Take a pass on Cipher Pharmaceuticals, says GMP Securities

A new strategic focus from specialty pharma company Cipher Pharmaceuticals (Cipher Pharmaceuticals Stock Quote, Chart, News TSX:CPH) raises a number of issues for GMP Securities analyst Justin Keywood, who reviewed Cipher’s third quarter results in a client update on Thursday.

Cipher Pharma has a portfolio of prescription products for which it manages the clinical development and regulatory approval process along with marketing them either directly in Canada or through partners in Canada, the United States and South America.

Oakville, Ontario-based Cipher released its third quarter 2019 financials on Thursday, showing total revenue climbing 20 per cent year-over-year to $5.8 million with an adjusted EBITDA increase of 149 per cent to $3.7 million. The company had a net loss from continuing operations of $2.2 million or $0.08 per basic and diluted shares. (All figures in US dollars unless where noted otherwise.)

“We continue to make progress on our near-term priorities, including our focus on cost optimization and improving profitability,” said Craig Mull, Interim CEO, in a press release. “I am pleased that we were able to achieve a 58-per-cent decrease in SG&A costs while delivering 20 per cent top line growth. Net income in the quarter was negatively impacted by restructuring costs and impairment charges related to the strategic review of the business; adjusting for those factors, profitability is trending in the right direction.”

Drilling down, Cipher’s Q3 featured licensing revenue increase by 11 per cent year-over-year to $3.6 million and product revenue climb by 40 per cent to $2.2 million.

Keywood judges the third quarter results as “okay,” with improved sales and adjusted EBITDA, while pointing to the high net income loss which resulted from restructuring and impairment charges, together putting CPH’s EPS at a loss of $0.08 per share.

“Overall, we see Q3 results as progressive, ahead of what could be partnership agreements related to some of CPH’s more valued products but we await until these transactions materialize,” Keywood writes.

Yet, it’s the company’s announcement in early August that still raises questions for Keywood. Then, Cipher said that it would be targeting strategic distribution partnerships for its Canadian assets as opposed to maintaining and expanding its direct sales force, a scenario which management felt would be too capital intensive and not optimal.

On the shift in focus, Keywood writes,

“We see CPH’s change in strategy as valid given the challenges of trying to market disparate products without scale. However, we also see potential issues with relying on third party partners to successfully market products, where there is far less control. This situation to a certain extent played out with Absorica at CPH, where its US partner removed promotions that led to sharp declines. Although, upfront payments under the model could reduce debt and provide capital for new assets, we believe that investor interest will be limited for essentially a royalty business. Further, uncertainty around future transactions is also expected to affect valuation,” he says.

With his update, the analyst is maintaining his “Hold” recommendation and C$1.45 target, which represented a projected 12-month return of 16 per cent at the time of publication.