Cipher Pharmaceuticals is similar to Obagi, but much cheaper, says Byron Capital

Byron Capital analyst Douglas Loe says the price Canadian pharma giant Valeant Pharmaceuticals is paying for its most recent acquisition target bodes well for the smaller Cipher Pharmaceuticals (Cipher Pharmaceuticals Stock Quote, Chart, News: TSX:DND).

Loe says Valeant’s recently upped offer of $24 for California-based specialty skin care products firm Obagi Medical Products values that firm at (U.S.) $384 million. With revenue of just $120-million in fiscal 2012, Loe says the offer reflects favourably on the specialty pharma space in general, and on the attractiveness of dermatology as a medical market, specifically.

Loe says there is a danger in equating Obagi and Cipher, because the pair do differ in some important ways. Obagi, he points out, has a longer track record of revenue and EBITDA generation, a larger product portfolio, and a higher proportion of cosmetic products than prescription pharmaceuticals. But Cipher, says Loe, does derive most of its revenue and earnings from dermatology products, and expects this will grow as its Absorica launch with partner Ranbaxy rolls out in the United States.

In a research update to clients this morning, Loe maintained his BUY rating and $5.25 target price on Cipher Pharma.

Mississauga-based Cipher Pharmaceuticals is a spinoff of CML Healthcare, a more than three-decades old medical imaging company that shed its drug development division, which was burning cash, when it decided to convert to an income trust. The resulting spinoff, Cipher, transitioned from being defined by its relative risk to being notable for its comparative safety. Unlike many of its newfound peers, Cipher has carved out a sweet spot in the middle of the drug development process, identifying late stage product candidates with near term market potential.

Last year was a good one for Cipher Pharma, especially after May when the company announced it had received FDA approval for acne treatment Absorica. Absorica was the third Cipher product to receive regulatory approval. Since 2007, the company has derived most of its revenue from cholesterol treatment drug Lipofen, and in Q3 of last year it began to market ConZip, a Tramadol treatment for moderate to moderately severe chronic pain.

Cipher management, however, believes Absorica could be the first Cipher product to be truly differentiated from its competition.

While Lipofen and Conzip have found niche markets, the products were not first to market and competed in relatively crowded spaces. Loe points out that in the first two months alone, Absorica achieved 3.6% prescription market share against lower-priced generic alternatives.