CPHR: Total Revenue Grew 28% in Third Quarter of 2015

By Grant Zeng, CFA

NASDAQ:CPHR

On Nov 4, 2015, Cipher Pharmaceuticals (CPHR) reported strong financial results for the fiscal second quarter of 2015 ended September 30, 2015.

Total revenue for the third quarter of 2015 was $8.5 million, compared to $6.6 million for the same period last year, an increase of 28%.

Revenue growth in third quarter of 2015 was mainly driven by strong growth in product sales, which was up 367% compared to that for third quarter of 2014. Licensing revenue grew slightly by 2% in the fiscal third quarter of 2015.

Product Revenue

Product revenue growth was primarily a result of the acquisition of Innocutis completed in April 2015, which added 7 commercial products marketed in the US. Innocutis products contributed $1.6 million, composed primarily of Nuvail^® at $0.4 million, Bionect^® at $0.4 million, Sitavig^® at $0.3 million, Umecta at $0.3 million and Inova at $0.1 million. After excluding certain one-time product return reserves recorded in 3Q15, product revenue from U.S. operations would have been $ 2.1 million with Sitavig at $0.7 million and Nuvail at $ 0.5 million.

Canadian product revenue from Epuris and Vaniqa sales in 3Q15 increased by 63% compared to 3Q14, with Vaniqa contributing 20% of that growth amount. Epuris was launched in June 2013 and until Q2 2015 was the only product marketed by Cipher’s Canadian sales and marketing organization. In May 2015, a new product, Vaniqa was added to the Canadian portfolio.

Licensing/royalty Revenue

Total licensing revenue in 3Q15 increased 2% to $6.3 million from $6.2 million in 3Q14.

Revenue for Absorica was $4.8 million in Q3 2015, compared to $4.4 million in Q3 2014, an increase of 9%. Market share continues to hold in the 19% to 20% range consistent with the last three quarters, compared to 20.3% in Q3 2014 according to IMS Health. Overall growth for the U.S. isotretinoin market in TRxs was 10.7% compared to Q3 2014 and up 8.7% for the nine month period ended September 30, 2015.

On Oct. 5, 2015, Cipher announced that the Company, along with its US distribution partner, Ranbaxy, a Sun Pharma Company, and its in-licensing partner, Galephar Pharmaceutical Research, Inc., have entered into a Settlement Agreement with Actavis that dismisses the patent litigation suit relating to Actavis' Abbreviated New Drug Application (ANDA) for a generic version of Absorica® (isotretinoin capsules).

As part of the Settlement Agreement, Cipher, Ranbaxy and Galephar have entered into a non-exclusive license agreement with Actavis under which Actavis may begin selling its generic version of Absorica® in the U.S. on December 27, 2020 (approximately nine months prior to the expiration of the patents in September 2021) or earlier under certain circumstances.

The Settlement Agreement is subject to review by the U.S. Federal Trade Commission and the U.S. Department of Justice.

We continue to believe Absorica will perform well and will be the largest licensing revenue contributor in the coming quarters providing strong positive cash flow to Cipher that is allowing management to branch-out and fund all the recent acquisitions, as well as take on debt at favorable terms. Sunpharma, Cipher’s US partner, has made it clear that dermatology is a core focus for the new Sun-Ranbaxy combined company, and Absorica is the flagship brand. Sales of Absorica in 2014 were around $240 million. We believe peak sales are around $400 million, still leaving good room for growth in royalties to Cipher.

Revenue for Lipofen was $1.1 million in 3Q15, compared to $1.0 million in 3Q14, an increase of 10%. The product continues to perform well in 2015 despite the fact the company’s partner, Kowa, has decreased their commercial efforts.

Revenue from the Company’s extended-release tramadol product (ConZip in the U.S. and Durela in Canada) was $0.4 million in 3Q15, compared to $0.7 million in 3Q14, a decrease of 43%. The reason for the sharp decline was due to an authorized generic version of the product which was launched in the U.S. market in July 2015 by Cipher through its partner Vertical.

R&D expense in 3Q15 was $0.5 million, compared to $0.2 million in 3Q14. R&D expenses relate to the company’s drug development activities.

SG&A expenses in 3Q15 were $7.9 million, compared to $1.9 million in 3Q14. The increase of SG&A expenses in 3Q15 was primarily driven by the Innocutis acquisition.

GAAP net loss was $2.2 million ($0.09 per share) for 3Q15, compared to GAAP income of $7.9 million ($0.31 per share). Non-GAAP net loss for 3Q15 was $2.2 million ($0.09 per share), compared to non-GAAP net income of $4.3 million ($0.17 per share) for 3Q14.

Cipher reported adjusted EBITDA of $15,000 in 3Q15, compared to adjusted EBITDA of $4.8 million in 3Q14. Adjusted EBITDA was impacted by two significant items during 3Q15. A foreign exchange loss on the conversion of Canadian denominated cash and cash equivalents of $2.1 million and the impact of one time product return provisions recorded in 2Q15 of $0.5 million. Excluding the impact of these two items would have resulted in an improvement in Adjusted EBITDA of approximately $2.6 million for the three month period ended September 30, 2015.

Balance Sheet Remains Strong

As of September 30, 2015, Cipher held $28.1 million in cash and cash equivalents. During the nine month period ended September 30, 2015 the Company generated net cash from operating activities of $8.4 million and utilized cash of $7.4 million to acquire new products as well as $9.0 million for the purchase of Innocutis.

In April, 2015, Cipher closed on a private offering of $100 million in aggregate principal amount of Senior Secured Notes due 2020, provided by investment funds managed by Athyrium Capital Management. Cipher received an initial drawdown of $40 million, which was used to fund the majority of the upfront purchase of INNOCUTIS. The remaining balance of the Senior Secured Notes will be made available to finance future acquisitions and is subject to certain conditions. The five year fixed rate 10.25% Notes are payable on the last day of each quarter. The Notes are interest-only and are secured by assets of Cipher and its subsidiaries, subject to certain exceptions.

Very Attractive Valuation

We continue to rate Cipher shares a Buy and reiterate our price target of $17 per share.

Our model is consistent with management’s guidance that the INNOCUTIS deal will become accretive in two years. We model product revenue will reach $10 million in 2015, and grow to $125 million in 2018, an impressive compound annual growth rate (CAGR) of 133%, driven by both existing products and new approvals.

With respect to the valuation, we believe Cipher shares are undervalued at current market price. Currently, Cipher shares are traded at about $5.00 per share, which values the company at about $132 million in terms of market cap. This is deeply discounted compared to its peers. We believe Cipher shares are fair-valued at $17 per share. The specialty pharmaceutical industry trades at an average P/E ratio of 15x. According to our financial model, Cipher’s EPS will grow from $0.02 in 2015 to $1.95 in 2018. Applying the 15 x P/E multiple and the $1.95 EPS in 2018, discounted at 20% for three years, we come up with the fair value of $17 per share.

If management continues to capitalize on selective acquisitions, continues to develop their deep and growing pipeline of dermatology products, we believe the shares continue to offer significant upside potential. With the recent acquisitions, we believe Cipher is on its way to building a leading pure play dermatology based specialty pharmaceutical company with a focus on growing its North American presence. And what is even more impressive is that execution remains excellent. As such, we continue to have faith in management’s vision, growth strategies and strategic priorities, and expect another solid performance for 4Q15 and beyond.

Finally, we see the end-game for Cipher shareholders as an acquisition by a larger U.S. pharmaceutical player.

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