Cipher Pharmaceutical Inc (TSX: CPH) is a specialty pharmaceutical company with a diversified portfolio of commercial and early to late-stage products. Cipher acquires products that fulfill unmet medical needs, manages the required clinical development and regulatory approval process, and markets these products either directly in Canada or indirectly through partners in Canada, the U.S., and Latin America.

Investment Rationale

• Bullish Break-Out on Daily Price Chart: CPH shares registered a bullish breakout on the daily price chart and entered into a bullish zone. Its share price crossover the crucial long-term resistance of 200-day SMA and managed to trade above it for the last three consecutive trading sessions. Typically, a breakout above long-term resistance perceived as a strong bullish momentum. Also, its shares are trading well above the crucial short-term support level of 50-day SMA, which implies a strong uptrend in the stock.

Technical Price Chart (as on March 23, 2021). Source: Refinitiv (Thomson Reuters)

• Short-term Breakout on Weekly Price Chart: A bullish breakout also appeared on the weekly price chart, with stock price crossover its 50-day SMA and moved higher. Also, 14-day RSI of 67.5, indicating a bullish bias in the stock.

Weekly Technical Chart (as on March 23, 2021). Source: Refinitiv (Thomson Reuters). 

• Industry Leading Margin Profile: The company is having an industry leading margin profile, with a gross margin if ~86% as compared to the industry median of 71%, EBITDA margin of ~62% against the industry median of 15.2%, operating margin of 31.2% vs industry median of 1.7% and a net margin of 20.3% against the industry median of 6.3%. A higher margin profile reflects the competitive advantage of the company within the industry and also reflects the financial efficiency of the company. Also, this higher margin profile reflects that company is able to convert higher profit as a percentage of revenue for its shareholders.

Source: Refinitiv (Thomson Reuters)

• Strong Fundamentals: The company is built upon the strong fundamentals with a solid margin profile reported over the past 5-year. The company has consistently reported a gross margin above 85%, implies a lower percentage of COGS and converting more than 85% of the revenue in income. Moreover, over the past 5-year company has consistently delivered an EBITDA margin above 25%, which is really a strong financial metric from an investor’s standpoint and also reflects the company’s financial prudence and management efficiency.  

• Exclusive co-promotion agreement with Verity Pharmaceuticals Inc: Recently Cipher Pharmaceuticals Inc entered into an exclusive co-promotion agreement with Verity Pharmaceuticals Inc. for the marketing, sales and co-promotion of Brinavess, Aggrastat and Trevyent. Under the terms of the Agreement, Verity will be responsible for the co-promotion of all hospital products inclusive of all costs and expenses associated with those products. 

• Risk Associate to Investment:
  • License risk: The company needs approval from various drug authorities before commercializing its products.
  • Risks Related to Intellectual Property: The company’s research, development and commercialization activities may infringe, or otherwise violate or be claimed to infringe or otherwise violate, patents or patent applications owned or controlled by other parties.
  • Forex Risk: The Company is exposed to currency risk through its net assets, namely its lease obligation and certain recurring transactions denominated in Canadian dollars.
  • Liquidity risk for Investors: As a penny-cap market capitalization of the company, investors are exposed to liquidity risk as daily average volume in these penny cap companies vary.

Financial Highlight: FY20

Source: Company Filings

• Total net revenue decreased by USD 0.8 million or 4% to USD 21.6 million for the year ended December 31, 2020, compared to USD 22.5 million for the year ended December 31, 2019.
• Licensing revenue decreased by USD 1.4 million or 10% to USD 12.8 million for the year ended December 31, 2020, compared to USD 14.2 million for the year ended December 31, 2019.
• Licensing revenue from Absorica in the U.S. was USD 9.9 million for the year ended December 31, 2020, a decrease of USD 1.5 million or 13% compared to USD 11.3 million for ended December 31, 2019. Absorica’s market share for the year ended December 31, 2020, was approximately 5.5% compared to approximately 7% for the year ended December 31, 2019. Overall, the Absorica business (brand and LD format) remained steady year over year at a 7% market share.
• Product revenue increased by USD 0.6 million or 7% to USD 8.8 million for the year ended December 31, 2020, compared to USD 8.2 million for the year ended December 31, 2019.
• Product revenue from Epuris increased to USD 8.1 million for the year ended December 31, 2020, compared to USD 7.3 million for the year ended December 31, 2019. Spurs had a prescription market share of over 40% in Canada for the year ended December 31, 2020, compared to 38% for the year ended December 31, 2019, according to IQVIA.
• Total operating expenses decreased by USD 1.0 million or 6% to USD 14.9 million for the year ended December 31, 2020, compared to USD 15.9 million for the year ended December 31, 2019. The decrease in operating expenses for the year ended December 31, 2020, was a result of a significant reduction in selling, general and administrative costs and restructuring charges offset by an impairment charge.
• Cost of products sold for the year ended December 31, 2020, increased by USD 0.2 million to USD 3.1 million compared to USD 2.9 million for the year ended December 31, 2019. The gross margin remained consistent at 65% in 2020 compared to 65% in 2019. In the current year, the Company had an increase in its inventory obsolescence provision.
• Research and development expenses represent the costs directly associated with developing and advancing our pipeline products and the cost of regulatory submissions in Canada. R&D expense was USD 0.1 million for the year ended December 31, 2020, compared to USD 0.4 million for the year ended December 31, 2019.
• Selling, the general and administrative expense was USD 6.3 million for the year ended December 31, 2020, a decrease of USD 1.3 million or 18% compared to USD 7.6 million for the year ended December 31, 2019. The decrease in SG&A costs for the year was driven by a reduction in human resources related costs.
• Interest income for the year ended December 31, 2020, decreased by USD 0.15 million to USD 0.03 million from USD 0.18 million for the year ended December 31, 2019.
• The Company experienced a foreign exchange gain of USD 0.09 million for the year ended December 31, 2020, compared to a loss of USD 0.1 million for the year ended December 31, 2019.
• Adjusted EBITDA for the year ended December 31, 2020, was USD 13.7 million, an increase of USD 1.1 million or 89% compared to USD 12.6 million for the year ended December 31, 2019.
• The Company had cash of USD 9.1 million compared to USD 6.3 million as of December 31, 2019.

Valuation Methodology (Illustrative): Price to Sales Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: On a YoY basis, the company performance was decent, with revenue was largely stable and strong cost control, which translated into an 8.6% improvement in adjusted EBITDA and a 60% surge in the EPS.

Also, a recent co-promotion agreement with Verity Pharmaceuticals Inc for the marketing, sales and co-promotion of Brinavess, Aggrastat and Trevyent with Verity sales force would help the company to manage the costs efficiency and drive growth and profitability within the hospital business.

Further, the group commands a strong competitive advantage against the competition, with industry leading margin profile. The group consistently generated an EBITDA margin above 25% over the past 5-year, which implies that the group is converting its sales into profit more efficiently. Moreover, technical indicators are showing an upside momentum in the stock.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a “Spec Buy” recommendation at the closing price of CAD 1.16 on March 23, 2021.

1-year Price Chart (as on March 23, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at March 24, 2021 price as well.

Disclaimer

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