Earnings Call Transcript Full
Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Cipher Pharmaceuticals Fiscal 2014 Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation, instructions will be given for the question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded today Wednesday, October 29, 2014.
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 Provisional Security Laws. Forward looking statements involve risks and certainties 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 may cause actual results to differ materially from expectations and that material factors or assumption applied in making forward-looking statements, please consult the MD&A for this quarter when available to you, the Risk Factor section of the Annual Information Form and Cipher's other filings with Canadian Securities Regulators. Except as required by Canadian Security Laws, Cipher does not undertake to update any forward-looking statements. Such statements speak only as of the date made.
I’d now like to turn the conference over to Mr. Shawn Patrick O'Brien, President and Chief Executive Officer of Cipher Pharmaceuticals. Please go ahead.
Shawn Patrick O'Brien - President and CEO
Thank you, Tracy. Good morning and thank you for participating in today’s conference call. Joining me today is Norm Evans our Chief Financial Officer. On the call today, we’ll review the financial results and provide an update of our product operational activities. After that we’ll open the call to your questions.
I’ll have Norman to start with the financial highlights of another strong quarter performance. Norman?
Norman Evans - CFO
Thank you, Shawn and good morning everyone. Our financial performance in Q3 2014 was strong, showing growth for all three of our products compared to Q3 of last year. Profitability continues to be very strong. EBITDA in Q3 2014 was $5.2 million, an increase of 37% over prior year, reflecting the impact of the increase in revenue compared to Q3 2013.
Net income for Q3 was $8.7 million or $0.34 per basic share, compared with income of $3.4 million or $0.14 per basic share in Q3 2013. In addition to higher revenue from our products, the significant year-over-year increase in net income was due to the recognition of a net deferred tax asset of $4 million. Excluding the impact of this item, net income for the quarter would have been $4.6 million or $0.18 per basic share.
Total revenue was $7.2 million, up 28% from $5.6 million in Q3 2013, which reflects increases in all of the Company’s products. Our lead product Absorica, generated $4.8 million of revenue compared with $4.5 million in the same period of last year. There was a sequential decline in revenue for Absorica compared to Q2 2014 which was expected due to the seasonality of this product.
Epuris, which was launched in Canada in June of 2013 and is reported as product revenue on our financial statements generated $500,000 of revenue in the quarter, which was an increase of 3% over Q2 of this year and that during a period where the isotretinoin market experienced a sizeable summer decline.
Revenue in Q3 2013 was $40,000 as the product was still in its initial launch phase last year. Cost of products sold in Q3 2014 was $135,000 for the quarter and that product continues to realize a gross margin in excess of 70%.
It was another solid quarter for Lipofen with net revenue of $1.1 million, that’s a $0.5 million increase over the same period last year. The increase is mainly due to the launch of an authorized generic version of the product, as we discussed on last call at the end of Q2.
Lastly our extended release tramadol product ConZip in the U.S. and Dulera in Canada contributed $0.8 million of net revenue in Q3 2014, up from $0.5 million in Q3 2013.
Selling, general and administrative expenses increased to $2.1 million in Q3 compared to $1.7 million in Q3 2013. The year-over-year increase was primarily a result of additional resources for our business development group as well as higher stock option expense due to the increase in the share price compared to the prior year. R&D expenses were down modestly to $267,000 in Q3 versus $388,000 in Q3 2013.
With regard to the additional deferred tax asset recognized in Q3, you will recall that we first set up the deferred tax asset in Q4 of ’13 in the amount of $6.6 million. At that time, it represented the amount that was sufficiently probable to be realize this future taxable income.
In the first three quarters of 2014, the Company had already utilized $3.7 million or over 50% of its deferred asset recognized at the end of 2013. It was therefore appropriate this time to reevaluate the tax assets based on performance to date in 2014 and the extended period to assess the sufficiently probable test. As a result, an additional tax asset was recorded in the amount of $5.1 million.
Year-to-date the results are excellent. Our total revenue of $23.8 million is up 65% from the same period last year and EBITDA rose 87% to $17.0 million. Strong operating performance enabled us to grow our cash balance again in Q3 and we ended the quarter with $47.6 million of cash, an increase of $7.9 million from Q2 of this year.
With three products in the market, no debt and a strong cash position, we're well positioned to continue to execute on our growth plans.
I’ll turn it over to Shawn, who will discuss our products and future plans in more detail. Shawn?
Shawn Patrick O'Brien - President and CEO
Thanks, Norm. Let me start with an update on our current portfolio beginning with our [ph] [acme] franchise. As Norm mentioned, Absorica continues to perform well achieving 19.7% market share by September 2014, essentially holding it steady during the quarter. As we stated on our last call, Q3 is a slower period for isotretinoin prescriptions.
The total market increased by 9.7% compared to the previous quarter. There is a long record of this seasonal decline during the summer months when [ph] [kids that has a normal] routine in benefiting from a positive effect of sunlight on their acne. During the last 12 months, TRX peaked in March 2014 at 99,000 prescriptions whereas September TRX were down to 80,000 prescriptions. Historically, prescriptions rebound in the fourth quarter.
In addition to this general seasonal decline, our results for Q3 reflect the reduction in market share of the 30 milligram strength. That particular strength performed extremely well in Q1 and Q2 due to it’s out of stock situation by one of our generic competitors. They’ve now resolved their supply problems and market share has return to more normal levels.
As Ranbaxy works to further increase market share of Absorica, one of their strategy is new and unique dosage strength, which gives physicians greater flexibility in the weight based dosing regime for isotretinoin. In September Ranbaxy launched 25 and 35 milligrams strength. Additional formulary coverage is another potential growth driver in the coming quarters.
Overall, the isotretinoin market continues to grow. In the 12 months ended September 2014, prescriptions rose by 7% and by 4.2% in Q3 over the same comparable prior year. As we’ve disclosed, this product is subject of a Paragraph IV challenge. Ranbaxy and Cipher intend to vigorously defend Absorica’s intellectual property rights and pursue all available legal and regulatory pathways in the sense of the product.
Absorica is currently protected by two issued patents in FDA approved drug product list, the Orange Book, which expire in September 2021. There are three new product patent applications pending with the U.S Patent and Trademark Office. The [ph] [Markham] pretrial hearing is scheduled for the first quarter of 2015, which we expect the Epuris, the brand name for Absorica in Canada, the prescription share rose to 13.5% by September, 15 months post launch.
We are encouraged by the overall market growth. The total isotretinoin prescription market increased by 9.1% through Q3 2014. We expect to build on this solid base through expanded private and public coverage. In total, public coverage in Canada represents approximately 16% of the market, but also influences private coverage, especially in Quebec.
On the public side, we’ve provincial formulary coverage in Saskatchewan, Ontario, Nova Scotia and Manitoba. We are working to secure the remaining provinces, such as Quebec, BC, and Alberta, with the largest one being Quebec.
On the private side, by the end of 2014, we have -- expect to have more than 80% of all private insurers with open plan outside of Quebec coverage. An important component of our growth strategy is to add more products to the bag for Joan Chypyha, our Vice President of Sales and marketing and our team in Canada.
With respect to our development stage derm candidate, Betesil Patch we’re working to finalize the regulatory package to submit to Health Canada by the end of this year.
Turning to Lipofen, it was another solid quarter for the product. Coming off a very successful Q2, which as you recall, received significant lift based on the introduction of an authorized generic version of the product. Kowa continues to promote the brand version of Lipofen, while offering the authorized generic through their partner.
Total Lipofen prescriptions, brand plus the generic, increased modestly over the second quarter. Predictably, prescriptions continue to move from branded generic, roughly 63% for the brand and 37% for the authorized generic. This is positive for Cipher as we drive better economics on the authorized generic. Today we have no visibility on generic Lipofen filing with the FDA.
Turning to our extended-release tramadol product line, in Q3 ConZip prescriptions increased 10% over the last year’s Q3 and in Canada, Durela were 47% higher in Q3 of 2013.
Over the past several months, Norm and I’ve spent considerable amount of time talking to current and prospective shareholders telling the Cipher story. In addition to highlighting the many strength of the business, growing cash position, pristine balance sheet, the high performing team, we’ve been talking about our business development plans and ambitions.
To summarize our three prong approach, first, we plan to build a much larger derm franchise in Canada under Joan Chypyha’s leadership through the combination of in-licensing and acquisitions that will be accretive within two years. Second, we want to use the strength of our efficient drug development to license in and develop potentially transformative, especially pharma assets for North America. And third, we want to establish a commercial infrastructure in the U.S. through M&A again with the expectation that this business would be accretive within two years.
We have been pushing hard on all fronts over the last several months and the business development pipeline is very robust. We expect to have more discussions in the coming months as we consummate some of these deals.
In our press release today, we announced our intention to seek a NASDAQ listing. As we execute our growth strategy we believe it makes sense to have a U.S. listing which we expect will provide access to a broader range of investors and over time greater liquidity.
The application has been made and I look forward to updating you on the progress at the end of Q4 at the latest. Thank you, operator.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from David Dean with Cormark Securities. Your line is open.
David Dean - Cormark Securities Inc.
Hi, guys. Nice quarter. Can you talk a little bit about what you see for Lipofen going forward? We got a big quarter last quarter. Did you think it’s going to stay where it is here or what do you expect?
Shawn Patrick O'Brien - President and CEO
As far as going into the fourth quarter David, we don’t expect any changes there. We’re seeing a nice growth pattern that emerged. We are in decline before the authorized generic launch. So the revenue stream that we achieved I think in Q3 should be expected in the fourth quarter going forward. As we highlighted we have no visibility at this point in time that there is a generic coming into the market through an FDA approval process. So, hopefully that will continue into the first quarter of 2015 and perhaps beyond.
David Dean - Cormark Securities Inc.
Okay. So if we look at Lipofen in Q2, I think it was $1.9 million, that you don’t expect to see a repeat of that then or would it be surprising?
Shawn Patrick O'Brien - President and CEO
No, I think Q2 had some load in and stocking and things of that. I think Q3 is really more reflective of the market conditions and the true demand for the product.
David Dean - Cormark Securities Inc.
Okay. Can you talk a little bit more about increased formulary coverage for [ph] [the drug] in U.S in particular? Is there any more details that you can discuss?
Shawn Patrick O'Brien - President and CEO
Obviously we have been benefiting in the past from what I would say a very favorable rebate levels for this product and we had to negotiate I would say higher levels of rebates that came through in this recent quarter. And going forward, we expect that trend to continue and in plans like (indiscernible) in United Health which we’d like to get on by mid 2015.
David Dean - Cormark Securities Inc.
Okay. So when we are looking at gross to net discounting should we increase it a little bit from kind of where we are now? Or how do you view United Health and kind of more players coming on is impacting the current market?
Shawn Patrick O'Brien - President and CEO
Yes. As we go forward I think the gross to net will continue to widen, not just because of our business but just the market sentiment and how the payers are playing in United States currently.
David Dean - Cormark Securities Inc.
Okay. And last question, can you remind us what your tax losses exiting this quarter are?
Shawn Patrick O'Brien - President and CEO
Norm.
Norman Evans - CFO
The tax losses exiting this quarter?
David Dean - Cormark Securities Inc.
Yes.
Norman Evans - CFO
Well at the beginning of the year we had about $70 million of tax loss carry forwards remaining.
David Dean - Cormark Securities Inc.
Okay. And exiting this quarter?
Norman Evans - CFO
Close to the $55 million to $60 million range.
David Dean - Cormark Securities Inc.
Okay. Thanks a lot guys.
Shawn Patrick O'Brien - President and CEO
Thank you, David.
Operator
(Operator Instructions) Your next question comes from Jason Napodano with Zacks. Your line is open.
Jason Napodano - Zacks Investment Research
Good morning, everyone.
Norman Evans - CFO
Good morning, Jason.
Jason Napodano - Zacks Investment Research
Congrats on another great quarter. I wonder if you could provide a little update on the sales force in Canada. I believe you guys are still at 6.5, is that the case?
Shawn Patrick O'Brien - President and CEO
We have seven people out on the field and one is a half time representative on the East Coast. And as we expand our coverage and bring more products into the Canadian business we will be moving from 7 reps to 16 in a step wise fashion.
Jason Napodano - Zacks Investment Research
Can you -- and excuse my ignorance, but can you give me a sense of what's -- coverage in Québec why is that -- I don’t want to say difficult but why is -- what's different about Québec versus the other four providence that have come online?
Shawn Patrick O'Brien - President and CEO
In particular Québec I think the difference really is the private payers follow the public plant when actually less than 16% of the business for isotretinoin would go through the plant officially in Québec. So, that’s the real difference is, it’s a bigger control mechanism in that province versus the other provinces.
Jason Napodano - Zacks Investment Research
Okay. But nothing inherently different about seeking the coverage, I mean you’ve got coverage in four providences, I mean just, I’m wondering when we can expect Québec and BC and Alberta to come online in terms of coverage -- for the public coverage?
Shawn Patrick O'Brien - President and CEO
Yes, on the public side we’re working to achieve all those in 2015.
Jason Napodano - Zacks Investment Research
Okay. You guys have done some deals in South America for the isotretinoin product. Can you just remind us of where the regulatory filings are in Brazil or a stage of those filings in Brazil and Chile? What needs to happen before we see those go under review?
Shawn Patrick O'Brien - President and CEO
So, in Brazil it’s a little longer timeframe than Chile our deal with Ranbaxy. We expect that, that approval process will finish by the end of 2015, early 2016 for a launch at the beginning of 2016, and it’s just -- it’s nothing that we have to create new data or anything of that nature for the product. Its all inspection related and (indiscernible) review that’s more protracted in Chile -- I mean in Brazil versus Chile. In Chile we do expect to come on stream within the first half of 2015 for isotretinoin.
Jason Napodano - Zacks Investment Research
Okay, great. Last question on Lipofen. You mentioned the economics are slightly better to you guys for the authorized generic. Can you just give us a quick 30 second rundown of why that is in terms of the breakdown between the economics of the authorized generic versus the branded product?
Norman Evans - CFO
Yes, the royalty rate that we earn is higher on the product and the gross to net mechanics are slightly more in our favor. So, it’s net-net and its being more favorable for us and our partner.
Jason Napodano - Zacks Investment Research
Okay. And in 2015 assuming the authorized generic continues to gain share. What would you expect in terms of coverage from -- is there a difference in coverage between the branded and the generic product?
Shawn Patrick O'Brien - President and CEO
Well I think on the formulary coverage I’m not aware of any difference. I think Jason the major difference is, in the past when some plants wanted to find a generic and there wasn’t one, they would try to force substitution with the prescriber and switch him over to a generic non-Lipofen technology. As you know our 150mg strength is equivalent to a 200mg of the normal product, and so it is a unique dose offering in the market place. And so, what you have now is when some plants are looking for a generic now they have an opportunity to have a generic substitution. If you recall, we did have some nice price increases so that the authorized generic price now is the higher price than the 12 months ago price of the brand. So, we’ve gone north of $5 for the brand and we were around $4.50 now I think for the authorized generic. So we used to be below $4 for the brand not too long ago. So that’s why the economics has improved. Then we’ve given the market an opportunity to substitute where they couldn’t substitute in the past.
Jason Napodano - Zacks Investment Research
Got it. That’s helpful. I appreciate the added color there. Congrats on the quarter again guys. Thank you.
Shawn Patrick O'Brien - President and CEO
Thank you.
Norman Evans - CFO
Thank you.
Operator
(Operator Instructions) Your next question comes from Kurt Mull with Scotia Capital. Please go ahead.
Kurt Mull - Scotia Capital Inc.
Hi. Good morning, gentlemen.
Shawn Patrick O'Brien - President and CEO
Good morning.
Kurt Mull - Scotia Capital Inc.
Terrific quarter Shawn and Norm. Its great, superb quarter. Increased cash in the NASDAQ listing, that’s a (indiscernible). I have three questions if I could. One deals specifically with retail brokers and trying to get coverage for the stock. I know that Joe and David have been long time analyst for the physician, but on Bloomberg we can only see those two firms providing coverage, and I was wondering if you could let us know if there’ll be an update on who is covering the stock so that some of us at the big banks can have third party research so we can backup purchases on the stock for our compliance purposes?
Shawn Patrick O'Brien - President and CEO
Yes, it’s a good question Kurt. As I mentioned in the early part of the conference call here where Norm and I have spent a lot of time talking to potential investors and also bankers relative to making sure we understand how to navigate the U.S. markets going forward. And so, we anticipate that the coverage for our business will increase dramatically as we move for incentives part of our plan.
Kurt Mull - Scotia Capital Inc.
Perfect. Sometimes Bloomberg doesn’t update the Canadian coverage as quickly as they could, and so now with a company of $360 million of market cap it deserves more coverage.
Shawn Patrick O'Brien - President and CEO
All right. Well we have three coverage’s Euro Pac and in addition to David Dean and Jason that you mentioned.
Kurt Mull - Scotia Capital Inc.
Right, Zacks and Cormark. Okay.
Shawn Patrick O'Brien - President and CEO
Zacks, Cormark and Euro Pac.
Kurt Mull - Scotia Capital Inc.
Right. Okay, next question I had is, with Brazil being a market two-thirds the size of the U.S. what sort of -- what is Ranbaxy’s expectations with isotretinoin?
Shawn Patrick O'Brien - President and CEO
They haven’t communicated back, but Brazil being two-thirds the size of the population maybe, but from an economic standpoint nowhere near that. So Brazil is in economic terms, just to make sure you understand the economic terms of the isotretinoin market in the U.S. is around $600 million, Brazil is roughly $50 million. So it’s a, that’s a 12 fold difference. So Brazil is three times the size of the Canadian market for isotretinoin, but it’s nowhere near or third the size of the U.S.
Kurt Mull - Scotia Capital Inc.
Right. So, lots of term to grow?
Shawn Patrick O'Brien - President and CEO
Yes. So it’s obviously three times the opportunity we have in Canada.
Kurt Mull - Scotia Capital Inc.
Right. Okay, last question I have. You mentioned the possibility of an acquisition in the States. Could you let me know what would be the ideal sort of purchase you’re looking for?
Shawn Patrick O'Brien - President and CEO
The ideal purchase is, well obviously there is couple of parameters that we look at. We looked at; one, we can execute on growth. Two, it is an accretive opportunity. So its important at first point it’s a growth opportunity not a flat or declining opportunity, accretive that’s in the specialty market and preferably in derm where we have high confidence already going forward. So those are the kind of businesses we’re looking at. As you know the market today have -- the pricing of companies and products is expensive in the U.S. that’s the price of the cost of capital being relatively low right now and, so we are taking a very measured approach to making sure that we can acquire something that makes sense and we know we can grow it.
Kurt Mull - Scotia Capital Inc.
Terrific. Understood. Thank you very much and congratulations again on a great quarter.
Shawn Patrick O'Brien - President and CEO
Thank you.
Operator
There are no further questions in queue at this time. I’ll turn the call back over to Mr. O'Brien.
Shawn Patrick O'Brien - President and CEO
Okay. Well thank you everybody for your attention during this conference call, and we look forward to speaking to you on further news on the company coming forward. Enjoy your day.