Cipher Pharmaceuticals Inc

TSX:CPH

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Cipher Pharmaceuticals Inc. Fiscal Second Quarter 2020 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, August 13, 2020.On behalf of the speakers that follow, listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements within the meaning of the safe harbor provisions of the Canadian provincial securities laws. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements. Certain material factors or assumptions are implied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements.For additional information about factors that could cause results to vary, please refer to the risks identified in the company's annual information form and other filings with Canadian regulatory authorities. Except as required by Canadian securities laws, the company does not undertake to update any forward-looking statements. Such statements speak only as of the date made.I would now like to turn the call over to Mr. Craig Mull, Interim Chief Executive Officer of the company. Go ahead, Mr. Mull.

[Craig J. Mull]

Thank you, operator, and good morning, everyone. Joining me today is Scott Langille, Cipher's new CFO. I'd like to take this opportunity to welcome Scott to the team. Scott brings nearly 30 years of senior leadership roles with solid focus on life sciences. Scott's tenure as CFO and founding member of Tribute Pharmaceuticals and his direct involvement with product acquisitions, licensing and development deals will be invaluable to Cipher as we continue to rightsize the business and look for opportunities for growth.On today's call, I will be making opening remarks before passing the call over to Scott to review the financial results in detail. Following our prepared remarks, we will open the call for questions. Note that all amounts are in U.S. dollars, unless otherwise stated.The second quarter was one highlighted by economic uncertainty as the world adapted to challenges presented by COVID-19. Cipher entered this global crisis from a position of strength with a reduced cost structure, a strong balance sheet and a renewed focus on profitability. Epuris continued to perform well in the quarter with revenues at $1.9 million, up 4% in Canadian dollars. Epuris finished the quarter with a 41% market share in the Canadian market, up 38% in the comparative period. In the first half of 2020, product revenues from Epuris increased $4.3 million compared to $3.5 million in the 6 months ended June 30, 2019. We are extremely pleased with the performance of Epuris and the stability of the revenue and cash flow during this challenging time.In the second quarter, licensing revenue decreased by $0.8 million due to declining Absorica sales. Licensing revenue from Absorica in the U.S. was $1.8 million in the quarter, a decrease of $1.1 million compared to the prior year. Absorica's market share for the 3 months ended June 30, 2020, was approximately 6% compared to approximately 8% for the 3 months ended June 30, 2019, according to IQVIA. Market share, including Sun's ABSORICA LD, was approximately 7%.Earlier this year, Sun Pharmaceutical Industries, Cipher's marketing partner for Absorica, launched ABSORICA LD capsules in the U.S. for the management of severe nodular acne in patients 12 years of age and older. In addition to the benefits that ABSORICA LD will bring to the patient population, the launch triggered 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 January 13, 2020, the company received notice of termination from Bausch Health for alleged breach of contract in respect to its licensing agreement for TRULANCE. The company is currently in arbitration to resolve the matters contained within.Despite lower revenue, our results demonstrated our commitment to expense management. Total operating cost decreased 41% in the second quarter over last year. The optimized cost structure resulted in EBITDA increasing 22% and adjusted EBITDA coming in relatively unchanged at $2.9 million. We are encouraged to see EBITDA margins were up dramatically to 61% in Q2 2020 compared to 42% in Q2 2019.Net income in the quarter was $0.4 million or $0.02 per share. Both net income and EPS were depressed due to a CRA tax assessment, which resulted in an additional tax expense of $1.4 million in the quarter. Excluding the impact of this tax assessment, EPS would have come in at $0.07 per share or CAD 0.10 per share. The company intends to fight -- to file a notice of objection with the CRA on this matter.We have taken substantial costs out of the business, and we intend to keep a close eye on the cost structure and profitability. With our cost structure largely optimized, our focus has now shifted to looking for the right opportunities for growth. 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.As previously announced, the company concluded its binding arbitration with Upsher Smith. This arbitration was related to a patent infringement lawsuit alleging Upsher Smith had infringed on one -- or on at least one or more of Cipher's patents by filing an Abbreviated New Drug Application with the FDA to market a generic version of Absorica. We believe that the launch of ABSORICA LD and the conclusion of the arbitration with Upsher Smith improves and extends the competitive position of our products, placing the company in a strong position to benefit from future revenue stream associated with Absorica and ABSORICA LD.I will now turn the call over to Scott for a review of the financial statements for the second quarter.

[Scott M. Langille, Chief Financial Officer]

Thanks, Craig. Before I begin the financial review, I'd like to say that I'm very excited to have joined the team at Cipher, and I look forward to contributing to the strategic direction of the company as we deploy our cash flow and look for the right opportunities for long-term growth.Second quarter revenue was $4.7 million compared to $5.6 million for the prior year. The main driver for the $0.9 million decrease in revenue was a decrease in licensing revenue. Licensing revenue was $2.7 million for the 3 months ended June 30, 2020, compared to $3.5 million for the 3 months ended June 30, 2019. Licensing revenue from Absorica in the U.S. was $1.8 million for the 3 months ended June 30, 2020, compared to $2.9 million for the prior year period. Absorica ended the quarter with a 7% market share.Licensing revenue from Lipofen and the authorized generic for Lipofen was $0.5 million for Q2 2020, unchanged for the 3 months ended June 30, 2019. Licensing revenue for the extended-release tramadol product, ConZip and Durela, was $0.3 million for the 3 months ended June 30, 2020, an increase of $0.2 million compared to revenue of $0.1 million for the prior year.Product revenue was $2 million for Q2 2020 compared to $2.1 million in 2019. Product revenue from Epuris increased by 4% or $0.1 million during the quarter. According to IQVIA, Epuris has a prescription market share of approximately 41% in Canada for the 3 months ended June 30, 2020, compared to 38% for the 3 months ended June 30, 2019.Total operating expenses decreased by 37% to $1.3 million for Q2 2020 compared to $215 million for Q2, excluding restructuring costs, 2019. The decrease was primarily driven by a decrease in SG&A expenses. SG&A expense was $1.3 million for Q2 2020, a decrease of $0.8 million or 37% compared to the prior year -- prior period. The decrease in SG&A was primarily driven by all -- overall reduction in costs related to human resources and marketing spend.During the quarter, the company received the final assessment in respect to the 2014 and '15 CRA audit, which, in addition to evaluating the intangible assets at a lower value than reported for tax purposes, disallows certain intangible assets for 2015. There is an additional income tax expense, including interest of approximately $1.4 million, that's CAD 2 million, for amortization taken for those intangible assets from 2015 to 2018. The company believes its basis for the valuation is reasonable and intends to file a notice of objection with the CRA.Net income was $0.4 million or $0.02 per basic and diluted share, that's CAD 0.03, in Q2 2020 compared to $1.4 million or $0.05 per basic and diluted share in Q2 2019. As Craig mentioned, excluding the onetime tax adjustment due to CRA tax assessment, EPS would have come in at $0.07 or CAD 0.10. EBITDA in the quarter increased 22% to $2.9 million compared to $2.4 million in the prior year. Adjusted EBITDA for Q2 2020 was $2.9 million compared to $3 million in Q2 2019.The company generated $1.9 million in cash from operating activities during the quarter. As of June 30, 2020, the company has cash of $8.7 million and $3.7 million drawn on the credit facility. The company's expectation is that the credit facility will be paid off by the end of the fiscal year.I'd like to turn the call back to Craig for closing remarks.

[Craig J. Mull]

Thanks, Scott. Overall, we are pleased with the company's second quarter results. With our rationalized cost structure in place, Cipher will now focus on several key milestones that will enhance long-term value, including a full year benefit of the cost reduction plan, increased adoption of ABSORICA LD and a renewed focus on growth. With a profitable business and a reduced cost structure, we feel we are in an excellent position to find the right opportunity to turn Cipher to growth.We will now take calls. Operator?

[Operator]

[Operator Instructions] Your first question comes from Doug Loe of Echelon Partners.

[Unknown]

Congratulations on the strong EBITDA in the quarter. Sorry to start with a boring question, but the income tax element certainly squashed your cash flow in the quarter and just want to get into the weeds there a little bit. I mean in your MD&A, you indicated that it was a -- it's a valuation adjustment in intangible assets dating back to 2004. That -- I get a sense that might be related to valuing the licensed assets you brought in from Galephar at the time, but I don't know. Maybe just a little bit of detail about what this entails just so we can kind of understand whether or not a reversal on appeal could be imminent here.And then sort of related to that, I was just wondering if you could comment a little bit on the tax losses that you acquired from Correvio and over what time frame that you might assume that those are going to be more impactful on cash flow. As for example, I thought maybe your Correvio tax losses might have mitigated the tax expense if you had to book this quarter. So just some context there would be helpful, and then I have a follow-up.

[Scott M. Langille, Chief Financial Officer]

Doug, what I can tell you is you're right on the valuation question related to the patent rights for the product portfolio. There was an element of also disallowed additional expenses related to a portfolio of 3 products. And as far as your question on Cardiome and when we're going to take advantage of that, we're obviously assessing that as we speak, and we should have further information on that in Q3.

[Unknown]

Okay. Fair enough. And then maybe I'll shift beyond Absorica, whose royalty revenue was soft for reasons, I think, we can all understand. You didn't mention any of the licensed U.S. products specifically with Can-Fite and Moberg in the psoriasis and nail fungus, respectively. Just wonder if there's any update you can share there on time lines to Phase III data and whether or not you still regard those pipeline assets as being germane to your future royalty revenue prospects. And I'll leave it there.

[Craig J. Mull]

Doug, I'll respond. It's Craig here. The Moberg product is still undergoing clinical trials. They've come out with some results that were not where they had hoped they would be compared to the existing products on the market. But they're trying to reformulate their product to deal with the, in particular, the whitening of the nail on treatment. And so they've got more work to do. We're in close contact with them. But unfortunately, it's going to be further from market now than it was before these trials were concluded. You had another product, Doug, that you referenced in your question?

[Unknown]

Yes. Yes. I think it's an adenosine analog that Can-Fite is developing that was in Phase III psoriasis [ study ].

[Craig J. Mull]

Yes. We haven't heard much from them. They have slowed on their development plans. I would need to get an update, and perhaps when we talk again, that I will provide you with that update.

[Operator]

Your next question comes from Andre Uddin of Mackie Research.

[Andre Uddin, Managing Director of Healthcare Research]

Craig and Scott, just wondering if you could just give us a little bit of an update in terms of your out-licensing plan for your Canadian portfolio?

[Craig J. Mull]

Sure. I can answer that. We are in advanced discussions with a marketing partner. And when I say advanced, I'd say that we're moving towards a definitive agreement and that, I expect, will be completed no later than the end of September. It has been delayed a bit on purpose because we -- our sales reps with their sales reps are unable to get into physicians' offices right now, and we don't want to start incurring costs when we don't have to. So it will be ready to go, and we expect that we'll be able to access physicians more regularly as we move through this COVID-19 situation. We're also looking at other ways to be in touch with physicians, including virtual-type marketing, virtual meetings and even perhaps a virtual website where physicians can diagnose the indication for treatment.

[Andre Uddin, Managing Director of Healthcare Research]

And just one other question. Could you just maybe provide a little bit of color in terms of what your ideal product would be to bring in for in-licensing?

[Craig J. Mull]

An ideal product would probably follow similar characteristics of Absorica, which was a product that we took through late-stage development with our partner, Galephar, and it had a large market potential that was unmet. And isotretinoin had characteristics that would add value in the treatment, including no food effect and good absorption. So a product similar to that and one preferably in the derm area.

[Operator]

Your next question comes from Prasath Pandurangan of Bloom Burton.

[Prasath Pandurangan, Associate of Equity Research]

Firstly, could you provide any update on the potential authorized generic for Absorica that's going to be launched towards the end of the year? Do you have any additional information on that?

[Craig J. Mull]

I can tell you that Actavis, who is the maker of the product or manufacturer of the product, has not registered the product with the FDA, which may indicate that they're either slow for whatever reason or perhaps they're having some difficulties with the manufacturing of the product. But that's speculation at this point.

[Prasath Pandurangan, Associate of Equity Research]

Okay. Okay. And could you comment on the other Galephar products that you're looking to develop right now?

[Craig J. Mull]

Well, the lead product that we're looking to develop is, and the first of 3, is a product called alitretinoin, and it is a product focused on severe hand eczema and again, a derm product in the isotretinoin family of molecules. And our -- obviously, our development partner, Galephar, has got a great deal of experience with that molecule.

[Prasath Pandurangan, Associate of Equity Research]

Got it. And then to follow up on the tax dispute, could you give additional color on what your position is versus the CRA's position? And if there is a possibility of recovering this expense, what are the potential time lines we're looking at?

[Scott M. Langille, Chief Financial Officer]

The -- I can answer that to a degree. The answer is we're going to file a notice of objection. And that notice of objection is primarily going to be related to valuation and the difference of opinion on valuation. We're going to file that in September. And we're not totally sure how fast we can resolve it with Revenue Canada. It would be likely in the 6-month area based on the current state of the pandemic and other -- and just their services. So -- but we hope there will be an ongoing dialogue to resolve it as soon as possible, obviously.

[Operator]

[Operator Instructions] Okay. It appears there are no further questions. You may proceed.

[Craig J. Mull]

Thanks, operator. Thank you all for joining us today. We look forward on reporting on our progress throughout the balance of 2020 as we execute on the priorities discussed today. Again, thank you for your time.

[Operator]

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