Cipher Pharmaceuticals Inc

F:PHE

Good morning, and thank you for joining us today. Before I begin, I would like to remind everyone that all figures discussed on today's call are expressed in U.S. dollars, unless otherwise specified.

Cipher's third quarter of 2026 continued to demonstrate the strength of our highly profitable specialty pharma dermatology platform. Net revenue of $12.7 million was essentially in line with the third quarter of last year, as growth in Epuris and higher licensing revenue largely offset lower Natroba sales in the U.S. We reported net income of $10.9 million, or $0.42 per diluted share, which includes the favorable impact of the arbitration award that our CFO, Ryan Mailling, will discuss in his remarks, and adjusted EBITDA of $7.2 million, representing an adjusted EBITDA margin of 57%. Ryan will provide detailed -- a detailed overview of our financial results following my commentary.

Turning to our commercial portfolio, revenue from Natroba and its authorized generic, spinosad, for the third quarter of 2026 was $7.1 million compared to $8.1 million for the same quarter in the prior year, a decrease of 12%. As in the prior quarter, the decrease was driven by lower sales volumes to Medicaid-covered patients, arising from reductions in the number of covered lives under the Medicaid programs. However, despite the impacts from the reductions in Medicaid programs, the performance of Natroba is demonstrating improvement with a sequential -- 14% sequential increase in revenue during the third quarter of 2026 compared to the second quarter of 2026, well ahead of the 4% sequential increase we saw over the same period last year.

We continue to invest in expanding the U.S. business beyond the Medicaid payer channel, including through the commercial payer, direct-to-patient, and retail pharmacy initiatives we outlined last quarter. This investment is reflected in higher selling and marketing spend in the third quarter, driven by expanded marketing campaigns focused on increasing awareness of Natroba in the U.S.

Natroba also represents a potential opportunity outside of the U.S., including Canada and other rest of the world markets. We announced in January that Health Canada has accepted for review our new drug submission for Natroba for the treatment of head lice and scabies, and the results of the review are expected soon and likely in the first quarter of 2027. Head lice products currently available in Canada and other countries globally have, like in the U.S., become less effective due to its resistance. We believe that Natroba fulfills an unmet need in many markets outside the U.S. with a proven single treatment option.

During the quarter, we also strengthened our out-licensing efforts for Natroba and are seeing interest from parties in various markets, given the high unmet need and the effectiveness of the product in being able to address those needs.

Our Canadian portfolio continued to deliver growth during the quarter. Product revenue from the Canadian portfolio was $4.3 million for the third quarter of 2026, an increase of 8% compared to the same quarter in the prior year. Revenue from Epuris was $3.9 million, an increase of 15% compared to $3.4 million in the same quarter last year. Market share for Epuris increased from 48.7% as of September 30, 2026, according to IQVIA, up 1.6 percentage points from 4.7 -- 47.1% in June of 2026.

We also made significant progress on public reimbursement for Epuris during the quarter. Following the letter of intent signed by the pan-Canadian Pharmaceutical Alliance in July, we have worked with the federal and provincial-territorial drug plans and have now finalized the majority of the additional product listing agreements, including in three key markets. Public funding for Epuris became effective August 17th in British Columbia, on August 27th in Quebec, and October 1st in Alberta, among other jurisdictions across Canada. Listing on these public drug plans provides wider access for Epuris for patients who were not previously covered and expands Cipher's addressable market for the product.

We expect this expanded coverage to continue contributing to market share growth over time, particularly in key markets where a sizable portion of the patient population has drug coverage through publicly funded drug plans, which were previously not accessible to Cipher. We have also increased our sales and marketing initiatives in Canada in connection with this expanded coverage. This is truly a beneficial development for the Canadian patient population navigating severe nodular acne.

For the remainder of my commentary, I'd like to provide an update on our business development activities, which remain a key area of focus for Cipher. On September 21st, we announced the appointment of Mr. Rajiv De Silva to our Board of Directors. Mr. De Silva brings over 30 years of experience in the healthcare sector, including board and executive leadership positions, and has a proven track record of guiding high-growth organizations through complex mergers and acquisitions. His extensive background in M&A and corporate strategy is expected to strengthen the execution of our growth strategy. With this appointment, our board expands to four members, three of whom are independent.

We continue to pursue our three distinct strategies in addition to our existing business in order to drive future shareholder value and growth of our business. Firstly, we're looking for acquisitions or in-licensing opportunities of complementary products. Secondly, we're looking to out-license both Epuris and Natroba to markets outside of North America. And lastly, we're looking for company acquisitions for strategic value.

The first area of our growth strategy is the pursuit of the acquisition or in-licensing of complementary products, which can be directly commercialized through our existing Canadian and U.S. commercial infrastructure. We continue to source and explore opportunities in this area and have been assessing some of these opportunities in detail, including holding discussions with vendors during and subsequent to the third quarter. We remain optimistic that we will find an opportunity that is the right fit for Cipher. However, as we have said previously, these activities take time. The time horizons on each opportunity vary, and the opportunities may or may not come to realization in the end.

The second strategy is pursuing out-licensing opportunities for both Natroba and Epuris outside of North America. We continue to believe there is a high unmet need for a highly effective product like Natroba to address head lice and scabies in other territories globally. Similarly, given Epuris is the leading isotretinoin product in the Canadian market, we believe Epuris could also perform strongly in other territories with similar markets to Canada.

To provide additional support and strengthen our out-licensing efforts, we have recently engaged a consulting firm with expertise in assisting companies achieve their strategic business development objectives. This firm is assisting with out-licensing efforts for both products, which to date has been beneficial in the process, and we are receiving additional interest from parties for both products from various markets. In addition to assisting with our out-licensing efforts, the firm that we have engaged is also assisting our internal team in identifying potential product acquisitions or in-licensing targets, which is expected to broaden the opportunities available to us.

Thirdly, the third part of our strategy is evaluating and pursuing company acquisitions which may have strategic value for Cipher. As we have said previously, we continue to believe that Cipher would benefit from additional size and scale, both in pursuing our other business development strategies and in our ongoing and future operations. As we discussed last quarter, we were in the advanced stages of a process for an acquisition target earlier this year, but ultimately determined that not continuing was the right decision for Cipher, and a deal did not materialize. Following the advanced stage opportunity that ultimately did not materialize, we continue to actively source, evaluate, and pursue potential acquisitions that achieve our objectives, and we believe that the addition of Mr. De Silva to our board will strengthen our ability to execute in this area.

We remain optimistic that we will achieve success in finding and executing on the right opportunity. Although a transaction has not come together to date as a result of the three growth strategies we are pursuing, this remains a key focus area for Cipher, to which we are dedicating resources and believe we are making meaningful progress. We remain optimistic we will ultimately achieve success in finding the right opportunity.

I will now pass the call over to our CFO, Ryan Mailling. Please go ahead, Ryan.

Thanks, Craig, and good morning, everyone. As Craig mentioned at the beginning of today's call, all amounts provided are expressed in U.S. dollars unless otherwise noted. Today, Cipher Pharmaceuticals is reporting results from the company's third quarter and year-to-date 2026, which are the three and nine-month periods ended September 30, 2026.

Before I review the results, I want to begin with the arbitration award that Craig briefly mentioned earlier, as developments related to this during the quarter had a pervasive impact on our third quarter results. On September 1st, we announced that a New York federal court ruled in Cipher's favor with respect to the appeal process that was launched in respect of the previously announced award from an arbitrator. In connection with our contractual dispute related to certain clinical data and its 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 clinical data in dispute.

The court affirmed the following remedies in Cipher's favor: one, compensatory damages of CAD $4.2 million, a 15% royalty on net sales of Absorica LD in Canada, beginning on January 1st, 2026, running through to the end of 2040, and 80% of our out-of-pocket attorney's fees and certain expenses directly related to that arbitration. The court also awarded us interest on the arbitration award until such time as it's satisfied. The award was not previously recognized in Cipher's financial statements prior to this quarter due to uncertainty surrounding the outcome of the court proceedings.

In October, subsequent to the end of the third quarter, we received payment of $5.7 million for the portions of the award related to the damages and our out-of-pocket attorney fees and certain other expenses, as well as interest. As a result, we recognized these portions of the award in our third quarter results. This included $2.3 million of other operating income from damages, a $2.2 million recovery within selling, general, and administrative expenses for previously incurred legal fees and certain other expenses, and $0.5 million of interest income.

Because the recognized amounts are expected to be non-recurring and are not reflective of our core business, we have included arbitration-related recoveries as an adjustment item in our definition of adjusted EBITDA this quarter. And as a result, although our net income includes these recoveries, adjusted EBITDA excludes the benefit of these recoveries. I will refer to these items as I review the financial results for the third quarter and year-to-date.

Total net revenue for the three and nine-month periods ended September 30, 2026, was $12.7 million and $37.3 million, respectively. Net revenue for the third quarter of 2026 decreased by $0.1 million or 1% compared to the same quarter in 2025. Net revenue for the nine-month period ended September 30, 2026, decreased by $0.9 million, or 3%, compared to the same period in the prior year. Lower product revenue from Natroba was partially offset by growth in Epuris revenue and higher licensing revenue.

Licensing revenue increased by $0.4 million or 62% to $1.2 million for the third quarter of 2026, and increased by $0.5 million or 17% to $3.5 million for the nine months ended September 30, 2026. Licensing revenue from Absorica in the U.S. was $0.7 million for the quarter, an increase of $0.3 million or 75%, and licensing revenue from Lipofen and its authorized generic was $0.5 million, an increase of $0.2 million or 67%. Licensing revenue primarily benefited from higher product shipments to our distribution partners on which we earn revenue from supplying product.

Product revenue decreased by $0.6 million, or 5%, to $11.5 million for the third quarter of 2026, and decreased by $1.5 million or 4% to $33.8 million for the nine months ended September 30, 2026. Product revenue from Natroba and its authorized generics decreased by $1 million, or 12%, to $7.1 million for the quarter, and by $2.2 million, or 10%, to $20.3 million for the nine months ended September 30, 2026. Product revenue from Natroba and its authorized generic, spinosad, continued to be impacted by lower sales volumes to Medicaid-covered patients, arising from reductions in the number of covered lives under Medicaid programs. However, Natroba has demonstrated improvement over the last quarter with a sequential quarterly increase of 14% over the second quarter of 2026.

Product revenue from Epuris increased $0.5 million or 15% to $3.9 million for the quarter, and by $0.8 million, or 7%, to $11.9 million for the nine months. Epuris benefited from higher sales volumes for both periods compared to the prior year. Epuris also continued to gain market share during the third quarter, ending with 48.7% share of the isotretinoin market in Canada as of September 30, 2026, according to IQVIA. Cipher's business continued to be highly profitable with 82% gross margin for the third quarter, which remained consistent with the third quarter of 2025.

On a year-to-date basis, gross margin increased by 1% to 81% for the nine months ended September 30, 2026, compared to 80% for the same period last year. This increase in gross margin for the year-to-date is largely due to non-recurring fair value adjustments included in cost of products sold for the prior year.

Total operating expenses, net of arbitration-related income and recoveries, decreased by $4.9 million, or 62%, to $3 million for the third quarter of 2026, decreased by $8.4 million, or 32%, to $17.5 million for the nine months ended September 30, 2026.

SG&A, which are included in total operating expenses, were $1.2 million for the third quarter of 2026 compared to $3.7 million during the same quarter the prior year, a decrease of $2.5 million or 68%. For the nine months ended September 30, 2026, SG&A decreased by $5.3 million or 41%, to $7.5 million from $12.8 million during the same period last year. As I mentioned earlier, these figures include $2.2 million of recovery of legal costs related to the arbitration award, which is non-recurring.

Beyond this recovery, there were two other main drivers of change in our SG&A, the first being non-recurring legal costs incurred in the prior year of $1.2 million, as well as operational efficiencies that we have gained in our business during the year. The reduction in total operating expenses also benefited from $2.3 million of other operating income recorded during the third quarter of 2026, which is a non-recurring source of income earned in connection with the arbitration award.

Net income for the three months ended September 30, 2026, was $10.9 million or 42 cents per diluted common share compared to $5.5 million or $0.21 per diluted common share in the prior year. The increase for the third quarter was primarily attributable to the arbitration-related income, recoveries, and interest.

Net income for the nine months ended September 30, 2026, was $21.1 million or $0.81 per diluted common share compared to $14 million or $0.54 per diluted common share for the same period last year. Similarly, the increase was attributable to arbitration-related income and recoveries and the non-recurring expenses incurred in the prior year, including legal costs related to the arbitration, certain restructuring costs, and fair value adjustments to acquired inventory.

Adjusted EBITDA for the third quarter of 2026 was $7.2 million compared to $7.3 million for the third quarter of 2025, representing a decrease of $0.1 million or 1% and resulting in an adjusted EBITDA margin of 57%, which was consistent year-over-year. The decrease was largely attributable to lower gross profit, partially offset by lower selling, general, and administrative costs, excluding the arbitration recovery.

Adjusted EBITDA for the nine months ended September 30, 2026, was $21.8 million, compared to $21.1 million for the nine months ended September 30, 2025, representing an increase of $0.7 million or 3%, with the adjusted EBITDA margin improving to 58% from 55% in the prior year. The increase in adjusted EBITDA margin was primarily attributable to reduced selling, general, and administrative expenses, partially offset by lower gross profit.

Cipher continues to be highly profitable, cash-generative, and debt-free. We ended the quarter with $15.3 million in cash, up from $9.1 million at the end of the second quarter, and also collected an additional $5.7 million in cash subsequent to the end of the third quarter, bringing our cash balance to approximately $20 million post-quarter end. We retained $65 million of undrawn availability on our facility, plus a $25 million accordion feature that is subject to lender approval. This potential financing, along with cash on hand and continued positive operating cash flows, positions us well to continue investing in our growth strategy, which Craig had outlined.

Thanks, Ryan. Before we open up the call for questions, I wanted to reiterate and leave you with a few key items from our commentary. First, Cipher remains highly profitable and is debt-free, with gross margins of 81% and adjusted EBITDA margins of 58% on a year-to-date basis, and $15.3 million of cash at the end of the quarter. Second, the court's confirmation of the arbitration award is a significant win for Cipher. We have received $5.7 million in October, and the 15% royalty on net sales of Absorica LD in Canada through 2040 represents a further potential upside that has not yet been recognized in our results.

Third, Epuris continues to build on its position as the market-leading isotretinoin product in Canada, with a market share of 48.7%. Public drug plan coverage is now in place in key markets including BC, Quebec, and Alberta, and we expect this expanded access to support further growth of the product. Fourth, in the U.S., Natroba continues to be impacted by reduced Medicaid volumes. However, we remain focused on expanding awareness of the product and its effectiveness and growing commercial payer volumes.

And finally, we remain highly active in the area of business development, including in-licensing of products, acquisitions of products or companies, and out-licensing of our existing portfolio. And we have strengthened our board with the appointment of Mr. De Silva, who has extensive M&A experience. We view these activities as key growth drivers for Cipher.

We will now open the call for questions, and at this point I'll ask the operator to provide instructions for the question-and-answer session. Operator, please go ahead.

We can hear you.

I'm going to pass the question to Bryan here.

Andre, we are continuing to pursue that. Usually, that decision is made at the state level P&T committee if they are going to require a step-through. So it's usually -- that decision is usually made at a clinical level versus the financial level. For the most part, when we're renewing with states, we don't get passed back to the clinical P&T committee to, kind of, look at that aspect of it. It's typically reviewing utilization, and we continue to have strong utilization in the state, which then implies a renewal of our Medicaid coverage, which is typically annually or biannually, varying by state. So, we do have the opportunity to speak to the P&T committee from time to time, but it's not pervasive with every negotiation of every state at renewal.

Again, each year we're having a dialogue with the state, so the opportunity is always there. So I can't really comment because when you say, how long would it take to get implemented with the various states, there are so many parties and we're negotiating with so many at the time. We continue to use Illinois as the example to say, if you would like even further preferred pricing, can we open up this discussion related to the clinical aspect and the step-through. And we have had some uptake there, just that each state may not decide to do that. So there's no fixed timeline to that.

Yes, just because of sensitivities with the Walmart contract and it's highly important to us in that relationship, talking about exactly the volume of the units, that's something we wouldn't want to disclose just because of that relationship with Walmart that's just started as well as for competitive reasons. What I can say and what I can offer is that the stocking program isn't just for certain stores across the U.S., it's all Walmart stores. So even with a bit of effort, we could indicate how many stores there are and get an estimate of how many units would have gone out. That's what I can offer or, kind of, signal over to you.

Yes, Andre, we're having discussions with Sun about an extension, and we're also considering a proposal from another generic outfit.

Justin, Craig here. The way that we're looking at it is, if we feel we've got a deal that's close, we may pull back a bit on the share purchases, the NCIB. But I also got to tell you that the NCIB program is very restrictive. Like, I mean, there's only so much that we can buy, and that's one of the reasons why we have been considering a SIB as a more effective way to buy back our stock. I hope I answer your question.

Well, I know what my hopes are. But, like, I mean, I don't really want to say, hey, something's imminent, because then if it was, the vendor would be in a better position for leveraging the price, etc. So all I can tell you, Justin, is that there's a lot of activity. There's lots of opportunities that we're seeing right now. And again, I am expecting that we get something done in the short term.

Well, we want to expand that U.S. business. We want to get more volume going through that infrastructure that we have in the U.S. So that -- I would say that's a priority for us, although we are also looking at some opportunities in Canada.

The answer plainly is yes. There aren't more effective options in addition to Natroba. It's clearly superior to permethrin 5% for the treatment of scabies. That's virtually the only other scabies treatment indicated. So we have a full picture there. With head lice, it's a bit more difficult because as we've seen with the marketplaces, it's a lot more common where people would go and try OTC products. So most people are just ingrained. They don't even know about what pyrethrin or permethrin is, they just run to Walgreens or CVS and pick up something and, kind of, use that as an alternative. They won't do that research. A lot of times, head lice isn't treated like a medical condition until it becomes more serious. So those are the patients that we capture, the ones that do treat a bit more seriously or typically fail on permethrin over and over, and they'll do a bit more research and get prescribed by a physician.

So what are we doing about that? Well, one of the things that we're doing is, over the course of 2026, we've invested heavily in marketing to help educate on the brand, the effectiveness, and that Natroba is a superior product. So really, kind of, getting into that from a head lice perspective, and then our field force is really out there and unentrenching prescribers who believe permethrin 5% is the only thing you can use to treat scabies and saying there's a superior topical option. That's, kind of, the two-pronged strategy that we're having to go after, kind of, the head lice indication and the permethrin 1% competition and the permethrin 5% on the scabies indication.

Well, we're in constant communication with Galephar on different projects that they're looking at, some of which fit for us and some that don't. We haven't seen anything probably in the last six months from Galephar, but we're usually the first people that they talk to when they've got something that they feel might be worth developing. So nothing at the moment, but that changes from time to time.

Thank you. Before signing off, I'd like to take this opportunity to thank everyone for joining us on the call today. We look forward to continuing to update you on Cipher's progress. Again, thank you for your time.