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DND.TO - Cipher's Astute Deal

By Jason Napodano, CFA

On August 7, 2012, Cipher Pharmaceuticals Inc. (DND.TO) (OTC Markets:CPHMF) announced it has reached agreement with Institut Biochimique SA (IBSA), a privately-owned, global pharmaceutical company headquartered in Lugano, Switzerland, to obtain exclusive license and distribution rights in Canada to market the Betesil Patch, a novel, patent-protected, self-adhesive medicated plaster containing 0.1% betamethasone valerate, for the treatment of inflammatory skin conditions such as plaque psoriasis. IBSA recently began marketing the Betesil Patch in several European countries.

Under terms of the agreement, Cipher will pay IBSA an upfront fee of $0.1 million CAD, followed by other regulatory related milestone payments. Cipher intends to meet with Health Canada in the fourth quarter 2012 to finalize the new drug submission (NDS). We model the NDS filing in early 2013. We note that commercial product will be supplied by IBSA at a cost-plus transfer price.

Background On Betesil Patch

Betesil Patch is a patent-protected, 7.5x10 cm self-adhesive patch containing 2.25 mg of betamethasone valerate, a medium-potency corticosteroid that is widely prescribed for the treatment of inflammatory skin conditions such as eczema and plaque psoriasis.

Betesil Patch offers an innovative approach to problems commonly associated with betamethasone creams and ointments. Advantages of the product include:

1 - Once daily administration. Creams and ointments often need to be re-applied, especially in areas outside the clothes where the cream can be rubbed or washed off.
2 - No mess. Betesil Patch is self-adhesive and easily applied, without the mess or smell associated with creams and ointments. 
3 - Stays in place. Betesil Patch is ideal for difficult-to-treat areas of skin like the knees and elbows. It also focuses betamethasone use in only the affected area, protecting healthy skin from unnecessary corticosteroid exposure.
4 - Uniform protection. Betesil Patch provides both a uniform concentration of betamethasone and protection of the lesion from physical damage while the patch is in place from rubbing against clothes or skin. The patch also helps to moisturize the skin, which accelerates healing.

The efficacy and safety of the Betesil Patch has been established in three successful phase 3 trials conducted by IBSA. The first two of these trials showed the non-inferiority of Betesil Patch to 0.1% betamethasone creams in 273 patients with moderate chronic plaque psoriasis. 

The third study compared Betesil Patch head-to-head with Taclonex ointment (calcipotriene 0.005% and betamethasone dipropionate 0.064%), sold by Leo Pharmaceuticals in the U.S. as Taclonex and Canada as Dovobet. The 290 patient trial demonstrated Betesil Patch was non-inferior to Taclonex / Dovobet on the primary endpoint of total severity score (TSS) reduction at the end of four weeks. Based on prescription tracking services, Leo Pharma sells roughly $200 million of Taclonex in the U.S. and $21 million of Dovobet in Canada for the treatment of plaque psoriasis. 

We think this third study, along with the differentiation noted above, will be an important piece of the marketing and promotion campaign that Cipher builds around Betesil Patch. The Canadian betamethasone market grew approximately 6% in 2011 to over $50 million in sales. The market is made up primarily of ointments and creams. Leo's Dovobet is the market leading product. Xamiol, a gel version of Dovobet, does roughly $4 million in sales.
Why It Makes Sense For Cipher

As outlined in a  previous note on Cipher Pharmaceuticals, the company received U.S. approval of Absorica in May 2012. Absorica is an improved formulation of the prescription acne medication, isotretinoin. Cipher has teamed up with Ranbaxy Pharmaceuticals, Inc. to promote Absorica in the U.S. - a potential $150 to $200 million opportunity in our view.

The product is currently under review by Health Canada. The NDS was accepted in late January 2012. We are expecting a decision in the first quarter 2013. We view Abosrica (CIP-Isotretinoin) as a potential $10+ million opportunity in Canada. The total isotretinoin market is Canada is approximately $20 million. Two other generic isotretinoin products are on the market in Canada, Roche’s Accutane and Mylan’s Clarus, although neither are actively promoted. 

Cipher intends to commercialize Absorica on its own in Canada, a new strategy for a management that has previously looked to larger companies as marketing partners for its products. We believe that a sales force of 6 to 8 representatives could effectively promote Absorica for Cipher in the Canadian market. Promoting the product in-house creates an opportunity for significantly more upside to Cipher.  

As noted above, if Absorica is a potential $10+ million opportunity in Canada for the company, then after marketing and promotion costs, Cipher should start to see positive cash flows once sales get around the $3 to $4 million range. Although we think this is easily achievable, it still creates risk. However, with the acquisition of Betesil Patch, Cipher can now effectively promote both Absorica and Betesil Patch using the same specialty dermatology focused sales force of 6 to 8 representatives. We see Betesil Patch as another $10+ million opportunity for Cipher. This dramatically lowers the risk profile of building an internal sales force by shortening the time to break even and increasing the call detailing on the dermatologist.

It's a very astute deal in our view. Financially, Cipher is looking probably less than $1 million all-in for Betesil Patch. The acquisition provides a second product for the company's specialty dermatology sales force in Canada, thereby lessening the time to break even and raising the upside to shareholders.

In late July 2012, Cipher reported impressive financial results for the second quarter 2012. As a result, we recently raised our estimates for the company. We raised our price target to $3 per share back in May on the U.S. approval of Absorica. We highlight the second quarter results, the potential for Absorica, and the existing business with Lipofen and ConZip in our full report ( CPHMF_Napodano) dated July 25, 2012. The shares are currently rated 'Buy'. 

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