Cipher Pharmaceuticals is about to ramp up, Stifel says

In a Sept. 16 note, Stifel analyst Justin Keywood reiterated a “Buy” rating and C$20.00 target on Cipher Pharmaceuticals (Cipher Pharmaceuticals Stock Quote, Chart, News, Analysts, Financials TSX:CPH) following investor meetings with CEO Craig Mull, who holds a 41% interest in the company.

Cipher, a Canadian specialty pharmaceutical company focused on dermatology, operates with a lean structure and generates much of its revenue from product royalties in the U.S. and Canada. The company has consistently posted strong profitability, with EBITDA margins near 55%and free cash flow conversion around 90%, aided by a sizeable tax-loss balance of about C$195-million.

The July 2024 acquisition of Natroba (head lice/scabies treatment) for US$89.5-million was described as “transformational,” effectively doubling the business. Debt taken on for the transaction has already been reduced to US$18-million and management expects to be debt-free by year-end 2025.

Cipher is also evaluating four to five late-stage assets, with US$72-million of available liquidity to pursue additional acquisitions.

“We see upcoming high growth FCF quarters as continuing to re-rate shares with M&A serving as catalysts,” Keywood said, adding that insider alignment, 48% of shares are held by insiders, further de-risks execution.

Second-quarter results reflected the step-change from Natroba, with revenue up 152% year-over-year, Adjusted EBITDA up 148%, and free cash flow conversion of 78%, enabling US$22-million of debt repayment. Keywood said seasonal strength from Natroba should drive another strong Q3, coinciding with back-to-school demand. Management also indicated that a future U.S. Nasdaq listing could be considered as scale builds.

Cipher’s U.S. salesforce of about 35 representatives is viewed as underutilized, creating scope for further operating leverage as complementary dermatology products are added. Management has emphasized overlap with nurse practitioner call points, as with Natroba, and sees digital marketing and telemedicine partnerships as tools to gain share against incumbents like Permethrin.

“This strategy is the key to operating leverage within the U.S. franchise, which we expect would be immensely accretive to an already-phenomenal margin profile with high FCF conversion,” Keywood said.

Keywood forecasts Adjusted EBITDA of $27.0-million on $50.1-million in revenue for fiscal 2025. He added that the U.S. platform could support revenue two to three times its current base, underscoring a longer-term growth runway beyond Natroba.

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