Cipher Pharmaceuticals has 112 per cent upside, Echelon Wealth says

Soft Q1 financial results from Cipher Pharmaceuticals (TSX:CPH) are cause for a forecast revision from Echelon Wealth Partners analyst Douglas Loe, who on Monday nonetheless stuck by his support for Cipher by reiterating his “Buy” recommendation with a lowered price target of C$8.75.

Ahead of its full first-quarter report, Cipher pre-released financial data on Monday, posting total net revenue of between $4.2 and $4.8 million (all figures in US dollars unless noted), which is significantly down from last year’s Q1 net of $8.1 million. Management chalked up the decline to decreasing licensing revenue from its main money-maker, the acne treatment drug Absorica.

“Fiscal 2017 was a record year for Cipher’s Absorica revenues based on our partner’s successful promotional campaign; however, as we discussed in our Q4 earnings, we were cautious heading into 2018 because of the decreased prescriptions in December,” said President and CEO Robert Tessarolo in a press release. “Absorica prescriptions have stabilized and market share has levelled off over the past several weeks. This remains a differentiated product in the market and a flagship brand for our partner.”

Loe says that the Q1 drop in revenue was already in the cards for CPH, for the most part because of 2017’s successes with Absorica. Nevertheless, the analyst is confident in Cipher’s pipeline of products.

“While we are disappointed that FQ118 financial data is poised to be so dramatically down sequentially, and largely from royalty revenue softness for what is still the firm’s flagship product, we believe we are justified in assuming that FQ118 softness is transient and not systemic, and we expect Absorica royalty revenue to re-equilibrate to quarterly levels that we routinely saw in F2014-F2016,” says the analyst in a note to clients.

“We continue to endorse recently-licensed pipeline products and the medical market diversity they infuse into our investment thesis, but none are expected to positively contribute to revenue/EBITDA until next year, and not to any transformational degree until F2020. But that said, FQ118 softness has no bearing on our medical market assessment for newly-licensed drugs and our core investment thesis is thus unchanged,” he says.

Loe has now introduced 2019 estimates for CPH, projecting revenue and EBITDA for 2018 of $27.0 million and $10.8 million, respectively, and revenue and EBITDA for 2019 of $34.2 million and $15.8 million, respectively.

His 9x EV/EBITDA F2020 valuation produces a target price of C$8.75 (down from C$10.00), which represents a target return on investment of 112 per cent at the time of publication.