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 2018 Fourth Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Tuesday, March 19, 2019.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 Robert Tessarolo, President and Chief Executive Officer of the company. Please go ahead, Mr. Tessarolo.

[Robert D. Tessarolo, President, CEO & Director]

Thank you, Jessica, 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. Please note that all amounts are in U.S. dollars.In the fourth quarter, we continued to make important progress in executing our strategy to build a diversified portfolio of prescription products that will deliver reliable and sustainable growth for Cipher. We are deploying the cash flow from our licensing business into the growth of our Canadian commercial platform. We achieved a few significant milestones this quarter.In October, we relaunched Brinavess for the rapid conversion of recent onset atrial fibrillation to sinus rhythm for patients in both the surgical and nonsurgical setting. Brinavess was acquired as part of the Cardiome acquisition we closed in May 2018. In December, our new drug submissions for TRULANCE and A-101 were both accepted for review by Health Canada. TRULANCE, used in the treatment of irritable bowel syndrome with constipation, was acquired from Synergy Pharmaceuticals in February of 2018; while A-101 was acquired from Aclaris Therapeutics in April of 2018 as a topical solution for the treatment of raised seborrheic keratosis, which is a form of noncancerous skin growth in older adults.Another important highlight of the fourth quarter was the stellar performance of our Canadian commercial platform. Our team continues to generate growth in demand and capture market share for key brands. Revenue from the Canadian commercial products increased by 18% to $1.8 million, primarily driven by Epuris, our largest product used for the treatment of severe acne, which now holds a national market share of over 35% in Canada. Importantly, Epuris has become the #1 prescribed oral isotretinoin by dermatologists and, in Ontario, our largest market, Epuris now is the market leader with over 51% market share.In the quarter, we obtained reimbursement coverage for Actikerall. Prescriptions of Actikerall have increased 38% this quarter compared to the fourth quarter of 2017. In the first quarter of 2018, we launched OZANEX, a topical antibiotic, into the contagious skin infection impetigo market and have achieved our launch metrics to date. We're pleased with the high engagement from the dermatology community as the number of prescribers continues to grow, with high satisfaction leading to over 65% repeat prescribers.With an impressive CAGR -- 5-year CAGR of approximately 68%, our Canadian business is a proven growth platform for Cipher. In 2018, we launched 2 new products in Canada and added multiple exciting programs to our business development efforts. Based on the transaction activity to date, we expect to bring 4 additional products to the Canadian market over the next 2 years targeting valuable markets and indications.Together, the new products, if approved, will provide near-term revenue generation and the potential to dramatically increase Cipher's total revenue in the coming years.In 2018, we completed 6 transactions that provide new growth avenues, transform our pipeline and over time will significantly diversify and improve our financial operating results. In addition to TRULANCE and A-101, we acquired the exclusive rights for MOB-015 from Moberg Pharma. MOB-015 is a patented proprietary formulation of terbinafine for the topical treatment of onychomycosis. Moberg is currently running the Phase III trials required for the regulatory submission to Health Canada and onychomycosis is a fungal nail infection with an estimated prescription market of approximately $58 million according to IQVIA.In looking back over 2018, in addition to these business development successes, we are pleased to have executed an amendment to sustain the marketing of Absorica and bring innovative new isotretinoin products used to treat severe acne to the U.S. market.In July, we announced important changes to our agreement with Sun Pharma that expand and extend our royalty stream from Sun. This is a positive development for Cipher, providing the opportunity to maximize total cumulative revenues from the Absorica brand, provides a longer runway to execute our long-term growth strategy and generate additional profits we can invest in our Canadian commercial platform.We are encouraged to see the prescriptions for Absorica have stabilized. According to IQVIA, average monthly prescriptions for Absorica over the past several months are approximately 11,000 per month. Many thanks to our Cipher colleagues and our partners for delivering meaningful progress across all aspects of our business.I will now turn the call over to Stephen to review the financial results. Stephen?

[Stephen L. Lemieux, CFO & Secretary]

Thank you, Rob. Good morning, and thank you for joining us. I will provide an overview of our Q4 results. Total net revenue for the quarter was $6.4 million compared to $12.1 million for the comparative period. The main impact year-over-year was lower licensing revenue that declined to $4.6 million versus $10.6 million last year.Licensing revenue from Absorica was $3.7 million in the fourth quarter compared to $9.4 million in Q4 2017. As you may recall, the decrease in Absorica licensing revenue was attributable to a promotional campaign that our partner executed in 2017.Licensing revenue from Lipofen, an authorized generic, was $0.7 million in the fourth quarter compared to $0.9 million in Q4 2017.As Rob mentioned, a key highlight was the continued strong growth of our Canadian commercial business. Product revenue increased by 18% to $1.8 million in the quarter from $1.5 million in Q4 2017. The growth was led by Epuris, which recorded revenue of $1.5 million, up from $1.3 million over last year's fourth quarter.Total operating expenses, which included cost of goods sold, research and development and SG&A increased in the fourth quarter to $5.8 million from $4.3 million in Q4 2017. The increase related to costs associated with launching Brinavess and the regulatory submissions for TRULANCE and A-101.Other expenses were $0.1 million in the quarter compared to $2.7 million in Q4 2017. The improvement is related to the refinancing of Cipher's debt in 2017, which resulted in 83% year-over-year decrease in interest costs, a full year savings of $4.4 million. Overall, we finished the quarter with income before taxes of $0.5 million compared to $5.2 million in the prior year and adjusted EBITDA was $1.1 million in the quarter compared to $8.1 million in Q4 2017.Our balance sheet remained strong, and we finished the year with cash of $10.4 million compared to $28.2 million in December 2017. Our cash flow from operating activities for the year was $11.3 million, including $1.8 million in the fourth quarter. We used approximately $26 million in cash in 2018 to fund the Cardiome acquisition and the licenses for the Canadian rights to TRULANCE, Eskata and MOB-015. In addition, we drew $5 million from our accordion in our credit facility and we have made $5.7 million in scheduled debt payments, leaving our outstanding debt balance with CIBC at $17.6 million.In summary, between our cash balance and cash inflows from operations, we continue to be in a strong financial position to continue to deliver on our growth strategy.I will now turn the call back to Rob for his closing comments.

[Robert D. Tessarolo, President, CEO & Director]

Thank you, Stephen. We've made substantial progress with our growth strategy in 2018. Our Canadian commercial business is growing strongly and provides a platform we can continue to build on with highly novel products in select therapeutic categories. With positive EBITDA and a healthy balance sheet and cash flows over the next several years, we're equipped with capital resources to drive our continued future growth.In the past several quarters, Cipher's pipeline has been transformed with multiple late-stage assets that have near-term commercial potential. In 2019, we expect the commercial launch of Xydalba in the acute care setting; preclinical results from DTR-001, our preclinical asset for tattoo removal; potential regulatory approval for TRULANCE from Health Canada; potential regulatory approval for A-101 from Health Canada; and top line results from MOB-015 Phase III study in North America.We look forward to reporting on our progress against these catalysts and milestones throughout the balance of 2019, as we drive for exceptional operational execution and continue to search for opportunities that enhance shareholder value.We'll open up the call for questions now, Jessica. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Prasath Pandurangan of Bloom Burton.

[Prasath Pandurangan, Associate of Equity Research]

Firstly, could you provide more color or updates on the Absorica life cycle management strategy and any potential impact from the recent ANDA filing by Upsher Smith? And secondly, how is the Brinavess launch progressing in terms of the number of hospitals served, number of procedures and the current reimbursement coverage?

[Robert D. Tessarolo, President, CEO & Director]

Great. Thanks, Prasath. We appreciate your questions. So to start off, I'll make a comment about the life cycle management with Absorica. As you are aware, that, that agreement was extended in July of 2018. It provides the opportunity for Sun to enter the market with patented isotretinoin products. We can't comment on any differences of any of the formulations. That's something for Sun to do and hasn't been disclosed publicly, we'll leave it to them. But we do -- we have been guided that we expect another product on the market by Sun in 2019 and that's what we're expecting. With respect to the Phase IV filing from Upsher Smith, again, I can be fairly scanty in my comments here. On December 19, we received a notice of Paragraph IV Certification from Upsher Smith, as Sun, Cipher and Galephar filed a complaint against Upsher asserting patent infringements for 5 patents on or about January 30. And on the 12th of February, Upsher Smith filed its answer to the complaint. Beyond that, for ongoing litigation, we're not going to comment on or provide further comments or details. Relative to Canada, we're encouraged by how Brinavess has been received thus far. We relaunched Brinavess in October putting some key account experience and efforts against it across the country. We're not giving guidance on this product. However, we are pleased that over 55% of the top institutions will indeed be rendering a decision within 9 months of launch. And for those who are familiar with the hospital segment in Canada and just having hospitals consider new products in the pharmacy and therapeutic arena is a success into itself. And within the first 9 months, over 55% of the top institutions will be rendering a decision, and we think this bodes well for the potential for Brinavess. And again, we'll provide updates as we move forward.

[Operator]

Your next question comes from Justin Keywood of GMP Securities.

[Justin Keywood, Director of Equity Research]

Just going back to the Upsher Smith ANDA, is there an anticipated time line when you expect some clarification on the matter?

[Robert D. Tessarolo, President, CEO & Director]

Yes, Justin, So as far as the time line goes, obviously, litigation is one of those things we're not going to comment very much about aside from saying that the complaint has been submitted and ongoing and, obviously, this is something that we're going to -- that Sun and Cipher and Galephar will all be very interested in and driving forward to conclusion. I would reiterate the -- one important point that we have a settlement in place with Actavis that has December 2020 date, which is the date that we're sort of working against relative to generic impact to this market. As the litigation proceeds, where there's disclosable events, I think we'll certainly get them out. But as of now, beyond indicating that we are litigating, I don't think we are going to say very much.

[Justin Keywood, Director of Equity Research]

Okay, understood. And then just on the SG&A, ticked up in Q4, should we expect this level to continue into 2019 as the commercialization efforts continue?

[Stephen L. Lemieux, CFO & Secretary]

Yes. So it's going to be a little bit lower in Q1 and Q2 and you saw in Q4 we had some like additional year-end accruals that went through there. But yes, you will see some of the increase in the investment costs that launch Brinavess, not to the levels you saw in Q4.

[Justin Keywood, Director of Equity Research]

Okay. And what were those levels of accruals for Q4?

[Stephen L. Lemieux, CFO & Secretary]

I don't have comments specifically on the accruals, but not just like some of the year-end for like employee compensation and so on and so forth, actually. The normal business stuff.

[Operator]

[Operator Instructions] There are no further questions at this time. Please proceed.

[Robert D. Tessarolo, President, CEO & Director]

Well, thank you, Jessica. Thank you all for attending and your interest in Cipher Pharmaceuticals. And we'll talk to you next quarter. Bye for now.

[Operator]

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