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DND.TO - Cipher Receives FDA Approval of Absorica

By Jason Napodano, CFA

On May 27, 2012, Cipher Pharmaceuticals (DND.TO) 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. 

…Ranbaxy To Commercialize…

We remind investors that in August 2008, the company entered into a distribution and supply agreement with Ranbaxy Pharmaceuticals Inc., under which Cipher granted Ranbaxy the exclusive right to market, sell and distribute Absorica (CIP-Isotretinoin) in the U.S. Cipher noted on its first quarter conference call three weeks ago that pre-commercialization activities are underway at Ranbaxy. Ranbaxy plans to launch Absorica in the fourth quarter 2012. 

Approval triggers two milestone payments to Cipher totaling $9.0 million from Ranbaxy, of which we expect Cipher to retain 50% after paying sub-milestones to Galephar. We model that Cipher will exit the second quarter 2012 with over $13.5 million in cash and investments. Cipher will also receive royalties (we model mid-teens) on net U.S. sales and is eligible for future milestone payments (totaling $10 million to Cipher) based on sales targets.

Through conversations with management, we believe the net $5 million sales-related milestones are achievable under the current expected plans with Ranbaxy. Ranbaxy has committed a dedicated 60-person sales force and to promote Absorica in the primary position for a minimum of three years. Venkat Krishnan, Ranbaxy's Senior Vice President and Regional Director, noted that the company plans to position Absorica as the company's flagship brand with its specialized dermatology sales force. 

We are excited that Cipher has partnered with Ranbaxy to commercialize Absorica. Ranbaxy has previous experience in the isotretinoin market with Sotret. We note that in 2009, Ranbaxy had to recall a single lot of Sotret when the FDA issued a Class-III warning on manufacturing, citing deviations from good manufacturing practice (GMP) at the company’s plant in India. Sotret achieved annual sales of $41 million in the U.S. in 2009. Sales were triple that in 2008 prior to the recall.

We are not concerned about history repeating itself with manufacturing issues on Absorica because Cipher is responsible for product supply and manufacturing, which will be fulfilled by its partner, Galephar.

…Big Opportunity…

We see a significant opportunity for Absorica once launched. Despite strict FDA monitoring around prescriptions of isotretinoin, the market remains quite robust. Generic (multiple providers) isotretinoin does around $500 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 in terms of dosing flexibility over generic isotretinoin.

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.

…Canada Up Next…

On January 30, 2012, Cipher announced that Health Canada had accepted the company's New Drug Submission (NDS) for CIP-isotretinoin for review. We are expecting a decision out of Health Canada in the first quarter 2013. The NDS was first submitted to Health Canada in late December 2011. 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 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 think CIP-isotretinoin becomes cash flow positive for Cipher in Canada at sales around $3 million. We think this can be achieved by the third year post-launch.

Raising Target to $3.00 On Absorica Approval

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 $3.00 per share. Cipher will receive a net $4.5 million cash payment from Ranbaxy based on Absorica approval. Our model (posted below) shows that operating cash flow should turn positive in 2013. By the end of 2012, Cipher will be collecting revenues from three approved products in the U.S., with a growing cash balance of over $10 million in the bank, and generating positive cash flow on a sustained basis.

Approval of Absorica is transformational for Cipher. It presents the clear opportunity to in-license yet another 505(b)(2)-like product for late-stage development and commercialization in 2013. Cipher is now three-for-three. It's time for U.S. investors to take notice. Our rating is ‘Outperform’.

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