Yahoo Finance DND: Cipher Beats Again, Seeks NASDAQ Listing
By Jason Napodano, CFA And the change in market share for the major isotretinoin players since CIP-isotretinoin came into the market: …Lipofen…
On October 29, 2014, Cipher Pharmaceuticals (DND.TO) (CPHMF) reported financial results for the third quarter ended September 30, 2014. Total revenues in the quarter were $7.2 million, up 28% over the third quarter 2013. Revenues did decline by $1.5 million sequentially from the second quarter 2014 due to seasonality of the company’s leading isotretinoin franchise, which we discuss below. Revenues were driven by $4.8 million in royalties of Absorica™ (CIP-isotretinoin) from U.S. commercial partner Ranbaxy, along with $1.1 million in revenues associated with Lipofen (CIP-fenofibrate) and $0.8 million from ConZip/Durela (CIP-tramadol). Cipher also recorded $0.5 million in product sales relating to sales of Epuris® (CIP-isotretinoin) in Canada. This was generally in-line with expectations.
Operating expenses in the quarter were in-line with expectations. The company has been able to keep overhead and R&D costs low even while the top-line dramatically increases. The company has been expanding its commercial operations in Canada and executing on its business plan well over the past year. For example, Cipher hired 6 full-time representatives and 1 part-time representative in 2013 to promote Epirus in Canada. We expect further expansion of this staff to the mid-teens level in 2015. Over the summer, Cipher was successful in expanding the CIP-isotretinoin licenses outside the U.S. with two recent agreements:
- In June 2014, Cipher announced it had entered into a definitive distribution and supply agreement with Laboratorios Andrόmaco S.A. under which Cipher has granted Andrόmaco the exclusive right to market, sell and distribute CIP-isotretinoin in Chile. Andrόmaco already sells a generic isotretinoin product in Chile called Lisacne®, along with other dermatology products Fucidin® and Daivonex®. The company will replace Lisacne® with Cipher’s formulation and call it Lisacne-CIP, once approved. We estimate the generic isotretinoin market in Chile is around $10 million in size and expect Lisacne-CIP will be on the market by the middle of 2015.
- In July 2014, Cipher entered into a definitive distribution and supply agreement with Ranbaxy under which Cipher has granted Ranbaxy the exclusive right to market, sell, and distribute CIP-isotretinoin capsules in Brazil. This agreement extends the current relationship with Ranbaxy, which markets and distributes CIP-isotretinoin as Absorica™ in the U.S. Ranbaxy plans to promote the product through a brand dermatology division in Brazil. We estimate the size of the Brazilian isotretinoin market at around $50 million. Cipher's CIP-isotretinoin formulation is expected to be a flagship product in Ranbaxy's dermatology franchise in Brazil, once approved. Cipher believes Ranbaxy will be in position to launch CIP-isotretinoin in Brazil in the first half of 2016. Under the terms of the agreement with Ranbaxy, Cipher will receive an upfront payment and is eligible for additional pre-commercial milestone payments. Ranbaxy is responsible for all regulatory related activities.
EBITDA in the third quarter totaled $5.2 million, up 37% from the same quarter in 2013. Net income in the quarter totaled $8.7 million, up 158% year-over-year. This equated to $0.34 in positive EPS. Income in the quarter included a $4.0 million gain related to recognition of a net deferred tax asset. Prior to this gain, net income would have been $4.6 million on a pre-tax basis. As of September 30, 2014, the company still has a deferred tax asset of $8.0 million on the balance sheet and an estimated $55 million in net operating loss carry forwards to offset future income.
Net cash generated from operating activities in the quarter totaled $7.1 million. For the nine months ending September 30, 2014, Cipher has generated $21.6 million in cash from operating activities. Cash as of September 30, 2014 now stands at $47.6 million. We note the company continues to speak about in-licensing or M&A, specifically with a focus on the Canadian dermatology market and North American specialty pharmaceutical market. We discuss this opportunity below. Given the company’s strong cash balance, we would not be surprised to see Cipher acquire at least one more product to promote alongside of Epuris in Canada in the next few months.
…Absorica…
Total net Absorica revenues in the third quarter 2014 were $4.8 million, comprised of $0.6 million in amortization of upfront licensing fee and $4.2 million in royalties on U.S. sales at Ranbaxy. We note that Cipher receives a “mid-teens” royalty (we believe ~15%) on U.S. sales of Absorica at Ranbaxy, but then shares that royalty with manufacturing partner Galephar 50/50. Cipher collects a mark-up on transfer to Ranbaxy (we believe ~1.5%). Thus, we believe Absorica sales in the first quarter equated to roughly $47 million. This was a decline from the estimated $58 million in sales in the second quarter 2014 due to seasonality. We note Absorica use in primarily in teenagers who often take a holiday from the drug during the summer months.
Despite the dip in the market over the summer, the launch to date has clearly been impressive. Ranbaxy has 50 sales representatives promoting Absorica to roughly 3,500 prescribing dermatologists. Cipher reported that Absorica held roughly ~20% market share at the end of September 2014. Besides the strong market share gains, the total isotretinoin market continues to be strong. Prescriptions grew by 7% in the for the twelve months ending September 30, 2014, with 4% year-over-year growth in the third quarter alone.
We see Absorica as a differentiated product, promoted by a highly motivated and focused sales force, into a nicely growing market. The trend should continue into 2015. Based on existing trends, we estimate the total isotretinoin market in the U.S. is around 1.1 million prescriptions per year. When equated into Absorica (branded) price, this is around $1.2 billion in potential sales. Ranbaxy’s ~20% market share as of July 2014 equates to a ~$240 million annualized run rate. This is consistent with the ~$175 million in sales we back-calculated off Cipher’s royalty line for the first three quarters on 2014. We are expecting gross sales at Ranbaxy of $55 to $60 million in the fourth quarter 2014, putting total 2014 sales generally in-line with expectations.
The only key risk for investors to be aware of is potential generic alternatives to Absorica. In September 2013, Ranbaxy received a Paragraph IV Certification Notice of filing from Watson Labs of an Abbreviated New Drug Application (ANDA) to the FDA for a generic version of Absorica. Ranbaxy and Cipher intend to vigorously defend Absorica's intellectual property rights and pursue all available legal and regulatory pathways in defense of the product. The Markman (pre-trial) hearing is scheduled for the first quarter 2015. We remind investors that Absorica is currently protected by two issued patents listed in the FDA's Orange Book that expire in September 2021. Management noted on the third quarter conference call that there are three new product patent applications pending with the U.S. Patent and Trademark Office. Hatch-Waxman exclusivity on Absorica protects the product until April 2016. This would be the earliest a potential generic could come to market in the U.S.
…Epuris…
Sales of Epuris totaled $0.512 million in the third quarter 2014, up from the $0.498 million reported in the second quarter 2014. We remind investors that Cipher launched Epuris on its own in June 2013. The company hired 6 full time reps and 1 part-time rep to promote the product. Cipher also hired Joan Chypyha as Vice President of Marketing and Sales in early 2013. Ms. Chypyha heads up the company’s commercial operations in Canada, and manage the recently created in-house sales force contracted for the Epuris launch. We note that Ms. Chypyha seems uniquely qualified for this role, having spent more than 25 years in the pharmaceutical industry with an emphasis on marketing, sales and business development in the dermatology area. We note her previous role as for 16 years with Hoffman-La Roche, escalating to Business Unit Director for the Dermatology franchise where she was responsible for the management of a specialty sales force that promoted Accutane, among other brands.
Cipher management noted that this specialty sales force that promoted Accutane was 6 to 8 representatives and achieved peak sales between $25 and $30 million. The current Canadian isotretinoin market is only around $15 million in size, but it has been fully genericized and there is no active promotion of any branded products besides Epuris. As of September 30, 2014, Epirus holds 13.5% market share.
Below we present a graph of U.S. Absorica and Canadian Epirus market share since launch:
Net Lipofen revenue in the third quarter 2014 was $1.1 million, surprisingly above our forecast for $0.9 million thanks to continued solid growth of the authorized generic product. As a reminder, in the second quarter 2014 net Lipofen revenues totaled $1.9 million thanks to inventory stocking at wholesalers. Lipofen is having an excellent 2014 so far, with total revenues of $4.1 million for the first nine months of the year vs. the $3.4 million reported in all of 2013. As noted above, earlier in the second quarter, Cipher and manufacturing partner Galephar decided to launch an authorized generic formulation of Lipofen ahead of the patent expiration in January 2015. The authorized generic, priced at around 85% of branded Lipofen, now has around 37% market share as of September 30, 2014, up from 15% market share at June 30, 2014. Going forward, we expect the authorized generic to control over 50% of the market by year end, and dominate the market in 2015.
The good news for Cipher is that with still relatively strong pricing we see this astute strategy as allowing Cipher to continue to record meaningful revenues from Lipofen well after the patent expiration in early 2015. For example, Cipher and Kowa Pharma have raised the price on the branded Lipofen product to the point where 85% of that price, the price of the authorized generic, exceeds what the price of the branded product was only 12 months ago. And because of the terms of the manufacturing and promotion deal between Galephar, Cipher, and Kowa, the economics to Cipher are better for the authorized generic than the branded product. This all results in a growing revenue line for Lipofen when a year ago we would have expected Lipofen to almost completely disappear by early 2015. In fact, we would not be surprised to see only marginal erosion in now 2015 given a lack of alternative Lipofen generic products, continued promotion by Kowa, and strong pricing and market dynamics.
…ConZip / Durela…
Net revenues from ConZip / Durela in the third quarter 2014 totaled $0.8 million, mostly driven by sales of ConZip by Vertical Pharmaceuticals Inc. in the U.S. Cipher gets a 15% royalty from Vertical Health on U.S. sales of ConZip and a 20% royalty from Medical Futures on Canadian sales of Durela. Cipher does not breakout ConZip from Durela, but we note that the company did report ConZip prescriptions grew by 10% in the third quarter 2014 year-over-year and Durela prescriptions grew by 47% for the first nine months of 2014 vs. the same period in 2013. Durela sales were up 58% in the third quarter 2014.
One area we may see some new growth from the CIP-tramadol-ER franchise is in Latin America. In late April 2013, Cipher entered into an exclusive distribution and supply agreement with Tecnofarma International Ltd. for the right to market and distribute CIP-tramadol-ER in 18 Latin American countries, including Brazil and Mexico. Under the terms of the agreement, Cipher received an upfront payment and is eligible for additional milestones based upon regulatory approval in Brazil and Mexico. Cipher will supply product to Tecnofarma at a fixed-transfer price.
Cipher and Tecnofarma are working towards regulatory filings in these 18 countries. Management tells us that some of the small countries, ones that work of the U.S. FDA or Canadian regulatory authority, may see some approvals in 2014. Larger countries, like Brazil for instance, may see filings in 2014 and regulatory approvals in 2015. We do not model meaningful revenues from CIP-tramadol-ER outside the U.S. or Canada, so if Tecnofarma can being to generate revenues and start paying royalties to Cipher in 2014 and 2015 it would represent upside to our model.
…Solid Cash Position Should Lead To Pipeline Expansion…
Cipher exited September 30, 2014 with approximately $47.6 million in cash and investments. Cash generation in the quarter totaled $7.9 million, $7.2 million of which was from operating activities. We note the company continues to speak about in-licensing or M&A, specifically with a focus on the Canadian dermatology market and U.S. specialty pharmaceutical market. Given the company’s strong cash balance, we would not be surprised to see Cipher acquire at least one more dermatology product to promote alongside of Epuris in Canada in the next few months. In the U.S., we believe the company will see to acquire either specialty pharma companies or products that can be accretive in two years or less.
Cipher is also working to file a new drug submission (NDS) for the Betesil Patch in Canada. Current guidance is to file the NDS before the end of 2014. Cipher is working with Institut Biochimique SA while they prepare the U.S. NDA filing for the U.S. market. If approved late 2015, we think the Betesil Patch is an excellent complement dermatology product for Cipher’s contract sales force to co-promote along with Epuris. We think Cipher can achieve breakeven Canadian operations based on the launch of Epuris alone by the end of 2015. This would be sales in the area of $3 million. Adding one or two more dermatology products to the portfolio will help improve the overall efficiency and profitability of Cipher’s Canadian operations.
…NASDAQ Listing On The Horizon…
Subsequent to the end of the third quarter 2014, Cipher filed an application to obtain a listing on NASDAQ. We believe a listing in the U.S. on NASDAQ will provide access to a broader range of investors and, over time, greater liquidity for the stock. With positive shareholders’ equity of $58.5 million, $47.6 million in cash, a market capitalization of $320 million, and a stock price near $13 per share, Cipher certainly qualifies for NASDAQ. We believe a listing on the NASDAQ will be followed by major U.S. institutional buying and indexing of the stock.
Valuation & Recommendation
Cipher has executed well in its first full quarter under recently appointed a new CEO, Shawn Patrick O’Brien. The stock is at or near all-time highs, and up an impressive 550% over the past 24 months. With a market capitalization of $320 million, we believe Cipher remains an attractive specialty pharmaceutical company to own. For 2014, we forecast EPS of $0.81 per share. That equates to a P/E ratio of 15.3x 2014 EPS, generally in-line with the industry average of 16x. Cipher also offers positive cash flow, significant unrecognized deferred tax assets of $8.0 million, R&D tax credits of $3.6 million, a net operating loss carry forwards, and roughly $55 million in current cash and investments. We are reiterating our ‘Buy’ rating on the shares and adjusting our price target to $15 per share, or roughly 16x (industry average) our 2015 EPS estimate of $0.87 per share.
