Stifel raises rating on Cipher Pharma

Cipher Pharmaceuticals (Cipher Pharmaceuticals Stock Quote, Charts, News, Analysts, Financials TSX:CPH) has provided a great return to investors over the past two years, but Stifel GMP analyst Justin Keywood sees more upside to come. In a Thursday update, Keywood raised his rating from “Hold” to “Speculative Buy,” saying Cipher’s financials are looking better than expected.

Mississauga-based Cipher is a specialty pharma company with a range of early to late-stage products, including dermatology product Epurus and generic assets Absorica and Lipofen.

Cipher reported its first quarter earnings last month, with revenue dropping ten per cent year-over-year to $4.9 million but showing an increase in adjusted EBITDA of three per cent to $3.2 million. (All figures in US dollars except where noted otherwise.)

The company says it’s been focused on growing earnings and cash flow, with the result being that it ended the Q1 with $33.4 million in cash or $1.33 per share, up from $28.8 million after the previous quarter.

Cipher recently secured a $35 million credit facility to support its ability to deploy capital in what it calls an improved environment for pharma assets.

“With capital becoming incrementally more difficult to secure, we believe pharmaceutical companies are increasingly looking to monetize assets to meet shortfalls and raise liquidity,” said interim CEO Craig Mull in a May 11 press release.

“In the first quarter of 2023, Cipher generated $4.7 million in cash from operating activities, with substantially all of it flowing to our balance sheet, strengthening our total cash reserves in excess of $33 million,” he said

Keywood said he had previously assumed the genericization of Cipher’s assets would lead to a steep decline in the company’s financials but he said the generic tail has continued for a lot longer than previously expected. At the same time, Cipher has pivoted to an asset-light model and paid off its debt, leaving the company in a strong cash position.

“We see the base business as continuing to generate good free cash flow in the near term but still decline slightly. Our thesis is predicated on Cipher deploying its cash balance into good assets with the current capital-constrained market with tax losses to use against future earnings. There is a level of speculation to this thesis, but we also see valuation at ~4x 2023 EBITDA as providing downside protection, along with C$1.80/sh in cash (47 per cent of total),” Keywood wrote.

With the update, Keywood raised his target price from C$0.95 to C$4.75, which at press time represented a projected one-year return of 23 per cent.