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Edited Transcript of CPH.TO earnings conference call or presentation 9-Aug-19 12:30pm GMT

Q2 2019 Cipher Pharmaceuticals Inc Earnings Call

Mississauga Aug 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Cipher Pharmaceuticals Inc earnings conference call or presentation Friday, August 9, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Craig J. Mull

Cipher Pharmaceuticals Inc. - Interim CEO, President & Chairman of the Board of Directors

* Nadine Jutlah

Cipher Pharmaceuticals Inc. - Interim CFO

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Conference Call Participants

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* Andre Uddin

Mackie Research Capital Corporation, Research Division - MD of Healthcare Research

* Douglas W. Loe

Echelon Wealth Partners Inc., Research Division - Analyst of Healthcare and Biotech

* Prasath Pandurangan

Bloom Burton & Co., Research Division - Associate of Equity Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Cipher Pharmaceuticals Inc. Fiscal 2019 Second Quarter Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, Friday, August 9, 2019.

On behalf of the speakers that follow, listeners are cautioned that today's presentation and the responses to questions may contain forward-looking statements within the meaning of the safe harbor provisions of the Canadian provincial securities laws. Forward-looking statements involve risks and uncertainties, and undue reliance should not be placed on such statements.

Certain material factors or assumptions are implied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements. For additional information about factors that could cause results to vary, please refer to the risks identified in the company's annual information form and other filings with Canadian regulatory authorities. Except as required by Canadian securities laws, the company does not undertake to update any forward-looking statements. Such statements speak only as of the date made.

I would now like to turn the call over to Craig Mull, interim Chief Executive Officer of the company. Please go ahead, Mr. Mull.

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Craig J. Mull, Cipher Pharmaceuticals Inc. - Interim CEO, President & Chairman of the Board of Directors [2]

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Thank you, operator, and good morning, everyone. Joining me from Cipher is Nadine Jutlah, interim CFO.

On today's call, I will make a few opening remarks before Nadine reviews financial results in more detail, after which we will open the call for your questions. Please note that all amounts are in U.S. dollars.

We continue to keep the commentary -- we will keep the commentary on the financial results to a minimum, given we pre-released revenue and earnings. We will spend some time on the updated strategic priorities that we are now introducing in today's results.

At a high level, we are pleased with Q2 results -- that Q2 results continue to show early evidence of our commitment to increasing profitability. Total operating expenses decreased by 15%, and the company reduced its debt by $2 million.

Cipher has a long history of generating cash flow and earnings supported by the licensing portfolio, and we intend to return to those roots.

Absorica prescriptions have shown some signs of stabilization, and licensing revenue for Absorica is up modestly from levels seen in Q1 2019. We continue to look for new geographic markets for Absorica to enhance this franchise.

Epuris had prescription market share over 38% in Canada for the 3 months ended June 30, 2019 compared to 33% for the 3 months ended June 30, 2018.

As previously announced, the Board of Directors appointed a special committee to review and evaluate the strategic direction of the company and consider various alternatives to maximize shareholder value.

With today's announcement, we established several new strategic priorities. Most significantly, the company plans to target strategic distribution partnerships for the Canadian commercial assets. This direction will see the company return to its roots as a cost-conscious, financially prudent operator focused on building a portfolio of royalties in novel therapies.

Cipher has historically had a successful -- had success in bringing late-stage assets through the regulatory approval process and commercializing them with the right partners. We intend to focus on this model going forward.

The reason for this shift is because of the cost structure to develop and maintain an internal sales force across multiple therapeutic areas that's capital-intensive and not optimal for a company of Cipher's size. Partnering our Canadian commercial assets will help improve profitability and cash flow and rightsize the cost structure of the organization, ensuring a self-funding business model.

Our global licensing business currently has 3 products developed, approved and out-licensed. Our global licensing business generates 7 distinct royalty streams with average royalty rates of approximately 10%.

The company will transition its 6 Canadian marketed products, which are currently marketed directly to our internal sales force, to an alternative distribution model. Shifting to a partnership model will eliminate future milestone payments and commercial investments as these costs will be borne by our partners.

The template for our partnership model will be to generate upfront payments, which will recover pre-commercial investments across these products and also generate royalties. With this structure, we will reduce operating expenses and increase profitability. The company intends to use the cash generated from these royalties to pay down debt and focus on near-term development opportunities.

Cipher has assembled its attractive portfolio of assets beyond the current marketed products, and we are committed to moving our product -- our current pipeline products through the regulatory approval process. We will partner these assets once they receive regulatory approvals.

In addition, Cipher will continue to work with our technology partner, Galephar, to bring new exciting products to market with a focus on U.S. and international markets.

We look forward to providing you with update on the status of our partnership initiatives as we transition the commercial portfolio.

I will now turn the call over to Nadine to review the financial results. Nadine?

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Nadine Jutlah, Cipher Pharmaceuticals Inc. - Interim CFO [3]

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Thank you, Craig. Good morning, and thank you for joining us.

I'll now provide a financial overview of our second quarter results. Total net revenue for the quarter was $5.6 million compared to $7 million for the prior year comparative period. The main impact year-over-year was lower licensing revenue of $3.5 million compared to $5.2 million in the comparative period.

Licensing revenue from Absorica declined to $2.9 million in the second quarter compared to $4.5 million in Q2 2018. Licensing revenue from Lipofen and the AG remained relatively unchanged at $0.5 million.

Product revenue increased by 21%, $2.1 million for the current quarter compared to $1.7 million in the comparative period. The growth was led by Epuris, which recorded revenue of $1.9 million, up from $1.5 million in Q2 2018.

Total operating expenses, which primarily includes COGS, R&D and SG&A, decreased by 15% in the second quarter to $3.5 million from $4.1 million in the prior year comparative period. Included in operating expenses in the current quarter are $0.7 million in restructuring costs. The decrease quarter-over-quarter is largely due from acquisition and transaction costs incurred in Q2 2018.

Overall, we finished the quarter with net income from continuing operations of $1.4 million compared to $1.9 million in the comparative period.

Adjusted EBITDA decreased slightly to $2 million in the quarter compared to $3.3 million in Q2 2018.

The company had $9.3 million in cash at June 30, 2019 compared to $7.9 million at March 31, 2019. During the quarter, the company generated $3.3 million from operating activity and used approximately $2.2 million to service its credit facility. The remaining balance in our credit facility was $13.6 million at June 30, 2019. I'll now turn the call back over to Craig for his closing remarks.

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Craig J. Mull, Cipher Pharmaceuticals Inc. - Interim CEO, President & Chairman of the Board of Directors [4]

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Thanks, Nadine.

We look forward to reporting on our progress throughout the balance of 2019 as we execute on the priorities that we've discussed today. At this point in time, I'd like to turn it over to the operator for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Andre Uddin of Mackie Research.

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Andre Uddin, Mackie Research Capital Corporation, Research Division - MD of Healthcare Research [2]

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Craig and Nadine, just actually wondering if you could just give us a bit more color on SG&A run rate.

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Nadine Jutlah, Cipher Pharmaceuticals Inc. - Interim CFO [3]

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Yes, I'll take that one. So in terms of our OpEx run rate, adjusting for restructuring costs in Q2, the OpEx run rate approximates what we would expect for the rest of the year.

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Andre Uddin, Mackie Research Capital Corporation, Research Division - MD of Healthcare Research [4]

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Sorry, what was that? I didn't catch the very end.

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Nadine Jutlah, Cipher Pharmaceuticals Inc. - Interim CFO [5]

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If you adjust for the restructuring costs that were incurred in Q2, then that run rate will approximate what we expect for the remainder of the year.

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Andre Uddin, Mackie Research Capital Corporation, Research Division - MD of Healthcare Research [6]

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Okay, okay. And just in terms of if you do end up in-licensing some of Galephar's products, the pivotal trials would likely be required if approved. Just wondering if you could give us a rough range of what you're looking for in terms of R&D (inaudible).

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Craig J. Mull, Cipher Pharmaceuticals Inc. - Interim CEO, President & Chairman of the Board of Directors [7]

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Andre. Craig Mull here. I think it's going to be difficult to estimate at this point in time because we're in the midst of selecting the products that we're -- that we'll be investing in. But we will provide updates as we move through that process.

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Andre Uddin, Mackie Research Capital Corporation, Research Division - MD of Healthcare Research [8]

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And that would be the strategy then? So you would -- would you still expect to be cash flow positive then if you in-license some of those products?

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Craig J. Mull, Cipher Pharmaceuticals Inc. - Interim CEO, President & Chairman of the Board of Directors [9]

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Yes, we intend to be cash flow positive. If the investment that we're looking at is beyond our means, we would be looking for other royalty partners to join in on the project.

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Andre Uddin, Mackie Research Capital Corporation, Research Division - MD of Healthcare Research [10]

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Okay. And in terms of the debt, is it safe to assume that all debt would be paid off next?

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Nadine Jutlah, Cipher Pharmaceuticals Inc. - Interim CFO [11]

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So it is due or should be paid in full by November 2020. So between now and then, we will be -- we will have our debt paid off.

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Craig J. Mull, Cipher Pharmaceuticals Inc. - Interim CEO, President & Chairman of the Board of Directors [12]

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Andre, just to add to that, we're expecting to accelerate the repayment of that loan as well.

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Operator [13]

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(Operator Instructions) Your next question comes from Prasath Pandurangan, Bloom Burton.

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Prasath Pandurangan, Bloom Burton & Co., Research Division - Associate of Equity Research [14]

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Firstly, has there been a review of big sales estimates for the pipeline products? Or do you stand by the estimates that were given towards the end of last year?

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Nadine Jutlah, Cipher Pharmaceuticals Inc. - Interim CFO [15]

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Just to clarify, the question you're asking for, revenue estimates for the pipeline products?

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Prasath Pandurangan, Bloom Burton & Co., Research Division - Associate of Equity Research [16]

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Yes, that's right. Yes.

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Nadine Jutlah, Cipher Pharmaceuticals Inc. - Interim CFO [17]

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So we don't have any at this time because those would be included in the assets that we're looking for distribution partners on.

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Prasath Pandurangan, Bloom Burton & Co., Research Division - Associate of Equity Research [18]

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So I'm trying -- just trying to understand if the estimates that were given at the end of last year, when there was a review, are they still achievable? Are we still reviewing those estimates now?

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Nadine Jutlah, Cipher Pharmaceuticals Inc. - Interim CFO [19]

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They're still under review or they're currently under review.

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Prasath Pandurangan, Bloom Burton & Co., Research Division - Associate of Equity Research [20]

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Got it. Secondly, I wanted to check if you could talk about any potential options for corporate development that are on the table, if any?

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Craig J. Mull, Cipher Pharmaceuticals Inc. - Interim CEO, President & Chairman of the Board of Directors [21]

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Just, sorry, would you clarify that as well, please?

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Prasath Pandurangan, Bloom Burton & Co., Research Division - Associate of Equity Research [22]

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Sorry. I was looking to hear from you if there are any corporate development options, just asset divestment and, et cetera, that are on the table, if any?

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Craig J. Mull, Cipher Pharmaceuticals Inc. - Interim CEO, President & Chairman of the Board of Directors [23]

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Well, we've -- we are looking at a number of products from Galephar, and we have first right of refusal on 4 products that we've got serious interest in, one in particular. We intend to build a stronger collaboration with Galephar. We've got a long history with the company. They've got lots of resources and they've got a substantial number of projects in the pipeline that we hope to have access to as we build a stronger relationship with them.

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Operator [24]

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Your next question comes from Doug Loe of Echelon Wealth Partners.

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Douglas W. Loe, Echelon Wealth Partners Inc., Research Division - Analyst of Healthcare and Biotech [25]

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Craig, just wanted to kind of follow up on your Absorica strategy going forward. I mean, as you know, you've submitted your supply agreement with Sun earlier last year, and our expectations would be for Sun and then eventually you when you get the NDA back to kind of buildout new isotretinoin formulations to monetize the Absorica brand. Just wondering if there are any specific details that you can share either from Sun or from yourself on what sort of novel isotretinoin products you might be considering, and over what time frame you might not watch next-generation Absorica formulations? That's it for me.

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Craig J. Mull, Cipher Pharmaceuticals Inc. - Interim CEO, President & Chairman of the Board of Directors [26]

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Well, we do have a life -- product lifeline extension with Sun, so we expect that we'll continue to have a royalty stream through Sun for that particular product as formulated. We are constantly looking for reformulations of that product that would extend the life of that product for us. And when we say extend, we'd be looking for modifications of products to, in some way, make it a better product through reduction of side effects, for example.

At this point in time, we're not in a position that we can disclose any of that information, but it's certainly something that is on our front burner.

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Operator [27]

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There are no further questions at this time. Please proceed.

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Craig J. Mull, Cipher Pharmaceuticals Inc. - Interim CEO, President & Chairman of the Board of Directors [28]

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Yes. Well, thank you very much, everybody, for attending the call. We expect to be communicating a lot more frequently with the market and to let them know what -- how we're doing with our progress with our new plan, and appreciate your interest, and have a good day. Thank you.

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Operator [29]

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Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.