Cipher Pharmaceuticals Inc

TSX:CPH

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Cipher Pharmaceuticals Fiscal 2017 Fourth Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded today, Wednesday, February 28, 2018.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 the Canadian securities regulatory authorities. Except as required by security 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 Robert Tessarolo, President and Chief Executive Officer of the company. Please go ahead, Mr. Tessarolo.

[Robert D. Tessarolo, Chief Executive Officer, President and Director]

Thank you, Sharon, and good morning, everyone. Joining me from Cipher are Stephen Lemieux, our CFO, and Chris Watters, Vice President of Corporate Development. On today's call, I will make a few opening remarks before Stephen reviews the financial results in more detail. After which, we will open the call for your questions. Note, all amounts are in US dollars.Let me start by saying how excited we are to announce stellar financial results and detail the tremendously important event for Cipher with the acquisition of a differentiated new product, TRULANCE. Beginning with the financial results, we delivered another outstanding quarter for Cipher, led by the continued strong performance of Absorica and Epuris. We recorded 90% growth in revenue and 300% growth in adjusted EBITDA in the fourth quarter, while adding close to $4 million to our cash balances. This strong fourth quarter closes off a very successful year for Cipher, in which we executed on all points of our transformation plan to significantly improve our operations, financial position and return Cipher to higher levels of profitability. Contrasting Cipher today against the same time last year, we sold the transition to our underperforming U.S. operation which streamlined our business. We reduced the cost structure, as evidenced by the 17% year-over-year decline in total OpEx. We reduced our cost of capital substantially through prudent and deliberate management of our debt and a new facility in place with CIBC. This improved cost of capital increases our competitiveness as we pursue transactions. We strengthened the management team with the addition of many highly accomplished professionals. We rationalized our pipeline, which reduced our R&D spend in 2017, and importantly, our go-forward investments on these products. And we introduced an exciting new growth strategy for Cipher that includes broadening the therapeutic focus of the business. Today, we are diligently deploying capital against the 3 key growth strategies: acquiring our in-licensing products for Canada; pursuing M&A opportunities; and continuing to selectively invest in drug development programs where we see a favorable risk return profile.Importantly, we simultaneously redoubled our efforts and business development to ensure Cipher would have a well-established deal flow on which we could act once the transformation was behind us and our continuing operation was in a stronger position.We've made substantial progress against our new growth strategy, including the exciting licensing agreement we announced this morning for Canadian rights to TRULANCE. From a financial perspective, the success of these efforts is clear. We delivered an 80% increase in EBITDA and 155% growth in income for the full year.Looking at the operational results in more detail, it was another excellent quarter for our global licensing business led by Absorica. Licensing revenue increased by close to 100%. Consistent with our experience in the third quarter, the dramatic market share increases from the first half of 2017 were maintained through much of the fourth quarter. However, as we discussed on our earnings calls, we were cautious in our outlook for demand levels going forward. Our partner made material changes to their promotional program at the start of December 2017, and this was followed by a decline in market share at prescriptions for Absorica through the end of the year. While it's uncertain where Rx levels will settle, recall that Absorica's market share was steadily in the range of 13% to 15% prior to the promotional campaign initiation. We are very encouraged by the continuing growth of our Canadian business which delivered 43% year-over-year sales growth in Q4. Epuris remains the primary driver as market share rose to over 28% in Canada compared to 25% for the same period last year. We continue to believe that market share can be captured for Epuris, and this is the primary focus for our sales and marketing organization in Canada.The remainder of our Canadian portfolio delivered solid performance as well, highlighted by Actikerall, which achieved 198% year-over-year prescription growth and ended the year at 7% market share, up from 4% in the prior year. In our view, this performance underscores the power of the commercial fundamentals we use to drive superior execution in the marketplace. And as you pursue new license agreements for Canada, this is essential message and a point of differentiation for Cipher.Our thanks and appreciation go out to all Cipher colleagues for delivering another excellent quarter and a very strong 2017. I would now like to turn the call over to Stephen to review the financial results. Stephen?

[Stephen L. Lemieux, Chief Financial Officer and Secretary]

Thank you, Rob. Good morning and thank you for joining us.My comments this morning will focus on our continuing operations. I am pleased to report that for Q4 2017, total net revenue increased by 90% to $12.2 million, up from $6.4 million in Q4 2016. This increase related to licensing revenue from Absorica that increased to $9.4 million in the quarter, up 154% from $3.7 million last year and product sales from Epuris that increased to $1.3 million from $1 million in the comparative period. Slightly offsetting the growth in the quarter was a decrease of $0.3 million in licensing revenue from Lipofen and the authorized generic to $0.9 million from $1.2 million in the comparative period. Licensing revenue from our tramadol franchise was unchanged at $0.4 million.In the fourth quarter, our operating expenses decreased slightly to $4.3 million from $4.4 million in Q4 2016. In the fourth quarter of 2017, as we discussed earlier, we started investing for our January launch of OZANEX. Total other expenses were $2.7 million compared to $1.4 million in Q4 2016. Other expenses in the quarter included a prepayment penalty of $1 million and a borrowing fee of $1 million related to the repayment of the senior secured notes. We repaid the notes with the proceeds from our new 3-year $20 million term loan with CIBC that we discussed on our last quarter call. The repayment of the senior secured notes will substantially reduce our interest expenses going forward, as the new CIBC loan has a lower interest rate of LIBOR plus 1.5% to 2.5% based on our total debt-to-EBITDA ratio.In Q4, our interest rate was 2.8% compared to 10.25% with the senior secured notes. Our profitability matrix improved significantly. Adjusted EBITDA rose 300% to $8.1 million in the quarter and net income in the quarter increased to $4 million or $0.14 per basic share compared to a loss of $0.1 million or $0.00 per basic share last year.In the quarter, we added $3.9 million of cash to our balance sheet to close the year with $28.2 million in the bank. We also made a scheduled debt payment to CIBC in the quarter to lower our outstanding debt to $18.3 million.Overall, Q4 completed a very successful year here at Cipher, that includes some of the following key financial highlights: a 36% increase in total annual revenue to $40.3 million; a 17% decrease in annual operating expenses to $15.1 million from $18.1 million in 2016; a significant increase in income from continuing operations to $10.7 million, up from $4.2 million in 2016; and earnings per share from continued operations was $0.40 per share, a 150% improvement from $0.16 per share in 2016.In summary, these results demonstrate strong top and bottom line performance, and we entered 2018 in a great financial position to deliver on our growth strategy. I will now turn the call back to Rob for his closing comments. Rob?

[Robert D. Tessarolo, Chief Executive Officer, President and Director]

Thanks, Stephen.The third quarter of 2017, we introduced a revised growth strategy aimed at building a diversified portfolio of prescription products that meet unmet medical needs across a broad range of therapeutic areas. We are making excellent progress on this strategy. We are monetizing our existing licensing portfolio in other regions. Earlier this year, we completed an agreement with Italmex Pharma to distribute our isotretinoin product in Mexico. Isotretinoin has been a highly successful franchise in the U.S. and Canada, and we look forward to bring it to Mexico through a well-established specialty pharma company with a strong presence and track record in dermatology. We are expanding our Canadian commercial portfolio. In January, we launched OZANEX, a fast, effective and safe new treatment option for Canadians who suffer from impetigo. OZANEX, our fifth dermatology product, further leverages our existing Canadian sales and marketing organization. And we are adding high potential products to our portfolio. Earlier today, we announced the acquisition of the Canadian rights to TRULANCE from Synergy Pharmaceuticals, a US-based NASDAQ-listed company. TRULANCE is an FDA-approved once-daily tablet for adults with chronic idiopathic constipation and irritable bowel syndrome with constipation. Our team is very excited about the potential for TRULANCE for several reasons. TRULANCE is a differentiated product for an attractive market with unmet needs which creates an opportunity to establish market leadership. TRULANCE has demonstrated a strong and remarkably consistent efficacy and safety profile in clinical trials covering more than 4,700 patients. It was clear in our due diligence that TRULANCE targets a market with a significant need for more therapeutic options. The patient pool currently being treated with prescription products represents but a small portion, our estimate 5%, of the total patient population suffering with these GI disorders. So it's a market that should respond to the introduction of an innovative, new, safe and effective treatment option. It's also a rapidly growing market. Sales of the current prescription products grew at a CAGR of 25% from 2013 through 2016. The total market for laxatives...

[Douglas W. Loe, Healthcare and Biotechnology Analyst]

[Audio Gap]infer from that magnitude what your own revenue expectations will be, saying -- starting in early to mid-2019 and beyond. And then second of all, related question. Just -- this would be the sort of first sizable product acquisition in the GI market. Just wondering whether you saw GI as being a little bit more opportunistic with the TRULANCE acquisition or perhaps a little bit more strategic for augmenting that portion of your portfolio and moving beyond dermatology with Epuris. And then thirdly, just returning to your financials -- and I think this will be a general theme for some of the questions here -- your Absorica revenue was quite strong sequentially and actually to a magnitude that we weren't really picking up from some of the publicly available Rx data on that product. So I just wondered if you might be able to kind of walk us through what some of the core elements might have been for contributing to Absorica's sequential strength, and whether we might be able to see those trends creeping into 2018 performance. And I'll leave it there.

[Robert D. Tessarolo, Chief Executive Officer, President and Director]

Yes, great. Doug, thanks so much. I appreciate the congratulations and those are great questions that we're certainly excited to be able to respond to. I think first and foremost as we begin to characterize how we think the TRULANCE opportunity will shake out, the first thing we would say is, we think this is a very attractive opportunity for our organization. It will be, by far, the largest product for us -- the largest commercial product for us, with the peak sales that we're thinking about here in Canada. The upfronts and the details of the transaction, they go with the negotiations and they go with us being a competitive organization and an organization that believes that if we bring in products that are differentiated, we can have really great success in the marketplace and that sort of drove that. The market is sizable. It's growing in Canada. We've had the good fortune of working in these markets in the past, and they are certainly promotionally -- they respond to promotion, and they're, as they say, sizable and growing quick. The market leader, Constella, still early in its launch, are now, again, product -- is estimated around $13 million sales in 2017 based on IMS and still growing. So we believe the TRULANCE opportunity is -- we've got a very favorable value proposition compared to the other products that are out there. And that's the way we're thinking about that opportunity longer term. Relative to the therapeutic categories. So we love GI. We think it's a category where -- that is very promotionally responsive. We think there's a lot of indications and diseases that continue to need new medical treatments and additional pharmacologic therapies to meet the needs of the marketplace. And so we like that category. This is a product that has a great profile in which meets up -- matches up really nicely for us. And we think that this -- we think that TRULANCE provides us an opportunity to get into the GI marketplace and for the leverage, whatever infrastructure we build in that regard. I think the third question you are asking, if I'm not mistaken, was focused largely on Absorica, if I'm not mistaken. And so, the way we're going to respond to Absorica is again, we think 2017 was a tremendously successful year. We benefited from a very, very expensive, a very, very costly and aggressive promotional campaign that was put in the marketplace by our partner. It was highly successful and I think the results speak for themselves in terms of the royalties it's returned. I think the stickiness of that program speaks for itself if we start to refer back to the end-of-December-type of script levels and market shares. So I hope I got all your questions, if not, happy to follow up.

[Operator]

[Operator Instructions] Your next question comes from David Martin from Bloom Burton.

[David C. Martin, MD & Head of Equity Research]

I've got a few questions. On TRULANCE, I'm wondering if you can talk about how the drug is differentiated. You mentioned Allergan's drug, I think, Linzess. What were the levels of differentiation of TRULANCE?

[Robert D. Tessarolo, Chief Executive Officer, President and Director]

Great. So I'm going to throw the question over to Chris Watters, our VP of Corporate Development. Chris?

[Chris Watters, Vice President of Corporate Development]

Yes. Thanks, Dave, for the question. We're excited about the opportunity and point of differentiation for TRULANCE. A couple of key differences that we see relative to [ Constella. ] Obviously, no head-to-head data. One of the unique mechanisms that it provides is its mechanism of action. It's only TRULANCE that's thought to replicate the PH-sensitive activity of uroguanylin, which is one of the unique factors in terms of how it acts. When you look at the data and the profile that it offers, we're really positive around the combination of the efficacy and safety and tolerability profile that this product delivers. No head-to-head data, as I said, but great efficacy, consistent efficacy is -- only TRULANCE has been steady to meet the most stringent primary endpoint in CIC. It's been evaluated in the largest Phase III IBS-C clinical trials. And if you look at the tolerability profile, it's got the lowest -- very low incidence of diarrhea, 5% relative to placebo. So it's a couple of key benefits for the product.

[David C. Martin, MD & Head of Equity Research]

Okay. What about sales force for the product? Can you talk about what the potential investment will be? Will you need a new sales force to enter GI?

[Robert D. Tessarolo, Chief Executive Officer, President and Director]

Yes. That's a great question, David. So I think for 2018, expenditures that we're going to be looking at are regulatory filings and some are early marketing and key-opinion leader outreach. Second thing is, we're not building a sales force in 2018. That will come in 2019 and beyond, and relative to the size of the sales force, as we get closer to launch, we'll dial those numbers in. But clearly, the GI will be -- the gastroenterologist will be an important call point for us. And likewise, and as we mimic what we've done successfully in dermatology, high-prescribing GPs will be on our call point as well. And yes, it'll be a different sales [ team ] that will be built and scaled here at Cipher. Dermatology is fully leveraged and continues to perform well and we're actually seeking more products to further build out that organization.

[David C. Martin, MD & Head of Equity Research]

Okay. And my last question to the Absorica side of things. There were 2 generics, Amnesteem and I think, I would say, Myorisan, that we saw gaining some share at the end of Q4 and heading into this one. Do you know of some plans to re-implement the promotion that they have on Absorica to counter that competitive action?

[Robert D. Tessarolo, Chief Executive Officer, President and Director]

Yes. So we're obviously watching as well the generic, the generic activity and the way that, that market is responding. I think, importantly, when you look at the Amnesteem growth in market share from the beginning of August [ through until now ], when it came -- through the beginning of August, when it came back in the market [ through until now ], our read on that is the impact that, that relaunch had was to take share from Accutane. And again, we reiterate that all of the generics are generics for Accutane and so there is somewhat of an insulation against how it affects and how it impacts Absorica. And Myorisan seems to be trading share with Accutane as well. The biggest change for us and we look at the share development for Absorica is -- really centers around the change in the co-pay program, the promotional campaign. That's what we really see -- that's how we really see has the biggest impact to Absorica. And relative to plans to re-implement additional promotional campaign, we're not going to comment or signal that. That's a partner decision that they need to take on their own.

[Operator]

At this time, I will turn the call over to the presenters.

[Robert D. Tessarolo, Chief Executive Officer, President and Director]

Great. Thank you, operator, and thank you, everybody for joining us this morning. Have a great rest of the day and we'll speak to you the first quarter.

[Operator]

This concludes today's conference call. You may now disconnect.