By Jason Napodano, CFA
As noted above, Lipofen contributed $0.9 million in the second quarter 2012. Lipofen prescriptions continue to growth at an impressive rate. In fact, subsequent to the quarter end, Cipher achieved a contractual sales goal for product sales resulting in a royalty percentage increase by 3% (we model from 15% to 18%). We note this change in Lipofen royalty is retroactive to October 2011, so we are expecting a one-time catch-up payment on Lipofen royalties to be recorded in the third quarter 2012 of roughly $0.35 million.
ConZip / Durela
Cipher's extended-release tramadol (CIP-Tramadol-ER) was launched in the U.S. by Vertical Pharmaceuticals in September 2011 under the trade name ConZip. ConZip revenues in the second quarter totaled $0.4 million, up from $0.3 million in the first quarter 2012. We think that ConZip has a unique opportunity in the tramadol-ER market based on a differentiated profile in a large unpenetrated market.
Vertical officially launched the product in September 2011 under the brand name ConZip. Vertical has dedicated an initial sales force of 60 representatives, with plans for further expansion in the fourth quarter 2012. Cipher is still eligible for $3.8 million in milestones, plus royalties on sales, from Vertical Pharma.
In Canada, Cipher's partner, Medical Futures, recently launched CIP-Tramadol-ER as Durela in March 2012. The Canadian market opportunity for tramadol is much smaller than the U.S., but we are pleased to see management at Cipher monetizing their assets and finding new revenue streams. We expect that, albeit small, Durela will start contributing reportable positive cash flow for Cipher in the third quarter 2012.
Absorica / CIP-Iso
On May 27, 2012, Cipher announced it had received U.S. FDA approval of Absorica, the company's novel, patented brand formulation of the acne medication isotretinoin, for the treatment of severe recalcitrant nodular acne.
Absorica's offers more consistent absorption day-in and day-out over the course of a typical 3- to 5-month treatment period. We think this will be a significant marketing advantage for the drug. There are currently no promoted branded Isotretinoin products in the U.S. Existing branded products, Teva’s Claravis and Mylan’s Amnesteem, rely on previous patient and physician experience with Roche’s Accutane (isotretinoin) to drive sales. The efficacy profile of Isotretinoin is powerful enough that over one million prescriptions were written in 2011 despite this lack of active promotion.
We see a significant opportunity for Absorica once launched. Despite strict FDA monitoring around prescriptions of isotretinoin, the market remains quite robust. Generic isotretinoin does around $450 million in sales in the U.S., and that is with no promotion. Prescriptions have remained fairly consistent over the past few years, perhaps trending down slightly since late 2009 once Roche exited promoting Accutane.
We estimate that in terms of a “branded” opportunity, the Isotretinoin market is nearly $1 billion in size. We remind investors that Roche had Accutane sales over $750 million at peak. We believe that Cipher’s Absorica product, being the only promoted branded Isotretinoin on the market, could achieve peak sales near $200 million. Absorica offers significant advantages over generic isotretinoin in terms of dosing flexibility. The market is currently dominated by two un-promoted branded products, Mylan’s Amnesteem and Teva’s Claravis. Amnesteem posted sales of $136 million in 2010 on 386K scripts. Claravis posted sales of $330 million in 2010 on 670K scripts.
Cipher is seeking approval for CIP-Isotretinoin in Canada. The new drug submission (NDS) was accepted for review in January 2012. We are expecting a decision out of Health Canada in the first quarter 2013. We view CIP-Isotretinoin as a potential $10 million opportunity in Canada. The total Isotretinoin market is Canada is small, only around $20 million total.
Only two products, Roche’s Accutane and Mylan’s Clarus are on the market, with little to no promotion. Therefore, we believe that a sales force of 6 to 8 representatives could effectively promote the product in-house. We expect that Cipher will seek to commercialize the drug on its own in 2013. We think approval of CIP-Iso in Canada will create a meaningful shift in the company’s future development plans, as Cipher seeks to become a specialty pharmaceutical company with multiple products and its own sales force in Canada over time.
We have conducted a discounted cash flow analysis to value the shares of Cipher Pharmaceuticals Inc. Our model now shows that Cipher is worth $3.00 per share. Our model (found in our full report) shows that operating cash flow should turn positive in 2013 on a sustained basis.