Cipher Pharmaceuticals Inc.
A small, profitable specialty pharma co trading at value multiples with material forward growth catalysts
Hi, it's been a while. I went on vacation recently, and there's not a terrible amount of stuff to do in a remote beach town. So, I thought I'd do some short writing on a Canadian pharmaceutical company that I've been following.
I do own shares in this company, so take everything I say with a grain of salt.
Cipher Pharmaceuticals - $CPH.TO
Description: Specialty pharma focused on dermatology. Primary product: Epuris. Treats nodular cystic acne. #1 branded acne drug in Canada.
3 month ended March 31, 2023
(in thousands of United States dollars – unaudited)
Cash and cash equivalents, beginning of period 28,836
Cash and cash equivalents, end of period - 33,427
Revenue for the period - 4,886 (-9.78582% y/y)
Net income for the period - 2,626 (+22.19637 y/y)
Cash provided by operating activities - 4,665 (+138.9857 y/y; largely driven by a swing in AR)
2 YR Revenue Growth: -14.37225%
2 YR EPS Growth: 100%
Market Cap - USD 68.08mm USD
EV - 34.19mm USD
No interest expenses
Impression on valuation:
Over the period of roughly the last two years, valuation in terms of ciphers enterprise value has remained essentially flat without any large share repurchases or dividends taking place, so the share price appears to have essentially been acting as a tracker position to the company’s cash balance.
Company background: Combination of licensing/product revenue from dermatology products. Revenue declines in the last 5 years predominantly came from declining license revenues in the US from sun pharmaceuticals as their isotretinoin product went generic.
Notes from management: Expect revenue to stay roughly flat w/current products, seeking M&A, recently attained an expanded credit facility for up to 35m CAD (undrawn), exploring options for capital returns in the form of dividends and buybacks - see management interview at bottom.
Primary catalysts over the next 36 months -
1) MOB-015
MOB-015 is a topical formulation of terbinafine (which is an approved oral drug) for the treatment of a nail fungus called onychomycosis. There’s 1 other medication called JUBLIA (efinaconazole) in Canada which owns the lion's share of the Canadian market (>=90%). MOB-015 has already gone through two clinical Phase 3 studies. The data is encouraging to a laymen’s eyes - its mycological cure rate is greater than all existing marketable topicals in Canada and it has a mycological cure rate roughly equivalent to that of oral terbinafine. Oral terbinafine has a bunch of nasty systemic side effects that can be hard for patients to tolerate over the course of 12 weeks, and the weekly* (see note) administration process of MOB-015 is an improvement to that of JUBLIA (efinaconazole), which is administered daily.
Of note, for MOB-015, there is currently a significant difference to that of its “complete cure rate” and its "mycological cure rate" for onychomycosis. They’re reworking the application protocol to try and closer match the complete cure rate to the mycological cure rate - the problem is thought to be that the nail is absorbing too much water, resulting in discoloration of the nail at the end of the observation period.
A marketing decision is expected to be made in 2023 for Europe, with enrollment for a 2nd phase 3 trial in north America ongoing. Cipher purchased their exclusivity rights in Canada from Moberg several years ago. Bayer owns exclusivity for Europe.
“Under the terms of the licensing agreement, Moberg Pharma will receive development and regulatory milestones totaling USD 4.6 million, whereof USD 0.5 million is an up-front fee at the time of signing. Pending commercial targets, Moberg Pharma is entitled to further milestone payments of USD 10 million as well as royalties and supply fees for products delivered, enabling an industry standard gross margin for Cipher.”
This means a sizeable portion of Ciphers existing cash balance has essentially been pledged to milestone payments should the drug make it to market. This in conjunction with managements desire to perform M&A and the drug described below makes sense as to why Cipher's management hasn't been more aggressively returning capital via share repurchases despite the shares appearing quite cheap.
2) PICLIDENOSON
“Under the terms of the agreement, Can-Fite will receive an upfront payment of CDN$1.65 million and is eligible for milestone payments of up to CDN$2,000,000 and royalties from product sales in Canada. The agreement provides that Can-Fite will deliver finished product to Cipher.” Dated - 2015
"Can-Fite has submitted a comparable data package to the U.S. Food and Drug Administration (FDA) and expects a similar response."
Closing notes: this is a fairly well covered microcap given there are so few profitable Canadian pharma companies, so there’s quite a bit of material out there already - like this recent interview with management by Small Cap Discoveries. I expect that probably more than half of you that receive this email to already be aware/familiar with the company. Unfortunately, I couldn’t find a tangible number associated with the royalty obligation to Moberg or Can-Fite should these drugs be sold commercially. If any of you know what they are, I’d love to hear it.
What’s most interesting to me here is that they’ve rights to a drug, which seems likely to be approved, that would primarily be competing against a singular, clinically inferior drug that has the vast majority of its market. The size of which, should MOB-015 end up taking Jublia’s place, is large enough to grow their net revenues substantially - likely in excess of a 12mm USD quarterly run rate. Melting ice cube no more!
Anyways, that’s enough out of me. A few of you probably have a better idea about what’s going on at Cipher than I do, so definitely let me know if I’ve missed something big. Until next time.