By Jason Napodano, CFA
On July 25, 2012, Cipher Pharmaceuticals (Toronto:DND.TO) / (OTC Markets:CPHMF)
reported financial results
for the second quarter ended June 30, 2012. Results were outstanding, beating our projections for both revenues and earnings.
Revenues in the quarter totaled $1.629 million, nicely above our forecast of $1.0 million. Revenues consisted of approximately $0.9 million in royalties and milestones on Lipofen, $0.4 million in royalties and milestones in ConZip/Durela, and $0.3 million in milestones on Absorica (CIP-Isotretinoin).
Cipher reported net income of $0.210 million during the second quarter 2012. This was significantly better than our model had forecasted. Management continues to do an excellent job of maintaining low operating expenses despite the growing top-line and strong cash balance. Operating expenses consisted of $0.9 million in operating overhead, $0.4 million in research & development, and $0.2 million in amortization and depreciation. Net income per share was $0.02 based on 24.4 million shares outstanding.
This was Cipher’s second profitable quarter in a row. We are expecting a profit in the third quarter 2012 based on the one-time catch-up in Lipofen royalties; and, with Absorica expected to launch in the fourth quarter 2012, we think that Cipher could report positive net income in every quarter in 2012.
Cipher exited the quarter 2012 with $14.4 million in cash and equivalents. We find this to be sufficient to fund operations for the foreseeable future and even to cash flow positive operations now that Absorica has been approved in the U.S.
As noted above, Lipofen contributed $0.9 million in the second quarter 2012. Lipofen prescriptions continue to growth at an impressive rate. In fact, subsequent to the quarter end, Cipher achieved a contractual sales goal for product sales resulting in a royalty percentage increase by 3% (we model from 15% to 18%). We note this change in Lipofen royalty is retroactive to October 2011, so we are expecting a one-time catch-up payment on Lipofen royalties to be recorded in the third quarter 2012 of roughly $0.35 million.
We expect that net Lipofen revenues for the full year 2012 will total about $4.8 million, driven by $4.4 million in royalties and catch-up payments and $0.35 million in the recognition of the milestone payment for KPA noted above for the TTM sales eclipsing $25 million. We forecast royalties will continue to grow in 2013 and beyond, up to $4.6 million in 2014 when the patent expires.
ConZip / Durela
Cipher's extended-release tramadol (CIP-Tramadol-ER) was launched in the U.S. by Vertical Pharmaceuticals in September 2011 under the trade name ConZip. ConZip revenues in the second quarter totaled $0.4 million, up from $0.3 million in the first quarter 2012. We think that ConZip has a unique opportunity in the tramadol-ER market based on a differentiated profile in a large unpenetrated market.
The formulation is designed to provide a smooth consistent plasma level over an extended period of time. ConZip absorption is pH-independent, enabling the product to be taken with or without food – a key differentiator to generic tramadol-ER. ConZip also provides remarkably fast absorption, allowing for peak therapeutic plasma concentrations to be achieved in as little as 60 minutes – again superior to generic tramadol-ER.
There were over 36 million tramadol prescriptions written in 2011, up nearly 20% from 2010. Only 2.5% of those prescriptions were for extended release (-ER) formulations. All tramadol-ER products generated revenues of approximately $130 million in 2011. This was on a lack of real promotion from the primary players. We think a significant opportunity exists for Vertical Pharmaceuticals, Inc., Cipher's U.S. commercialization partner for ConZip, to actively promote the highly differentiated ConZip.
Vertical officially launched the product in September 2011 under the brand name ConZip. Vertical has dedicated an initial sales force of 60 representatives, with plans for further expansion in the fourth quarter 2012. Cipher is still eligible for $3.8 million in milestones, plus royalties on sales, from Vertical Pharma.
In Canada, Cipher's partner, Medical Futures, recently launched CIP-Tramadol-ER as Durela in March 2012. The Canadian market opportunity for tramadol is much smaller than the U.S., but we are pleased to see management at Cipher monetizing their assets and finding new revenue streams. We expect that, albeit small, Durela will start contributing reportable positive cash flow for Cipher in the third quarter 2012.
Absorica / CIP-Iso
On May 27, 2012, Cipher announced it had received U.S. FDA approval
of Absorica, the company's novel, patented brand formulation of the acne medication isotretinoin, for the treatment of severe recalcitrant nodular acne.
Approval triggered two milestone payments to Cipher totaling $9.0 million from commercialization partner Ranbaxy, of which Cipher to retained 50% after paying sub-milestones to Galephar. Cipher will also receive royalties (mid-teens) on net U.S. sales and is eligible for future milestone payments (totaling net $5 million to Cipher) based on sales targets. Through conversations with management, we believe the two net $2.5 million sales-related milestones are achievable under the current expected plans with Ranbaxy.
Absorica's offers more consistent absorption day-in and day-out over the course of a typical 3- to 5-month treatment period. We think this will be a significant marketing advantage for the drug. There are currently no promoted branded Isotretinoin products in the U.S. Existing branded products, Teva’s Claravis and Mylan’s Amnesteem, rely on previous patient and physician experience with Roche’s Accutane (isotretinoin) to drive sales. The efficacy profile of Isotretinoin is powerful enough that over one million prescriptions were written in 2011 despite this lack of active promotion.
All three products discussed above exhibit significant reductions in absorption under fasting conditions. We note this this is not a problem for Cipher’s Absorica (CIP-Isotretinoin). In total, Isotretinoin products posted sales of $466 million in 2010, up over 10% from 2009. We think Absorica will benefit from all of the known efficacy benefits of generic Isotretinoin, but with the improved formulation market share gains should be meaningful. We note that the FDA has labeled Absorica so that it is not substitutable with generic Isotretinoin. We see this is a meaningful advantage for Cipher.
We see a significant opportunity for Absorica once launched. Despite strict FDA monitoring around prescriptions of isotretinoin, the market remains quite robust. Generic isotretinoin does around $450 million in sales in the U.S., and that is with no promotion. Prescriptions have remained fairly consistent over the past few years, perhaps trending down slightly since late 2009 once Roche exited promoting Accutane.
We estimate that in terms of a “branded” opportunity, the Isotretinoin market is nearly $1 billion in size. We remind investors that Roche had Accutane sales over $750 million at peak. We believe that Cipher’s Absorica product, being the only promoted branded Isotretinoin on the market, could achieve peak sales near $200 million. Absorica offers significant advantages over generic isotretinoin in terms of dosing flexibility. The market is currently dominated by two un-promoted branded products, Mylan’s Amnesteem and Teva’s Claravis. Amnesteem posted sales of $136 million in 2010 on 386K scripts. Claravis posted sales of $330 million in 2010 on 670K scripts.
Cipher is seeking approval for CIP-Isotretinoin in Canada. The new drug submission (NDS) was accepted for review in January 2012. We are expecting a decision out of Health Canada in the first quarter 2013. We view CIP-Isotretinoin as a potential $10 million opportunity in Canada. The total Isotretinoin market is Canada is small, only around $20 million total.
Only two products, Roche’s Accutane and Mylan’s Clarus are on the market, with little to no promotion. Therefore, we believe that a sales force of 6 to 8 representatives could effectively promote the product in-house. We expect that Cipher will seek to commercialize the drug on its own in 2013. We think approval of CIP-Iso in Canada will create a meaningful shift in the company’s future development plans, as Cipher seeks to become a specialty pharmaceutical company with multiple products and its own sales force in Canada over time.
Accordingly, we think Cipher will in-license another late-stage or Health Canada approved dermatology or pediatric product in 2013. We think CIP-Isotretinoin becomes cash flow positive for Cipher in Canada at sales around $3 million. We think this can be achieved in the third year post-launch.
Valuation & Recommendation
We have conducted a discounted cash flow analysis to value the shares of Cipher Pharmaceuticals Inc. Our model now shows that Cipher is worth $3.00 per share. Our model (found in our full report) shows that operating cash flow should turn positive in 2013 on a sustained basis.
By the end of 2012, Cipher will be collecting revenues from three approved products in the U.S., with a growing cash balance of over $14 million in the bank, no debt, and generating positive cash flow. Cipher is now three-for-three. It's time for U.S. investors to take notice. This is a stock to own. Our rating is ‘Buy’.