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DND.TO - Cipher Keeps Chugging Along

By Jason Napodano, CFA

Solid Third Quarter Financial Results 

On October 24, 2012, Cipher Pharmaceuticals (DND.TO) (CPHMFreported financial results for the third quarter 2012. Total revenues in the quarter were $2.118 million, in-line with our forecasts. Revenues consisted of approximately $1.3 million in royalties and milestones on Lipofen, $0.3 million in royalties and milestones in ConZip/Durela, and $0.5 million in milestones on Absorica (CIP-Isotretinoin).

With respect to Lipofen, at the end of the second quarter 2012, 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 was retroactive to October 2011, resulting in a one-time catch-up payment on Lipofen royalties recorded in the third quarter 2012 of roughly $0.35 million. Lipofen monthly total prescriptions are tracking around 25,000 per month, showing solid growth throughout 2012.

Cipher reported net income of $0.754 million during the third quarter 2012. Despite revenues being up 89% year-over-year in the third quarter 2012, operating expenses of $1.364 million were actually down slightly from $1.369 million in the third quarter 2011. Management continues to do an excellent job of maintaining low operating expenses despite the growing top-line and strong cash balance. Operating expenses consisted of $0.80 million in operating overhead, $0.34 million in research & development, and $0.23 million in amortization and depreciation. Net income per share was $0.03 based on 24.4 million shares outstanding. This was Cipher’s third profitable quarter in a row. We are expecting a profit in the fourth quarter 2012 based on Ranbaxy launching Absorica (CIP-Isotretinoin) in the fourth quarter 2012. Validation batches have been completed and Ranbaxy is currently working on sales force training and reimbursement. Once launched, we expect that Absorica, a potential $150+ million opportunity in the U.S., will be a meaningful driver of both the top- and bottom-line at Cipher in the coming years.

Cipher exited the quarter 2012 with $15.1 million in cash and equivalents, up $0.7 million from the second quarter 2012. We are impressed that the company can grow its cash balance even as it acquires new products, as management did with Betesil Patch in August 2012.

Stock Looks Significantly Undervalued

We have conducted a discounted cash flow (DCF) analysis to value the shares of Cipher Pharmaceuticals Inc. Our model now shows that Cipher is worth $3.50 per share. In the first quarter 2012, the company received a milestone payment on Lipofen sales from commercialization partner, Kowa Pharmaceuticals netting $0.5 million. Cipher received a net $4.5 million cash payment from Ranbaxy based on Absorica approval in the second quarter 2012. In the third quarter 2012, the company recorded a catch-up payment on a retroactive increase in Lipofen royalties from Kowa of $0.35 million. In the fourth quarter 2012, Ranbaxy will launch Absorica.

In the next six months the company should hear back from Health Canada with respect to CIP-Isotretinoin approval and file the new drug submission (NDS) on Betesil Patch. Cipher has three approved products, four revenue streams, a potential drug approval coming early next year, $15.1 million in cash and no debt. These are solid fundamentals. Our model shows that operating cash flow should turn positive in 2013 on a sustained basis. Based on our estimate for EPS of $0.29 in 2013, Cipher is trading at 6.9 times earnings. We think that’s cheap for a company that just grew revenues by 89% in the previous quarter.

Approval of Absorica was transformational for Cipher. Absorica is a potential $150+ million drug in the U.S., and Cipher will collect 8-10% royalties on sales with no ongoing expenses from Ranbaxy. The potential approval of CIP-Isotretinoin in Canada, along with the astute acquisition of Betesil Patch, moves Cipher squarely into the Canadian specialty pharmaceutical market, making the company ripe for an eventual acquisition. It's time for U.S. investors to take notice. This is a stock to own. Our rating is ‘Buy’.