is now available in key markets, among them B.C., Quebec, and Alberta, and we expect this broader access to help drive further growth for the product. Fourth, in the U.S., Natroba is still being affected by lower Medicaid volumes. Even so, we continue to focus on broadening awareness of the product and its effectiveness while growing commercial payer volumes. Finally, we stay very active on the business development front, including in-licensing of products, acquisitions of products or companies, and out-licensing from our existing portfolio. Our board has been strengthened by the appointment of Mr. De Silva, who brings extensive M&A experience. We see these activities as key growth drivers for Cipher. We'll now open the call for questions, and at this point I'll ask the operator to give instructions for the question and answer session. Operator, please go ahead.

Is this coming through at your end? Hi there?

Yes, you're coming through.

All right, great. All right, thank you, operator. Hi, Craig, Bryan, and Ryan. I understand that some changes have taken place regarding Medicaid coverage. Are you still moving forward with the Medicaid step-through process for Natroba in states beyond Illinois?

I'll hand that question over to Bryan.

Hey André. Good morning. We’re still working on that. Normally, a decision like this gets made by the state-level P&T committee, if a step-through were going to be required. So that call is generally made on the clinical side rather than the financial side. In most cases, when we renew with states, we aren’t sent back to the clinical P&T committee to examine that particular aspect. What usually happens is a review of utilization, and utilization in the state remains strong for us, which then points toward a renewal of our Medicaid coverage, and that is typically every year or every two years. It differs from state to state. So we do get the chance to talk with the P&T committee periodically, but it isn’t universal across every negotiation in every state when renewal comes up.

All right. What kind of timeframe do you figure it would need before being put in place across the various states?

Once more, every year a conversation happens between us and the state, so that chance remains available. I'm not in a position to say much, because when you ask, "How long would it need before being put in place with the various states?" there are so many parties involved, and at any given moment we are in negotiations with so many of them. We keep using Illinois as the illustration, saying, "If you'd want even further preferred pricing, could we open up this discussion related to the clinical aspect and the step-through?" There we have seen some uptake, just on a each state might not choose to do that. Passing down a timeline to that is difficult.

All right, that's reasonable. Could you also put a number on the Natroba pipeline fill for Walmart? More precisely, how much of Q3's sequential revenue growth came from that initial stocking rather than from prescription demand?

Yeah, the thing is, given sensitivities around the Walmart contract, and that relationship matters a great deal to us, discussing the exact unit volume is something we'd prefer not to disclose, both because of that relationship with Walmart that's only just begun and for competitive reasons. What I can tell you, and what I can offer, is that the stocking program covers all Walmart stores, not merely certain stores across the U.S. With a little effort, we could point out, okay, well, here's how many stores there are, and arrive at a rough estimate of how many units would have gone out. That's what I can sort of offer, sort of signal to you.

Okay. Fine. And have you figured out as well what will happen with the marketing of Absorica? Are you still considering Sun Pharmaceuticals, or is there any news on that front?

Yes, André, we're in talks with Sun regarding an extension, and we're also looking at a proposal from a different, essentially, generic company.

All right. That's all from me. Thanks.

Morning. Good to see such strong cash generation. On that point, since the balance sheet is set to become stronger with the arbitration proceeds, how do you weigh share buybacks against possible capital deployment? And regarding buybacks, I saw that a fairly small amount was carried out in Q3, and whether a SIB, or substantial issuer bid, might perhaps be on the table. How are you balancing capital deployment for the remainder of this year and as we head into next?