Is Cipher Pharmaceuticals still a buy?

Following a major acquisition, Research Capital analyst Andre Uddin has raised his price target on Cipher Pharmaceuticals (Cipher Pharmaceuticals Stock Quote, Chart, News, Analysts, Financials TSX:CPH).

The analyst summarized the development.

“This morning, Cipher made an accretive acquisition of two dermatology products from ParaPRO LLC (private) for US$89.5M – CPH paid US$80 million in cash (satisfied from US$40 million cash on hand and US$40 million from a new credit facility) and issued US $9.5 million in common shares of Cipher to ParaPRO (1,474,097 shares at a deemed issue price of CAD$8.91- ParaPRO now becomes CPH’s 2nd largest shareholder),” he wrote. “Cipher has acquired the profitable and growing U.S. based Natroba operations and global product rights to ParaPRO’s Natroba (FDA exclusivity and patent protection until 2033) and its authorized generic Spinosad – prescription based topical treatments for both head lice and scabies. From 2021 to 2023, US sales of Natroba and its authorized generic were US$19M, US$24.8M and US$28M, respectively. Based on Natroba 2023 sales, CPH paid 3.2x P/S for two drugs with similar margins to Cipher – based on our historical (since 2005) spec pharma company acquisitions the median P/S has been 3.5x, with historical biotech and spec pharma product acquisitions at 2.7x. The transaction was financed by entering into a new credit agreement and partnership with the National Bank of Canada (NA-T) for US$65 million (US$40M was drawn down for this transaction and US$25M is available via an accordion feature (the previous Royal Bank of Canada (RY-T) facility has been terminated).”

Uddin says he does not anticipate dilution as a results of this acquisition

“We do not expect Cipher to raise equity, as the company should be able to repay the facility with its existing cash flows from operations,” the analyst said. “The facility matures three years from closing and has an optional annual extension clause and was designed to provide further financial support to fund future accretive acquisitions. There is a high probability the future growth prospects are higher than we forecast due to the global opportunity for Natroba which are not in our estimates.”

In a research update to clients July 29, Uddin maintained his “Buy” rating and raised his price target on CPH from $11.00 to $17.00, implying a return of 54.4% at the time of publication.