Cipher Pharmaceuticals - $CPH.to
Company Profile
Price: $1.80 CAD / $1.39 USD
Shares outstanding: 26.5 mil
Market Cap: $37 mil
Enterprise Value: $21.3 mil
*Shares trade on the TSX in $CAD, but they report in $USD. All values are in $USD unless stated otherwise.
I've built a reasonable sized position in CPH over the last 9 months and welcome some feedback on the idea. To me the idea is summarized by a cheap business, a strong presence with one of their main products, run by a prudent allocator with a couple of paths to higher valuation.
The company is a former market darling from years ago when the launch of Absortica drove revenue and cash generation to new highs. As such, the expectation was for the success to continue. CPH traded at over 10x rev at one point (ah the good ol days of Canadian specialty pharma). The launch of a generic version of Absortica and some other less than stellar moves with a large cash pile have left some with a serious case of PTSD when you mention CPH.
Background
Cipher Pharmaceuticals Inc. operates as a specialty pharmaceutical company in Canada.
Its commercial products include Epuris (CIP-ISOTRETINOIN), a formulation of the active ingredient isotretinoin for use in the treatment of severe acne; Ozenoxacin to treat adult and pediatric patients with impetigo; Actikerall, which is indicated for the treatment of palpable or moderately thick hyperkeratotic actinic keratosis; Vaniqa, a prescription cream that reduces the growth of unwanted facial hair in women; BRINAVESS, a treatment for sinus rhythm in adults; and AGGRASTAT, an intravenous anti-platelet drug.
The company’s licensed products comprise Absortica (CIP-Isotretinoin); Lipofen (CIP-Fenofibrate), a formulation of the active ingredient fenofibrate used for the treatment of hyperlipidemia, a cholesterol disorder; and Conzip/Durela (CIP- Tramadol), a formulation of the active ingredient tramadol for the management of moderate to moderately severe pain.
Its pipeline products also include Trevyent, a vasodilatory prostacyclin analogue to treat pulmonary arterial hypertension; CF-101 for severe plaque psoriasis and rheumatoid arthritis; MOB-015, a topical formulation of terbinafine for the treatment of onychomycosis; and DTR-001, a tattoo removal cream. Cipher Pharmaceuticals Inc. was founded in 2000 and is headquartered in Oakville, Canada.
Income Statement & Cash Flow
In the short term Absortica and Epuris results will drive the income statement. Both are used to treat severe acne and are not subject to a typical business cycle, whatever that is. The ISOTRETINOIN market as a whole continues to expand year after year.
As mentioned earlier Absortica faced (and continues to face) generic competition. CPH has partnered with Sun Pharmaceuticals to distribute Absortica in the US. Sun has recently launched Absortica LD and Absortica AG to maintain their marketshare. The agreement with Sun ends Nov 2022, I am operating under the assumption that they continue to work together after Nov 2022. Regardless, this has been quite a fall for Absortica.
The ttm has seen sales of about 9mil USD with Q3 2021 being the lowest at 1.4 mil. On the most recent conference call, the company mentioned to look at Q2 2021 and Q3 2021 together as a better indicator of what to expect from Absortica. These two quarters have seen sales of 3.8 USD.
Epuris is the same product although CPH owns the commercial rights. Since the peak sales of Absortica in 2016/17, Epuris has continued to gain market share (now over 40%) and sales, albeit not quick enough to offset Absortica's decline. So far, there hasn't been significant competition for Epuris.
CPH has recently launched Epuris in Mexico with their distribution partner Italmex which should help offset any further weakness in Absortica sales. This is a large opportunity for CPH, although it will take time for this to show up on the income statement.
There are some additional licensed sales, mainly Lipofen. They have a small amount of product sales from prior Cardiome products.
Costs have come down and margins have been maintained with the change in leadership (more to come).
Balance Sheet
The company has effectively no debt and 15 mil in cash. They continue to generate cash every quarter with this amount of revenue. Removing the cash balance from working capital leaves you with a very asset light business. TTM ROE is north of 20%.
With the purchase of the Canadian products from Cardiome in 2018, CPH also acquired a bunch of tax loss pools. 200 mil that expires up to 2033. As well there is an additional 50 mil USD that does not expire. This leaves a total of 250 mil (when purchased in 2018).
From the 2020 Annual Report:
"The Company has non-capital losses of $210,596 [2019 – $211,390], investment tax credits of $13,860 [2019 – $13,587] and SR&ED expenditures of $55,962 [2019 – $54,859]. The non-capital losses expire in varying amounts from 2026 to 2039. The investment tax credits expire in varying amounts from 2023 to 2032."
Management
There was a unforeseen change in leadership in 2016 with the then CEO stepping down. That was followed by a few more changes in CEO before the board appointed Craig Mull as interim CEO in 2019. Craig took over not long after the Cardiome acquisition. Since taking the helm, Craig has done a good job brining operating costs in line with the new reality for CPH.
They have also continued to execute the NCIB for up to 10% of the outstanding shares. CPH has also managed to ink a co-promotion agreement with Verity Pharmaceuticals for the marketing, sales and co-promotion of Brinavess, Aggrastat and Trevyent (all of which came with the Cardiome acquisition in 2018). This provides some additional upside to CPH. These products are referred to as CPH's hospital products. This is a fairly significant deal as there has been little revenue contribution from the products so far.
On the last conference call the CEO mentioned that they are looking to purchase cheap(ish) legacy assets with the cash. I view this as positive. I would rather them do something with the cash then sit on it. So far, the CEO has proven himself to be a good steward of capital.
Share Structure and Ownership
There are about 26.5 mil shares outstanding (26.9 mil fully diluted). They have a clean share structure with little potential dilution.
The founder (Dr. John Mull) still owns 37% of CPH. He is also on the board.
CEO owns about 2% and is Chairman.
Other board members own about 2%.
Total insider ownership is 40%
Pipeline - some additional upside
Why is CPH potentially mispriced?
There have been some misteps in the past that have left investors with a poor perception of CPH.
Trulance settlement with Baush regarding a breach in contract and resulting in CPH taking an 5.4 mil charge.
Epuris (their main cash generating product) could face future competition from a generic product.
Continued decline in Absortica sales and not sure where/if it bottoms.
Frequent CEO changes.
The purchase of Canadian business of Cardiome in 2018 failed to materialize meaningful revenues.
Valuation
Despite the positive steps being taken, CPH trades at less than 2x EV/adj EBIT. The P/E is 3-4 if you remove the one time items. It doesn't take much imagination to see a re-rating in the future.
The company has generated almost 10 mil in cash over the ttm if you exclude the one time items (legal settlement and lease extinguishment). This would equate to 2x EV/FCF, although Q4 2021 is against a tough comp so I don't expect them to beat it.
Needless to say, it's cheap. I don't believe that you really need to know the exact multiple to determine that the market has low expectations for CPH.
Summary
CPH is unwanted by many. It's not sexy. It isn't "ESG", growing gangbusters, curing covid, or somehow involved with crypto. The colorful history, illiquid shares and short term uncertainty have created a favorable risk/reward set up in my mind. Investors are worried about the future of the company with declining Absortica revenue and a disproportionate amount of the future relies on Epuris. They have made a few moves in the last 12 months that lead me to believe that they will be less reliant on Canadian sales of Epuris than the market anticipates. I believe that CPH is a more typical low risk, high uncertainty set-up.
Anyone else own CPH or want to comment?
Dean
the author is long CPH at time of writing