Cipher Pharmaceuticals has 157% upside, Echelon Wealth Partners says

New acquisitions from Cardiome Pharma will have positive impact on Cipher Pharmaceuticals (Cipher Pharmaceuticals Stock Quote, Chart, News: TSX:CPH) going forward, says analyst Douglas Loe of Echelon Wealth Partners, who on Tuesday reiterated his “Buy” rating and 12-month target price of $10.00 for CPH.

Earlier this week, dermatology-focused specialty pharma company Cipher announced the purchase of Cardiome’s Canadian business portfoilio, which includes atrial fibrillation drug Brinavess, acute coronary syndrome drug Aggrastat, acute bacterial skin and skin structure infections treatment Xydalba and pulmonary arterial hypertension treatment Trevyent.

The deal has Cipher paying $25.5 million in upfront cash, plus acquiring Cardiome’s tax losses in the process. Cipher says that the move will open up an attractive new vertical for the company with expansion into the hospital specialty business.

“This acquisition accelerates the expansion of our Canadian commercial portfolio, bringing additional revenue streams and pipeline assets, while marking our entry into the Hospital Specialty vertical, which is a growing segment of the Canadian market,” said Robert D. Tessarolo, President and CEO of Cipher, in a press release.

Loe says he endorses the transaction for Cipher’s longer-term growth while at the same time acknowledging the substantial impact the deal will have on the company’s available cash.

“But even though we see modest revenue/EBITDA contribution over the next few quarters from Brinavess/Aggrastat alone, we believe that peak sales from the overall portfolio could exceed US$10 million as a reasonable case scenario,” says the analyst in a client update, “and if we back out the proportion of deal value that could credibly be ascribed to the tax assets that Cipher is acquiring in the deal (say, about US$6 million to US$9 million for Cardiome’s cumulative losses of [US$392.8 million] as a guess), residual deal value of US$10.5 million to US$13.5 million is closer to 1.1x-1.4x peak sales, a more attractive valuation assuming our peak sales expectations are achievable, say by F2021.”

The analyst sees minimal impact of the deal on his near-term revenue and EBITDA forecasts while more upside is expected once Xydalba and Trevyent, the most attractive assets in the acquired portfolio, says Loe, are launched.

“Xydalba is already in pre-registration in Canada and so could be Health Canada-approved by end-of-F2018, and if Cipher chooses to submit a NDS for Trevyent simultaneous to Steadymed’s own NDA filing, it is conceivable that Health Canada approval for this novel treprostinil formulation could be conferred near end-of- F2019, with launch in FH120 clearly achievable if those regulatory timelines are met,” he says.

The analyst sees CPH taking in revenue of US$39.9 million and EBITDA of US$23.4 million in 2018. His $10.00 target price is based on a 9x EV/EBITDA F2018 forecast valuation and represents a projected return of 157.1 per cent at the time of publication.