Edited Transcript of CPH.TO earnings conference call or presentation 26-Mar-20 12:30pm GMT

Subsequent to year-end, Sun Pharmaceutical Industries, Cipher’s marketing partner for Absorica, launched ABSORICA LD capsules in the U.S. for the management of severe acne. In addition to the benefits ABSORICA LD will bring to the patient population, we are thrilled that the launch will trigger an extension of our agreement with Sun, providing us with 2 additional years of royalties on Sun’s isotretinoin product portfolio. As previously communicated, the royalty rate on ABSORICA LD will be identical to the royalty on Absorica until December 2021. The extension allows for a reduced royalty rate in subsequent years.

On December 9, the company received — the company’s licensing partner MOB — for MOB-015, Moberg Pharmaceuticals, announced that MOB-015 met the primary end points as well as secondary end points in their North American Phase III study. MOB-015 is an internally developed topical formula for the treatment of onychomycosis, a common nail fungus. According to IQVIA, in Canada, the prescription market for the product was CAD 97 million in 2019. 84% of the market is topical drugs, growing at a 5-year CAGR of 24% for the period of 2014 to 2019. Results from this Phase III trial in Europe are expected in the second quarter of 2020.

In October, Cipher received Health Canada approval for TRULANCE. As part of the strategic review of the Canadian commercial assets, we are in the process of selecting a distribution partner for TRULANCE to bring this novel product to market. Subsequent to year-end, Cipher announced it had received a Notice of Termination from Bausch Health in connection with the license, development and commercialization agreement of Trulance. Cipher believes the notice is without merit and is currently working with Bausch to resolve the matters contained within.

The notice from Bausch has impacted the timing of the strategic review process. At the onset of the strategic review, the Board of Directors contemplated 2 scenarios for the Canadian commercial assets. The first was to sell the assets to a single buyer or multiple buyers. The second option was to find the most cost-effective means to distribute the Canadian commercial products. Progress has been made on both fronts, but the legal dispute with Bausch has extended the time line of the process. The company continues to remain confident in the process despite timing issues created by the notice from Bausch.

Cipher has assembled an attractive portfolio of assets beyond the currently marketed products, and we are committed to moving our current pipeline products through the regulatory process. We will partner these assets once they received regulatory approvals. In addition, Cipher will continue to work with our technology partner, Galephar, to bring new, exciting products to market with a focus on the U.S. and international markets. We look forward to providing you with updates on the status of our partnership initiatives as we transition the commercial portfolio.

Before passing the call over to Nadine, I wanted to briefly touch on the COVID-19 outbreak that continues to emerge around the world. While the precise impacts of the virus on the company remain unknown, rapid spread of the virus may have material effect on global economic activity and can result in volatility and disruption to global supply chains, operations, the mobility of patients and people and the financial markets.

I will now turn the call over to Nadine to review the financial results. Nadine?

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Nadine Jutlah;Interim CFO, [3]

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Thank you, Craig. Good morning, and thank you for joining us. Total net revenues for the quarter was $5.9 million, a decrease from $6.4 million in the prior year comparative period. Licensing revenue decreased to $3.8 million in the fourth quarter compared to $4.6 million in the comparative period. The decrease was primarily due to lower licensing revenue from Absorica, which is $3.1 million in Q4 2019 compared to $3.7 million in Q4 2018.

Product revenue increased by 21% to $2.2 million in the current quarter from $1.8 million in the comparative period. The increase was attributable to Epuris, which grew to $2 million in Q4 2019 compared to $1.5 million in Q4 2018. Epuris had a prescription market share of over 38% in Canada for the 3 months ended December 31, 2019, compared to 35% for the 3 months ended December 31, 2018.

Total operating expenses decreased 62% in the fourth quarter to $2.2 million compared to $5.8 million in the prior year comparative period. Selling, general and administrative expenses in particular decreased by 73% to $1.3 million in the current period from $5 million in Q4 2018. Managing OpEx for 2020 will remain a priority to ensure that our credit facility is paid down as scheduled.

Overall, we finished the quarter with income from continuing operations of $2.6 million or $0.10 per basic and diluted share compared to a loss from continuing operations of $0.5 million or $0.02 per basic and diluted share in Q4 2018. Adjusted EBITDA increased by $3 million for the quarter to $4.1 million compared to $1.1 million in Q4 2018.

Cipher generated $8.9 million in cash from operating activities for the year ended December 31, 2019, and used approximately $12.5 million in cash. This included $10 million in principal repayments against the credit facility. We had $6.3 million in cash and $7.6 million in debt at December 31, 2019.

I will now turn the call back to Craig for his closing remarks.

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Craig J. Mull, Cipher Pharmaceuticals Inc. – Interim CEO, President & Chairman of the Board of Directors [4]

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Thanks, Nadine. With our rationalized cost structure in place, Cipher will now focus on several key milestones that will enhance long-term value, including the full year benefit of cost reduction — of the cost-reduction plan, the conclusion of the strategic review process, increased adoption of the ABSORICA LD and discussions with Galephar regarding new product opportunities.

We will now open the call up to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Andre Uddin at Mackie Research Capital.

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Andre Uddin, Mackie Research Capital Corporation, Research Division – MD of Healthcare Research [2]

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Craig, just had a couple of questions. Could you provide some more details on your Canadian outlicensing plans and where you are in the process and if you have any LOIs meeting right now? And then in terms of your Canadian product portfolio, if you exclude the Bausch, I guess, suit that’s going on, are you breaching any of the licensing agreements by not having any — not having enough sales reps? And/or are you missing any certain sales levels that you need to

(technical difficulty)

those licensing…

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Craig J. Mull, Cipher Pharmaceuticals Inc. – Interim CEO, President & Chairman of the Board of Directors [3]

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You mean besides the Trulance issue? Is that what you’re speaking to?

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Andre Uddin, Mackie Research Capital Corporation, Research Division – MD of Healthcare Research [4]

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Yes. Yes.

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Craig J. Mull, Cipher Pharmaceuticals Inc. – Interim CEO, President & Chairman of the Board of Directors [5]

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Right. Well, no, we’re not in breach of any of the other licensing agreements for the Canadian portfolio. I can’t speak in any real detail about Letters of Intent that we may have received as we’re under a confidentiality agreement with everybody that we may be speaking to with regards to that portfolio.

Was there any other specific questions, Andre, that I — I know you asked a number of them in that…

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Andre Uddin, Mackie Research Capital Corporation, Research Division – MD of Healthcare Research [6]

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Yes. I just wanted to get a better sense on how because it’s been a — I know business development always takes a bit of time, but I was just wondering where you are on the process for…

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Craig J. Mull, Cipher Pharmaceuticals Inc. – Interim CEO, President & Chairman of the Board of Directors [7]

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We’ve had a healthy response, and we’ve been approached by a number of companies, Canadian companies and U.S. companies, interested in the portfolio. We’ve had ongoing discussions with them. We’re looking for the best method to distribute that product — that set of products, which may be a partnering or outlicensing to a third party or it could be the employment of contract sales organization. And we’re reviewing and analyzing the options there, and they look quite attractive.

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Operator [8]

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The next question comes from Doug Loe of Echelon Wealth Partners.

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Douglas W. Loe, Echelon Wealth Partners Inc., Research Division – Analyst of Healthcare and Biotech [9]

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Craig, just sticking with the Canadian portfolio and specifically on the basket of acute care products you acquired from Correvio. I know that you would clearly be looking to explore strategic options for the basket of assets as you would be forward for the rest of the portfolio. But maybe just specifically on Trevyent for which United has already refiled its NDA in the U.S., any intentions to perhaps enhance the value of that asset through filing your own NDS filing with Health Canada? Or maybe just how you’re conceptualizing that product would be helpful feedback.

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Craig J. Mull, Cipher Pharmaceuticals Inc. – Interim CEO, President & Chairman of the Board of Directors [10]

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Yes. We are in the process of going through the process for Health Canada approval. I don’t have much to report as to the progress of that as it’s sitting with the FDA — or sorry, the Health Canada at the moment. And we haven’t had a response from our submission of documentation.

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Operator [11]

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The next question comes from Prasath Pandurangan from Bloom Burton.

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Prasath Pandurangan, Bloom Burton & Co., Research Division – Associate of Equity Research [12]

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I had a couple. First, what’s the essence of the dispute with Bausch as it stands now? And are discussions likely to resolve those? Or do you see it going to arbitration? And secondly, I know it’s early days, but do you have any insight on where the ABSORICA LD prescriptions are coming from? Are these new prescribers? Or is it predominantly switching from the prior formulation?

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Craig J. Mull, Cipher Pharmaceuticals Inc. – Interim CEO, President & Chairman of the Board of Directors [13]

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Okay. Dealing with the first question, I believe that it was related to the Bausch dispute. Again, I’m under — Cipher is under confidentiality agreement there. So there’s limited amount of information that I can provide to you on that matter. We are hopeful to resolve the matter. I think it would be in everybody’s best interest to do that. We’ve got a product that could be on the market. And the sooner it’s resolved and that product is being sold in the Canadian market, the better for all parties involved.

The second question, I believe, related to Absorica and the uptake of the LD product. The idea there was that it’s part of the life cycle management of Absorica, whereby Sun would be out converting prescribing physicians to the LD product, which is a patented product that would be able to defend itself against the generic entry. In other words, the product couldn’t be genericized. And the idea is that there would be a conversion or a transition from the basic Absorica product to ABSORICA LD. And that would be a defense against genericization.

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Operator [14]

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(Operator Instructions) And the next question comes from [Adrian Smith], an investor.

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Unidentified Shareholder, [15]

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Yes. Craig, congratulations. Amazing quarter, and thank you for rightsizing the company and creating some incredible positive cash flows. My question to you is, you’re still carrying a bit of debt on your balance sheet. And clearly, the world’s in a bit of a financial crisis right now. I think as a small company, you’re in a very unique position to sort of delay capital projects or spend and really just to potentially pay off the debt and accumulate cash over the next couple of quarters and maybe even into the end of the year with the pandemic. So just wondered how you’re sort of thinking about cash flows and debt levels? And are you moving right ahead with business plans? Or you’re kind of holding back and taking care of the books?

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Craig J. Mull, Cipher Pharmaceuticals Inc. – Interim CEO, President & Chairman of the Board of Directors [16]

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Well, we certainly have a focus on cost here and you can see that in the results of the fourth quarter. We’re in a good position to pay back the debt, which I believe is due at the end of this year. We’re in a close, if not in a net positive cash position, when you take the debt off. So I think that we’re in the right position to weather this situation with the virus. And we want to maintain our profitability. And to do that, we’ve got a very close eye on expenses.

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Unidentified Shareholder, [17]

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Right. Well, thank you very much. I mean I appreciate it. As a private investor, it gives me a lot of confidence that my money is safe. And I clearly think your share values are ridiculously underpriced at this point. But I guess that’s the nature of the world markets at this point. So congratulations. Look forward to your next quarters.

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Craig J. Mull, Cipher Pharmaceuticals Inc. – Interim CEO, President & Chairman of the Board of Directors [18]

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Appreciate that you came on the line. Thank you.

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Operator [19]

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There are no further questions. I will now turn the call back over to Craig Mull for closing comments.

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Craig J. Mull, Cipher Pharmaceuticals Inc. – Interim CEO, President & Chairman of the Board of Directors [20]

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Thank you for joining us today. We look forward to reporting our progress throughout the balance of 2020 as we execute on the priorities discussed today. Thank you, and have a great day.

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Operator [21]

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